Fit-for‑Future Manufacturing SMEs

1. Synthesis of findings

Abstract

This chapter synthesises the findings of the report on how digitalisation, the transition to low-carbon and energy-efficient production, and geopolitical and supply chain disruptions are reshaping manufacturing SMEs, with a focus on the automotive, electronics and semiconductor, and machinery and equipment sectors. It highlights how the pace and nature of these transformations differ across sectors, creating distinct opportunities and challenges for SMEs, including in access to finance, skills, technology and markets. Drawing on policy approaches in France, Germany, Japan, Korea and the United States, the chapter assesses how industrial strategies address SME needs and finds that support often remains secondary to measures targeting larger firms. It identifies emerging approaches to more SME-responsive industrial policies, including ecosystem-based R&D and cluster initiatives, place-based skills and networking support, and simplified access to tailored finance and advice.

Introduction

The manufacturing industry is undergoing profound disruptions and transformations, driven by global megatrends, notably accelerated digitalisation and the emergence of low-carbon and energy efficient production models. Recent economic shocks, geopolitical tensions and trade policies have further compounded uncertainties, accelerating reconfigurations in global trade and value chains. These shifts present mounting challenges for the industry. To remain competitive, especially for SMEs, it is crucial to understand how these transformations are impacting production processes and reshaping the drivers of competitiveness across different sectors. This insight is equally vital for policymakers aiming to design effective and forward-looking industrial strategies.

As detailed in the report, these transformations pose common challenges to manufacturing SMEs, like skills, finance and technology gaps. However, they unfold differently across manufacturing subsectors, which results in distinct priorities for SMEs and start-ups. In the automotive sector, the shift towards clean, connected, and autonomous vehicles represents an existential challenge for SMEs producing internal combustion engine components, many of which need to adapt their capabilities to electric vehicle (EV) value chains or pivot to new industries to meet the evolving demands of original equipment manufacturers (OEMs). In the semiconductor sector, historically characterised by long and fragmented global value chains (GVCs) – with chips commonly crossing borders up to 70 times during production (Global Semiconductor Alliance, 2020[1]) – geopolitical tensions, trade policy changes and national industrial policies are driving supply chain reconfigurations. While the industry’s capital- and skill-intensity creates high entry barriers, opportunities open up for innovative SMEs and start-ups in niche segments like energy-efficient chip design, specialised components supply (e.g., raw components like wafers, or etching machines) or service maintenance. In the machinery sector, SMEs face growing product complexity driven by the rapid advancement of digitalised machines and systems. Accelerating digital adoption and organisational change is crucial for machinery SMEs to capitalise on the growing opportunities in smart manufacturing, as well as address rising material costs and price-eroding competition, especially from large global competitors that manufacture comparable products.

The varying speeds and magnitudes of transformation, along with inherent challenges faced by SMEs, highlight the necessity of integrating broad framework policies with sector-specific and SME-targeted policies. To design and implement effective SME policy support in the manufacturing sector, it is crucial to gain a granular understanding of SME-specific and sector-specific challenges and opportunities stemming from these profound transformations. This report focuses on specific sectors and supply chains – automotive, electronics (semiconductor) and machinery – which, given the prominent role of SMEs, offer distinct yet exemplary insights for SME policy development.

This synthesis of findings is structured as follows: the first section summarises the impact of key trends on selected manufacturing subsectors and implications for SMEs. The second section offers insights on broad industrial policies and targeted instruments developed by selected OECD countries to assist SMEs in navigating these transitions. The third section highlights key features of industrial policies in the manufacturing sector that actively include SMEs, as emerging from the experience of the OECD countries examined in the report, namely France, Germany, Japan, Korea and the United States.

Global megatrends impact manufacturing sectors at varying speeds and intensities, shaping distinct challenges for SMEs

The impact on the manufacturing sector and its SMEs

Automotive

In the automotive sector, SMEs play a prominent role in the multi-tiered supply chains centred around carmakers. Tier 1 suppliers, the linchpins of the car-making ecosystem, aggregate detailed components from a broad network of Tier 2 and Tier 3 suppliers, mainly SMEs that contribute specialised parts and materials. In fact, SMEs are present in different segments of the automotive value chain, from raw material, component and module provision (upstream) to retail, service and maintenance (downstream), accounting for 58% of value added in the sector.

With the advent of electric and autonomous vehicles, this supply chain landscape is undergoing radical transformation. With consistently rising global sales of electric vehicles (EVs), traditional internal combustion engine components are being gradually phased out in some countries. Batteries and electric motors have emerged as the new power generation systems, complemented by an array of sensors and software.

The shift from internal combustion engines to electric powertrains demands significant investments in new technologies and specialised skills, hence the need to mobilise substantial financial resources. In Germany, in 2023, automotive suppliers allocated 28% of their total investments to e-mobility, despite it generating only 10% of profits. Access to finance represents a major constraint to the transition, compounded by regulatory uncertainty that affects OEM strategies. Evidence from Korea highlights that a large number of suppliers, especially smaller ones, are not ready to transition, due to limited financial resources but also lack of knowledge about target areas. Uncertainty about regulation and supply chain reconfiguration results in reluctance by SMEs to invest in the new technologies and skills needed for the transition.

Despite significant progress in the technological, legislative, and commercial development of autonomous driving, particularly triggered by breakthroughs in artificial intelligence (AI), SMEs face similar uncertainties and high entry barriers. However, these advancements also present substantial opportunities for SMEs and start-ups in the ICT sector, as well as sensor and hardware providers. The fierce global competition between established car manufacturers and big tech companies entering the autonomous driving space further fuels these opportunities but also generates risks related to increased vertical integration. To navigate this competition, large OEMs are acquiring expertise to bridge gaps in software capabilities and build data infrastructure, often through acquiring start-ups, establishing subsidiaries, or forming alliances. Big tech companies, which tend to internalise autonomous driving technologies based on their own hardware and software capabilities, are also acquiring start-ups in key technological areas to enhance their development. This trend towards vertical integration of supply chains presents risks of marginalisation for many SME suppliers. Consequently, SMEs, including those offering ICT services, software, and connectivity-related components, increasingly depend on the strategies of OEMs and Tier 1 suppliers for collaboration.

Electronics and semiconductor

The electronics sector – and its core, the semiconductor sector – is characterised by highly fragmented and globally interdependent value chains. The sector produces a foundation for digitalisation, powering everything from smartphones to data centres, and its supply chains span diverse regions and firm sizes. While the dominant players in the sector are large firms, SMEs play a distinct role in the ecosystem, particularly in upstream activities such as supplying raw components like silicon wafers and photomasks, as well as specialised equipment like etching and chemical vapor deposition equipment.

The rapid advancement of AI and other emerging technologies has sharply increased demand for semiconductor chips, driving significant growth across the sector. Global semiconductor sales doubled between 2012 and 2022 and are projected to reach USD 1 trillion by 2030. Growing demand for chips in critical sectors such as drones, robotics, telecommunications, and aerospace, has also elevated the strategic importance of semiconductors. In response, many governments launched industrial policies for reshoring and localisation of products, aiming to build localised ecosystems, the U.S. CHIPS Act and EU CHIPS Act representing notable examples. These shifts may carry important implications for global supply chains, potentially reshaping sourcing patterns and investment strategies.

This expansion of demand for semiconductors is not limited to cutting-edge chips dominated by major players. It also creates fragmented and niche markets where SMEs can compete effectively – for example, in custom chips, energy-efficient processors, or specialised packaging. The rise of the fabless model (chip design without owning a fabrication facility) has lowered entry barriers, enabling start-ups and SMEs to enter the market through design-focused innovation, where agility and innovation are more important than scale. The creation of local and regional ecosystems through reshoring efforts also offers potential for local SMEs to integrate into restructured supply networks, especially in materials, tools, and back-end processes, where many SMEs are already active. For SMEs, opportunities exist particularly in low-power chip solutions, energy-efficient architecture, and materials alternatives, where their agility and smaller scale offer an advantage over larger firms bound by legacy infrastructure.

These trends create new opportunities for SMEs to expand their customer base, but only if they can develop strong technological expertise and clear strategic direction. With limited capacity for full-scale R&D and often insufficient managerial resources, SMEs also face persistent barriers like capital constraints, restricted access to resources, such as proprietary IP and design tools, and power asymmetries in global partnerships. As countries race to position themselves as global semiconductor powerhouses, national industrial policies often prioritise large players, and fail to capitalise on SMEs’ agility advantage, offering them limited support to fully participate in the evolving semiconductor value chains amid a rapidly changing global landscape.

Machinery and equipment

The machinery and equipment sector is a central pillar of industrial value creation, supplying a wide range of products to other sectors of the economy. SMEs represent the vast majority of companies in the sector, accounting for 44% of total turnover on average across the OECD in 2022, and as high as 60-75% in countries like Korea, Portugal, Italy, and Spain. Medium-sized firms are especially prominent, often delivering specialised intermediate components.

However, the SME share of turnover in this sector has shown a downward trend, falling from 50% in 2010 to 48% in 2015, and further to 44% in 2022. This mainly reflects rising capital intensity and scale economies amid technological transformations and increased system complexity. With structural change driven by digitalisation and connectivity, demand in this sector is shifting from stand-alone hardware to integrated solutions involving the Internet of Things (IoT), AI, and data analytics. For instance, in construction machinery, predictive maintenance enabled by sensors and connectivity is becoming standard, with companies increasingly offering digital service packages alongside equipment. The increasing customer demand for automated and connected solutions is reflected in projections for the smart manufacturing market, which is expected to grow by around 13% annually until 2030.

Furthermore, the sector is playing a crucial role in driving energy efficiency across the entire manufacturing sector, as its products shape energy and material use in a range of industries. Evidence from Germany suggests that a growing share of machinery manufacturers’ customers are requiring solutions that improve energy efficiency and minimise product losses. To address these changing market demands, companies in the sector are adapting their product portfolios, expanding into areas such as hydrogen fuel cells, energy storage systems, recycling solutions, and drive components for the global wind gearbox industry.

Adopting smart manufacturing presents diverse opportunities for SMEs. New technologies like AR/VR, digital twins, and 3D printing are transforming product development, allowing rapid prototyping and reduced costs, especially beneficial for SMEs producing in small batches. For example, virtual simulation allows SMEs to test machinery systems without costly trial-and-error cycles. Moreover, IoT-enabled platforms – exemplified in this report by Italy’s TRE-E Smart Lifts consortium and Germany’s Oculavis GmbH – demonstrate how collaborative digital ecosystems can strengthen SME service delivery, data sharing, and customer engagement.

Despite these opportunities, many SMEs remain focused on hardware production and face challenges in transitioning to service-based or digitalised business models. The cost of digital transformation (including IT infrastructure, system integration, and workforce training) remains a significant barrier to SMEs. A 2022 survey of US companies shows that, although 75% of manufacturing SMEs recognise the strategic value of smart technologies, only around 50% are willing to invest in them. Skill shortages, particularly in automation, AI, and cybersecurity, further limit SME adoption. Research from Korea also highlights path dependency, as SMEs with low initial technology adoption are less likely to succeed in digital diversification, widening the capability gap with larger firms.

SMEs are increasingly expected to design more energy-efficient, durable, and recyclable machines, yet often with limited resources to do so. In some countries, recent energy price hikes have compounded the challenge, particularly in energy-intensive processes like forging and machining. While digitalisation offers mitigation tools, such as predictive maintenance and optimised energy use, these solutions again require significant upfront investment, which remains a recurring barrier for many SMEs.

Economic shocks and geopolitical tensions highlight the critical need for manufacturing SMEs to accelerate the transformation

Recent crises have exposed the heightened vulnerability of manufacturing SMEs to economic shocks and supply chain disruptions. The impact of disruptions is amplified for SMEs due to multiple factors including their limited financial reserves, which can provide a buffer against rising costs for essential inputs such as energy and raw materials. This vulnerability became evident in several countries following the sharp increase in energy prices triggered by Russia’s war of aggression against Ukraine. Many firms, especially in European countries that are heavily reliant on Russian oil and gas, faced skyrocketing energy costs. This posed substantial challenges to the competitiveness of manufacturing firms and highlighted the fragility of global supply chains.

Long-term economic transformations are increasingly being shaped by geopolitical developments and the shifting comparative advantages of firms, regions, and countries, thereby catalysing the emergence of new industrial strategies across countries. Since the global financial crisis in 2008, governments have gradually embraced industrial strategies to promote their national economic growth and productivity. This marks a significant departure from the historical reluctance surrounding such strategies since the 1970s (OECD, 2022[2]). The COVID-19 pandemic and disruption of global trade further underscored the actual and potential risks associated with long and fragmented GVCs. In response, across world regions, countries have intensified efforts to build more resilient supply chains, increasingly prioritising proximity and strategic autonomy over the cost-efficiency once offered by distant delocalisation.

In recent years, major industrial policy initiatives have emphasised the localisation of supply chains as a means of strengthening industrial resilience. In practice, these strategies often include tax incentives for domestically produced machinery components, encouraging firms to maintain or establish production facilities within national markets. The CHIPS Acts in the United States and Europe adopted a similar approach, aiming to expand semiconductor manufacturing capacity within national or regional borders and, in doing so, reshape supply chains in this strategically important sector.

As governments implement structural reforms to enhance industrial competitiveness and reduce supply chain vulnerabilities, some SMEs have proactively adapted to mitigate risks by diversifying their supplier networks – particularly by sourcing from geographically closer partners. Evidence from France shows that, over 2020-24, 31% of SMEs have experienced supply chain disruptions. Among those affected, 61% responded by either increasing inventory levels or diversifying their supplier base. Insights from Japanese SMEs reveal that businesses with advanced digital infrastructure were better equipped in handling disruptions. These businesses leveraged data for real-time inventory management and explored alternative sourcing strategies more effectively. These examples underscore the critical role of digital adoption and diversification strategies in strengthening SME resilience against external shocks.

Despite growing awareness of supply chain vulnerabilities, many SMEs across OECD countries remain underprepared for disruptions. For example, 2022 evidence from Korea reveals that only 2% of SMEs had established strategies to manage supply chain risks. This lack of preparedness is often rooted in structural barriers such as limited awareness, constrained resources, and the complexity of navigating foreign regulations. These challenges hinder SMEs from developing effective risk management strategies in response to strategic dependencies and geopolitical tensions. Moreover, major industrial policies integrate SME realities to a limited degree. The following section explores the implications of these policies for manufacturing SMEs and examines more targeted support instruments designed to enhance their future readiness.

Policy priorities and approaches vary across sectors and countries, with SME support often limited

Industrial policies to strengthen manufacturing sectors reflect countries’ differences in economic structures, strategic priorities and institutional capacities, as illustrated through selected cases in this report. Across countries, various targeted measures have been designed to support SMEs, recognising their role in achieving strategic objectives. However, in most cases industrial policies mainly target and engage large enterprises, and place limited emphasis on addressing the specific needs of SMEs, although differences emerge across sectors. The report investigates policy strategies and their specific implications for SMEs across the three sectors of focus, illustrating emerging approaches to better align industrial and SME policies.

Automotive

In the automotive sector major policies address the development and adoption of electric and autonomous vehicles. A variety of complementary regulatory and policy instruments focuses on the ongoing shift from traditional internal combustion engine-centred value chains to the production of electric and low-emissions vehicles. In Europe, climate regulations, such as the EU’s “Fit for 55” package, which targets a 55% reduction in greenhouse gas emissions by 2030, have introduced new requirements for the road transport sector. In particular, the revised EU CO₂- emission standards for cars and vans set fleet‑wide targets through 2035, creating a regulatory framework for zero‑ and low‑emission vehicles. These measures are complemented by pollutant‑focused regulations, such as the Euro 7 standards, which set limits on exhaust and non‑exhaust emissions. Beyond the EU, other OECD countries have also set mandatory targets for zero-emissions vehicles within timeframes ranging from 2025 to 2050.

To achieve these targets, many countries have adopted price-support measures, in particular purchase subsidies for EVs in the EU, to make EVs more price competitive as compared to traditional internal combustion engine vehicles. Norway first introduced these measures in the 1990s, and, as of 2024, 15 EU countries, along with some non-EU countries, such as Korea and Japan, had similar policies in place. In the past, the U.S. federal government has offered tax credits instead of direct purchase subsidies. In addition, most OECD countries have put in place public investments to foster the EV charging infrastructure, as well as complementary support measures, such as providing free parking for EVs in inner cities.

Despite variations in the effectiveness of EV subsidies and tax incentives across countries – and recent policy rollbacks in some regions – EV sales have steadily risen at the global level. The report underscores the importance of policy consistency in enabling OEMs and SMEs to adapt their business models to this industry evolution, through long-term strategic investments. For example, Germany’s sudden termination of its EV environmental bonus led to significant drops in EV sales, production slowdowns and planning uncertainty for suppliers. This case illustrates the risks associated with abrupt policy changes, which can result not only in direct financial losses, but also in undermined long-term investment confidence across the supply chain.

While regulatory frameworks in the area of autonomous driving are still evolving, with road management regulations, accident liability, and insurance policies yet to mature, countries like the U.S., China, and Germany are advancing in autonomous driving regulations. Major automobile-producing countries, including the U.S., EU countries, and UK, are also implementing funding policies to support autonomous driving vehicle technology. These policies create opportunities for innovative SMEs and start-ups, particularly in sectors like ICT, AI, and cybersecurity.

A variety of targeted policies have been implemented across countries to help SMEs navigate mega-trends and integrate into future automotive value chains. These policies include funding for collaborative R&D projects, preferential loans, and grants for investment, as well as initiatives to enhance skills and foster networking opportunities. Notable examples are France’s 2030 five-year investment plan, which allocates funding for innovation and supports SME involvement in digital and low-carbon projects for future vehicle production. Automotive sectoral strategies, in particular in EU countries, are increasingly adopting an “ecosystem approach” to strengthen collaboration between OEMs and suppliers through R&D networks. A notable example is Germany’s Catena-X project that encourages the development of standardised data solutions by industry-led consortia to improve SME integration into automotive value chains, particularly in increasingly data-driven production settings. Strategies also aim to lower investment barriers for SMEs. For example, Japan’s Mikata project provides capital investment subsidies and consulting services tailored for SMEs to innovate and produce future vehicle parts. These policies are further supplemented by specialised workforce training programmes, such as France’s “Compétences et Métiers d’Avenir”, which helps workers reskill for roles in digital and sustainable transformation. Additionally, state-run programmes in Germany offer SMEs targeted advice, assist with funding applications, and promote collaboration through regional transformation networks. By combining financial support with advisory services, networking, and training, these policies aim to ensure SMEs have the resources and guidance necessary to remain competitive in the rapidly evolving value chains of the automotive industry.

Electronics and semiconductor

Recognising the critical role of the electronics and semiconductor sector in driving technological progress, several countries have implemented large-scale strategic initiatives. National-level policies and support packages have emerged with a strong focus on reshoring production to strengthen supply chain resilience and reduce dependency on foreign semiconductor manufacturers. Over the past decade, around 2 500 industrial policy interventions targeting advanced technologies – including semiconductors and their critical inputs – have been implemented globally. The US CHIPS Act was enacted in 2022, and the EU CHIPS Act was introduced in 2023, with the aim to double the EU’s semiconductor production by 2030. Similarly, in recent years, Japan, Korea, and China have implemented national master plans and regulations, supported by large-scale public and private investments. While all “CHIPS Acts” share the core objective of enhancing supply chain resilience through reshoring, key differences exist. For example, in the U.S., new federal funds have been allocated specifically for semiconductor initiatives, alongside tax incentives to attract investment. In contrast, the EU has been channelling funds from existing programmes and operates a more complex and lengthier approval process, compared to the more streamlined U.S. system.

There are different financing mechanisms to support the highly capital-intensive semiconductor sector, with a trend-shift from traditional tax incentives for R&D activities to direct subsidies to expand domestic production. This shift is exemplified by large-scale public funding for new domestic production facilities under the U.S. CHIPS Act and the Important Projects of Common European Interest (IPCEI) framework within the EU CHIPS Act. These programmes aim to leverage substantial private investment in line with the scale of public co-funding. Alongside the establishment of advanced fabs, IPCEI includes specific financing and networking support for SMEs and start-ups, recognising their role in the broader semiconductor ecosystem.

Despite a decreasing weight in recent years, traditional tax-incentives – once accounting for approximately 90% of total budgetary support to firms in the semiconductor industry, based on 2014-2018 data (OECD, 2019[3]) – continue to play an important role. The main players in the sector, namely the U.S., EU, Korea, Japan, China, Chinese Taipei, and Singapore all have tax incentives in place, with varying funding amounts allocated for either investments in semiconductor manufacturing equipment or R&D activities. Complementary instruments to promote R&D include research grants, training initiatives and public-private partnerships, which are exemplified by cross-country projects under the EU’s Horizon Europe. As a highly R&D-intensive sector that operates through globally distributed supply chains, government policies have also focused on technology transfer through FDI policies. To build a thriving domestic semiconductor ecosystem, several countries have adopted cluster policies inspired by successful experiences, such as Chinese Taipei’s high-tech clusters. These geographically concentrated ecosystems bring together research, manufacturing, design, and assembly, enabling shared infrastructure, access to talent, and co-development of supply chains.

While innovative local SME suppliers benefit from large-scale investments via increased demand for components for semiconductor production, SME-targeted support in this sector remains limited. Some innovative SMEs are able to address specific market needs, such as by developing energy-efficient chips, thereby benefiting from tax incentives and emissions regulations impacting the growing semiconductor sector. However, despite some targeted initiatives like SME-focused subsidies in some EU countries, high entry costs, complex technological requirements, and skills barriers in the sector often result in the sidelining of SMEs, while large firms continue to receive the bulk of government funding. This imbalance underscores the need for a policy design and implementation that includes SMEs more actively. This report highlights emerging initiatives that aim to better integrate SMEs and start-ups into the broader semiconductor ecosystem. These programmes often focus on connecting SMEs with larger firms, fostering knowledge transfer, and facilitating access to critical infrastructure and funding. As a case in point, Korea provides SMEs with preferential financing, targeted R&D support, and enhanced access to foundry services through partnerships with larger players. These efforts are also complemented by prototyping services to reduce development costs and lower market entry barriers for emerging players.

Machinery and equipment

Sectoral strategies in the machinery industry focus on digitalisation, automation, energy-efficiency, and strengthening domestic supply chain resilience. In particular, strategic initiatives are in place to help companies adapt to evolving component ecosystems – characterised by increasing software integration, and growing demands for maintenance and lifecycle management. Key policy frameworks such as U.S. National Strategy for Advanced Manufacturing, Korea’s I-Korea 4.0, the EU Digital Strategy, and Germany’s Platform Industry 4.0 exemplify these trends. Additionally, machinery-specific regulations, such as the EU Machinery Regulation 2023/1230, address these shifts. The regulation broadens the definition of safety components to include digital and software elements and introduces cybersecurity requirements to protect safety functions from digital threats. While the regulation applies broadly, it offers simplified conformity assessment for certain machinery types, and reduced fees for SMEs, easing administrative burdens and helping especially smaller manufacturers meet market entry requirements more easily.

As the machinery sector is closely linked to other manufacturing industries – particularly automotive and semiconductor – major policies targeting these industries significantly impact the sector and its strong base of medium-sized companies. This has been the case, for instance, of the various CHIPS Acts that have implemented in many countries, and that have contributed to increased demand for advanced semiconductor manufacturing equipment. Financial instruments such as tax incentives, grants, and preferential loans can help machinery SMEs invest in the production of energy-efficient equipment and advanced technologies. Major initiatives that have been implemented over the past decade include the U.S. Inflation Reduction Act (IRA), the EU Green Deal Industrial Plan, and EU measures under the Recovery and Resilience Facility (RRF). Some policy initiatives emphasise supply chain resilience, targeting the upgrading of local production capacity to reduce reliance on foreign suppliers. This is the case, for instance, of Japan’s “Initiatives for Ensuring the Stable Supply of Machine Tools and Industrial Robots”, which promotes innovation to strengthen domestic manufacturing capabilities.

As a medium to high R&D-intensive sector, the machinery sector and its SMEs are heavily reliant on R&D investments. Accordingly, R&D support policies play an important role. For instance, Korea’s Smart Manufacturing Innovation Support Programme, under the Manufacturing Innovation and DX Acceleration Strategy, offers R&D funding and resources to help SMEs adopt advanced manufacturing technologies like smart factories, robotics, and process automation. A common feature across these policies is simplified access to R&D funding (e.g., through streamlined application processes). Within larger R&D projects, even those focused on developing SME-friendly solutions, SMEs often have limited involvement in resource-intensive development processes. To address this, some larger projects integrate technology transfer components for SMEs, such as Germany’s “ScaleMX” under Manufacturing-X, which includes support for networking, capacity-building and SME access to data-based solutions.

Bridging digital skills gaps is essential for SMEs navigating sectoral transitions, particularly in areas like automation, IoT, AI, and cybersecurity. In response, many OECD countries have introduced training initiatives, often implemented by local actors. A notable example is the longstanding U.S. Manufacturing Extension Partnership (MEP) (Box 2.12). Given the varying digital gaps between urban and rural areas and varying skills needs across regions, local actors play a crucial role in identifying training needs and ensuring effective programme design and implementation.

Towards a SME-responsive industrial policy framework for the manufacturing sector

Across OECD countries, the manufacturing sector is regaining strategic prominence, as evidenced by a wave of national industrial policy initiatives aimed at boosting global competitiveness, leveraging the low-carbon and digital transformations, and enhancing resilience to global disruptions. While these strategies often target key sectors within manufacturing, direct and structured support for SMEs remains limited. Many industrial policies operate under the assumption that SMEs will benefit indirectly through trickle-down effects from broader sectoral growth. However, in today’s rapidly evolving industrial landscape, marked by accelerated technological change, supply chain restructuring, and demands for resource-efficiency, such spillovers cannot be presumed to materialise automatically.

SMEs are not merely subcontractors in larger value chains – they are vital contributors to supply chain diversification, technological innovation, regional development, and economic inclusion. Empowering SMEs within industrial strategies is essential for building resilient and innovation-driven manufacturing ecosystems. Despite their strategic importance, SMEs often face structural disadvantages – limited access to finance, talent, and advanced technologies – that hinder their ability to fully engage in industrial transformation. To ensure SMEs are not left behind, industrial policy must evolve into a multi-layered framework that integrates SME-specific interventions with broader strategic goals.

Maximising the impact of industrial strategies requires deliberate synergies between general industrial policy and targeted SME support. This includes tailored funding mechanisms, simplified regulatory pathways, and access to collaborative innovation networks. Moreover, as governments pursue multiple objectives – such as enhancing supply chain resilience and in many countries, advancing the transition to a low-carbon economy, – potential trade-offs need to be carefully managed (Juhász, Lane and Rodrik, 2024[4]). These complex dynamics demand well-designed, context-sensitive SME policies embedded within broader industrial strategies to ensure balanced and sustainable outcomes.

While the scope of this report is necessarily selective – focusing on selected manufacturing sub-sectors and countries – it indicates a growing recognition among governments of the need for industrial policies that more explicitly incorporate SMEs. Recent policy developments point to a gradual shift towards more targeted and better‑integrated forms of SME support within broader industrial strategies. These emerging approaches are characterised by several common features, including:

Ecosystem approaches that foster structural linkages between SMEs and key players in local and global supply chains, including large firms and research organisations. These policies are designed to resolve co-ordination failures that risk sidelining SMEs by maintaining or strengthening their participation in the value chains. They can take various forms.

R&D networks

In sectors like automotive, policy strategies increasingly promote collaboration between OEMs and suppliers through R&D networks to drive innovation across the supply chain. However, SMEs often have limited ownership in large R&D projects due to size-related constraints. Therefore, embedding an SME-lens in government programmes implies including focus on niches where SMEs can unleash their innovation potential, as well as dedicated knowledge transfer components to ensure broad accessibility to a diverse group of SMEs.

Germany’s Manufacturing-X, which funds industry-led R&D consortia, provides an illustrative case. The primary co-ordination failure addressed by the initiative is the lack of a unified data ecosystem in the manufacturing sector. This issue often forces SME suppliers to rely on proprietary digital systems developed by larger companies, creating dependency and limited transparency, which is needed for the sharing of data. To develop interoperable data ecosystems aligned with industry needs, consortia led by major industry companies carry out R&D projects co-financed by the government. An “ecosystem approach” is adopted by involving relevant actors of the ecosystem – including research institutions and SMEs – in the projects and by focusing R&D activities on the development of SME-friendly “plug-and-play” solutions, supported by targeted technology transfer measures to ensure effective deployment across the economy. The sub-initiative ScaleMX under Manufacturing-X initiatives further enhances support by offering capacity-building activities that enable SMEs to easily adopt these digital solutions. As the Manufacturing-X initiative aims to standardise cross-border and cross-sector solutions, this provides a solid foundation for wide-ranging collaboration and innovation.

Regional clusters

Geographic clustering is a key ecosystem approach used to advance regional development, enhance industrial competitiveness, and strengthen supply chain autonomy. These clusters are typically supported through public subsidies and incentives that facilitate the co-location of research, manufacturing, design, and assembly activities. This model is particularly advantageous for SMEs, especially in high-tech sectors like semiconductors, where access to advanced infrastructure and collaboration with large firms is essential. To ensure that cluster development does not sideline SMEs, several countries have introduced targeted measures – such as dedicated funding streams, capacity-building initiatives, and platforms that foster collaboration between large firms and local SMEs. These efforts aim to strengthen SME capabilities and enable their integration into regional and global value chains.

An example of SME integration into cluster policies can be observed in Korea’s Semiconductor Mega Cluster in Yongin, which aims to reinforce the domestic semiconductor ecosystem. The initiative includes the Semiconductor Ecosystem Fund and dedicates financial support for fabless SMEs, with the goal of increasing domestic self-sufficiency in key materials from 30% to 50% by 2030. Similarly, Japan’s TSMC Kumamoto project reflects a strategic effort to bolster domestic semiconductor manufacturing by establishing a major TSMC production facility within Japan. The project is expected to generate significant benefits for regional SMEs, supported by financial instruments such as loans and guarantees under the Economic Security Promotion Act (2022). These examples illustrate how regional cluster policies, when designed with an SME lens, can serve as powerful tools for industrial development that actively engages SMEs.

Place-based skills development and networking support for SMEs: As megatrends, particularly digitalisation, reshape the manufacturing sector, the demand for new skills is rapidly evolving. SMEs are finding it increasingly difficult to keep pace, as reflected in the widening digital skills gap between large firms, which often dominate data ecosystems, and smaller enterprises that face mounting complexity. This challenge has a significant regional dimension, with varying skill needs driven by factors such as regional specialisations in the production of emerging technologies, as well as a pronounced digital skills gap between urban and rural areas. Thus, policies that aim to address skills gaps of manufacturing SMEs are often implemented by regional actors, including regional innovation agencies, transformation networks or technology and innovation hubs – even when coordinated at the national level. In skill-intensive manufacturing sectors where large firms dominate, regional networking support is equally vital. Facilitating collaboration and knowledge exchange between SMEs and larger enterprises helps bridge capability gaps, accelerates technology transfer, and fosters innovation ecosystems that actively include SMEs.

A notable example of place-based and network-oriented support for manufacturing SMEs is the U.S. Manufacturing Extension Partnership (MEP). Created in 1988, this public-private partnership operates 51 centres across the U.S., providing skills development (e.g., in adoption of advanced manufacturing technologies and cybersecurity) through advisory networks and SME-targeted training programmes on advanced manufacturing technologies, especially relevant to each region. Korea’s Semiconductor Mega Cluster Strategy also offers another example, with networking support to connect SMEs and start-ups with larger semiconductor firms.

Simplified access to funding and advice tailored to diverse SME needs: Manufacturing SMEs face major financing barriers, particularly for undertaking strategic innovation, due to high upfront costs for technical infrastructure, training and restructuring of organisational processes. Tailored financial instruments can boost SME investment, but broad SME participation depends on low-cost access to expert advice and simplified funding processes, such as streamlined R&D funding application processes, and proactive outreach to increase awareness of available programmes.

For example, Japan’s Mikata project offers individual consulting services, including free expert advice, to help automotive SME suppliers adapt their business model for the CASE era (Connected, Autonomous, Shared, Electric vehicles). Similarly, the France 2030 investment plan includes initiatives like the “Improvement and Transformation of Sectors” project, which funds SME participation in regional transformation projects through grants and repayable advances. Given the varying readiness levels among manufacturing SMEs, even within the same sector, targeted and differentiated support is crucial. In Germany, targeted initiatives typically provide an initial point of contact, guiding SMEs to relevant advice and funding opportunities (e.g., through consulting vouchers covering expert advice). For instance, “Transformationslotse Bayern”, as a first point of contact, provides initial needs assessment, expert networks, training opportunities and funding guides tailored to each SME’s transformation path.

Conclusion

Megatrends such as digitalisation, automation, transitions to low-carbon and energy-efficient economies, and geopolitical shocks are reshaping the industrial landscape and posing complex challenges for governments and firms. The pace and depth of SMEs’ transitions towards more digital, low-carbon and resilient business models vary significantly across sectors and countries, underscoring the need for granular analysis which can underpin differentiated policy responses.

A persistent challenge is that industrial policy initiatives often prioritise large enterprises - particularly evident in recent reshoring and strategic autonomy efforts - while sidelining SMEs, despite their central role in supply chains and innovation ecosystems. Ensuring that SMEs have equitable access to essential resources such as finance, training, networks, and advisory services is a strategic necessity. Given their central position in production networks and their heightened exposure to policy shifts and market volatility, SME‑responsive policies are essential to strengthening the resilience, competitiveness, and adaptability of manufacturing systems as a whole.

This report explores key trends, identifies priority policy areas, and highlights emerging practices for designing industrial strategies in the manufacturing sector that actively include SMEs. It underscores the value of adopting a balanced, multi-layered policy approach - one that thoughtfully navigates trade-offs and promotes alignment between overarching industrial objectives and targeted support for SMEs. Such an approach can contribute to more resilient and forward-looking industrial ecosystems.

References

[1] Global Semiconductor Alliance (2020), Globality and Complesxity of the Semiconductor Ecosystem.

[4] Juhász, R., N. Lane and D. Rodrik (2024), “The New Economics of Industrial Policy”, Annual Review of Economics, Vol. 16/1, pp. 213-242, https://doi.org/10.1146/annurev-economics-081023-024638.

[2] OECD (2022), An industrial policy framework for OECD countries: Old debates, new perspectives.

[3] OECD (2019), “Measuring distortions in international markets: The semiconductor value chain”, OECD Trade Policy Papers, No. 234, OECD Publishing, Paris, https://doi.org/10.1787/8fe4491d-en.