Boosting SME Innovation: The Power of Policy Mixes

The Untapped Potential of Innovation Policy

Innovation is the lifeblood of a thriving economy, and Small and Medium-sized Enterprises (SMEs) are its beating heart. While SMEs drive significant economic growth and job creation, they often face hurdles in fostering innovation. A recent study examined how innovation policy, particularly the combination of different policies (policy mixes), can significantly impact SME innovation, offering valuable insights for policymakers and businesses alike.

This research, focusing on Chinese NEEQ-listed enterprises from 2011 to 2020, used a Multi-Level Treatment Effect (MLTE) model to analyze the impact of government subsidies, tax incentives, and their synergistic combination on SME innovation. Unlike previous research, this study considered both "substantive innovation" (focused on technological advancement) and "strategic innovation" (adapting to market and government needs).

Policy Mixes: A Winning Formula

The study reveals that innovation policies do indeed boost SME innovation, especially substantive innovation. Remarkably, the combination of policies—the policy mix—proved even more potent than individual policies. This suggests that a multifaceted approach, leveraging the strengths of various policy instruments, can create a powerful engine for SME innovation.

“Innovation policies notably enhance SME innovation, particularly substantive innovation. The efficacy of the policy-mix in stimulating SME innovation outweighs that of individual innovation policies.” - Zhao, Shan, and Gao (2025)

Targeting the Right SMEs

Not all SMEs are created equal. The study found that those demonstrating "strong motivation" and "high ability" in innovation are more likely to be selected for government support. This "picking the winners" approach highlights the importance of SMEs showcasing their innovation potential to attract vital policy support.

Furthermore, the research unveiled distinct policy preferences for different types of SMEs. Large-scale, low-leverage SMEs, particularly those with strong growth, tend to attract government subsidies. Conversely, tax incentives often favor SMEs with weaker growth. This underscores the need for tailored policy approaches that align with the specific characteristics and needs of different SMEs.

Regional and Industry Variations

The impact of innovation policies also varies regionally. The policy mix proved particularly effective for SMEs in eastern China, boosting both substantive and strategic innovation. For SMEs in central and western regions, government subsidies were more impactful for substantive innovation and tax incentives or policy mixes showed promise for strategic innovation. This geographic nuance highlights the importance of regional considerations in policy design.

Industry also plays a significant role. High-tech SMEs seemed less reliant on policy support, likely driven by inherent industry competition. Non-high-tech SMEs, on the other hand, benefited more from policy intervention. Interestingly, government subsidies were more effective for high-tech SMEs, while tax incentives were more impactful for their non-high-tech counterparts.

Policy Recommendations for a Brighter Future

Based on these findings, the study proposes several key policy recommendations:

• Tailored Support: Implement a tiered innovation policy framework that caters to the specific needs of different SMEs based on their region, industry, and inherent characteristics.
• Holistic Selection: Consider a broader range of SME attributes, including scale, leverage, growth, and board independence when allocating policy support.
• Strategic Policy Mixes: Capitalize on the synergy of government subsidies and tax incentives to create optimal policy combinations, potentially exploring new policy tools and learning from international best practices.

By adopting these recommendations, policymakers can unlock the full potential of SME innovation, driving economic growth and creating a more vibrant and competitive business landscape.