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Innovations Pay Off

Successful innovators achieve higher margins and cash flow ratios – and can afford innovations easier. This is one of the most significant findings by a research study on innovations in German Mittelstand.

KfW Bankengruppe, a German bank owned by the federal government and the Länder, analysed innovations activities, resulting employment effects, the role of enterprise start-ups, as well as funding of innovations in small and medium-sized enterprises (SMEs) in Germany during 2002 to 2004. Even though the overall ratio of innovators increased moderately from 38% to 42%, the fraction of original innovators, i.e. companies which successfully launched new-to-market (in contrast to new-to-firm) products, decreased slightly (2002: 8%; 2004: 7%).

  "In 2004, problems regarding funding presented by far the most important obstacle to innovation for all of the companies. Among them, smaller and younger enterprises were affected considerably more." Correspondingly, a decrease in innovations activity has been found with younger enterprises contrary to the general trend. The finding that innovations level increases continuously with company size can be traced back to funding problems, too. For "innovations are financed mainly by internal funds, such as profit, cash flow, and reserves. External capital tends to be avoided because it is regarded to be more expensive and because of its fixed costs character. […] The amount of venture capital used by German enterprises for funding innovations is small."
  The study showed clearly that innovation activities and internal financing are strengthening one another. "Innovators achieve higher margins; higher margins facilitate internal financing, and advance the level of innovations expenditure. This means that funding future innovations projects from internal sources tends to be easier for successful innovators. On the other hand, companies which are less active and less successful innovators face less advantageous profit situations, which in consequence impede financing of innovations."
A similar situation has been found with respect to employment effects: "Innovating enterprises – both start-ups and those established in Mittelstand – create significantly more jobs than others. Thus the higher profits achieved by innovating SMEs permit them to grow organically combined with low cost of capital. Innovations create competitive advantage and, by this, pay off continuously.
The report "Innovationen im Mittelstand" was published in July 2006 as No. 37 of the series "Beiträge zur Mittelstands- und Strukturpolitik" (in German only). It can be downloaded from the Internet pages of KfW Bankengruppe.


  1. Beiträge zur Mittelstands- und Strukturpolitik, Nr. 37, Juli 2006, Sonderband "Innovationen im Mittelstand"
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