Lack of innovation continues to hamper small business and startups

Small business innovation in the UK has fallen for the fourth consecutive year despite record levels of entrepreneurial ambition, according to the latest State of Small Business Britain report from the Enterprise Research Centre. The annual study draws together findings from a range of business surveys and shows that 36 percent of working age adults are now starting, running or planning to launch a business. This is the highest level recorded since the Global Entrepreneurship Monitor began tracking activity in 1999. Early stage entrepreneurial activity has doubled since the early 2000s and has stabilised at around 12 percent.

However, the report suggests that this growth in aspiration is not being matched by business performance. The proportion of small and medium sized enterprises reporting product or service innovation has fallen from 30.4 percent in 2021 to 24.1 percent in 2024. Export activity has also declined, from 19.4 percent of firms in 2021 to 17.2 percent in 2024.

The research indicates that the UK’s entrepreneurial ecosystem has weakened in recent years. Expert assessments gathered through the Global Entrepreneurship Monitor show ratings have slipped from sufficient to less than sufficient since 2020. Ongoing challenges include access to finance, the quality of entrepreneurial education and the effectiveness of policy support. The report also finds that support for female entrepreneurs lags behind that available in France, Germany and the United States.

Stephen Roper, Director of the Enterprise Research Centre and Professor of Enterprise at Warwick Business School, said that while the UK retains a strong entrepreneurial culture, ambition alone will not deliver productivity or growth. He warned that declining levels of innovation and exporting, combined with uncertainty over the future of small business support, risk undermining the country’s potential.

The report identifies economic uncertainty as the most frequently cited barrier to turnover among SMEs, ahead of competition and labour costs. Late payments are estimated to cost the UK economy £11 billion each year, with micro businesses employing fewer than 10 people most exposed.

Adoption of artificial intelligence is increasing, with 45 percent of businesses reporting some use of AI tools. Uptake varies by firm size, with significantly lower levels among smaller organisations.

Workplace mental health also remains a concern. Presenteeism is at its highest level since before the pandemic, affecting 37 percent of firms in 2025, yet only around half of businesses have introduced mental health initiatives.

Micro businesses account for 81 percent of all employer firms and employ 4.2 million people. Despite their scale, the report argues they remain underserved and under researched, even though longitudinal analysis of 239,000 firms suggests they grow faster than larger businesses.

The research warns that the wider business support system faces a severe funding threat as the UK Shared Prosperity Fund is due to conclude in March 2026. This could place local enterprise support infrastructure at risk.

Mark Hart, Deputy Director of the Enterprise Research Centre, said that while the Government’s small business strategy published last summer drew on the centre’s evidence and included a number of commitments, delivery may be jeopardised by funding uncertainty. He called for a stable and coherent support system that reflects the diversity of the UK’s business base.

Jane Galsworthy, Chair of the centre’s steering group, described 2025 as a year of mixed outcomes, with record levels of entrepreneurial aspiration alongside rising costs, higher tax burdens and uncertainty about future support.