The UK Government committed to replacing EU Structural funding, as outlined in the newly established UK Shared Prosperity Fund (2016). The goals of improving productivity and developing UK industry were further articulated in the Building Our Industrial Strategy green paper (March 2017), which was based on ten pillars underpinning the strategy. Of these, the two most relevant to the research presented here are the development of a more innovative economy and the understanding of variations in innovation activity by economic sector and region (p. 12). These ideas were further expanded upon with the launch of the Industrial Strategy: Building Britain Fit for the Future (November 2017), which was strongly endorsed by then Prime Minister Theresa May. This strategy emphasised the need to strengthen the overall business environment and improve productivity, particularly among small and medium-sized enterprises (SMEs) and across different regions.

An additional scheme was developed for SMEs to support smaller firms under the title Be the Business (https://www.bethebusiness.com). This initiative grew out of a 2015 government request for top business leaders to review ways to improve productivity. In response, the initiative called for a business-led movement to enhance management skills. It was funded by the government and collaborated with leading UK companies. The idea of improving SME productivity became increasingly important. However, the arrival of the Johnson Government in July 2019 marked a shift away from the UK Industrial Strategy, leading to considerable confusion. A Parliamentary Inquiry was launched in 2020 and reported in 2021, noting that ‘the Government’s approach to industrial policy shifted rapidly but without establishing a clear direction of travel’ (BEISC, 2021). More recently, this was followed by the government’s white paper Levelling Up in the UK (H.M. Government, 2017), which aims to address regional disparities and inequalities at various levels. However, Shearer (2022) points out that ‘several of the areas relevant for levelling up missions – such as business’ (p. 4) are not scheduled for review for another 12 months.

Unlike previous studies on absorptive capacity among SMEs, our research focuses on three main economic sectors: Manufacturing, High-Tech, and Services. The latter is one of the most neglected in comparative studies of SMEs, although there is research focusing on the tourism sector (Thomas & Wood, 2014). These broad sectors were identified using a combination of NACE data and Eurostat definitions, but we did not break down the high-tech sector further1.

The research encompassed four main regions: Cornwall; Cumbria and North Lancashire; the Edinburgh region; and Essex, Norfolk, and Suffolk. As we will show, these areas have different types of economies. For example, Cornwall and Cumbria had significant numbers of SMEs in the service sector. Data from Essex and Scotland were sourced from Fame, while data from Cornwall and Cumbria were obtained from local databases.

Cornwall (Corn) has a service-based economy, experiencing a long-term decline in primary industries such as mining and fishing. The region is characterised by a small-firm economy, with 90% of businesses employing fewer than ten people and approximately 25,000 employees overall. There is also a growing proportion of high-tech enterprises related to the digital economy and e-health. Productivity is only 74% of the average for England, which may partly be due to the relatively large number of lifestyle entrepreneurs, many of whom are in the tourism sector. Indeed, Cornwall’s main economic activity and employer is the tourism sector, which contributes an estimated £1.8 billion per year to the local economy.

For this study, the Edinburgh region (Edin) primarily includes the central belt of Scotland, the area with the highest population density, with approximately 3.5 million inhabitants across 10,000 square kilometres. The central belt is one of the UK’s highest-performing economic and innovation regions, with Glasgow and Edinburgh ranked 5th and 6th, respectively, in terms of FDI (by value). As of March 2017, an estimated 365,600 private sector enterprises were operating in Scotland. Almost all of these enterprises (98.3%) were small (0 to 49 employees); 3,855 (1.1%) were medium-sized (50 to 249 employees); and 2,365 (0.6%) were large (250 or more employees). SMEs provide approximately 1.2 million jobs. Our survey covered SMEs in the Edinburgh, Glasgow, Livingston, Falkirk, and Penicuik regions.

Essex, Norfolk, and Suffolk (Ess) covers the counties of Essex, Norfolk, and Suffolk. The area's economic structure is dominated by SMEs (fewer than ten employees), mostly operating in the service sector. However, several large companies operate in manufacturing—including pharmaceuticals, telecommunications, and automotive industries—primarily located along the M11 corridor and in South Essex. More recently, several tech businesses have been established in the region, thanks to the presence of large companies such as British Telecom and engineering science parks like Hethel Innovation.

Cumbria and North Lancashire (Cumb) covers the county of Cumbria and the Lancaster-Morecambe Bay area, encompassing diverse sectors. These include the tourism-dominated Lake District, post-industrial West Cumbria (Whitehaven, Workington, and surrounding areas), largely agricultural areas (Eden Valley and rural North Lancashire), and the more mixed urban economies of Carlisle, Barrow, Lancaster, and Morecambe. In West Cumbria, the presence of the Sellafield nuclear processing facility supports a cluster of atomic supply chain SMEs and larger engineering contractors. Based in Barrow, BAE Systems also supports a local supply chain, along with a small number of high-technology SMEs. The mixed urban centres of Carlisle and Lancaster host a range of service SMEs, some with innovative business models.

This study employs a mixed-methods research design to comprehensively address the research questions regarding the absorptive capacity of UK SMEs. This approach integrates both quantitative and qualitative methods to capture a more in-depth understanding of innovation across different economic sectors and regions.

Integrating data from these two approaches allows for a more comprehensive view of how knowledge management and absorptive capacity influence innovation activities among SMEs. The quantitative data provide a broad overview of patterns and clusters among SMEs, while the qualitative data offer detailed insights into the stages of absorptive capacity—acquisition, assimilation, transformation, and exploitation—as experienced and implemented by SMEs. Together, this mixed-methods approach enables the study to address the research questions effectively, providing robust evidence on the role of absorptive capacity in facilitating innovation across various contexts.

Our study is based on a convenience sample2 of SMEs selected in equal numbers across three economic sectors. Ten firms from each sector were chosen, totalling at least 30 SMEs per location. The sample was selected to represent at least 20 per cent of the firms’ population in each region.

Two surveys were conducted. The first was an online questionnaire that gathered data on how knowledge was used to develop innovations. It also collected demographic information about the respondents, such as age, gender, and educational background, alongside business-specific data such as company size, location, sector, and access to external funding. This was complemented by insights into their experience with innovation capacity, including their innovation processes, inputs, sources of innovation, and staff involvement. Rigorous sample selection criteria were applied to ensure data quality and relevance, screening out incomplete or low-quality responses. By the end of the survey campaign, we received 115 valid responses, each representing a distinct company. These participants held key positions as owners, directors, or managers within their respective businesses. The sample distribution across regions included 30 respondents from Essex, 30 from Cornwall, 25 from Cumbria, and 30 from Edinburgh.

The second data collection phase involved in-depth interviews with businesses selected from the first stage. As far as possible, these interviews were evenly distributed across regions and economic sectors, with a minimum of four interviews conducted in each case study area. The interviews lasted between 30 and 50 minutes, with an average duration of 40 minutes. They were structured around the four key stages of absorptive capacity and innovation, based on Zahra and George (2002), as shown in Table 1. These dimensions of absorptive capacity were made explicit in the interviews and guided the discussion. The interviews were conducted face-to-face, online, or via telephone, with all data collection taking place during 2018.

Looking at the basic characteristics of our sample firms, approximately 33% of the respondents were directors or managers, while the remainder identified as owners or partners. Around 70% of the respondents were male, with the highest proportion of male respondents in the Edinburgh region (90%), followed by Essex (80%) and Cumbria (68%). Only Cornwall had a relatively equal gender split, with 57% male and 43% female respondents.

Regarding firm size, 58% of our sample had up to nine full-time employees, while only 14% had 10–19 full-time workers. There were interesting variations by region in this variable. For example, 73% of respondents from Cornwall and 70% from Cumbria had up to nine full-time employees, both regions with high proportions of service sector businesses, reflecting the importance of tourism in these areas. Edinburgh followed a different pattern, with 20% of respondents having between 100–149 full-time employees. As for the number of part-time employees, the majority of respondents (83%) had up to nine. Cumbria and Cornwall had particularly large proportions of part-time workers, at 90% and 87%, respectively, compared with 71% in Edinburgh.

The key sections of the questionnaire focused on the managerial processes surrounding innovation in the various enterprises within the sample. This was investigated in three ways. First, questions about direct management processes were presented through a series of statements, shown in Table 3, using 5-point Likert scale questions. Second, statements regarding internal management processes, particularly employee engagement, were included. Finally, questions addressed sources of knowledge within different sectors, with a special focus on regional variations. Together, these questions were designed to cover key aspects of knowledge transfer and absorption, as discussed in the literature review.

Of the statements in Table 3, 53% of respondents strongly agreed with the statement, ‘The organisation continuously scans the market to identify new trends’ (A1), while 52% strongly agreed with the statement, ‘The organisation regularly seeks to introduce new ways and procedures’ (A2). Similarly, 54% agreed with the statements, ‘In general, employees in this organisation are not hostile to change’ (A5), and ‘Innovation and change are implemented at all levels of the organisation’ (A8) (see Table 3). In contrast, 39% of respondents reported working for an organisation without a dedicated R&D team, which is not surprising given the prevalence of small enterprises in the sample. Moreover, a third of respondents indicated that the innovation management process was seen as proactive and decentralised—meaning control was not solely handled by specific research teams or management. In this context, we use the term ‘decentralised management’.

The second part of the survey focused on the role of employees in the innovation process, with 72% of respondents agreeing that employees were encouraged to share their ideas for improving products or processes. The final part of the survey examined the sources of knowledge, with 85–95% of respondents emphasising the importance of customer knowledge, as well as knowledge gained from suppliers or competitors. These factors were consistently important across all four case study regions.

Our respondents identified several sources of knowledge, including networks and customers. As one respondent explained, ‘I think here in Cornwall we have a good network of innovating groups of people in different kinds of businesses, and this is a good way of getting started’ (Corn.1). This emphasises the importance of local networks as sources of knowledge. Consistent with the questionnaire survey results, a key source of information was customers. Typical of the interview comments was this perspective from a business in Essex (Ess.1): ‘We get a lot of information from our customers, mainly about the problems they encounter, which allows us to write a spec of what the product needs to do to overcome these issues’. This contrasts with a more formal approach highlighted by a service sector business in Cornwall, which stated, ‘We pay to be part of an innovative group, and we use an advisor as a sounding board’ (Corn.2).

Of all the respondents listed in Table 7, all but three mentioned a range of external knowledge sources. Those in the high-tech sector mentioned engagements with industry groups, forums, and collaborations with technical partners, such as larger organisations. Several businesses in the service sector explained that they drew on previous experiences, while others mentioned regional organisations and networks (e.g., the Institute of Directors). A few smaller businesses were more proactive in horizon scanning using social media, with respondents from the more rural areas of Cornwall, Cumbria, and Essex noting that social media was an increasing source of knowledge.

Most respondents indicated that the early stages of assimilation were primarily focused on evaluating any new knowledge. This evaluation process involved aligning the new knowledge with the firm’s overarching business strategy. The interviews highlighted differences based on the size of the business. However, several respondents emphasised that the evaluation and decision-making process was inclusive. In this context, the size of the company influenced the scale and, to some extent, the formality of the knowledge evaluation process, as illustrated in Table 8. These differences in formality were also, to some degree, reflected in the variations between manufacturing and the service sector, though this was not as clearly defined in the interviews as expected.

The differences between formal and informal processes based on firm size are not surprising, but our results show that assimilation is a significant component regardless of firm size or sector. Moreover, in many cases, it appears to have been an inclusive process involving the workforce.

This stage of knowledge absorption revealed the greatest variety in how respondents understood the process. Some businesses, particularly those in the high-tech sector, described a formal, evidence-based approach through experimentation. As one medium-sized business in Cumbria explained, ‘It moves straight to a formal design trial-and-error process, for example, to find out about a new material with a different application’ (Cumb.1). Others emphasised a more scientific approach, with one respondent stating, ‘We create hypotheses about what the market wants. Being experimental, knowledge is dynamic, not static, and needs updating when new evidence comes in’ (Ess.2).

In contrast, in two cases, businesses carried out the knowledge transformation process without significant modification. In response to the question, ‘Was there anything that had to be done to the new knowledge?’, a medium-sized manufacturing company in Edinburgh indicated, ‘No, you think just from people. When you get everybody’s buy-in, and everybody agrees, that’s a good idea. You get on it to a new product’ (Edin.1). Another respondent to the same question stated, ‘No, not really, we both understood how to create a product out of our ideas’ (Ess.4).

Two other businesses described the involvement of universities in the knowledge transformation stage. A medium-sized high-tech firm in Edinburgh stated, ‘A lot of knowledge would come in from the university that would be very academic in its nature. You would have to adapt it to make it more commercial and deal with real-world scenarios’ (Edin.2). In another case, a small service firm in Essex stated, ‘We had to consult an external company and a university to be able to set up the database system’ (Ess.3).

Respondents were asked about the outcomes of the knowledge absorption process in terms of outputs. Three main types of responses were identified. First, regarding the knowledge process and its aims, one respondent from a small high-tech business stated, ‘Very successful. Profits and stable growth are the targets’ (Ess.2). A small manufacturing company in Cornwall was also positive, indicating, ‘Yes, I think so. Often, we get offshoots of things that you are not expecting. Learning through mistakes or areas, just by chance’ (Corn.3). Another respondent offered a more optimistic view, saying, ‘The system [referring to the innovation process] is in use. We see some benefits, but we are now planning to enhance it with AI’ (Ess.6).

A second set of views saw the innovation process as ongoing and self-reinforcing. One respondent from a medium-sized company in Edinburgh (Edin.2) indicated, ‘We sold to new clients around the world and brought in money. We can use that to do new things. So, it’s a constant sort of flywheel. You innovate, you sell, get some money, and use that for further innovation’.

A third perspective viewed the outcomes of innovation as creating new opportunities. For example, a medium-sized high-tech firm in Cumbria mentioned new possibilities: ‘Sometimes we’ll develop an innovation and realise it could be used in a completely different way in a different industry’.

Beyond the four main stages of the knowledge absorption process, we also examined during the interview phase what SMEs perceived as the aids and barriers to obtaining new knowledge internally (see Table 9). Most responses identified the factors that support the absorption of new knowledge. Several firms referred to what they called a ‘management culture’, which centred around dialogue and effective communication. Interestingly, some small companies viewed themselves as more fluid and responsive to change compared to larger corporate cultures. This was noted by respondents from Ess.2, Ess.4, and Corn.1.

In contrast, a few respondents highlighted what they saw as significant barriers to knowledge absorption. Two companies pointed to the challenge of reacting to customer requirements rather than following their planned innovation road map. They emphasised the lack of time to ‘get products out of the door over new product development’ (Cumb.1 and Edin.4).

We also investigated the importance of place in the qualitative survey. The significance of location has been highlighted in the literature, as it can influence levels of entrepreneurial activity, local labour availability, and access to capital (Fritsch & Storey, 2017; Henley, 2020). In our interviews, we found differences across economic sectors in how SMEs perceived the importance of place. The development of small service sector businesses was closely linked to their location and related communities, as seen in Cornwall and Cumbria. In contrast, place was either neutral or viewed negatively in the context of high-tech businesses. For example, one company in Cumbria stated, ‘A complete hindrance for us, we can’t get skills – it presents a massive difficulty in terms of skills shortages’ (Cumb.1). Similarly, a high-tech business in Edinburgh noted, ‘Our engineers come from all over Europe, and it is difficult to find engineers with similar capabilities in the UK at the moment’ (Edin.3).

Some respondents highlighted labour mobility and access to talent as significant issues. For example, two of the high-tech companies in Edinburgh approached knowledge acquisition by recruiting staff internationally, bringing in a high level of technical expertise. As one respondent explained, ‘Knowledge is coming from the employees we hire, and that is the technique we have used on a number of occasions, bringing in someone who had a particular knowledge’ (Edin.2). Several small businesses in the rural areas of Cornwall and Cumbria also relied on social media to help develop new ideas or as a source of information when other options were not available.

Finally, we asked the business owners whether they had received any support or funding to aid their innovation process in the recent past. The responses varied, with 50% of respondents reporting that they had received assistance or funding. Some businesses, however, encountered obstacles in accessing funding (see Table 9). In these cases, respondents requested further support, as the Innovate UK process appeared somewhat opaque to some business owners. In contrast, there were numerous examples of SMEs benefiting from Innovate UK grants and other funding sources, as also shown in Table 9.

The main goal of our study was to identify the factors that drive absorptive capacity among SMEs while testing whether there are significant regional and industry differences in the levels of absorptive capacity among SMEs. One of the key contributions of our study is its focus on the four dimensions of absorptive capacity, as identified by Zahra and George (2002), as well as on the role of place in shaping SME absorptive capacity. However, unlike other studies, we have attempted to measure firm responses across each dimension. Our quantitative analysis highlights that, on average, there are differences—although not uniform across all factors—among the SMEs in our sample across four key factors: Decentralised Innovation Management, Employee Engagement, Use of Innovation Knowledge, and Internal Training Procedures.

We also tested whether these differences could be attributed to industry practices. An important element of our study was the comparison of SMEs across three economic sectors (Manufacturing, High-Tech, and Services), which differs from many other studies. Our findings suggest that sectoral differences do not significantly impact absorptive capacity. For instance, cluster analysis indicates that the most successful cluster, which engaged with decentralised management, comprised SMEs from all three sectors. This result supports existing literature emphasising the importance of governance in innovation—found by Noblet et al. (2011), along with Kodama (2005) and Du (2021)—as well as the role of human capital, as noted by Jones-Evans et al. (2016). Indeed, Iammarino et al. (2012) argue that this link with employees is complementary to the innovation process.

Our qualitative analysis has yielded interesting findings for each component of absorptive capacity. For instance, all SMEs have established routines to assimilate and exploit the external knowledge they acquire. Typically, the acquisition process involves diverse forms of collaboration with external parties, including customers, suppliers, universities, and indigenous capabilities (Marshall & Murphy, 2020; Martínez-Alonso et al., 2024). Knowledge is assimilated through an inclusive process, where both management and employees evaluate and make decisions.

Knowledge appears to be transformed in various ways, either through trial and error and experimentation or, for some SMEs, by adopting what they considered a more scientific approach. In other firms, knowledge transformation seems to have been carried out unknowingly as part of routine developments. Finally, once absorbed, knowledge exploitation becomes a relatively straightforward process.

Altogether, these findings suggest that internal processes facilitating the use of external knowledge for innovation, while varying across firms, are not industry-specific but rather specific to the SMEs and the opportunities they encounter as a group. One objection could be that SMEs are a heterogeneous group, and therefore, we might expect to find more differences in their practices around absorptive capacity compared to other types of firms. Our cluster analysis tested this argument, specifically examining whether SMEs differ by location, size, or sector within each cluster. The study suggests there are no such differences. However, the ANOVA indicates significant regional differences among certain factors. Although the differences vary across regions, this key finding confirms the importance of considering the regional context when focusing on absorptive capacity.

While we do not explore which place-specific factors impact absorptive capacity, our study confirms the importance of clients, suppliers, similar organisations, and universities at certain phases of the innovation process. In locations where these actors are absent, or where links to other actors are underdeveloped, the absorptive capacity of SMEs may be limited. Close connections with the market via clients are well documented in the literature through various studies (Iammarino et al., 2012; Madriz et al., 2018; Tether, 2002). Additionally, a wealth of literature on local innovation systems shows how the local environment can influence knowledge flows and usage. Research by Jones-Evans et al. (2016) constructed an innovation network index that highlighted regional variations using ONS data. As Kitson (2019) argues, ‘local innovation systems will vary and will reflect different structures and trajectories of development’ (p. 293).

This paper contributes to managerial practice by demonstrating that the key to successful innovations lies in using new knowledge through open management processes that draw on employees' contributions. In our analysis, this was termed decentralised management, highlighting the importance of management skills across all types of SMEs. The UK’s Be the Business initiative recognised this, aiming to promote best management practices. Increased management expertise within SMEs, alongside a degree of trust within the business, is highlighted by Cavusgil et al. (2003). Kodama (2005) also emphasises the critical role leaders play within the company, which, in our case, refers to the manager or owner of the SME (Noblet et al., 2011). Additionally, the workforce played an active role in the knowledge absorption process.

The qualitative analysis revealed a clear recognition among SMEs that local environments can constrain growth and potential innovation. One example of this variation from our research came from a high-tech company in Cumbria, which acknowledged that their location was a disadvantage. To compensate, they operated a global collaboration model. This type of flexibility may mitigate some of the constraints associated with place (Du, 2021; Troilo et al., 2017). Another mechanism to compensate for a weak regional environment is the increased use of social media platforms as sources of knowledge. Some businesses in our sample, particularly those in the rural areas of Cornwall and Cumbria, emphasised the importance of social media as a knowledge source. This trend is widely recognised in studies that identify social media as an important driver of innovation within SMEs, especially in the service sector (Papa et al., 2018).

One of the limitations of this empirical paper is its focus on four regions, which do not represent the whole of the UK. It is possible that similar analyses in different UK regions, particularly the devolved nations, could produce results that differ in specific details. Additionally, we want to highlight that this study can be easily extended to other countries and regions, potentially opening new research avenues by exploring other aspects of the innovation process that are typically not covered by traditional innovation surveys.

Our research has provided a detailed perspective on the role absorptive capacity plays within a range of SMEs. In addition, we identified the ways in which SMEs obtain external knowledge. By using a range of methodologies, we were able to explore how SMEs perceive the external knowledge environment. Successful SME innovations often hinge on managers or owners who foster a participatory environment and decentralised management structures. This empowers employees to actively engage in the absorption of new knowledge, driving innovation forward.

Our analysis also revealed that strategies underpinning absorptive capacity vary across economic sectors and regions, which was the main aim of the paper. This finding is significant, as it underscores the need for policymakers to work at the intersection of regional policies and industrial strategies to improve the performance of SMEs across the UK.