Innovation coherence, financial slack, and SMEs' success in competitive innovation policies: Evidence from the EU SME-instrument

Innovation policies are a key instrument to support small and medium-sized companies in overcoming financial constraints and pursuing high-risk and cutting-edge innovation projects. Yet, the mechanisms through which internal capabilities and innovation resource configurations influence success in such competitive arenas remain underexplored. In this scenario, this study explores how innovation coherence – the alignment between a firm's new project and its existing patent portfolio – and available financial slack shape the likelihood of securing public innovation funding. Funding evaluations are critical policy tools, as they not only improve access to resources but also act as market signals of technological quality and implementation capacity during the competitive evaluation process. Against this backdrop, we test our framework in the context of the EU Horizon 2020 SME Instrument, one of the most competitive innovation policy scheme in Europe, using a novel measure of innovation coherence derived from text analysis of firms' patent portfolios and project proposals, and combining its effect with financial slack. Innovation coherence and financial slack are found to strongly and positively influence evaluation outcomes, offering both theoretical and practical contributions for SMEs and policymakers engaged in competitive innovation policy initiatives. • The Horizon SME-Instrument eases SMEs' financial constraints and boosts innovation. • A novel innovation coherence index links patents and proposals through topic modeling • Innovation coherence and financial slack strongly predict SME-I funding success. • Findings guide SMEs and policymakers on funding's technology and resource strategies.