THE STATE OF SMEs IN EUROPE
Now that the UK has left the European Union (EU), it is interesting to examine the state of the small to medium sized enterprises (SMEs) prior to our departure and whether there are any lessons from the European entrepreneurial experience especially given that a considerable amount of public funding to support innovation in SMEs had previously come from EU sources.
According to the latest annual report on European SMEs, they account for most of the increase in economic prosperity in recent years, with much of this being driven by micro businesses employing less than ten employees) especially in less knowledge-intensive industries. Encouragingly, their performance in terms of employment growth and in the number of new enterprises was stronger than either the USA or Japan.
However, this alone is not enough for competitive advantage over other countries and it is important that more SMEs are involved in developing innovative products and services.
It is estimated that nearly half of all European SMEs have been involved in some sort of innovation activity although this varies widely amongst the different EU members ranging from 10% in Romania to 66% in Portugal (with 52% of UK SMEs classed as innovators).
Whilst this is good news, there are certainly a range of policies that could enhance and stimulate greater innovation within the SME sector which are as relevant to the UK outside the EU as they would be if it was still a member.
First, there is a need to increase the in-house R&D activities of SMEs which could be done by increasing support via programmes such as the European Regional Development Fund (ERDF) which, as we know, have been operating successfully in Wales for the last twenty years.
Whilst the UK will no longer have access to these financial incentives once the current round of funding has ended, the new Shared Prosperity Fund could, and should, continue to make the support of innovation within SMEs a key part of its approach once it replaces programmes such as ERDF.
Not only does the UK government currently spends proportionately less money on supporting innovation within SMEs than the average for the EU but the UK has one of the lowest share by SMEs of business expenditure on R&D in the EU. This will need to be addressed as a priority if the UK is to continue to be a competitive economy over the next decade.
The study also shows that skills shortages represent a major barrier to innovation and whilst EU level actions that lead to the cross-border access of SMEs to skills to allow them to engage in innovation, the UK may be excluded from such co-operation in the future meaning that it will have to examine how it attracts the right innovative talents to boost SME competitiveness. That will include having an immigration system that focuses on attracting the right global talents needed by innovative businesses in the UK.
Another key finding is that a higher share of university graduates in Science, Technology, Engineering and Mathematics (STEM) correlates with a higher share of innovative SMEs in the EU. Whilst it is critical that the UK universities continue to get access to exchange programmes that potentially bring in new talent, it should be a priority for the new UK Government to ensure that more STEM graduates are available on labour markets. The fact that there is a commitment to doubling the public research and development budget over the next five years should go some way towards addressing this.
Not surprisingly, a further barrier is the lack of availability of funding for innovative SMEs to scaling up their businesses. Whilst European level programmes such as the future Horizon Europe plan to address market gaps in scale up financing of innovative SMEs at all stages of their development, the UK cannot be left behind in supporting this sector which suggests that government owned bodies such as the British Business Bank may need to examine how it can focus its efforts on such firms in the future.
Finally, and most worryingly, one of the advantages of the involvement of UK SMEs in EU funded projects has been the increase in collaboration which has led to greater innovation over time. This is not only in terms of connections with other SMEs but access to laboratories, technology centres, innovation funds and investors. Given this, it is critically important that the UK continues to support and gain access to programmes such as the Enterprise Europe Network that have helped innovative firms work with each other over the last two decades.
Therefore, with the UK no longer a member of European Union, it must ensure that the advantages it previously enjoyed in terms of support for innovation from European funded programmes are not eroded over time. And if Brexit is to truly herald a new beginning for this country, then a greater focus on stimulating innovation at a higher level than the remaining members of the EU must be a priority for the UK Government over the next five years.