Technovation, 18(1) (1998) 39–55

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Small firms, R&D, technology and

innovation in the UK: a literature
review
Kurt Hoffman, Milady Parejo, John Bessant* and Lew Perren
Centre for Research in Innovation Management, University of Brighton, Brighton BN1 9PH,
UK

Abstract
The importance of small and medium-sized enterprises (SMEs) in economic
growth has made them a central element in much recent policymaking. Of
particular interest have been policies designed to promote and facilitate the
operation of the innovation process within SMEs, and there has been
substantial expansion of this kind of effort. Despite this interest, the
knowledge base about how SMEs actually undertake innovative activities
remains limited. This paper reports on a literature survey of UK work over
the past decade and tries to characterise the state of knowledge about SMEs
and innovation. It concludes with a discussion of gaps and weaknesses in the
literature and some requirements for future research in this field.  1998
Elsevier Science Ltd. All rights reserved

1. INTRODUCTION example, there is now an extensive innovation support

Small and medium-sized enterprises (SMEs) are
increasingly seen as an important focus for the atten-
tion of policymakers. Most economic structures are
largely composed of SMEs, and despite the presence
of large firms most employment is concentrated in
this group. Whilst definitions vary, there is general
recognition of the need to look closely at the charac-
teristics and behaviour of this majority of enterprises,
especially in view of their perceived importance in
economic growth and job creation.
Of particular interest is the ways in which SMEs
innovate, and much recent policymaking has been
directed at mechanisms to support this activity. For
infrastructure across the European Union targetted on
SMEs, and many individual countries operate SME-
directed support schemes — for example, the Busi-
ness Links programme in the UK provides access to
innovation and technology counsellors to help SMEs
with innovation-related problems.1
Despite this strong commitment to supporting inno-
vation within SMEs at both regional and local level,
the actual processes whereby small firms undertake
innovative activity remain unclear. We know little,
for example, about the volume of SMEs involved in
innovative activity, nor about the nature of that
activity; what we can detect from R&D and other stat-
istics is likely to be only the tip of a much bigger

1
For a fuller discussion of SME innovation support policies see Dodg-
*Author for correspondence. son and Bessant (1996).

Technovation Vol. 18 No. 1 39

Kurt Hoffman et al.
iceberg, since SMEs do not necessarily innovate in
formally recognised ways. It is likely that they make
much more extensive use of external linkages and
emphasise process innovation as much as product
innovation — but with whom are these linkages for-
med, of what type, with what purpose, etc. remain
largely unanswered questions.
Concern with these themes led to a commission
from the UK Department of Trade and Industry to
carry out a short literature survey summarising recent
(post-1986) academic research on innovation in
SMEs. Among the particular questions in which inter-
est was expressed were the following:
— what types/categories of SME use R&D
— is it more important in some sectors than
others;
— from where do SMEs not carrying out R&
D get their knowledge;
— how many SMEs are active in the generation
and/or use of R&D
— how do these SMEs fund the R&D which
they need;
— what sources of R&D expertise are used;
— how do SMEs fit R&D activities into their
business;
— who is responsible for new product develop-
ment, process improvement and other R&D-
related activities.
An additional set of issues, significantly broader
than the original terms, pushed the enquiry further
towards wider questions about SMEs’ innovative
efforts in general and the impact of policy. These
included:
— The components of innovation in SMEs —
do ‘lean and mean’ firms innovate; are slack
resources essential; how important are external
sources of technology, information etc.;
— UK SME strengths/weaknesses — how are
UK SMEs placed in their possession of the rel-
evant factors; is available technology effectively
utilised; are poorly equipped firms surviving
through the crisis; do macro-economic factors
dominate SMEs’ innovative efforts;
— Technology take-up — role of intermedi-
aries; is intermediation effective or irrelevant; is
there a ‘not invented here’ syndrome; is there, and
why is there, low take-up of technology;
— SME innovation: progressive or defens-
ive? — do weak companies innovate;
— Policy targeting issues — any further evi-
dence on whether or not to support growth firms
40 Technovation Vol. 18 No. 1
with over 10 employees; how do we recognise
growth potential firms.
In this paper we briefly summarise the key findings
of the literature as they relate specifically to R&D
emphasis and more selectively to the wider concerns
with innovative effort and policy in SMEs, as well
as highlighting other issues of possible interest. We
conclude with some comments on possible future
research directions for this field.
2. COVERAGE AND METHODOLOGY
Our search of the UK literature concentrated on
four types of material:
(i) published journals and published books
which have the UK academic and policymaking
community as their main audience;
(ii) papers submitted to the two principal annual
conferences concerned with SMEs — the Small
Business and Enterprise conferences and the
National Small Firms Policy and Research confer-
ences;
(iii) other research and work-in-progress papers
prepared for a variety of ad hoc and regular con-
ferences focusing on innovation, technology and
management issues; and
(iv) other sources of ‘grey’ unpublished litera-
ture.
In addition, some leading authorities in the field
were consulted and other libraries visited, but most
of the work was carried out with reference to the
resources of CENTRIM and the University of Brigh-
ton.
The bibliography contains approximately 120
items. More than 70% of these date from 1990
onwards, though the research work they are based
upon sometimes dates from the late 1980s. Approxi-
mately 50 of these references report back on primary
empirical research, with approximately 12 of these
based on small-sample, case study research and the
remainder using survey-based research methods that
frequently relied extensively on postal surveys.
We use the qualifier ‘approximately’ above because
single research projects often give rise to multiple
papers whose empirical origin is not always easy to
distinguish, and which sometimes present different
findings of the research and sometimes present the
same findings with a bit of product differentiation
thrown in for good measure!
 Small firms, R&D, technology and innovation in the UK: a literature review
3. THE SME/R&D/INNOVATION LITERATURE: SOME
GENERAL OBSERVATIONS
The SME literature is large and diverse; in general,
the quality of the work carried out is high and the
attention given to methodological issues is notable (if
sometimes excessive in our opinion). There are now
recognised centres of excellence in the field and there
would appear to be vigorous and open lines of com-
munication between SME researchers and policy
makers (see Carter and Faulkner (1986) and Curran
(1986) for early critiques).
However, despite the impressive scope of the SME
literature in general, it should be noted at the outset
that the literature reviewed does not, unfortunately,
provide robust, conclusive answers to most of the
questions raised above. It does, of course, shed useful
light and insight on many aspects of some of the
issues. But (inevitably perhaps) the gaps in empiri-
cally based knowledge in the specific topics identified
in the terms of reference are significantly greater than
in those areas where we can draw definitive answers.
Thus we feel it would be worthwhile drawing atten-
tion at the outset to some significant gaps and biases
in the treatment of R&D/innovation in the SME litera-
ture since these gaps go a long way towards
explaining why we believe our literature review can
shed relatively little convincing light on the specific
questions posed in the terms of reference. These
issues include the following.
3.1 Mixing service sector and industrial SMEs together in the
sample population
The first bias stems from the fact that most
observers and researchers are interested in SMEs (as
a general category of economic agents) because of
their allegedly vital role as a key source of employ-
ment and employment growth. This means that:
쐌 a significant share (approximately 70% in the
context of our review) of empirical surveys tend to
include SMEs from both the service and industrial
sectors — whose fundamentals, particularly as
regards the role of technology and its impact on
firm performance, sectoral development and com-
petitive dynamics are very different;
쐌 the researchers tend not to be too fussy about
the composition of the industrial/manufacturing
activities covered as long as the sample firms are
broadly distributed across sectors;
쐌 the samples frequently exhibit a bias toward
micro enterprises (firms with less than 10
employees); and
쐌 the samples are frequently constructed with a
particular geographical catchment area in mind.
This approach to sector coverage is perfectly legit-
imate for the purposes of the authors’ stated research
objectives — which in turn obviously derive from the
legitimate intellectual preoccupations of SME
researchers (and the research funders) with employ-
ment issues. However, this tendency towards inclus-
iveness when sector/activity selection is taking place
significantly reduces the value of any R&
D/innovation/technology-related findings that emerge
from this work either as an accurate descriptor of
national SME reality or as a basis for government pol-
icy.
The problem is straightforward enough but has
fairly profound implications. The universe of SMEs
covered by the research carried out over the last ten
years is simply too small, too broad and at the same
time too narrowly distributed to allow us to draw any
firm conclusions from the findings reviewed. (Most
of the references could be cited here but see, for
example, the sample structure in Moore and Sedaghat,
1992 and Adam-Smith and McGeever, 1995.)
3.2 Narrow focus on selected high-technology sectors
The second bias lies at the other end of the spec-
trum and stems from the over-concentration of the
SME research community on a fairly narrow set of
technology-intensive and new technology-based sec-
tors, most notably biotechnology and, to a lesser
extent, IT. (For example, 80% of the case studies with
a high-technology focus in our review are concerned
with these sectors.)
Again, this focus is entirely legitimate, given the
general importance that has historically been attached
to the employment potential of high-technology firms.
And as a result of this work we do now know a good
deal about the approach of these firms to R&D and
technology management. However, because
researchers have not gone very far afield in their
examination of other sectors that are technology
intensive in one sense or another, the sample universe
on which we have empirical information — and thus
our ability to generalise outward from existing
research on a few high-technology sectors to other
high-tech sectors particularly and industry more gen-
erally — is very limited.
For those surveys (as opposed to case study
projects) that focus on high-technology SMEs, a dif-
ferent sort of coverage limitation arises because of
the high incidence of non-manufacturing firms in the
Technovation Vol. 18 No. 1 41
Kurt Hoffman et al.
sample as opposed to software firms and providers of
consultancy services, testing and analysis, research
and training. (See Monck et al., 1988 and Westhead
and Storey, 1994 (where only 25% of the science park
firms surveyed were engaged in manufacturing
activity).)
3.3 Inadequate treatment of innovation
The third generic problem with the existing body
of research lies in the characterisation of the R&
D/innovation/technology variable itself — parti-
cularly when these topics are a focus for hypotheses
and data collection efforts in studies that have a broad
range of research objectives.
To be sure, the empirically based, conceptual
analyses contributed by some authors have added gre-
atly to understanding of the link between innovation
and SME performance. (See for example Goss, 1991;
Storey, 1993, 1994; Oakey, 1990, 1991b; Johnson,
1990; Rothwell, 1989; Rothwell and Dodgson, 1993;
Monck et al., 1988; Smallbone et al., 1993 and
Pratten, 1991.) But in many of the empirical and sec-
ondary studies reviewed here, the analytical treatment
of innovation within the SME context is underwhelm-
ing, both theoretically and methodologically. These
studies generally do not set out to measure compre-
hensively, and then to link, innovative inputs
(observed either directly or by proxy) to innovative
outputs, nor to explore whether innovative effort has
had a measurable impact on firm performance (output,
employment, exports, market share etc.). Yet this set
of concerns is at the heart of the broader field of inno-
vation studies — and should, we believe, constitute
the bedrock of any SME studies that purport to exam-
ine innovation and technology issues.
There are exceptions, of course, as mentioned
above — particularly the work of Oakey and Storey
but also with more specific focus: see Monck et al.
(1988) and Westhead and Storey (1994) on Science
Park SMEs; Harrison and Hart (1986) in relation to
Northern Ireland SMEs; and Hall (1991) on the deter-
minants of SME innovation in the instrumentation
sector. And no doubt some good analytical work is
to be found in those studies we have not been able
to review. Moreover, our comments are not meant to
undermine the value of those studies that do address
innovation/SME issues in some form but do so within
the context of the pursuit of understanding of a differ-
ent set of phenomena.
Nevertheless, because of the generally limited
treatment of the innovation variable, our ability to
draw firm, generalisable conclusions is further
42 Technovation Vol. 18 No. 1
compromised. A good example of this problem is to
be found in the final report on, by far, the largest and
thus most authoritative recent empirical survey of
SME behaviour carried out by the Cambridge Small
Business Research Centre.
The research reported on by SBRC (1992) collected
data from 2000 or so SMEs across a range of topics,
with technology and innovation being but one of
them. The overall work carried out is extremely use-
ful; and the insights generated by the study across
numerous issues are valuable in general and for our
purposes. The work, for example, finds that 60% of
the sample had introduced a major product or service
innovation in the previous five years — thus suggest-
ing SMEs are highly innovative across sectors. How-
ever, the data collected and presented in the section
on technology and innovation is largely qualitative,
based on subjective perceptions of the SMEs; and the
analysis, though suggestive of some useful broad cor-
relations, does not quantify innovative investment nor
robustly link innovative effort to some quantitative
measure of firm performance.
For example, what does the concept of “a major
innovation introduced in the previous five years”
actually mean in terms of input (i.e., how much did
this innovation cost, what share of innovative
resources did it consume, how efficiently were these
resources used, has there been any improvement over
time in the firm’s innovative activities) and in terms
of output (its effect on firm performance, market
share, profitability etc.)? This question is not answ-
ered by the information provided. Without this infor-
mation, it is simply impossible to judge whether the
finding that 60% of the sample have introduced a
major innovation in the last five years actually means
anything at all in analytical or policy terms. Similar
problems of extrapolation and interpretation exist in
other empirical surveys. (See for example Leigh et
al., 1990; Devins and Kimbara, 1995; Joyce et al.,
1993; Lean and Chaston, 1995 and Keeble and
Walker, 1993.)
Likewise, with a few important exceptions (most
of them based on some excellent work on high tech-
nology SMEs), the case study research really does not
dig into the innovative process in sufficient detail or
rigour to give us the sort of understanding necessary
to answer the questions posed in the terms of refer-
ence at anything other than an anecdotal level. (See,
for example, Bedrock and Watson, 1993.)
The same can be said for the secondary literature.
For example, Stanworth and Gray (1991), an excellent
and comprehensive discussion of SME-related devel-
 Small firms, R&D, technology and innovation in the UK: a literature review
opments since the Bolton report, barely mentions
innovation issues at all in nearly 250 pages of detailed
discussion by leading analysts.
3.4 Need for a benchmark survey
In the light of the above assessment, we conclude
that by far the most significant gap in available infor-
mation is the lack of an authoritative, up-to-date,
macro analysis of the role of SMEs in the UK
industrial/manufacturing sector (in terms of numbers
(and size) of firms, share of output, employment,
value added, investment, export performance etc.),
assessed against the best available
technology/innovative effort/R&D input and output
indicators.
This is not to deny the value of earlier work which
fits into the type of analysis we are calling for (see
for example Barber et al., 1989a; Pavitt et al., 1987
and Rothwell, 1989). Indeed, some analysts (such as
Rothwell, Storey, Dodgson and Oakey) have
addressed various parts of this task and are exten-
sively and legitimately cited for their analysis and
insight. Nor do we suggest that SME researchers are
unaware of the need for a broad but rigorous approach
to the measurement of innovation in SMEs as called
for by Hansen (1992). (See, for example, ACOST,
1992; Devins and Kimbara, 1995 and Westhead and
Storey, 1994; see also Hyvarinen, 1991 for some pro-
posals for measuring SME innovation and perform-
ance based on US data.)
Nevertheless, our review suggests that there is sim-
ply not enough of this work being carried out on a
large enough and visible enough scale to provide the
sort of analytical foundation that SME innovation
studies require in the last half of the 1990s if it is to
make a solid contribution to policy formulation.
Thus a comprehensive study of the sort called for
above, combining rigorous survey research with stat-
istical analysis, carried out at the three or four digit
sectoral level over a sufficiently long time series (and
ideally presented in comparison with other OECD
countries) would now seem to be essential.
The ‘reflection’ and ‘interpretation’ of existing
knowledge that would necessarily underpin this work
could go a long way towards generating a widely
accepted technology and sectoral based characteris-
ation of industrial SMEs that we believe is also
needed by this field (and called for by Oakey (1993),
Tither (1994) and Goss (1991)) — where at the
moment, apart from the logic underlying research on
high-tech SMEs, sector selection is not driven by
technology variables.
Such a study would thus provide a benchmark, or
at least a starting point, for assessing which sectors
and at what levels SMEs are actually playing a sig-
nificant dynamic role and the relative importance of
the technology/innovation variable as a determining
factor in their economic contribution — or lack of it.
Moving from this knowledge base to answering spe-
cific questions of the sort posed in the terms of refer-
ence would then be straightforward, sectoral research
priorities could be easily set and scarce policy
research funds appropriately targeted.
Further justification for the work called for above
arises from the persistence of doubts and question
marks raised by senior analysts (and given weight by
some of the research reviewed for this paper) about
the validity of some of the most fundamental and
cherished tenets of the SME liturgy.
For example, there is good but limited evidence in
the work surveyed for this review that UK SMEs do
generate employment when they grow — but it also
appears that this effect is concentrated within a
(frequently small) minority of firms. Thus, Patton and
Bradley (1995), Storey (1993), Oakey (1990) and
Gourlay (1996) all raise some fundamental questions
about the genuine contribution to employment growth
made by SMEs in general in recent years — and in
the future — which still need to be definitively answ-
ered.
Likewise, convincing doubts have been voiced
about the allegedly important role in employment
generation played by NTBFs and high-technology
SMEs in particular who were and are often depicted
as rapidly growing dynamos creating new products,
new jobs and new industries. (See Faulkner, 1986 for
an early view of their potential.)
In fact, whilst there is evidence that some of these
firms have done better than average — particularly
SMEs in the biotechnology sector located on science
parks — it would also appear that most of these firms
are destined either to remain permanent infants or to
be swallowed up by their larger, predatory competi-
tors. (See Calori, 1990 and Parolini, 1990 in general;
and Oakey, 1991a and Walsh et al., 1995 on biotechn-
ology. See Garnsey and Cannon-Brookes, 1993;
Westhead and Storey, 1994 and Storey and Strange,
1990 for similar evidence in relation to SMEs
operating in UK science parks.)
Technovation Vol. 18 No. 1 43
Kurt Hoffman et al.
4. SMES AND INNOVATION — KEY THEMES
In this section, we attempt to pull out of the litera-
ture reviewed information and arguments that illumi-
nate the key concerns raised in the terms of reference.
As we noted above, it is difficult to generalise from
most of the findings in the research available to us,
and the evidence presented should be considered in
this light.
4.1 Innovation is widespread ... but does it contribute to
profitability or success?
The comments in the preceding section make clear
that while the literature we have reviewed does not
allow us to distinguish between sectors in terms of
SMEs’ R&D intensity nor even the degree of inno-
vation, there certainly is substantial research evidence
that numbers of SMEs in a variety of sectors do
engage in innovative activities, and that these activi-
ties are likely to be an important determinant of their
success. (See Rothwell, 1991; Lawton-Smith et al.,
1991; SBRC, 1992; Joyce et al., 1994; Keeble, 1992;
Barber et al., 1989b; Moore, 1993 and Herbert, 1988.)
These research findings confirm the longstanding
impression that SMEs are generally innovative, but
we are minded to acknowledge the admonitions
voiced by authors such as Storey (1994) and Oakey
(1993) that not all SMEs in all sectors innovate.
Moreover, the mixture of available research results
suggests that though innovative effort appears to be
widespread, this does not translate directly into
improved firm performance and, ultimately, greater
profitability.
For evidence of this non-sequitur, see for example
the results reported by Hall (1991) that R&D intensity
is only slightly associated with profitability among
SMEs in the instrumentation sector (and the extent of
patenting not at all). These findings parallel those of
Oakey et al. (1988) which reported that, whilst a sur-
vey of 131 British and US high-tech SMEs found that
a large percentage (79%) performed R&D, there was
no correlation between R&D investment and firm
growth.
On a slightly different tack, Keeble (1993) shows
that the high growth rates among NTBFs in Scotland,
the North East and Wales are not explained either by
size factors nor by R&D effort; Westhead et al.
(1995) show that innovation and technology factors
do not explain success or failure among Science Park
SMEs; and Dickson et al. (1995a) show that in their
sample of three high-tech firms, overall competi-
44 Technovation Vol. 18 No. 1
tiveness, marketing effort and size are more important
than innovation in determining success; whilst Keeble
(1992) shows similar results for rurally based SMEs.
4.2 Some common features of the SMEs’ R&D and innovative
effort
However, we can say with some confidence that,
across industrial sectors, SMEs’ innovative activities
tend to exhibit broadly similar characteristics. For
example, they:
— are more likely to involve product inno-
vation (sometimes based on R&D) than process
innovation (which is important nonetheless);
— will be focused heavily on producing pro-
ducts for niche markets rather than mass markets;
— will be more frequently organised formally
within larger SMEs and tend to be more ad-hoc
or project driven in smaller SMEs;
— will be more common among final product
firms and are least likely to be found among
component subcontractors;
— will generate incremental innovations as
well as major breakthroughs;
— will frequently involve some form of exter-
nal linkage (see below); and
— are likely to be associated with growth in
output, turnover and employment — thus
implying that weak firms (little or no growth) are
either not successful innovators or are overcome
by their weakness in other aspects of the competi-
tive struggle.
For examples (not exhaustive) of the above findings,
see ACOST (1992); Pratten (1991); Storey (1994);
Keeble et al. (1992); Cannon (1985); Keeble and
Walker (1993); Oakey (1990); Vaux et al. (1996); Lee
(1993a); Lee and Oakes (1995); Hartman et al.
(1994a) and Goh and Ridgway (1994).
The available research also suggests strongly that,
for reasons to do largely with location, rising con-
sumer incomes and increasing business complexity,
rural SMEs appear to be more innovative than urban
SMEs — yet they are far less likely to be active users
of external knowledge sources. (See Keeble, 1990,
1992; Keeble and Walker, 1993 and Keeble et al.,
1992.)
4.3 The importance of internal factors
Another common finding across studies is that, on
balance, internal factors are likely to be more
important core determinants of whether innovation
 Small firms, R&D, technology and innovation in the UK: a literature review
plays a key role in success or failure than are external
factors. This goes for industrial SMEs, broadly speak-
ing, as well as for high-technology SMEs, where
innovation (primarily product based) is the raison
d’être and lifeblood of the firm.
4.4 Qualified scientists and engineers (QSEs) and owner
managers as key sources of innovative effort
Among the internal factors shown to be most
important determinants of innovative activity and
economic success are, not surprisingly, a high inci-
dence of QSEs (and the knowledge base they
represent) among employees and strong leadership
provided by a highly educated MD or
founder/entrepreneur.
Likewise, both of these categories — employed
QSEs and technically accomplished OMs — have fre-
quently been found to be central to the R&D effort —
either as direct sources of knowledge, ideas and inspi-
ration, as the actual doers of R&D or as managers of
the SMEs’ relations with external sources of R&D.
Two logical extensions of these commonsense fin-
dings are that inability to recruit high quality technical
staff can be a serious constraint on growth — for
some SMEs but not necessarily all; and that as SME
size increases so too does the incidence of dedicated
R&D departments and formalised procedures. (See,
for example, Allan, 1993; Bedrock and Watson, 1993;
Pucik, 1988: SBRC, 1992; Devins and Kimbara,
1995; Young and Francis, 1991; Sedaghat, 1992;
Rothwell and Beesley, 1989 and Moore and Sed-
aghat, 1992.)
Finally, somewhat diverging from the above, Phil-
pott (1995) shows that, in the specific case of the
Scottish electronics industry, technology access
appeared to be a constraint on the development of an
SME supplier base whereas being part of a network
of automotive component suppliers appears to be con-
tingent on SMEs having a high degree of innovative
capability. This finding is reinforced by Lee (1993b)
who shows that product design and development
capabilities are key to SMEs becoming part of ‘part-
nership networks’ on which large firms are increas-
ingly relying for component supply.
4.5 Other internal factors
Other internal factors that surfaced as important
determinants of the success of SMEs’ innovative
efforts across our sample are the nature of the com-
mercialisation and marketing effort, the degree of
marketing involvement in product planning and firm
competence in the area of technology strategy and
technology management. (See Johne and Rowntree,
1991; Barker et al., 1990; Pratten, 1991; Berry and
Taggart, 1994; Dodgson, 1991; IRDAC, 1987;
Rothwell and Dodgson, 1992 and Moore, 1989.)
4.6 Typologies of founders linked to innovation
Some of the research focusing on high-technology
firms attempts to develop firm innovation typologies
linked to the particular characteristics of the foun-
ders — by, for example, differentiating between
scientific, technical, academic and industrial
entrepreneurs. One important, albeit obvious, con-
clusion is that academic/scientific entrepreneurs in
particular often have difficulty reconciling their
research interests and the needs and demands of run-
ning a business — a conundrum which, if not solved
or addressed, can lead to failure among this type of
entrepreneur. (See Dickson et al. (1995a, b).)
The analysis of Jones-Evans and Steward (1995)
goes beyond this type of categorisation and suggests
that the category of ‘research’ entrepreneurs, in parti-
cular, is more likely to introduce a novel product tech-
nology or new combinations whilst other types of
entrepreneur will introduce incremental innovations.
4.7 The psychology of entrepreneurs
Almost as an aside, we would observe here that the
research cited above is part of a large (and growing)
body of work that seeks to explain SME performance
(particularly micro SMEs) by linking it (often in a
qualitative fashion) to a detailed dissection of the per-
sonality and psychological traits and perceptions of
individual founders/owner managers.
The fascination of researchers with uncovering this
degree of detail appears to derive partly from (entirely
legitimate) intellectual interest and partly in order to
contribute to the trend of policy interventions that
were and are intended to help develop policies that
promote a high rate of SME start-ups (and thus
expand employment). While we understand the intel-
lectual fascination of this set of issues, we are uncon-
vinced about the policy value of this aspect of current
SME research. It seems too subjective and too
beholden to some idealised view of the heroic nature
of the owner–entrepreneur to be of much use in policy
terms (a criticism echoed by Curran, 1986). More-
over, as we shall see below, the discipline of the mar-
ket, as firms struggle to move beyond the start-
up/micro stage, would appear to be a far more
efficient filter of start-ups into the economy than pol-
Technovation Vol. 18 No. 1 45
Kurt Hoffman et al.
icy interventions based on the concept of picking win-
ners based on psychological profiles of the
entrepreneurs concerned.
4.8 The role of new technology-based firms (NTBFs)
In an interesting departure from this approach,
Moore (1989) carried out high-tech SME case study
research and concluded that one can view start-ups as
the realisation of new product possibilities spotted by
research entrepreneurs. This approach highlights a
number of common barriers to growth, chief of which
is the fact that most high-tech start-ups are born into
highly restricted growth circumstances precisely
because of their single product focus and niche mar-
ket character.
The problems this constraint poses for achieving
growth are exacerbated if the product is truly rad-
ical — as then a lack of credibility and demonstrated
track record appears to make market access even
more difficult. For Goss (1991), this feature of
NTBFs — firms arising exclusively on the basis of
radical innovation — which marks them out as a very
rare commodity and of relatively little real econ-
omic significance.
This is clearly an important question not fully
answered by the literature: are NTBFs, in particular,
a significant force for innovation and technological
dynamism in the UK economy or simply an interest-
ing phenomenon? Macro research of the type called
for in the preceding section could answer this
important question.
5. SOME CONTRADICTORY FINDINGS
The SME research reviewed for this report also
reveals some intriguing divergences over some of the
issues surrounding innovative activity within this
group. These include the following.
5.1 Impact of macro-economic conditions
One area where the research findings are ‘multi-
dimensional’ relates to the impact of the ‘market’ and
macro-economic conditions on the innovative per-
formance of SMEs. For example:
— Dickson et al. (1995a), Moore (1989) and
others show that, for SMEs where the founder is
a scientific or academic entrepreneur, the firm’s
ability to meet the demands of surviving in a com-
petitive marketplace — be they for good market-
ing or careful cash flow management and rigorous
46 Technovation Vol. 18 No. 1
project planning — are more important than the
basic innovative capabilities and instinct that led
to the launch of the firm in the first place;
— Oakey (1994) suggests that poor macroecon-
omic conditions in the 1980s led many innovative
SMEs to adopt a risk and growth averse strategy;
Oakey et al. (1990) presented the same arguments
for biotechnology SMEs;
— Pratten (1991) shows that SMEs are well
capable of creating new products and are not thre-
atened by large firm R&D superiority — but they
do face serious difficulties in commercialising
their products in the marketplace; likewise, mar-
ket access variables far outranked technology fac-
tors as market entry barriers in the work cited by
Barber et al. (1989a);
— Hall (1991), examining performance factors
among 40 instrumentation firms, found that innov-
ative effort had a mildly positive benefit whereas
market conditions, in terms of the degree of com-
petition faced, appeared to have no impact at
all — yet Parolini (1990), Storey et al. (1989) and
Vaux et al. (1996) found exactly the opposite
effect’
— Keeble (1992, 1993)) shows that the precise
mix of local market and other environmental fac-
tors makes a great deal of difference to the extent
and nature of regional clustering of high-tech-
nology firms, but points to a generally favourable
upward trend in the establishment of new clusters
outside Cambridge — whereas Bishop (1988),
Gripaios et al. (1988) and Lean and Chaston
(1995) confirm the importance of local market
conditions but suggest also that high-technology
regional clusters are in fact not self-sustaining
because of the ‘environmental’ constraints of per-
ipheral regions.
5.2 Finance as a constraint on innovative effort
Another area where contradictory findings can be
reported relates to the role of finance — the lack of
availability of which in the UK has long been
accepted as a serious constraint on SME growth —
particularly in the high-technology sectors.
The results reported by SBRC (1992) encapsulate
the divergent messages. On the one hand, the Cam-
bridge researchers found strong evidence that the
availability of finance was cited by a large share of
entrepreneurs as a constraint on expansion and the
introduction of new technology — yet they also found
that only a very small number of those seeking fin-
ance actually failed to find it!
 Small firms, R&D, technology and innovation in the UK: a literature review
Walsh et al. (1995) examined R&D funding
sources for 150 SMEs in the biotechnology sector and
found that while only 1 in 5 had secured venture
financing, more than 50% apparently preferred to
eschew equity financing and remain dependent on
internally generated resources as a means of retaining
their independence. (See also Moore (1993), whose
results parallel these, and ACOST (1992), which
points out that this attitude propels SMEs into a rev-
enue trap because their retained earnings are not suf-
ficient to finance major technology development
efforts.)
Austin et al. (1995) explored differences between
financing mechanisms in France and the UK, con-
firming the usual blinkered approach and lack of com-
petence of UK banks to properly evaluate financing
applications from high technology firms — whilst
also pointing to significant differences between the
terms and the low level of government-subsidised
financing found in the UK and the more generous
medium to long term support offered to French SMEs.
Murray and Lott (1993) surveyed 40 venture capital
firms (accounting for 77% of UK venture financing)
and found a distinct bias against SMEs in terms of
more stringent rate-of-return requirements, but found
in fact this was in line with market expectations and
reflected accurately on high-tech SME success and
failure rates. (This finding is reinforced by Storey et
al. (1989) who found that only 4% of the fast-track
start-ups they surveyed were of interest to venture
capital firms.)
One final thought-provoking divergence in the fin-
dings is also highlighted by Murray and Lott (1993),
who show that SMEs were disadvantaged when
applying for commercial financing if they could not
point to success in securing any government-backed
funding — a further indictment of UK government
policy on subsidised R&D financing. These results
would appear to underpin the repeated calls in the
literature for the government to expand its role in pro-
viding subsidised medium to long term R&D finance
on an equity basis. Oakey has further argued that in
the particular case of biotechnology this would pre-
vent the asset stripping that currently takes place
when large predatory firms take over their smaller,
resources-starved colleagues. Yet Wilson (1992) and
Goss (1991) suggest that the availability of such fin-
ance would run counter to the original start-up objec-
tives of many high-tech SME entrepreneurs — the
prospect of a lucrative buy-out of the owner’s equity
a few years after start-up!
5.3 External linkages and SMEs’ innovative strength and
competitiveness
The topic where empirical research has cast most
light relates to the existence, nature and impact of
linkages between SMEs and external sources of
knowledge. A number of issues are pursued by this
research — consensus has emerged in some areas and
not in others.
For example, a substantial body of work, opened
up by Rothwell, Beesley and Dodgson in the second
half of the 1980s but subsequently extended by others,
established that many SMEs, particularly those in
high-technology sectors, had diverse and extensive
linkages with a variety of external sources of knowl-
edge (public and private) either individually or as
members of networks of various kinds.
The value of this work lies in three findings:
— first, there appears to be no significant struc-
tural impediments operating on these SMEs in
terms of the availability of and their access to
external knowledge sources of a variety of types;
— second, these linkages can be important
sources of knowledge that directly strengthen the
technological competences of the SMEs and thus
their competitive strength;
— third, however, the management of external
linkages to ensure that positive benefit is extracted
is neither straightforward nor costless and requires
the allocation of considerable technical and mana-
gerial resources.
For research that illuminates this group of issues
(and more) see, for example, Beesley and Rothwell
(1987), Dodgson (1989), Keeble (1992), Jones-Evans
and Steward (1995), Stockport (1989), Hartman et al.
(1994b), Rothwell and Dodgson (1990a), Lawton-
Smith (1991), Dickson et al. (1995b), Lang (1995),
Faulkner and O’Connor (1989), Senker and Faulkner
(1992), IRDAC (1987), Ang’Awa (1995), Buisseret
and Cameron (1994) and Duff and Gearing (1995).
However, despite the strength of the findings sub-
sumed in this body of knowledge, there is also evi-
dence that counters many of the positive assumptions
about the value and extent of linkages between exter-
nal sources of knowledge and SMEs, and suggests
these questions are as yet unresolved.
For example, as far back as the mid-1980s, Cannon
(1985) was demonstrating from approximately 20
case studies of manufacturing SMEs in medium-tech
industries that, whilst these firms were actively innov-
Technovation Vol. 18 No. 1 47
Kurt Hoffman et al.
ative and largely successful at commercialising their
innovations, relatively little use was made of external
relations — with the exception of their trading part-
ners.
This finding has been underpinned by the more
recent work of Devins and Kimbara (1995), Tang et
al. (1995), Leeds TEC Policy Research Unit (1993),
Jones and Beckinsdale (1994), Moore and Sedaghat
(1992) and Vaux et al. (1996). These studies cover
both high-tech and general industrial SMEs and sug-
gest that one cannot generalise about the existence
and importance of SME external linkages.
Some serious questions are also raised in this body
of work about the contribution of higher education
institutions (HEIs) in particular as sources of tech-
nology and technical assistance for SMEs. For a
whole variety of reasons, they simply do not appear
to be playing the role that has been identified for
them. Indeed, Tang et al. (1995) and Storey (1992)
suggest that there may be an inherent, intractable mis-
match between the essentially long-term research
interests and focus of most HEIs and the short-term,
near-to-market needs of most SMEs.
This is a finding that will not surprise Oakey
(1993), who has long been decrying the value of uni-
versity-based science parks, seeing them as culs de
sac and diversion of valuable resources — whose
existence may suit the perceived needs of the univer-
sities to generate rent and to the SMEs for having a
low-cost, prestige address but do not contribute a
great deal other than that. Westhead and Storey
(1994) probably would not go quite so far, but their
extensive research into the benefits of science parks
to SMEs struggled to find really compelling evidence
to counter the Oakey view.
Finally, Moore (1993), using case studies on 12
SMEs (from the biotechnology and scientific instru-
ments sectors) engaged in collaborative research ven-
tures of various kinds, reveals that the firms felt that
on balance the costs of these collaborations out-
weighed the benefits. A parallel set of concerns about
the benefits of external links is raised by Oakey
(1993) in relation to research and other collaborations
between large and small biotechnology SMEs.
6. SME POLICY INTERVENTIONS: ARE THEY WORKING?
The research literature reviewed for this report is
fairly patchy in its geographical, sectoral and pro-
gramme coverage of the impact of government policy
in the SME/innovation area. There is also very little
48 Technovation Vol. 18 No. 1
in the way of rigorous quantitative assessments meas-
uring additionality and other benefits. Nevertheless,
there are some disappointing as well as some encour-
aging findings.
The most disappointing, and no doubt well known,
general conclusion has come from the Cambridge sur-
vey which argued that, on the basis of assessments
provided by the firms themselves (more than 2000),
the overall impact of government policy over the last
decade has been poor. There is reinforcement for this
view scattered throughout the literature we reviewed.
At the level of general critiques, Oakey (1991b)
offers a strong critical analysis of government policy,
as does Johnson (1990). More specifically, Keeble
(1992) shows that rural firms are not big users of
government services — though he does not put this
down to poor design and delivery of the services;
Devins and Kimbara (1995) point out how few (less
than 5%) of their sample of firms sought government
R&D assistance. Curran (1993) and Adam-Smith and
McGeever (1995) take a fairly critical posture on
TECs, suggesting that they are still not yet reaching
the sorts of SMEs and delivering the sorts of services
that they were set up to provide.
The arguments deployed powerfully by Storey
(1993) and other senior analysts over the wisdom of
continued government support to promote a high
birthrate of start-up firms are echoed in Goss (1991),
Joyce et al. (1993) and Patton and Bradley (1995).
We would conclude that, despite the arguments used
in favour of supporting start-ups (summarised in
McMullan and Vesper, 1987), there is a general sense
pervading much of the literature that it is far better
to find an SME- or firm-directed way of channelling
available support to proven firms with unrealised
growth potential than to attempt to pick winners from
among start-ups.
Nevertheless, despite the inevitable criticism of
government policy, there were also some fairly
encouraging results reported, for example:
— There was uniform and positive support for
the impact of the Teaching Company Schemes —
as summarised in Senker and Senker (1994) and
confirmed in Jones and Beckinsdale (1994) and
Tiler and Gibbons (1990).
— The SMART and SPUR programmes were
acknowledged as valuable and useful, with a
widely distributed take-up of these awards (Mason
and Harrison, 1992; Keeble, 1993; Moore, 1993;
Moore and Garnsey, 1991 and Devins and Kim-
bara, 1995), though there was also a view that the
 Small firms, R&D, technology and innovation in the UK: a literature review
schemes were far too small and a good deal more
resources could be usefully channelled through
them.
— Roy and Potter (1990) highlighted the suc-
cess of government programmes to promote good
design in SMEs through the use of subsidised con-
sultants, and found a success rate of two-thirds
among more than 1000 grant recipients with an
average payback of 15 months.
Most encouraging, there does seem to be a consensus
emerging in favour of the direction of current govern-
ment policy towards supporting SMEs and their
innovative efforts as encapsulated in the M90s pro-
grammes and the TEC and Business Links schemes.
There are criticisms of the TECs (as noted above),
and a number of authors note that the Business Links
scheme has had limited impact, primarily because it
has not been in place long enough. (See Tang et al.,
1995; Patton and Bradley, 1995; Hughes and Down-
ing, 1995 and Vaux et al., 1996.)
But there is an evolving sense of agreement on the
wisdom of a policy, using local intermediaries, which
seeks to allow firms to find their way to the range of
services and schemes that are on offer and which
seeks to cover the gamut of SME needs in the area
of support for innovation and commercialisation. The
literature suggests that, while current policies may not
be as proactive or as comprehensive as the approaches
called for by Oakey (1991b) and Storey (1993), they
are still better than what was in place before and
should be given time to work.
7. CONCLUSIONS
This paper has provided an introductory review of
literature and related resources covering the theme of
SMEs and innovation. It suffers from a number of
weaknesses, not least the limitation of coverage to the
UK. Clearly there is considerable scope for extending
such a study to incorporate literature from elsewhere,
especially since there have been notable successes in
developing competitive advantage in countries with a
strong SME bias — for example, in the Italian furni-
ture industry or in Danish engineering firms.
In spite of its limitations, the survey suggests that
there are still substantial gaps in our knowledge, parti-
cularly about the detailed workings of innovation
within SMEs and, at the other end of the scale, about
the large-scale patterns of innovative behaviour
amongst this group. The former problem requires a
closer focus on the question of innovation manage-
ment — how SMEs develop strategy and incorporate
innovation into their thinking on this, how they
mobilise and access resources and how they monitor
and control their disposition in innovative projects.
Clearly many of the formal and structured approaches
used in larger firms and prescribed in business school
literature will be inappropriate in the case of the SME.
But at the same time a lack of appropriate control and
management is likely to lead to high levels of risk
and failure.
In the case of the large-scale survey, we suggest
that there is a need for an authoritative, up-to-date,
macro analysis of the role of SMEs in the UK
industrial/manufacturing sector (in terms of numbers
(and size) of firms, share of output, employment,
value added, investment, export performance etc.),
assessed against the best available
technology/innovative effort/R&D input and output
indicators.
This is not to deny the value of earlier work which
fits into the type of analysis we are calling for, but
rather to suggest that there is simply not enough of
this work being carried out on a large enough and
visible enough scale to provide the sort of analytical
foundation that SME innovation study requires in the
last half of the 1990s if it is to make a solid contri-
bution to policy formulation.
A comprehensive study, combining rigorous survey
research with statistical analysis, carried out at the
three or four digit sectoral level over a sufficiently
long time series (and ideally presented in comparison
with other OECD countries) would now seem to be
essential. The ‘reflection’ and ‘interpretation’ of exist-
ing knowledge that would necessarily underpin this
work could go a long way towards generating a
widely accepted technology and sectoral based
characterisation of industrial SMEs. This is an urgent
need since, at present (apart from the case of research
on high-tech SMEs), sector selection is not driven by
technology variables.
Such a study would provide a starting point for
assessing which sectors and at what levels SMEs are
actually playing a significant, dynamic role and the
relative importance of the technology/innovation vari-
able as a determining factor in their economic contri-
bution — or lack of it. This knowledge base would
provide a framework in which sectoral research pri-
orities could be easily set and scarce policy research
funds appropriately targeted.
Technovation Vol. 18 No. 1 49
Kurt Hoffman et al.
Acknowledgements
The research reported here was originally carried
out on behalf of the UK Department of Trade and
Industry. Their support and permission to publish this
material is gratefully acknowledged; the opinions
expressed remain, however, the responsibility of the
authors.
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Kurt Hoffman is an industrial economist with 22 years’ experience
in a unique variety of positions - as a Senior Fellow at the Science
Policy Research Unit, University of Sussex; a senior advisor to govern-
ment agencies and multilateral development institutions; as a corporate
strategy consultant to large and small firms; and as an entrepreneur
responsible for planning, securing venture capital investment for and
launching two commercial start-up companies. He carried out the work
for this project as part of his ongoing association with the Centre for
Research in Innovation Management (CENTRIM) as an Associate Fel-
low.
Management at the Centre for Research in
Innovation Management (CENTRIM), Uni-
versity of Brighton, and also Professor at the
Science Policy Research unit (SPRU), Uni-
versity of Sussex. He is the author of numer-
ous books and journal articles, the latest of
which, Effective Innovation Policy
(Thomson Business Press) appeared in 1996.
His research interests include continuous
improvement, innovation policy for SMEs
and organising for new product develop-
ment. He is a member of the Editorial board for Technovation.
Lew Perren is a principal lecturer in busi-
ness analysis at the Centre for Management
Development, University of Brighton. He
was a management consultant prior to join-
ing the university in 1990. Dr Perren’s
research focuses on the development issues
faced by small firms. He is the author of a
range of academic and professional publi-
cations. He is currently working with Pro-
fessor Adrian Berry on a project, funded by
the Association of Chartered Certified
Accountants, investigating the role of non-
executive directors in small firm development.

Milady Parejo is a highly successful con-

sultant in national and international projects
relating to technology management, techno-
logical change and deregulation. From 1984
to 1991 Milady worked as management con-
sultant for the design of policies and stra-
tegies for the Venezuelan government in the
field of industry and technology. Her most
recent experience there was with the privat-
isation of Venezuelan Telecommunication in
1991, funded by the World Bank. She has
also worked as international consultant for
the Development Agency UNIDO/PNUD. Milady Parejo is currently
Research Fellow at CENTRIM and is completing doctoral research
focusing on the management of technology in telecommunication.

Technovation Vol. 18 No. 1 55