Digital technology: are small firms being left behind?

The boom in digital technology during the pandemic was primarily driven by greater employee expertise rather than by higher investment in hardware and software. This is suggested by the figures from the latest KOF Innovation Survey. Firms continued to spend around 17 per cent of their total investment on information and communication technologies (ICT) between 2020 and 2022. However, more skilled workers underwent training and professional development in these areas.

Large companies one step ahead

The survey also reveals that the use of big data and AI has increased significantly overall (see chart G 1). They are primarily being used to automate workflows and processes. However, there is a huge divide in the extent to which they are being applied by small firms and large companies. Big data is being used by 20 per cent of small firms and 60 per cent of large companies. The situation is similar for AI, with just over 8 per cent of small firms using it, while for large companies this figure is already more than one in three. It remains to be seen whether ChatGPT and the changes rapidly implemented since its publication a good two years ago can close this gap.

One key to achieving competitive advantage is the combination of big data and AI. So far, however, less than 5 per cent of firms use AI to evaluate and analyse large volumes of data (see chart G 2). This could be due to a lack of expertise, infrastructure or poor data quality. If companies use AI, around a third adapt it to their specific needs. A quarter use AI software that has been developed or modified either by their own staff or by external providers. The study also shows that AI is particularly prevalent in industries with higher added value. This indicates a positive correlation with a firm’s competitiveness.

Swiss innovation landscape still strong and resilient

A cursory glance not only at digital technology but also at how innovative the Swiss economy is reveals a stable but varied innovation landscape. Despite fiercer international competition and the challenges of the pandemic years, firms maintained the success of their innovative products and services at the same level as in previous years. However, the proportion of companies actively conducting research and development (R&D) fell slightly between 2020 and 2022. The percentage of revenue spent on R&D also grew less than before. This means that the historically high level of R&D concentration in the Swiss economy has become entrenched, which is primarily due to the trend among businesses with fewer than 50 employees. By contrast, firms with between 50 and 100 workers were more willing to engage in risky R&D and invest more.

The high-tech sector plays an important role in Switzerland’s innovative prowess. However, it is precisely in this industry that the innovation landscape appears to be changing. The proportion of innovative and R&D-active companies is highest in this sector. R&D spending is also the highest here in relative terms. However, the market success of innovative products is lower than that of cutting-edge services. This is a sign of stiff international competition which, on the one hand, requires greater innovation efforts but, on the other, hinders the market success of innovative products.

Cost pressures on small SMEs

Process innovations to reduce production costs have increased among small SMEs for the first time since the 2014 to 2016 survey period. The cost pressures on many firms have grown. However, the proportion of businesses with cost-cutting process innovations continues to fall among larger SMEs with between 100 and 250 employees and large companies with more than 250 employees. The level of production cost savings achieved by large companies has even been declining for several periods. Either cost pressures have eased here or it has become much more difficult to realise further production cost savings.

High costs were the most frequently cited obstacle to innovation in the survey (see chart G 3). This had already been the case in previous years. Skilled labour shortages and, above all, building regulations and planning laws are additional recent factors. These are the second and third most important obstacles.

Fewer and fewer radical innovations

There is a clear shift in large companies’ innovation activities. The proportion of revenue spent on R&D has been falling significantly while the percentage of innovating firms has remained constant for several periods. This indicates a lower ‘depth’ of innovation. And, indeed, the market success of innovative products and services has been declining since 2016 when measured in terms of the share of revenue generated by innovations. This downward trend is particularly evident in the proportion of revenue generated by new-to-the-market products (radical innovations), i.e. products and services with a high level of innovation depth, which generally provide at least short-term competitive advantages.

New innovation funding instruments

Following a steep rise in the proportion of innovative companies that have received innovation funding, this proportion has stabilised at a high level. This sharp increase is primarily due to cantonal funding. The tax deductibility of R&D expenses and the patent box have provided additional funding instruments since 2020. It is also striking that around a quarter of innovative firms see the changes in Switzerland’s association status with Horizon Europe as either negative or very negative.

Commentary “Room for improvement”

Comment by Prof. Dr. Martin Wörter, Head of the Innovation Economics research division

“The innovative prowess of the private sector is a mainstay of our country’s competitiveness and prosperity. Economic policymakers would be well-advised to optimise the regulatory framework for research and development (R&D) and for innovation activities in all areas of society. There is further room for improvement here. A cursory glance at the existing obstacles shows that – in addition to the high costs of innovation – skilled labour shortages and, above all, building regulations and planning laws have become significantly more important as barriers to innovation.

But that’s not all. International competition has intensified – particularly in the high-tech sector, which is important for Switzerland. This is also reflected in the fact that R&D spending as a percentage of revenue has increased while the market success of innovative products has decreased. Higher expenditure for lower returns means less competitive advantage from R&D or longer payback periods for innovative products. In the longer term this could jeopardise the financial viability of inhouse R&D and increase the risk of innovation, particularly for small SMEs. This could encourage R&D activities to be concentrated at larger companies. This in turn reduces the ‘absorptive capacity’ of the Swiss private sector as a whole, especially as inhouse R&D activities are often a prerequisite for recognising and exploiting the potential of new developments and trends in the competitive environment and at universities. Funding innovation can help to maintain the private sector’s absorptive capacity at a high level.

And it really does, as the latest evaluation study on Innosuisse’s project funding shows. It significantly increases the workforce and innovative revenue at the subsidised firms.