KfW: German SMEs Show Slightly Increased Willingness to Innovate

Germany's small and medium-sized enterprises (SMEs) are showing a somewhat greater willingness to innovate. Between 2022 and 2024, 41 percent of these companies introduced at least one innovation in the preceding three years, a two percentage point increase compared to the 2021-2023 period. Company spending on innovation reached €35.4 billion in 2024, up by €1.8 billion from the previous year. Even after adjusting for inflation, there was a gain of nearly three percent.

Despite these slightly positive developments, innovation activity among German SMEs has significantly declined since the mid-2000s. Furthermore, innovation is increasingly concentrated within fewer, predominantly larger, companies. In the most recent period, 73 percent of larger SMEs (with over 50 employees) introduced an innovation, compared to only 37 percent among small businesses with fewer than five employees. These larger enterprises also account for the majority of innovation expenditures.

"It is encouraging that slightly more companies are engaging in innovation again, especially considering the ongoing challenging economic environment," said Dr. Dirk Schumacher, Chief Economist at KfW. "However, given the importance of SMEs for the German economy, we cannot be satisfied with the current level of innovation activity, which has been considerably higher in the past. Productivity growth and the German economy's capacity to transform will be sustainably weakened if an increasing share of companies refrains from regularly renewing their production processes and product offerings."

Innovations within SMEs typically do not originate from dedicated research and development departments but emerge from daily work routines. Between 2022 and 2024, only three percent of SMEs engaged in continuous in-house R&D, with an additional six percent doing so occasionally. Schumacher emphasized the importance of designing economic policy measures, such as funding programs, to be accessible to smaller companies lacking their own R&D capabilities. Reducing bureaucratic hurdles and alleviating the shortage of skilled labor are also crucial for SME innovation.