Small and medium-size enterprises (SMEs) and entrepreneurship

The role of SMEs and entrepreneurship changed innovation in the 21st century.

An important shift has occurred from the “managed” to the “entrepreneurial” economy, associated with a fall in the importance of economies of scale in production, management, finance and R&D. It is characterised by a series of trends encompassing the emergence of the knowledge economy, open innovation, global connections, non-technological innovation, the “Silicon Valley Business Model” and social entrepreneurship and social innovation. SMEs and new business ventures are important players in this new environment. They have a key role in processes of creative destruction, knowledge exploitation, breakthrough and incremental innovation, and interactive learning. Ensuring they reach their full potential requires a new innovation policy approach that facilitates entrepreneurship and SME innovation. Priorities include inserting new and small firms in knowledge transfer networks, strengthening entrepreneurship skills, and improving institutional environments for social entrepreneurship

The creation of new business ventures and innovation in existing small and medium-sized enterprises (SMEs) are critical parts of today’s innovation process, and should take a central place in government strategies to promote innovation. Despite their importance, however, SME and entrepreneurship support is not yet fully embedded in innovation policy, and the requirements for effective policies in this area are still not well enough understood.

New firms and innovating SMEs are best seen as agents of change in the economy, introducing new products and services and more efficient ways of working. They underpin the adaptation of our economies and societies to new challenges and drive economic development.

Not all new and small firms are equal in innovation, of course. On one hand, there is a small group of highly innovative and high-growth-potential firms with important individual impacts on jobs and productivity. But their numbers from the Entrepreneurship Indicators Project should not be exaggerated. They make up only a small minority of all SMEs. OECD figures for eleven OECD countries suggest for example that “high-growth enterprises” account for between only 2 and 8 per cent of all enterprises with 10 or more employees, while “gazelles” account for less than 1 per cent of such enterprises. They nonetheless generate large impacts. Anyadike-Danes et al. (2009) calculate, for example, that the six per cent of UK businesses with the highest growth rates generated half of the new jobs created by existing businesses between 2002 and 2008.

Innovation is a source of the growth of these types of firms (Mason et al., 2009).2 The Global Entrepreneurship Monitor survey in 53 countries suggests that only 6.5% of new entrepreneurs are “highexpectation entrepreneurs”, who expected to create 20 or more jobs in five years time. Almost 90% of all expected new jobs were foreseen by less than one-quarter of nascent and new entrepreneurs (Autio, 2007). On the other hand, there is the vast majority of SMEs that innovate very little compared to large firms and are associated with only modest growth or decline.