The Federation of Small Businesses (FSB) is calling on the government to kickstart economic growth by investing more in small firms to encourage innovation after R&D tax breaks were scaled back and to set a target to direct at least half of all direct government funding at SMEs.

It also stressed that large businesses should be encouraged to include SMEs in their supply chains when they are working on R&D projects.

Growing turnover or profit was the main reason for investment in innovation, research for the FSB’s Tech Tonic report found while those that had introduced new or enhanced staff and customer-facing processes were motivated by the need to increase business resilience and automate systems.

The average cost of introducing any types of innovation over a three-year period amounted to an average £27,000 and increased revenue by 14.8%.

But barriers remained for small businesses aspiring to go further with their tech investments and innovation.

Two-fifths of small business owners said they did not have time to develop new ideas or adopt technologies to innovate their business, while 28% identified affordability as a barrier and a third said there was not enough communication and information about the type of support available.

Half of respondents said additional government grants would encourage them to innovate, and 46% said extra tax relief would do so.

FSB policy chair Tina McKenzie said: ‘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. 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 southeast 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.

‘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.’

The findings are detailed in a new FSB report on innovation, The Tech Tonic, which looks at the type of new ideas and technologies small companies used to drive productivity as well as the barriers faced.

In light of the findings, FSB called on the government to:

• spend the equivalent of at least 10% of the overall research and development budget on the diffusion and adoption of innovation;
• set itself a target that at least half of all direct government R&D funding goes to SMEs;
• introduce 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.
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