Conference Paper

high – and in many regions an increasing ‐ share of total employment in manufacturing. Yet SMEs in traditional sectors are relatively neglected by researchers and policy makers. This chapter argues that SME innovation in traditional sectors comprises multi‐dimensional and interrelated product, process, organisational/managerial and marketing innovations, all of which are important in adding value and generating employment. In designing public policy to promote innovation by traditional sector SMEs, the market‐failure rationale for subsidising R&D inputs is less relevant than an innovation systems approach informing a broad range of lower cost policy interventions, which include measures both to promote interactions with new partners (thereby accessing knowledge and opportunities) and to enhance SMEs’ capabilities to learn and to innovate (i.e. to commercially exploit knowledge). The most effective policy instruments to promote SME innovation in traditional sectors are demand‐led and relatively low cost. This chapter concludes with indicative conclusions for policy makers in the Western Balkans but cautions that further research is needed: to determine the extent to which policy transfer is possible; as well as the corresponding extent to which modifications of EU programmes will be needed to account for local circumstances.