*4.2. Types of SMEs Innovations and Sources of Funds*

The second aspect of the empirical investigations was concerned with the analysis of the associations between the percentage of SMEs that declared the implementation of a given type of innovation and the percentage of SMEs that declared the relevance of a given source of financing **(RQ2)**. In this respect, we may track the possible relevance of a given type of financing to the implementation of innovations. In Table 5, we present the Rho–Spearman correlation matrix, broken by the analyzed clusters of the EU countries.


**Table 5.** Correlations between declared type of innovation and relevance of a given source of funds.

Notes: statistically significant at \*\* α = 0.01; \* α = 0.05.

In the cluster of the old EU countries, there are statistically significant correlations between the percentage of SMEs that declared the implementation of process, management, and sales innovations and the relevance of debt financing. It suggests that debt finance remains a prime source of funds for these types of innovations in the SMEs performing in the old EU countries. However, if we consider the sub-clusters of the old EU countries (inner and outer core countries), the statistically significant correlations were observed only in the case of debt financing and management and process innovation (inner core), as well as between debt financing and the product, process, and sales innovation (outer core).

In the cluster of new EU countries, the statistically significant correlations are observable between debt financing and the implementation of all types of innovations. In addition, the declaration on the relevance of external equity financing was correlated with the declarations on the implementation of process and management innovations, while internal financing was correlated with the process innovations.

In general, if we consider the correlations in the sub-clusters of new EU countries (inner and outer peripheral), the statistically significant correlations were obtained only for debt financing and management and sales innovations (inner peripheral), as well as for debt financing and product and process innovations (outer peripheral). Interestingly, the relevance of equity financing was correlated with the declaration on the implementation of process innovations (both in inner and outer peripheral) as well as management and sales innovations (outer peripheral).

The obtained results clearly indicate that on the level of sub-clusters of the EU countries, there is no unified pattern of correlations between the relevance of a given source of financing and a given type of innovation. Nevertheless, debt financing seems to be a primary source of financing innovation in all clusters of countries, and external equity remains relevant only in the case of new EU countries. This may lead to the conclusion that different financing mechanisms were developed in different countries. In some countries, the main source of finance for innovative SMEs comes from the banking sector, in others—from the private equity capital providers. Possibly, our observations are related to the financial support and arrangements offered within the equity-related programs directed to SMEs operating in the new European member states.

### **5. Conclusions**

This study was designed to capture the cross-country differences in the types of innovations undertaken by European SMEs (**RQ1)** and the relationship between the types of innovations and relevance of given types of funding (**RQ2**). The empirical investigation has found out that there are significant differences in SMEs innovations if we consider the product, management, and sales innovations. However, the directions of these differences are heterogeneous. The larger scale of product innovations was observed in the new EU member states, while the larger scale of management and sales innovations was identified in the old EU member states. If we consider the sub-clusters of EU countries (inner/outer core and inner/outer peripheral), a similar pattern was confirmed. The SMEs from the inner core of the old EU member states are significantly least involved in the product innovations, at the same time, the SMEs form the inner core and outer core EU countries are the leaders in the management innovations. Simultaneously, the SMEs from outer and inner peripheral countries are less involved in management innovations.

This evidence suggests that the types of innovations undertaken by the SMEs may be linked to the general level of economic development and innovative activity in particular countries. The SMEs from the new member states try to catch up with SMEs from countries with a higher level of development, focusing on product innovations. On the other hand, more developed economies create a favorable environment for further improvements beyond product innovations. The importance of the regional factors in the innovation process was underlined by Varis and Littunen (2010). In addition, the different scale of innovative activity in different European countries was noticed by Anwar (2018). In this respect, further inquiries should be placed to detect the drivers of SMEs innovativeness, on the cross-country level. In particular, the relevance of dynamic development of IT technology shall be addressed, in this, the open access to knowledge and the increasing popularity of the open innovation concept.

This study has also confirmed the contingencies between the types of innovations undertaken by SMEs in each cluster of the European countries. These contingencies are most visible in the case of the cluster of the old EU countries, as well as in the outer peripheral cluster. It was found that various types of investment are accompanying undertaken innovations, thus various types of innovations co-exist, although they require different inputs and strategies as suggested by Vaona and Pianta (2008) and are characterized by different degrees of persistency as noticed by Tavassoli and Karlsson (2015). That relationship is explained by 'the spiral of innovation' phenomenon, according to which, one successful innovation provides the opportunity to create another one.

The second aspect subject to this study and addressed in the second research question (**RQ2**—the analysis of the associations between the type of innovation and a given type of financing) provided mixed results. Although debt capital was identified as the prime source of financing innovations in several sub-clusters of countries, there is no unified pattern of correlations between the relevance of a given source of financing and given type of innovation. These results are inconsistent with our earlier assumption about the importance of internal finance, as suggested by the BPOT. They are also in contrast to the earlier findings that innovative firms are more likely to be financed by equity than debt (Hall 2010). On the other hand, Kerr and Nanda (2015) noticed the growing importance of debt financing related to innovation. It suggests that different financing mechanisms were developed in different countries to facilitate SMEs access to finance for innovative activity, which was addressed by Moritz et al. (2016). However, further studies are needed to confirm this supposition. In particular, further studies shall revise the relevance of debt financing, with reference to the domination of banking sector in the financial system, which is typical in numerous European countries. On the other hand, in the case of SMEs, the external equity comes mostly from the private equity market, of which development is one of the priorities of the European Union strategy, focusing on the sustainable growth and innovation.

The results of this study contribute to the ongoing debate on the SMEs financing gap, as linked to their innovative activities (Hottenrott and Peters 2012; Lee et al. 2015; Vasilescu 2014). From an applicative point of view, these results may support the design of system intervention mechanisms that are implemented to reduce the existence of the SME financing gap. As the SMEs operating in various countries remain focused on various types of innovations, the country settings seem to be relevant for the directions of innovations undertaken by the SMEs. In finance-oriented contexts, the system intervention mechanisms should be multivariate and allow flexible design of SMEs financing mix. Moreover, it seems that the system interventions mechanisms should not pursue a defined financing mix for the implementation of a given type of innovation. The core element of these mechanisms should be based on the alternative market-based financing instruments, which are crucial for access to the long-term sources of funds, as noted by Goujard and Guérin (2018).

The main limitation of this study is the nature of the SAFE survey data. Surveys data are always exposed to the risk of bias. In this case, the conclusions are finally driven concerning the SMEs' self-reported (and thus subjective) information. However, as the SAFE survey is repeated continuously (the EU initiative), the risk of bias seems limited. Nevertheless, this study signals a need to perform further investigations that could potentially enrich the evidence on innovative activity of SMEs and financing (capital structure) considerations. In particular, by referring to other possible proxies of innovation in SMEs, the direct associations with the existing SMEs capital structures could be addressed. Such an approach, however, needs a detailed study related to balance sheet entries and annual reports. Further inquiries shall also be placed to better explain the possible reasons behind the differences in types of undertaken innovation in the country-oriented contexts.

**Author Contributions:** The contribution of co-authors is 40% for J.B.; 40% for M.W.-K.; and 20% for J.T. Conceptualization J.B. and M.W.-K.; literature review section J.B.; results and discussion section; statistical calculations M.W.-K. and J.T.; material and methods section M.W.-K.; writing and editing J.B. and M.W.-K. All authors have read and agreed to the published version of the manuscript.

**Funding:** This research received no external funding.

**Acknowledgments:** We gratefully acknowledge the insightful comments provided by three anonymous Reviewers of our paper.

**Conflicts of Interest:** The authors declare no conflict of interest.
