The Federation of Small Businesses is urging the Government to foster a risk-taking business culture from the bottom up by incentivising millions of small firms to invest in tech adoption and innovate.
The call comes after new research shows innovative and tech-savvy small businesses have less access to government funding than big corporates despite the majority having introduced changes and new ideas to their business in the last three years, fuelling productivity and economic growth.
FSB’s The Tech Tonic report looks at the types of new ideas and technologies small businesses use to innovate as well as the barriers they face against the backdrop of scaled down government support, including cuts to the R&D Tax Relief Scheme for SMEs and business support and insignificant funding to encourage tech adoption by small firms.
Seven in ten (69%) 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%), significantly improved existing or new product(s) (38%), and better staff and customer experience (25%).
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 process 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%.
But barriers remain for small businesses aspiring to go further with their tech investments and innovation.
Two-fifths of small business owners say they don’t have time to develop new ideas or adopt technologies to innovate their business, while 28% identify affordability as a barrier. A further 17% feel that they lack the know-how to implement changes.
Half of small firms say additional government grants would encourage them to innovate, and 46% say extra tax relief would do so.
There should be non-financial incentives as well, with close to a third (28%) of small firms seeking help with implementation. More than a quarter (26%) want better information and advice, and a similar proportion (24%) say they need more suitably skilled staff.
In light of the findings, FSB put forward a list of recommendations to the Government, including:
- Spending the equivalent of at least 10% of the overall Research and Development budget on the diffusion and adoption of innovation.
- Setting itself a target that at least half of all direct government R&D funding goes to SMEs.
- Introducing a ‘modernisation and diversification tax relief scheme’ based on R&D tax relief, providing small businesses tax relief for those which have invested in significantly improving products or processes.
- Introducing digital audit vouchers for small businesses to enable more small firms to effectively use data and technology.
- Expanding Made Smarter geographically and similar bodies should be set up for different sectors across the country – these organisations should be focused exclusively on enabling small businesses to adopt innovation and technology.
- Developing an Automation Fund, providing small businesses with grant funding to automate processes where access to labour is challenging.
FSB Policy Chair Tina McKenzie said: “The use of technology and innovation is a major force in economic growth, which is exactly what our country needs right now.
“The pandemic has shown how quickly start-ups and small businesses are to move with new ideas that change the economy, often up against large incumbents. These small firms are keen to keep that legacy alive but are also facing scarcer government support – cuts to R&D Tax Relief Scheme for SMEs, the scrapping of Help to Grow: Digital Scheme, and downscaled support for Growth Hubs.
“The reduced government support is down to a top-down approach to innovation policy overlooking the potential of 99% of the total business population. Becoming the next Silicon Valley won’t crack the productivity puzzle, if we can’t also encourage all firms to adopt new technologies and improve their process. Innovation must be for the many, not for the few.
“Think about the independent app developer in Wales which was rejected innovation funding three times before it finally got the support; the small computing programming firm in South East England looking to move to Singapore due to the lack of government support; and the family-run electric storage company in Northern Ireland that feels current innovation policy focuses too much on academic research.
“Our report tells the story of how tech adoption and innovation is not confined to big businesses and the tech industry, and how millions of small firms are bringing in new ideas and changes to their business, when times are tough, to drive productivity.
“We need a set of new policies and decisions to encourage new starters to innovate, and small businesses to take their new ideas and changes to the next level. To do that, there needs to be an inclusive, entrepreneur-led approach that incentivises small business owners to take risks and develop new solutions from the bottom up.”