Blog | 30 May 2022

Covid-19 has kickstarted innovation investment by UK SMEs

Thomas Jenkins

Economic Impact Consulting

Covid-19 left many companies focusing on short-term survival rather than long-term innovation investment. Planned development of new products and investments in corporate assets were halted, if not entirely scrapped—especially for SME businesses. Analysis by Oxford Economics found that over 55% of SMEs’ R&D projects were negatively affected by the pandemic, with fewer than 3% being significantly positively impacted.

The difficulties faced by firms were echoed in research we conducted with the Federation of Small Business, which reported that nearly 28% of its members cited “downsizing, closing, or handing on the business” in summer 2020, compared with roughly 12% before the pandemic’s start. In the immediate term, firm closures and a loss of revenue for those remaining has meant reductions in the overall innovation landscape and growth for SMEs, which play an integral role in creating jobs and supporting UK GDP.

But some firms responded to the pandemic by adapting and innovating. Analysis of the ONS Business Impact of Covid-19 Surveys (BICS) revealed that UK firms were six times more likely to say they had experienced more (24%) than less (4%) innovation since the start of the pandemic.

These effects are supported by Oxford Economics’ analysis of the SME sector with Funding Circle, which found that 33% of SMEs had high debt-to-cash ratios compared with just 14% before the pandemic. This suggests that once firms survived the initial shock of Covid-19, they were able to launch new and more ambitious R&D projects with these higher levels of savings. As such, firms experienced more innovation from investing in their long-term productivity-boosting projects.

Looking ahead, though, firms are less certain about their innovation plans than before the pandemic, with two in five (40.7%) unsure of how their business’s innovation will differ in the future and only a fifth (21.5%) believing that innovation will increase. There are many reasons why firms may be less willing to invest in innovation—lingering impacts of the UK’s exit from the EU and further supply chain issues arising from the conflict in Ukraine are contributors to pandemic-related uncertainty. Nevertheless, almost no firms (fewer than 1%) believe that their practices will regress, emphasising how we are yet again in a “new normal.”

In 1942 Joseph Schumpeter wrote that there are situations in which good firms fail that would otherwise succeed, because they couldn’t weather a particular economic storm. This is certainly true of the global pandemic.  But overall, many firms have used Covid-19 as a reset of their long-term innovative plans to accommodate customer needs in a post-pandemic economy, and consumers have benefited from their resilience and adaptation.

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