Presentation by Stephen Roper at workshop on ‘SME investment in research and development – trends and explanations’

1. Innovation in SMEs – challenges and
effective policy instruments
Stephen Roper
Stephen.roper@wbs.ac.uk
@steverop

2. UK innovation trends and the
growing ‘innovation gap’
Percentage of innovation active
companies in the UK: SME v large
Percentage difference in innovation
active firms between large and SMEs
Although innovation rates have varied there has been an almost monotonic increase in
the innovation gap between larger firms and SMEs in the UK…
Source: UK Innovation Survey

3. Barriers to innovation by firm size
… and micro and small innovators face increasingly strong headwinds…
Source: Innovation State of the Nation Survey, 2023

4. A national or local issue?
Oxfordshire
• Radar charts from the local
innovation dashboard
Leicestershire
… innovation strengths and weaknesses vary considerably by locality raising
questions about the appropriate spatial level of policy solutions….
Source: ERC Local innovation benchmarks -2021

5. The micro-geography of innovation
Knowledge exchange – particularly of
tacit - knowledge may be very
spatially constrained
Knowledge climates may differ
significantly over very short distances
in an urban setting
Berlin Innovation Panel data suggests
proximity to research institutes is
also critical:
‘The innovation dynamics in a firm’s
neighborhood in the recent past
(defined as changes in innovation
activities in other firms located
within a 250 m radius) do show some
relation to current innovation in
firms’.
… micro-geographies of innovation may also matter
again raising issues about the optimal spatial scale of
innovation policy…
Source: Rammer, C., Kinne, J., & Blind, K. (2020).
Knowledge proximity and firm innovation: A
microgeographic analysis for Berlin [Article]. Urban
Studies, 57(5), 996-1014.

6. UK innovation policy mix
• National policy mixes (and level of
support) differ substantially. The
UK (and Ireland) depend
increasingly on tax credits
• UK national statistics on R&D are
confused so hard to assess
national impacts or performance.
Major revisions are coming.
• But … recent work by Government
Tax Office (HMRC) suggests that
’Fraud or Error’ rates among SME
applicants for tax credits are 24%
(3% larger firms)
• Focus separately on direct and
indirect supports and then related
support measures at different
spatial levels
R&D support as a proportion of GDP – 2006 and 2016
Source: Lenihan, H Mulligan, K and O’Driscoll (2021) ‘A cross-country repository of
details on the innovation and science policy instruments available to firms in eight
countries (2007–2020): The devil is in the detail’, University of Limerick.
... national policy responses vary widely – a test of a range
of different recipes …

7. UK policy evidence – direct support
for R&D in SMEs
• Direct UKRI grants/projects have strong
and significant growth effects over the ST
(3 years) and MT (6 years)
• Growth effects are stronger in smaller
firms and often insignificant in large firms
Source: Vanino, E., Roper, S., & Becker, B. (2019). Knowledge to money:
Assessing the business performance effects of publicly-funded R&D grants
[Article]. Research Policy, 48(7), 1714-1737.
… direct grant additionality seems stronger in SMEs
than in larger firms (but does not cover spillovers)…

8. UK policy evidence – do regional
and sectoral supports work?
• Regional (Northern Ireland) and sectoral (Catapult) growth effects
• Both are delivered differently to national supports (competitions). Both are effectively
‘negotiated’ or bespoke support packages matched closely to firms’ needs
• Regional supports have the strongest growth effects – and again, we find stronger ATTs for
smaller firms (and larger regional support effects)
• Also, evidence of dynamic complementarities (regional -> national)
… How we deliver support (competition v tailored) and the spatial/sectoral
level at which we deliver support may matter ...
Source: Roper, Vanino, Hewitt-Dundas (2023) ‘Trade-offs and
complementarities between regional, sectoral, and national public support for
innovation’, Work in progress.

9. Tax credits and smaller firms
• OECD research (drawing on the microberd project) suggests the extent to which
R&D tax credits either encourage or discourage private sector investments in
R&D by firm size
• Analysis across OECD countries suggests that the additionality effects of R&D
tax subsidies on R&D spending are strongly negative among large firms but
strongly positive among smaller firms (10-49 employees).
• In other words, R&D tax credits are crowding-out (substituting) for private sector
R&D spending among larger firms but strongly crowding-in (leveraging) R&D
spending among smaller firms.
• In this respect it is notable that of estimated total cost of R&D tax credit in the
UK of £5.1bn in 2017-18 around 46 per cent was claimed by larger firms and 54
per cent by SMEs.
Source: OECD (2020) The effects of R&D tax incentives and their role in the innovation
policy mix, September 2020 OECD Policy Papers No: 92.
… again the suggestion is that additionality is stronger in smaller firms but remember
the F&E point made earlier…

10. R&D and place – an emerging (and
confused) policy area…
• Innovation accelerators – area based eco-system strengthening
investments in Manchester, Glasgow and Birmingham (IUK)
• Launchpads – support for emerging clusters of SMEs. First (2022) in
Liverpool and Tees Valley (IUK)
• Strength in places – large scale investments (£20-£50m) in local
collaborative R&D consortia based on existing strengths (UKRI)
• Community Research Networks – aim to develop grassroots research
agendas and build capability and expertise in community-led forms of
research and innovation. Pilot projects just launched (2023) (UKRI)
… spatially specific policies are attracting attention (and resources) but
evaluation and co-ordination are at the developmental stage…

11. Final remarks
• Growing innovation gap in the UK between SMEs and larger firms.
Probably exacerbated by cost of doing business crisis
• But is this a national, regional or local problem? Local
strengths/weaknesses differ markedly. And, then there is micro-
geography!!
• Evidence suggests that national, regional, sectoral direct support can work
for SMEs – generally higher levels of additionality. Same perhaps for tax
credits.
• So, there are tools but issues with selection, targeting and delivery modes
• Localised policy may also be relevant (Launchpads) but here the UK
evaluation evidence has yet to develop