The Role of SMEs in Innovation in the EU. A Case for Policy Intervention?

Innovation policies, addressing the barriers that inhibit Small- and Medium-Sized Enterprises (SMEs) to innovate, have the potential to be extremely effective. Nevertheless, as this article will illustrate, market failure for innovating SMEs needs to be carefully identified, to better target government policies. And even if policy is well targeted, there could still be failures in implementation, as the evidence from actual policies being implemented in the EU and elsewhere suggest. In order to support policy making for stimulating innovation at SMEs, this article first reviews the empirical evidence on the contribution of SMEs to innovation, examining whether the barriers to innovation are related to market failures and whether SMEs are affected more by market failure induced barriers. We also take a look at trends in actual SME innovation policies in Member States and at EU level and how they have been evaluated on effectiveness. A concluding section channels the insights from this evidence into suggestions for improving policies towards SMEs and Innovation. The potential for specific SME Innovation policies, towards Young Innovative Companies (YICs) with radical innovations is identified.