Australia's economy relies heavily on its small and medium-sized enterprises (SMEs), but a critical gap exists in the 'missing middle'—medium-sized enterprises (MSEs), typically defined as businesses with 20 to 199 employees or annual turnover between $10 million and $50 million. These firms bridge the divide between nimble startups and large corporations, yet they represent a smaller proportion of businesses and employment compared to Organisation for Economic Co-operation and Development (OECD) peers. A newly released paper by Industry Innovation and Science Australia (IISA), titled Mobilising Australia's missing middle, shines a spotlight on this oversight, proposing targeted strategies to unlock MSE potential for greater innovation and competitiveness.

Published on February 24, 2026, the paper highlights MSEs' unique attributes: small business agility paired with emerging scale, higher research and development (R&D) intensity, export potential, and vital supply chain roles across regions and sectors. Despite contributing significantly to productivity and resilience, MSEs face under-recognition in policy and industry strategies. This first installment in IISA's thought-leadership series builds on their 2023 report, Barriers to collaboration and commercialisation, urging a distinct approach to elevate these firms.

Defining the Missing Middle in Australia's Business Landscape

The term 'missing middle' describes the relative scarcity of MSEs in Australia. According to Australian Bureau of Statistics (ABS) data, SMEs comprise over 97% of businesses, but MSEs—firms graduating from small to medium size—lag behind OECD averages. In Australia, medium firms account for about 5-7% of total businesses, compared to 10-15% in countries like Germany or the US, where they drive manufacturing and exports more robustly.

This structural gap contributes to Australia's productivity challenges, with business R&D intensity at 1.68% of GDP in 2021-22, half the OECD average. MSEs hold promise as high-growth engines; for instance, they boast the highest rate of high-growth manufacturing firms. Yet, without targeted support, many stall at small scale, limiting economic diffusion of technology and innovation.

• MSEs as technology diffusers: They adopt and scale innovations from startups for broader markets.
• Supply chain anchors: Connecting regional small firms to global large ones.
• Resilient scalers: Better equipped than micro-businesses to weather shocks like supply disruptions.

The IISA paper emphasizes recognizing these traits to tailor interventions, fostering a more balanced firm size distribution for sustained competitiveness.

Core Innovation Challenges Facing Australian MSEs

MSEs grapple with multifaceted barriers to innovation, exacerbated by Australia's industry structure. Key hurdles include limited access to scalable finance, skills shortages, and collaboration gaps with research institutions.

Financing remains a top concern. While bank loans constitute half of business lending, MSEs face higher risk weightings and costs compared to large firms. The Reserve Bank of Australia (RBA) notes that innovative SMEs, including MSEs, struggle with equity gaps, as investors prefer proven scale. R&D tax incentives help, but uptake is low among MSEs due to administrative burdens.

Skills mismatches hinder digital adoption; MSEs show 68% AI uptake—28 points higher than small firms—but scaling advanced tech requires specialized talent amid national shortages. Regulatory complexity and export hurdles further impede growth, as noted in CSIRO's SME enablers report surveying over 800 firms.

Insights from IISA's Mobilising Australia's Missing Middle

The paper positions MSEs as pivotal for economic uplift, advocating their distinct treatment in policy. It outlines MSE strengths: higher productivity, export orientation, and regional contributions. For example, MSEs in manufacturing exhibit the fastest high-growth rates, yet policy often lumps them with SMEs.

Building on 2023 findings, it identifies structural constraints like low collaboration. IISA proposes a roadmap: exploring regional success stories, program refinements, barrier reduction, and demand-side innovation levers. This could amplify MSE impacts on resilience and productivity.

Stats underscore urgency: MSEs' AI optimism contrasts with scale barriers, positioning them for digital leadership if supported.

Photo by Laura Cros on Unsplash

Case Studies: Thriving MSE Segments in Australia

Though the paper promises future deep dives, existing examples illustrate MSE potential. In advanced manufacturing, firms like those partnering with universities via CRCs scale R&D into exports. A Queensland MSE in renewables grew 300% via government grants and uni collaborations, exporting tech globally.

In agtech, Victorian MSEs leverage CSIRO partnerships for precision farming, boosting yields 20%. These stories highlight supply chain roles, with MSEs enabling SME innovation diffusion.

• Renewables MSE: Scaled from prototype to $50m exporter using R&D tax incentives.
• Agtech innovator: Regional firm adopted AI for 15% cost savings, expanding interstate.

Such cases demonstrate MSEs' agility in priority sectors like clean energy and defence.

Financing and R&D: Critical Barriers to Overcome

Access to patient capital tops challenges. RBA data shows SMEs, including MSEs, receive half business loans but at premium rates. Innovation financing lags; only 46% businesses innovation-active per ABS 2023.

Solutions: Enhance R&D tax incentive accessibility, introduce MSE-specific funds. IISA echoes CSIRO: address enablers like IP navigation.RBA SME innovation speech

Skills and Talent: Building Human Capital for Scale

Skills shortages threaten MSE growth. With 370k digital gap by 2026, MSEs need STEM talent for R&D. Universities play key roles via industry placements.

Upskilling programs, apprenticeships target this. MSEs' regional presence amplifies need for localized training hubs.

Policy Levers and Recommendations

IISA urges: Highlight MSEs in grants, refine programs (e.g., Export Market Development Grants), foster uni-MSE links. Broader: Boost R&D intensity via incentives, procurement preferences (only 11% gov spend to SMEs).

Photo by Dennis Mettler on Unsplash

• Government: MSE-targeted innovation funds.
• Industry: Supply chain innovation consortia.
• Investors: Scale-up venture debt.

The Role of Higher Education in MSE Innovation

Universities bridge R&D gaps. Collaborations yield commercial outcomes; CSIRO notes high returns from SME-uni partnerships. Platforms like AcademicJobs.com connect researchers to MSE roles, fostering knowledge transfer.

Programs like CRC-Ps exemplify success, with MSEs gaining IP and talent.

Future Outlook: A Competitive MSE-Driven Economy

By 2030, mobilized MSEs could lift productivity 1-2%, per models. With AI adoption leading, targeted support counters challenges like rising costs, geopolitics. MSEs offer resilience amid transitions.

Stakeholders must act: policymakers refine levers, MSEs seek collaborations, academia accelerates transfer. Australia's missing middle holds keys to innovation leadership.

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