DP16298 The drivers of SME innovation in the regions of the EU

Author(s): José Luis Hervás-Oliver, Mario Davide Parrilli, Andrés Rodríguez-Pose, Francisca Sempere-Ripoll
Publication Date: June 2021
Keyword(s): Collaboration, EU regions, place-based, R&D, regional innovation, SMEs
JEL(s): L11, O31, O32
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16298

European Union (EU) innovation policies have for long remained mostly research driven. The fundamental goal has been to achieve a rate of R&D investment of 3% of GDP. Small and medium-sized enterprise (SME) innovation, however, relies on a variety of internal sources -both R&D and non-R&D based- and external drivers, such as collaboration with other firms and research centres, and is profoundly influence by location and context. Given this multiplicity of innovation activities, this study argues that innovation policies fundamentally based on a place-blind increase of R&D investment may not deliver the best outcomes in regions where the capacity of SMEs is to benefit from R&D is limited. We posit that collaboration and regional specificities can play a greater role in determining SME innovation, beyond just R&D activities. Using data from the Regional Innovation Scoreboard (RIS), covering 220 regions across 22 European countries, we find that regions in Europe differ significantly in terms of SME innovation depending on their location. SMEs in more innovative regions benefit to a far greater extent from a combination of internal R&D, external collaboration of all sorts, and non-R&D inputs. SMEs in less innovative regions rely fundamentally on external sources and, particularly, on collaboration with other firms. Greater investment in public R&D does not always lead to improvements in regional SME innovation, regardless of context. Collaboration is a central innovation activity that can complement R&D, showing an even stronger effect on SME innovation than R&D. Hence, a more collaboration-based and place-sensitive policy is required to maximise SME innovation across the variety of European regional contexts.