SME Instrument – So Far So Good? Expectations, Reality and Lessons to Learn

The SME Instrument (SMEI) is a new consolidated funding scheme within Horizon 2020. It was introduced in 2014 as a dedicated tool to support high potential innovation, ultimately as a way to consolidate EU policy efforts to foster European competitiveness in advanced technologies in order to match its excellence in science. The expectations were pinned on small firms – the drivers of knowledge economy. There was never previously a tool dedicated exclusively to supporting the technological entrepreneurship of small and medium-sized companies in the European policy landscape. Therefore, the introduction of the SME Instrument was eagerly expected and widely welcomed by both policymakers and European small companies. However, both practitioners and experts have been growing increasingly frustrated with the pace and the rates of implementation of the Instrument. With the extraordinary rate of response from European SMEs that the Instrument received, it has so far been financially constrained in satisfying the demand, which has eventually led to some losses of investment and the neglect of talent. this report, we provide the description and initial analysis of the SME Instrument, as well as first lessons that can be extracted from the ongoing stream of applications. We first note that Europe has long been experiencing a paradoxical disbalance between its strength in scientific research and its low capacity in innovation. We illustrate how the need for a dedicated tool of technological innovation support within the European policy landscape has been growing, becoming increasingly recognised throughout the successive framework programmes. In essence, the design of the SME Instrument mimics that of the U.S. Small Business Innovation Research Program in its 3-phase structure, amounts of the awards and focus on technology commercialisation. We analyse evaluation reports and academic literature of SBIR and provide initial comparison between the two programmes. What we note is that SBIR had multiple unexpected non-financial positive externalities, such as the facilitation of entrepreneurship culture, and we make multiple propositions about the likelihood of these effects occurring as a result of the SME Instrument funding. The report identifies three main policy implications based on first years of implementation of the SMEI: while it is extremely popular, it is way too competitive. The low probability of funding may discourage future applications once the hype for the new tool fades. Second, the variety of firms applying for the SMEI support discloses the variety of strategies and ways of coping with early stage lack of financing that exist in Europe. Many lessons can be extracted from the narratives of applicant firms and their business models. Third, there is still a lot of ambiguity about the 3rd phase of the SMEI and the ways in which SMEI awardees can access further sources of European finance. Finally, the report profiles the proposals in terms of their technological area, country where the proposals submitted from, countries with the highest rates of funded proposals, size and age of applicant and successful SMEs, the amount of funding allocated. Eventually, we open up discontinuities in funding between phase 1 and phase 2 of the SMEI, calling them ‘Wasted Talent’. This data can be a source for ongoing research in innovation management. Among others, the paper provides initial insights into how the SMEI awardee data can be used for the analysis of fast growing firms across sectors, how the applicant and awardee data can be used in the evaluation of the SMEI as a policy tool, a comparative dimension with the US SBIR and how it is possible to study synergies with other entrepreneurship policies on the European and national levels.