Small businesses power the European economy, but many of them lack the digital savvy necessary to compete during the pandemic. Digital innovation hubs provide the guidance and support needed to remake their businesses.

By Alberto Casorati, Arnold Verbeek and Shiva Dustdar

The most digitally savvy businesses have weathered the coronavirus pandemic the best. Whether it involves selling to customers online, managing costs through smart inventory systems or working remotely, technology has kept certain businesses running despite lockdowns and social distancing measures.

Small businesses, however, have been at a distinct disadvantage. Already hit hard by lockdowns, many of them also lack the digital tools necessary to survive the extremely difficult environment. In addition, the European regions most impacted by the coronavirus outbreak, like Italy, also tend to be those where small businesses are less digitalised, according to a recent study by the European Investment Bank’s Innovation Finance Advisory division, Financing the digitalisation of small and medium-sized enterprises: The enabling role of Digital Innovation Hubs (DIHs).

The report highlights just how deep the digital divide is and points to some possible solutions:

  • Fewer than 20% of European small and medium-sized enterprises (SMEs) are highly digitalised, compared with nearly 50% of large corporations.
  • Small businesses power the European economy, and their ability to survive the crisis will be key to our economic recovery and future growth.
  • Those businesses need financial support for their digitalisation, which means that banks need to better understand how technology can make small businesses more efficient and effective.
  • Digital innovation hubs scattered throughout Europe are already helping certain industries adopt digital tools. We need more of those hubs in underserved regions of Europe, and they should increase their support for small and medium-sized firms.

What are digital innovation hubs? Digital innovation hubs are one-stop shops that help companies use technologies to improve their products, services, and processes to boost competitiveness. The hubs provide the kind of digital guidance that Europe’s small businesses desperately need, particularly in these tough times. 

SMEs: An economic engine

It’s difficult to overstate how incredibly important small businesses are to the European economy. They represent 99.8% of non-financial businesses in the European Union, and account for two-thirds of employment.

Small and medium-sized businesses generate much of the value added to the non-financial economy as well – 56.2%. In Belgium, Italy and Spain, three of the countries most affected by the pandemic, smaller firms provide more than 60% of the value added to the non-financial economy.

The current crisis exposed these firms’ vulnerability to supply and demand shocks, such as Europe-wide lockdowns. An estimated 50% of Europe’s small businesses could fail, because they lack the deep financial pockets needed to survive the crisis.

Small businesses also form the backbone of the industries most affected by the crisis. According to the Organisation for Economic Co-operation and Development, these industries include transport manufacturing, construction, wholesale and retail trade, lodging and restaurants and real estate agencies, not to mention the gamut of professional and personal services (hairdressers/beauticians).

Innovation hubs step in during COVID-19

Digital innovation hubs improve a company’s digital awareness and adoption, by helping it assess its needs and develop its competencies. The hubs serve as a point of exchange, advice and hands-on support, providing informational seminars and conferences, networks of industry contacts and lists of digital service providers.   

The hubs focus on three main areas:

  • Innovation activities. Those activities help companies identify digitalisation opportunities and validate innovative solutions based on cutting-edge technologies.
  • Business development. The hubs aid firms in assessing the impact new technologies will have on their business and by changing firms’ business models, if necessary.
  • Skills development. Through seminars, conferences and other events, the hubs can help improve the digital skills of a company’s workforce.

The hubs have reacted to the coronavirus pandemic by helping companies work together to provide solutions, whether it be robotics for health care providers or new manufacturing processes for locally produced masks.

In the Lombardy region of Italy, one of the areas most affected by the outbreak, the local digital innovation hub worked with a regional industrial association, Confindustria Bergamo, to tackle a shortage of surgical masks. The hub led a massive local initiative to help regional manufacturers pivot their business from textiles, fashion or chemicals to making surgical masks for health workers.

To help companies navigate stringent health and safety regulations, Confindustria Bergamo set up a web page with clear, simple information on rules and technical requirements. The hub also sent out a tender for laboratories that could test the experimental masks.

As the health crisis intensified, the Digital Innovation Hub Lombardia reached out to its network of companies in the chemical, textile and packaging sectors, helping to build a local mask supply chain from scratch. The innovation hub sifted through almost 1 000 emails from interested firms and answered thousands of calls. It also held daily Zoom meetings with Confindustria Lombardia and other industry associations in Lombardy to coordinate efforts.

While thousands of companies applied, in the end the Italian health institute only approved three firms – one at the end of April and two at the beginning of June. The three companies, however, are now producing 50 000 to 100 000 masks a day.

Other digital innovation hubs have also spearheaded COVID-19 initiatives. DIH-HERO, a pan-European network of Digital Innovation Hubs specialising in healthcare robotics, opened a COVID-19 tender to support technologies and solutions that can be quickly deployed in the health sector. While DIHNET, a community of digital innovation hubs, is looking into the immediate and long-term needs of public sector organisations and small businesses after the pandemic and examining how digital tools could make them more resilient.

Bringing down barriers

One of the key barriers to the digitalisation of small and medium-sized enterprises is a lack of knowledge inside the enterprise. Digital innovation hubs can be a great place for small businesses to exchange ideas, giving them exposure to new technologies, processes and business opportunities.

Many EU members recognise the need to help small businesses on their digital journey. Innovation Finance Advisory has worked closely with Ireland and Portugal to support measures like training and the use of financial instruments for funding. A similar project is also planned for Italy.

In Ukraine, the European Investment Bank (EIB) recently signed a €50 million loan for a new innovation park in Kyiv called UNIT.City. The project will help finance one of the biggest technology hubs in Central and Eastern Europe, a 25-hectare site that houses start-ups, IT training centres, high-tech firms, research centres, incubators and accelerators. The project is supported by InnovFin Science, a joint initiative of the European Commission and the EIB that promotes research and innovation.

The EIB also works with the European Investment Fund (EIF) and the  Commission on  other initiatives to spur the digitalization of small and medium-sized firms. One example is the Digitalisation Pilot programme launched by the EIF and the Commission under the COSME Loan Guarantee Facility. The programme allows the EIF to provide financial support for small businesses’ digital projects.

The support for digitalisation supplement other EIB measures to shore up small businesses after the coronavirus shock. The EIB Group is creating a €25 billion Pan-European Guarantee fund in response to COVID-19. The guarantee fund will enable the EIB Group, in partnership with local lenders and national promotional institutions, to scale up its support to small and medium-sized firms. The guarantee fund is expected to mobilise up to €200 billion. Other EIB measures include:

  • A €1 billion guarantee based on existing programmes that is expected to mobilise up to €8 billion of small business financing
  • Dedicated liquidity lines to banks worth up to €10 billion to supply small businesses and mid-caps with working capital
  • Programmes to purchase the asset-backed securities held by banks, which will allow them to transfer some of the risk of their small business loans, freeing up more resources for more lending. The programme is expected to mobilise a further €10 billion of support.

In addition to those measures, the EIB study also recommends creating a dedicated risk-sharing financial instrument for digital projects and developing equity instruments or debt products for small businesses.

More generally, however, support for small business digitalization should be an integral part of Europe’s COVID-19 response. Digital innovation hubs are already well-placed to help with the transformation. Small and medium-sized businesses are the lifeblood of the European economy. They need to be healthy enough to resist the current, and any future, shock.

Alberto Casorati and Arnold Verbeek work as advisors in the Innovation Finance Advisory division of the European Investment Bank. Shiva Dustdar heads the Innovation Finance Advisory division.