Dramatic drop in innovation cuts off surge in SME business ambition

Academics have released a report that gives a sweeping view of the UK’s innovation scene and suggests that the nation is enjoying “considerable entrepreneurial creativity and resilience”, with a record number of Brits starting a business.

However, the report goes on to state that, while entrepreneurial activity is high, this isn’t translating into growth, suggesting that more needs to be done to raise confidence and help SME owners innovate.

A surge “in ambition”

The data comes from the State of Small Business Britain report, which has been published by The Enterprise Research Centre (ERC), an independent research centre based at Warwick Business School.

It paints a mixed picture for SMEs. Entrepreneurial activity (known as the TEA rate) has increased since the early 2000s and is now stable. 

This is despite the fact that the total business population decreased by 290,000 (4.9%). Interestingly, there was a divide between employing and non-employing businesses. The number of employing businesses actually increased by 0.4% from 2020 to 2025, but the population of non-employing businesses decreased by 6.5%. 

The tide may be turning, though, say the authors, who share that, last year, the overall private sector business population increased by 191,000, largely driven by self-employed business owners with no staff. 

The data also reveals that early-stage entrepreneurial activity by women saw an increase at the turn of the millennium and has continued since then. The authors add that since 2019 “…there has also been a significant shift in the age distribution of all early-stage entrepreneurs in the UK from early 40s to early 30s.” 

Innovation dropping

While the report suggests that the will is there, it also reveals that the climate remains tricky for SME owners, meaning that growth has stymied. 

Using the findings of the UK Longitudinal Small Business Survey (LSBS), the team writes that “sustained growth in SMEs is uncommon”. 

The panel report uncovered that only 14.6% of firms achieved sustained growth over all four years. It further revealed that the proportion of businesses reporting increased sales rose from 2021 (42.1%) to 2023 (59.6%), before falling back in 2024 (41.2%). 

A drop was also reported in the proportion of businesses that had increased their number of employees. This fell from 32.9% in 2021 to 21.7% in 2024.

However, the most pertinent figure was the proportion of firms reporting either product or service innovation. This sat at 30.4% in 2021, and has decreased year-on-year to 24.1% in 2024. 

What is needed

Subdued confidence among SME owners is stopping innovation, argue the report authors. They point squarely to access to funding and help as a huge issue for business owners writing,  “…business support and advice in the UK remains fragmented, underfunded, and insecure”. 

This echoes recent calls from those within the Government and trade associations alike that the current funding system isn’t fit for purpose. A group of Labour backbenchers are actively calling for an act to be instituted into law that would hold banks accountable for how much they are supporting SMEs. 

As the report team writes: “Improving awareness and access to affordable external finance, such as low-interest loans and alternative financing models, could also bring better growth and productivity outcomes.”

However, they also state that businesses need more support in other areas, including combating the negative impacts of late payments, as well as planning and access to local entrepreneurial ecosystems.

With more than one-third of working-age adults engaged in, or planning to start, a business, the report is a call for immediate action. While it’s clear there is optimism and appetite, the tax burden, NICS hike, business rate uncertainty, and rising costs are impacting confidence. 

This report is yet another call for more support for our SMEs in a climate that continues to be tough, however ambitious our founders are.