Contribution of SME innovation to economic growth

 

The contribution of small and medium enterprises in innovation-led economic growth and job creation has gained much interest in the recent decade. Extensive reports have been pointing out that young firms contribute massively to the innovation systems by establishing new products and catering existing ones to satisfy customer needs. To some extend this explains why some economists have advocated on the disproportionate impact of some markets and systemic failures and why governments have largely focused on implementing policies tailored for SME growth and the promotion of innovation. SMEs role in the global economy is immense, given their dynamics, adaption and flexibility features. Currently, around 99% of all businesses in the OECD area are represented by SMEs, generating about 60% of employment and totaling between 50% and 60% of value-added. While SMEs may be more enthusiastic and more innovative in new products and organizational practices than well-established firms, they still struggle to adapt to new technologies, cope with regulatory and administrative burdens, and access strategic resources – including skills, knowledge and finance – needed to compete in a globalized economy. 

The problem remains, however, that despite the evidence showing that SMEs are enablers of job creation, new employment is not universally created in high-productivity high-growth sectors, and wage gaps persist with large firms weighing on inclusiveness. Even in larger SMEs, the wage gaps remain around 20% lower than in large firms, highlighting lower productivity levels. In this context, innovation is key to boost productivity and foster wage increases. With the emergence of technological tools such as the internet of things (IoT), artificial intelligence, big data analytics, etc., SMEs can accumulate more product differentiation and customization, implement better supply chain systems and have new digital-enhanced business models that facilitate their faster market penetration.  

More specifically, evidence shows that SMEs that grow in terms of profitability, employees and market share, can have a significant impact on job creation, innovation and competitiveness, as well as help reduce the wage and income level gap. Given these developments, having an open, competitive, pro-growth and innovation-focused environment that is conductive of knowledge flow has increased in recent years. Globalization, on the other hand, has also boosted the importance of cross-border collaboration in innovation but given the lack of appropriate knowledge for partners and networks in foreign markets, most SMEs fail to reap its full benefits.  

Therefore, supporting innovation in SMEs holds the potential to contribute to inclusive growth by increasing productivity and reducing gaps with large firms. Policies can play a pivotal role in helping SMEs innovate by using the full benefits of increased digitalization. Targeted policies can help diffuse the digital technologies to SMEs and facilitate their most effective use. Specifically, this can be done via the development of targeted skills and supportive investments in organizational transformation and innovation. Further, ensuring fierce competition in markets is an enabler that allows new firms to challenge the incumbents, existing firms to grow and inefficient ones to exit.  

 

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