Small and medium enterprises are an often overlooked part of the economy. In Europe alone, however, there are approximately 22.5 million SMEs that employ over 80 million people between them. Indeed, the European Commission regards them as the engine of the European economy.

Despite this importance, they’re an often overlooked group, as they’re not considered sufficiently high growth to attract the wide range of VC-led support that fuels accelerators, incubators, and corporate venturing.

Research from MIT illustrates that while the kind of exponential growth that startups target is not without value, we should also loathe dismissing the more gradual growth targeted by SMEs, especially in a landscape where credit is unlikely to be as cheaply available for a few years to come. This is especially so as around two-thirds of the 40 million new jobs created in the US economy between 1980 and 2005 were created by new SMEs.

For instance, a study from KU Leuven University and the European Central Bank found that large companies do understandably innovate more often and more successfully than SMEs. Despite that, they identified 17% of SMEs who were either incremental innovators or leading innovators, meaning that they were investing in R&D and introducing new products and services to their market. In relative terms, this may be a small number, but when set against the 20 million or so SMEs operating across Europe, it’s a vast number of innovative firms.

Obstacles to overcome

As with any innovator, those that were identified as innovative nonetheless had various obstacles to overcome. These included things such as uncertainty about the future, a lack of skilled workers, and building demand for their innovation. They also cited difficulties in raising finance to help them implement their innovation.

Indeed, around a third of innovative SMEs cited taxation, regulations, and the availability of finance as a hindrance to their performance and growth. When the researchers interviewed larger firms, these concerns were far less apparent, which highlights perhaps some areas of particular support needed for innovative SMEs to flourish.

The authors argue that one possible intervention would be to provide more effective public sector grants, and especially to young and innovative small businesses. This is important, as even if companies are happy to remain relatively small, they still need money for new premises or to hire new employees, which may not be possible based upon organic income alone.

This was evident at the recent EIT Innoveit Summit, where small businesses from across Europe gathered to showcase their solutions. It’s probably fair to say that many of those ventures on display will never trouble “unicorn” status and many operated in positively unsexy areas like soil health or energy efficiency. They’re probably the epitome of the kind of Mittlestand venture that targets a very small niche and aims to succeed by being the main player in that small niche. They won’t be the next Tesla, but that doesn’t matter as they can still have clear societal value.

Small business innovation

It’s particularly common, however, to see small businesses dismissed as low-technology, hyper-local and often employing just the founder and their immediate family. While there are many businesses like this, it would be a mistake to assume SMEs are a homogenous group. Indeed, many SMEs pioneer new technologies, products, and services.

What’s more, SMEs are frequent participants in open innovation partnerships with a range of stakeholders. Research from the European Commission highlights that this process can be improved with effective support, however. The study identified four key challenges that prevent SMEs from being effective innovators:

1. A lack of strategic thinking – While there was a degree of understanding around intellectual property, relatively few of the SMEs examined for the research had in-house experience in managing IP strategically. This can present challenges when entering into collaboration with other partners, and especially with larger organizations, whether companies or universities.
2. SMEs struggle with soft IP – Hard IP is relatively straightforward to identify and demarcate, but soft IP was found to be something SMEs have a much harder time with. Soft IP is things like trademarks, design rights, and copyright.
3. Negotiation skills are lacking – This is further undermined by a general lack of IP negotiation skills, especially during high-risk, high-reward open innovation projects.
4. Asymmetries exist – Arguably the biggest challenges faced by SMEs was the asymmetries that exist as a result of different strategic priorities between the partners in an innovation project. This could include differences in culture, differences in legal formalities, tolerance of risk, and even the overall pace of progress.

SME innovation

The researchers provide three recommendations to help SMEs overcome these challenges. The first of these revolves around developing the skills and experiences around IP-related issues to enable SMEs to successfully dive into open innovation projects. Given the unlikelihood that such capabilities will be developed in-house, it’s key to ensure that access to independent experts is made more available, while also ensuring that a degree of rudimentary training is also provided.

Access to such knowledge, both from experts and from one’s peers, could be facilitated by digital platforms that enable such connections to be more easily made.

“We recommend the European Commission provides a digital platform to host an IP strategy expert pool and marketplace and provides a digital peer learning facility and mentoring scheme to enable knowledge transfer from more to less experienced SMEs,” the researchers explain.

This kind of “intangible support” is what Imperial College London’s Jonathan Haskel and the Royal Statistical Society’s Stian Westlake believe is key to the modern economy. In their recent book Restarting the Future they argue that intangible factors are now a greater driving force behind our economy than the more tangible assets that dominated much of the industrial age.

“The economy is no longer the physical stuff, like parts and machinery, and is more about things that we can’t touch and feel, like research and development, brands, artistic originality,” Westlake explains.

They argue that much of the lacklustre performance in the economy in recent decades is due to the inability of the institutions that form such a central part in supporting innovation and economic growth to keep up with the changing nature of both innovation and growth. While SMEs may not be natural targets for such support, given their crucial role in the economy it’s clear that this needs to change.