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, they often face hurdles in innovation. This research explores the largely uncharted territory of how innovation policy can empower SMEs to overcome these challenges and unleash their full innovative potential.

Focusing on China's National Equities Exchange and Quotations (NEEQ) listed enterprises from 2011 to 2020, this study uses a Multi-Level Treatment Effect (MLTE) model to analyze the real-world impact of different innovation policies on SME innovation. We delve into the distinct effects on substantive innovation (groundbreaking advancements) and strategic innovation (adapting to market and governmental demands).

Policy Mixes: A Winning Formula

Our findings reveal that innovation policies significantly enhance SME innovation, especially substantive innovation. Intriguingly, the combined effect of policy mixes (such as government subsidies paired with tax incentives) surpasses the impact of single policies.

This synergistic effect underscores the importance of a holistic approach to policy design, rather than relying on isolated measures. By combining different instruments, policymakers can create a more powerful and effective stimulus for SME innovation.

Picking the Winners: Who Benefits Most?

The research also sheds light on which SMEs are most likely to be targeted by innovation policies. SMEs demonstrating "strong motivation" and "high ability" in innovation tend to be favored by government agencies.

Specifically, larger SMEs with lower leverage ratios are more likely to receive support. This highlights the importance of both scale and financial stability in attracting government backing for innovation.

Regional and Industrial Variations

The effectiveness of innovation policies also varies across regions and industries. Policy mixes are particularly advantageous for SMEs in eastern regions of China, driving both substantive and strategic innovation. In central and western regions, however, government subsidies and policy mixes are more effective for substantive innovation, while tax incentives and policy mixes are better for strategic innovation.

This regional variation emphasizes the need for tailored policy approaches that consider the specific context and needs of different geographical areas and industries.

Furthermore, this study reveals that government subsidies outperform tax incentives for high-tech SMEs, while the reverse is true for non-high-tech SMEs.

Policy Implications: A Roadmap for Future Support

This research offers invaluable guidance for policymakers seeking to optimize innovation support for SMEs. It suggests the adoption of a multi-tiered approach that caters to the specific characteristics of different innovation entities, considering regional and industrial variations.

By employing comprehensive selection criteria that assess SME scale, leverage ratio, growth, and board independence, government agencies can ensure that support is directed towards those most likely to succeed. Finally, by strategically combining different policies and expanding the available "toolbox" of innovation instruments, policymakers can maximize the impact of their interventions and foster transformative innovation in the SME sector.

"This work not only advances our fundamental understanding of policy-driven innovation ecosystems but also offers actionable guidance to policymakers seeking to optimize the allocation of support to foster transformative innovation in the SME sector." - Zhao, Shan, and Gao (2025)