Capturing economic potential

Martin McTague, National Chair, the Federation of Small Businesses, shares how we need to think more broadly about innovation policy to capture the full economic potential.

street shot of alley of shops To many, the term "innovation" is usually associated with big names such as Elon Musk, Jeff Bezos and Mark Zuckerberg. But, in reality, the development and use of new ideas and technology is not confined to the tech industry. We need to think more broadly about innovation policy to capture the full economic potential.

A new report by the Federation of Small Businesses – titled The Tech Tonic – found that across all sectors, seven in ten (69 percent) small firms have introduced a new form of innovation in the last three years. This includes the development of an entirely new product(s) to their market (25 percent), significantly improved existing or new product(s) (38 percent), and better staff and customer experience (25 percent).

Small firms in the wholesale and retail sector have been particularly innovative in the past thre years. Close to a third (29 percent) of small businesses in this sector introduced changes to their processes, while 31 per cent brought forward new products. Two-fifths (41 percent) improved products. Perhaps the explanation why the retail sector has seen relatively high levels of innovation is due to rapid acceleration of structural changes in the sector during and since the pandemic. Given these significant shifts, small non-store and store retailers have needed to carefully consider their business model and operations in order to survive.

Small firms with new and improved products say increased turnover or profit is the main catalyst for change, followed by their desire to diversify their business. Those that have introduced new or enhanced staff and customer-facing processes are mostly motivated by the need to increase business resilience and automate. The average cost of introducing any types of innovation over a three-year period amounts to over £27,000 for a small firm, and the changes on average increase revenue by 14.8 percent. When it comes to tech adoption, the vast majority (83 percent) of small firms now have a company website, compared to only 51 percent in 2018. There has also been a significant increase in the number of companies using cloud storage, up from one third (33 percent) in 2018 to two thirds (67 percent).

However, innovative and tech-savvy small firms are facing scarcer government support. Since April this year, cuts have been made to the R&D Tax Relief Scheme for SMEs – a scheme that had been very successful in encouraging start-ups and driving innovation previously. The scrapping of the Help to Grow: Digital Scheme and downscaled support for Growth Hubs also impacted small firms' ability to invest in tech adoption and innovation.

Close to a third (28 percent) of small firms want help with implementing new ideas or modernising their business. More than a quarter (26 percent) want better information and advice, and a similar proportion (24 percent) say they need more suitably skilled staff. In terms of financial incentives, half of the respondents say additional government grants would encourage them to innovate, and 46 percent say extra tax relief would do so. To move our society from low or no economic growth, we need to see more businesses free and empowered to experiment and try new ways of working, as well as a more ambitious pathway for start-ups to shake up the marketplace and change the world.

To achieve this, the UK Government should spend the equivalent of at least 10 percent of the overall Research and Development budget on the diffusion and adoption of innovation, and set itself a target that at least half of all direct government R&D funding to go to SMEs. The Treasury should also introduce a 'modernisation and diversification tax relief scheme' based on R&D tax relief, providing small businesses with tax relief for those which have invested in significantly improving products or processes. FSB's research tells the story of how tech adoption and innovation is not confined to big businesses and the tech industry. Millions of small firms are bringing in new ideas and changes to their business, when times are tough, to drive productivity, but with ambitious policies they could do so much more.

As the UK's business support group, FSB is the voice of the UK's small businesses and the self-employed. Established over 40 years ago to help its members succeed in business, FSB is a non-profit making and non-party political organisation that's led by its members, for its members. As the UK's leading business campaigner, FSB is focused on delivering change which supports smaller businesses to grow and succeed. FSB offers members a wide range of vital business services, including access to finance, business banking, legal advice and support along with a powerful voice in Government. Each year FSB also runs the UK's Celebrating Small Business Awards. More information is available at You can follow us on twitter @fsb_policy and on Instagram @fsb_uk.

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