Strategy & Finance

Innovation and SMEs Must Go Hand-in-Hand

The evidence shows that it’s not just rhetoric that matches SMEs with adaptability and invention – it’s a competitive necessity, and one that in today’s post-virus world is more important than ever.

To grow and prosper, national economies need innovative and internationalised small and medium-sized enterprises (SMEs). In many countries, businesses of this size can make up more than 90% of the total number of companies. In the UK, for example, that figure is 99%; in France, it’s 95%; and in the UAE, 93%.

In turn, these SMEs require the strength, vision and ingenuity to survive immense pressure, often without reserves of cash and with limited access to top-class expertise. This need to survive has never been more true that in today’s post-coronavirus world.

The ability of an SME to develop and launch new products, services or innovative processes confers a number of benefits, including – 

  • Ensuring a return on investment
  • Long-term strategic advantage
  • Competitive edge over market rivals
  • The ability to charge higher prices

Research shows that when small business innovate, they experience increased productivity, potential growth and general sustainability. In some economic sectors, the proportion of innovative SMEs exceeds that of large companies; more than 20% of UK firms filing patents are small businesses.

When confronted with serious structural or technological changes, the evolution of markets is constrained by innovation. Global strategic direction, the enlargement of the external environment, and the acquisition of international customers are positive factors in the quest for innovation.

Internationalization and innovation

While previous research has explored the connection between innovation and international development, recent studies by the International Labour office (ILO) shows that technological resources are key drivers.

The innovation process is based on a company’s ability to activate its existing and available internal knowledge. It also depends on the firm’s capacity to gain knowledge from external sources through imitation, licensing acquisition, partnerships or the purchase of patents. Export strategies increase the innovative capacity of small- and medium-sized companies by increasing their access to resources such as skilled labour.

Global activities allow direct access to business partners and international experts in venture-capital markets. Only 30% of European SMEs engage in export, and in the two markets that buck the trend – the UK and Germany – product innovation is presented as a major factor in their propensity to export.

Moreover, SMEs operating within an industry or with technologically advanced suppliers have higher innovation potential. Research has shown that if businesses are constrained by geographic limitations, that also constrains their innovation capabilities.

Internationalization gives them the opportunity to increase their resources by reaching new markets. This leverage frees internal financial resources. Access to external financing is also improved through export activities, providing convenient access to new networks of potential investors who are more willing to participate in innovation drives. Proximity allows access to critical information in terms of current and potential customers’ ‘expectations – and indeed, there’s a good body of research showing that customers as the main lever of product innovation.

Toward more innovation…

Nevertheless, implementing mixed strategies can result in major difficulties. The size of SMEs limit innovation or internationalization strategies, as they can they consume significant financial, technological, commercial and human resources. Considered fragile in terms of resources, small businesses maintain performance through high flexibility. The synergy expected as a consequence of the joint development of both innovation and internationalization is limited by the low transferability of resources. Indeed, cultural and institutional distances can drastically reduce the transmission of skills and knowledge.

The results of the ILO’s research propose a better adaptation of public innovation and export policies, which are separated and individually managed. For example, the French Employment Orientation Council has identified more than 2,500 different promotion programmes, mainly based on financial support, but coordination is lacking and effectiveness limited. Indeed, a study conducted in the same nation by ANVAR (the French organisation for the improvement of innovation in SMEs) reported that 39% of the firms that received financial support still failed. By focusing on support in codifying the existing innovations, public policy would do a better job of sustaining the internationalization strategy, increasing the value-add and the industry production, and – most critical of all – boosting a job-creation effect.

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