Government Funding and Its Influence on Product Innovation in Micro, Small, and Medium Enterprises (MSMEs): A Comprehensive Review

Abstract

Introduction: Background: Micro, small, and medium enterprises form the critical part of driving economic growth, employment, and innovation in most countries around the world. However, they equally face important barriers, such as financial constraints, difficulties in accessing technology, and competitive pressures from larger firms. Government funding through grants, loans, tax incentives, and innovation hubs seeks to mitigate these barriers by enabling MSMEs to innovate, develop new products, and enter new markets.
Methods: This review evaluates the role that government funding has played in the product innovation process of MSMEs. Various mechanisms of funding were assessed in regard to their efficacy in driving innovations, and some challenges facing MSMEs in accessing the programs. Through comparative case studies and cross-regional analyses, insight is developed concerning the effectiveness of government initiatives and policy frameworks in place.
Results: Government funding has increased the R&D capacity among MSMEs, helped create new products, and enabled market expansion. For instance, initiatives such as Horizon 2020 of the European Union have contributed to improving MSME technological innovation. Yet, obstacles are set in the convoluted process of application and rigid eligibility criteria, and in differences among regional mechanisms that impede accessibility and effectiveness for this kind of initiative. This is risky because it creates overdependence on government funding that may be discontinued in the case of changes in policy. It has been responding to these kinds of challenges with the development of collaborative funding mechanisms and innovation ecosystems by forming partnerships between MSMEs and research institutions.
Conclusions: The most crucial role played by government funding is in overcoming the financial and technical problems of MSMEs in the development of a new product. Some useful policy measures for maximizing impact would include simplification of application procedures, designing programs considering heterogeneous needs, and encouraging joint innovations. Long-term sustainability of government-funded innovations and removal of regional and sectoral imbalance are some aspects that future studies may consider. These findings support the argument for more targeted, efficient, and inclusive funding approaches to enhance innovation in MSMEs and promote economic growth.