For many small and medium-sized enterprises (SMEs) their biggest challenge is growing the business while managing limited resources. Such is the entrepreneurial innovation challenge – creating value from practically nothing.

The track record of value creation by SMEs is outstanding. Some 95 per cent of all product and service innovations over the past 100 years have come from firms employing less than 20 people.

What has enabled such businesses to achieve success? First, an entrepreneurial approach to spotting opportunities, marshalling resources and building capability underpins the way small firms innovate and drive business development.

Entrepreneurs find a customer problem, solve it and then sell the solution on to others. While working for Dixons in 1997, Ajaz Ahmed noticed difficulties in accessing the internet, so he set about solving the problem.

Ahmed subsequently sold his solution to Dixons’ customers – the result was a new business called Freeserve, which in turn became a billion-pound enterprise.

Entrepreneurs try to spot superior opportunities that can solve a customer problem, that have a defensible competitive advantage and which might attract investor attention.

While in Australia, Sheffield wire manufacturer Hugh Facey noticed that individuals responsible for erecting wire fences often had badly cut hands.

Back in the UK he developed The Gripple, a system that joins wire quickly, cheaply and efficiently – and it is a technology that has enabled Facey to build a multimillion-pound business.

Startup entrepreneurs gain resources by begging, borrowing and befriending people. And during the growth stage, resource acquisition is achieved by forging alliances and partnerships with pioneering businesses.

Keepmoat, a leader in community regeneration in the North and Midlands, formed a partnership with a local authority. The authority provided the land and Keepmoat built starter homes. Both organisations shared the development profits and the partnership enabled Keepmoat to achieve its growth objectives.

During the expansion stage, entrepreneurs build the capability of their business by developing a preferred culture and investing in systems to help the business grow profitably. Sir Tom Hunter, for example, invested in an IT system capable of running a £300m business when Sports Division (since sold to JJB Sports) was just a £50m business.

The second key characteristic that enables entrepreneurs to be innovative is the culture within an SME. Many small firms are action-oriented, moving at pace and with high energy.

Contrast this achievement culture with that of the typical corporate business, where rules, procedures, planning and PowerPoint presentations dominate.

Such power and control culture explains why corporate businesses find it difficult to innovate.

Entrepreneurs, then, innovate through their personal behaviour and the culture they create within their business. But does the UK business environment help or hinder the innovation process?

The consensus of opinion in a recent Computing web seminar, in association with Oracle, suggests that the regulatory environment suffocates firms, with too much red tape and bureaucracy placing an embargo on action.

Does the government’s business support system for SMEs help with innovation? It funds Business Link and other support agencies, but most independent surveys suggest investment could be much better targeted at tax breaks or grants for innovation.

Entrepreneurs learn best from working in the field and from their successful peers. They do not rate spending money on advisers, training courses or consultants particularly highly – so the government should consider saving the taxpayers’ money.

Can SMEs, meanwhile, help the UK close the productivity gap? The US is 40 per cent more productive, while France and Germany are 20 per cent ahead.

Entrepreneurs need help to boost productivity. While good at innovating and starting a business, they often prove less successful at managing an ongoing enterprise because they get bored and want to move on.

The smart entrepreneurs recognise this, and appoint someone with complementary management skills. Two-thirds of business executives in a recent web seminar felt poor management was the main cause of low productivity in the UK.

Management is the only profession where you get promoted because you are good at something else – and the only one for which generally no preparation is thought necessary. So, what is the answer? Provide managers with the necessary training and tools to help them become more productive and successful before they are appointed.

A second factor that hampers productivity is the lack of investment in good information systems. Managers need quality, up-to-date information to make good decisions. Perhaps government grants for IT in SMEs might help?

SMEs make a fantastic contribution to innovation in the UK economy. But they are not helped by bureaucratic government legislation or the tax system.

The existing business support system, via Business Link, is generally regarded by firms as less helpful than it might be. But the right assistance with management development and IT investment could add real value.

• David Hall has been described as one of Europe’s leading facilitators of innovation and entrepreneurship. His consulting practice helps organisations to innovate and revitalise by creating entrepreneurial solutions for business issues