Expanding and fostering the potential of SMEs is a crucial challenge of modern times
Innovative entrepreneurship acts as an driver of change in all areas of value creation in trade and commerce. Entrepreneurial thinking and market-oriented action provide impetus for socio-economic developments in business and society. Coming from a variety of angles, three experts discuss how technologies come into existence at medium-sized businesses in Germany – the Mittelstand – and the role played in this by government bodies: Professor Dr. Norbert Zdrowomyslaw from the Steinbeis Transfer Center for Network Planning and Evaluation, Professor Dr. Heiko Auerbach from Stralsund University of Applied Sciences, and Christian Wulf from Assecor.
Programs aimed at supporting innovation in the SME sector – “From the idea to market success” (Source: Federal Ministry of Economic Affairs and Climate Action)
Megatrends such as digital transformation, the development of regenerative energies, and research into sustainable materials and efficient manufacturing processes are driving social advancement, with SMEs in particular playing a key role in this process of “creative destruction”[1]. Despite their potential to innovate, SMEs often run into internal limitations, however, because not all innovations translate into short-term market success. It can sometimes take a long time to progress from R&D to actually manufacturing market-ready products – and then selling them to the customers and target groups most likely to derive value and benefit from an innovation.
One of the first to provide a model for this customer journey was Everett Rogers in 1962. Rogers described how entrepreneurial innovations do not reach all customers from scatch, but instead are initially adopted by a small number of innovators and early adopters[2]. The most recent edition of his book in 2010 indicates that this theory is still a source of inspiration for specialists in marketing and sales. In the early stages of innovation processes it cannot therefore be assumed that there is a large market for a product, or that it will be possible to exploit market potential quickly. On the other side of the equation, even in the early stages of innovation processes SMEs run into material issues due to sourcing bottlenecks of a material, financial, and personnel nature. To exploit opportunities and ward off threats in a world of hypercompetition[3], SMEs depend on support from all key stakeholders, and a central role is played in this by governmental institutions.
Support from the Government with innovation and research
Market-oriented research and development are often associated with high risks and costs. As a result, many R&D projects conducted by SMEs can only be implemented with public funding. State bodies, public agencies, institutions, and support programs thus play a crucial role in this area. Investing in research, innovation, and training for skilled workers should make business enterprises more competitive and thus fuel long-term economic growth, prosperity, and employment opportunities. The idea is to use the various funding programs offered by the Federal Ministry of Economic Affairs and Climate Action (BMWK) to help foster innovation and digital transformation among SMEs, to create enthusiasm for technical and scientific professions, and to secure the next generation of qualified employees. The Bundestag (German parliament) is regularly updated on the effectiveness of programs in order to monitor their impact. Innovation policies are based on “from idea to market success” principles, revolving around four funding pillars focusing on startups, innovation know-how, pre-competitive research, and market-centric R&D.
It is understandable that the concepts of innovation and technology are often associated with large corporations with huge R&D labs. But it is easy to forget that the very nature of SMEs actually makes them particularly likely to be in a good starting position in the race to innovate. They can react quickly, they are more agile, and they thrive on customer focus. Even if it is unusual for SMEs to think in terms of economies of scale – tending instead to focus on smaller product, process, or social innovations – similar to the principle of chaos theory, or the butterfly effect, such economies do sometimes evolve into areas of future potential. Given that in economic terms, the backbone of the German economy is formed by Mittelstand enterprises[4], it is only logical that the innovation capabilities and competitiveness of SMEs should be supported, both in financial terms and through knowledge transfer.
Since innovative capability is borne by the knowledge, competence, and willingness to innovate of individuals, groups, institutions, and networks – and since SMEs only have limited resources to contribute to innovation and R&D projects – it can be hoped, for example, that collaboration with research institutes and universities involved in market-centric R&D will improve the prospects of SMEs of enjoying success. For example, since 2008 the Central Innovation Program for SMEs (ZIM), which is funded by the Federal Ministry of Economic Affairs and Climate Action (BMWK), has been supporting Mittelstand R&D projects with a focus on market needs, with no restrictions regarding technology or sector. Funding is provided for individual projects, projects focusing on national and international collaboration, and innovation networks. In particular, the benefits to companies lie in knowledge-sharing within research partnerships and innovation networks.
By launching its IGP initiative in late 2019 (IGP is an innovation program for business models and pioneering solutions), the BMWK is offering funding for market-centric, non-technical innovation projects and innovation networks. The focus of the program lies in business concepts that revolve around novel concepts, solutions, or services, the development of new processes and organizational methods, and the implementation of innovative marketing concepts and business models. These can be, for example, modern approaches to design, novel learning apps, or new ways to use technology. Most of the ideas submitted for projects relate to non-technical developments. Despite this, they can also involve the use or adaptation of new technological developments, or the use of technology in new areas. Each round of requests for proposals focuses on a specific topic, such as digital or data-driven business models, innovations of a cultural or creative nature, or innovations with a particular social impact.
Regional innovation strategies and global competition
SMEs are deeply rooted in the local area and place particular emphasis on developing the surrounding economy. They also tend to do business on a national and international level. As a result, it’s not surprising that the federal states of Germany develop so-called regional innovation strategies. For example, the state of Mecklenburg-West Pomerania launched a new Regional Innovation Strategy for Smart Specialization (RIS 2021–2027) with the aim of focusing more strongly on selected areas of the economy. The emphasis of the RIS initiative lies in renewable energy, hydrogen technology, medical technology, biotechnology, mechanical and plant engineering, ICT as interdisciplinary technology transcending different areas of the economy, and the bioeconomy[5].
For decades, Germany was considered a leading international powerhouse of disruptive and incremental innovation. Increasingly, however, its core competencies in the industries for the future (such as IT, biomedicine, and artificial intelligence) are now shifting to other countries and regions. Even if Germany still features in the top 10 of the Global Innovation Index, standing in 8th place in 2022[6], to keep pace with global competition when it comes to regional advantages (especially established economies, such as the United States, Switzerland, and Sweden, but also emerging countries in the tiger economies of the Far East) there is still a need for closer cooperation and more efficient innovation networks. Mittelstand companies will continue to play an important role here. It is therefore important to continue supporting companies in this area – not only through government programs but also through knowledge-sharing between industry and universities.