When does public funding foster SME innovation? A management-oriented systematic review of European evidence and the eco-innovation gap

Marival Segarra-Oña, Carlos A. García-Meseguer, Angel Peiró-Signes and Francisca Sempere-Ripoll

Central European Management Journal, 2026, 1-25

Abstract: PurposeThis study asks under what firm-level conditions public funding fosters innovation in European small and medium-sized enterprises (SMEs). Moving beyond aggregate policy evaluation, it adopts a management-oriented perspective that foregrounds firm-level capabilities and managerial decision-making, and synthesizes the fragmented empirical evidence on how subsidies, tax credits and policy mixes shape SME innovation outcomes.Design/methodology/approachFollowing preferred reporting items for systematic reviews and meta-analyses (PRISMA) 2020, peer-reviewed empirical articles indexed in Scopus and Web of Science between 1984 and December 2025 were screened. After relevance and quality criteria, 32 firm-level studies on European SMEs were retained. The review combines descriptive analysis with structured content analysis of instruments, outcomes, research designs and contingencies, interpreted through a capabilities-based framework integrating the resource-based view, absorptive capacity and dynamic capabilities.FindingsThe reported effect of public funding on SME innovation is predominantly conditional rather than uniform: most studies find effects contingent on firm and contextual characteristics. Absorptive capacity and prior innovation experience emerge as the dominant moderators, followed by strategic alignment and instrument-specific capability demands. Direct subsidies and policy mixes dominate the evidence base, whereas R&D tax incentives remain under-examined. A salient negative finding is an eco-innovation gap: only one of the 32 studies addresses eco-innovation directly.Research limitations/implicationsThe corpus is restricted to peer-reviewed, firm-level studies on European SMEs in upper-half-ranked journals, and outcome measures and designs are heterogeneous, limiting effect-size comparison. The evidence concentrates on subsidies, leaving tax credits and eco-innovation thinly covered. Future research should examine these instruments, extend to regulation and demand-side tools, exploit longitudinal and cross-country firm-level data and strengthen identification to address the endogeneity of funding allocation.Practical implicationsManagers should treat public funding not as a guaranteed input but as an external resource whose innovation value depends on the firm's absorptive capacity, prior experience and the alignment between funding objectives and strategy. Firms with weaker internal capabilities may capture less benefit, suggesting that capability-building should accompany funding applications rather than follow them.Social implicationsBecause the innovation returns to public funding are conditional on firm-level capabilities, undifferentiated support risks benefiting already-capable firms. Support schemes attentive to firm heterogeneity combining financial aid with capability development and clearer selection criteria – could distribute public resources more equitably and improve the societal return on innovation spending.Originality/valueBy synthesizing fragmented, methodologically heterogeneous evidence through a capabilities lens, the review reframes public funding as an external resource whose value is contingent on firm-level absorptive and dynamic capabilities. It offers an integrative framework linking instruments, managerial conditions and innovation outcomes, and explicitly documents the eco-innovation gap as a contribution.

Keywords: SMEs; Innovation management; Public funding; Subsidies; Absorptive capacity; Systematic review; Europe (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cemjpp:cemj-02-2026-0048

DOI: 10.1108/CEMJ-02-2026-0048

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