Ukrainian SMEs Innovation Activity: Analytical Evidence and Networking Opportunities

Businessman in front of a huge maze

After the signing of the Horizon 2020 Association Agreement with Ukraine on March 20, 2015, the discussions on how to enforce participation of different agents in this program have been initiated in Ukraine. Unlike in the EU, where SMEs are among Horizon 2020 priorities, in Ukraine the role of SMEs in innovation and S&T development is underestimated on the policy making level.

In our opinion, to develop an efficient mechanism of involvement of Ukrainian SMEs in European Research and Innovation programs, that is Horizon 2020, first of all there is a need to know how innovative Ukrainian SMEs are. Frankly speaking, it is not an easy task when one looks at the official Ukrainian statistics. Up to 2009 it provided data only on innovative activity of industrial enterprises while there was no detailed information on SMEs. Moreover, that data couldn’t be compared with European innovation indicators. Only in 2009 the Methodology of Community Innovation Surveys (CIS), that is used in EU, was adopted in Ukraine. This Methodology covers all types of economic activities and distinguishes SMEs from large enterprises. According to the official data1, 72.5% of surveyed enterprises were small and 20.8% were medium sized enterprises in Ukraine in 2010-2012. But at the same time, according to the survey data, small enterprises were the least innovative (just 16.9% of surveyed small firms have innovations in comparison with 25.0% of medium and 43.4% of large firms). If we look a little bit deeper we can see interrelation between enterprise size and innovations’ type. It means that SMEs prefer marketing and organization innovations, while large enterprises tend to implement technological innovations.

It’s interesting to note that enterprises which got state support for implementation of technological innovations in 2010-2012 in the most cases belonged to the following sectors as “Water supply; waste management and cleaning activities” and “Electricity, gas, steam, air conditioning”.

As it is known, the innovation process becomes more and more complex and requires strong cooperation among its actors. According to the official data, in Ukraine the level of innovation cooperation is comparable with many EU countries. Thus in 2010-2012 only 22.6% of Ukrainian companies with technological innovation collaborated with other companies and organizations, including universities, public research institutes and others, for small firms it was 17.2%. In spite of the fact that the level of cooperation between innovation enterprises and S&T institutes was higher than in the previous period (2008-2010) it still remains low – at about 6%2.

Regarding EU, the average level of innovative SMEs collaborating with others was 11.7% in 2014 (see Innovation Union Scoreboard), but there was large variance on data in member states.3

Besides official statistics there are a lot of surveys of economic activities conducted by different analytical institutions. The Institute for Economic Research and Policy Consulting (IER) conducts a number of business surveys on a regular basis. They are not specially focused on innovation activity, however, there are special questions which could shed light on it, including innovations in Ukrainian SMEs. First of all it concerns quarterly Business tendency survey 4 where enterprises are asked about the main barriers to the enlargement of their activity and about main steps on improving the economic situation that the government should take. The sample consists of 300 industrial enterprises in all Ukrainian regions.

The list of the barriers is fixed and unchangeable, and outdated technologies are among the barriers. Analyzing priorities of these barriers the interesting interrelations between general economic development and technology importance could be seen. During the crisis and post crisis years (e.g. 2009 and of course 2014) outdated technologies become more of a burden than during the period of recovery (2011-2013). Anyway it should be stressed that such barrier as outdated technologies was not among the top barriers. So, in 2014, the share of respondents who mentioned this barrier among others was slightly over 5%. Just to compare with others: such barrier as low demand was mentioned by 62.7% of respondents, liquidity issues – by 57.9%, unstable politic situation – by 43.3% and so on.

The respondents also were asked if they consider government support for innovations as the tool to help them develop their business activity. The share of respondents who mentioned innovation support was about 13% in 2014. It is interesting that there is no interrelation between outdated technologies as a barrier and necessity to have government support for innovations. Machinery building enterprises mentioned that they want to have such support more often than other industries that could be explained by the complexity of their technological processes.

In terms of firm size we can see that medium sized enterprises tend to get government support for innovations more often than small and large ones. It could be explained by the fact that medium size enterprises are involved in the technology based operations more than the small ones, but it is more difficult for them to deal with the technology modernization by themselves. So, there is a gap between medium enterprises’ needs for innovations and their resources to implement this. At the same time, large enterprises did not mention outdated technologies among barriers at all, while small enterprises mentioned this barrier more often than the medium sized.

Concerning cooperation and networking we may look at the results of the project “Investment attractiveness of the Ukrainian regions” where 600 of Ukrainian businesses were surveyed.5 The firms were asked to assess the level of cooperation between enterprises and S&T institutions in their region using the scale from 0 (no cooperation) to 9 (strong cooperation). The average level among all regions was 3.9 which means a not strong cooperation. But high level of standard deviation of this indicator shows that some enterprises have strong cooperation especially in Vinnitsa, Zaporizhzhya, Odesa, Poltava regions and Kyiv city. The lowest level of cooperation was identified in Crimea, Donetsk, Zakarpattya and Sumy regions (from 2.0 to 2.3).

So, what can be summarized from all mentioned above? First of all, innovations are really vulnerable to the crisis. General economic situation in Ukraine is so difficult and unfavorable to business that enterprises think how to survive rather than how to innovate and grow. It is interesting that businesses don’t rely on government support and, therefore, they tend to solve their problems by themselves. The main help they want from the state is to provide equal rules for all participants.

Also it should be stressed that links between different actors of national innovation systems in Ukraine are still weak. And while there are no proper links there are no ways to use the term “innovation SYSTEM”. It is possible to speak just about the certain elements of the system.

In spite of the fact that there are several good examples of participation of Ukrainian SMEs in FP7, the majority of Ukrainian SMEs unfortunately do not know about the existence of such programs as Horizon 2020 or COSME. From our point of view, there are three main ways to enhance SME’s participation in EU programs:

  1. First of all, we need to understand why SMEs do not participate in the EU programs – they do not need such opportunities or they do not know how to use them. In our opinion, they do not know how and they do not believe they can benefit from such participation. But we have to be sure about the reasons. So the first step is to analyze SMEs potential and to identify thematic priorities that could be interesting for Ukrainian entrepreneurs.

  2. Secondly, there is a need to inform SMEs about the real possibilities. It is impossible to wait until SMEs come, for example, to the National contact points (NCP) and ask for help. They won’t. Most of them will never come. We have to go to SMEs and bring this information to them through info-days, special web pages, and of course through special trainings provided not only by NCPs but also by professional consultancy firms such as IER and others. There should be a wide information campaign covering all issues for participation, not only perspectives and possibilities, but problems too.

  3. And of course networking. Networking with different actors, e.g. S&T organizations inside the country and even more important with partners abroad. This is one of the most serious challenges for SMEs in terms of their participation in the EU programs.

The article was prepared by Olha Krasovska, the Institute for Economic Research and Policy Consulting, Kyiv, Ukraine in the framework of Strategic Advisory Group project supported by the International Renaissance Foundation and presented during the Second ERA workshop “European Research and Innovation Programmes: fostering the participation of Danube region stakeholders in Horizon2020 with a special focus on SMEs”, Kyiv, 23 April, 2015 (http://danube-inco.net/object/event/14912)

Presentations can be downloaded here: http://www.ier.com.ua/files//Krasovska_Open%20Discussion%20Apr23.ppt

2 Ibid

3 Level of innovative SMEs collaborating with others in selected EU members: Austria 20.5%, Germany 14.7%, Slovenia 13.6%, Czech Republic 10.3%, Serbia 9.6%, Croatia 9.3%, Slovak Republic 8.3%, Hungary 6.7%, Bulgaria 3.3%, Romania 2.9%, etc, available at http://ec.europa.eu/enterprise/policies/innovation/files/ius/ius-2014_en.pdf

The Institute for Economic Research and Policy Consulting - Kiev