Britain's army of small firms are planning a fresh wave of R&D investment in a bid to boost sales but risk being held back by a lack of relevant skills, according to a survey by Lloyds Bank.
Four in ten firms (40%) expect to increase their investment in new products and services over the next five years, while a further 54% say they will do more if they can access the right funding.
In a further sign of growing business confidence, bosses at Britain's small firms expect annual sales to increase 7.4% over the next two years driven by new innovation, against UK GDP growth predictions of 2.4%. This would add £121.87 billion of additional sales to the UK economy, based on estimates from the Office for Budget Responsibility (OBR).
But despite the upbeat outlook, 62% of small firms said their R&D plans were being held back, with the most common cause being a lack of skills needed to drive innovation, including science, technology, engineering and maths (37%).
Last month, the CBI called on the government to prioritise innovation and science funding in the Comprehensive Spending Review, highlighting that the UK's research and development spending is now the lowest amongst the G8. In Septemeber, the World Economic Forum's global competitiveness index showed Britain had slipped to 10th place in the rankings, being overtaken by Sweden.
Gareth Oakley, managing director of SME banking at Lloyds Banking Group, said: "What we're seeing is a growing determination amongst Britain's small and medium-sized firms to innovate in order to drive competitiveness and secure their long-term success.
"SMEs are ideally placed to lead this charge. They have the advantage of being closer to their customers and more internally flexible, which makes the process of listening to feedback and adapting products and services a shorter cycle."
He added: "The scale of the challenge, however, is equally clear. Unless we provide access to the talent necessary to deliver that innovation, we run the risk of missing an enormous economic opportunity. That requires a concerted and collaborative effort on the part of the UK's innovation ecosystem, with skills and funding being the killer ingredients. As a major supporter of small firms, we're determined to play our part."
According to the survey, small businesses said their investment in innovation over the last five years had increased profits (42%) and led directly to them securing new contracts (43%).
Britain's SMEs invested on average 8% of revenue on R&D over the last five years, which was responsible for 15% of sales, meaning every £1 spent generated £1.74 of sales. In total, half (51%) plan to raise external funding to support their innovation rather than working capital. Two thirds (67%) of firms polled said innovation was vital to their growth strategy.