Determinants of innovation: A multivariate analysis in Colombian micro, small and medium-sized enterprises.
| Autor | Restrepo-Morales, Jorge Anibal |
Introduction
Micro, small and medium-sized enterprises (hereafter we will use the terms SME and MSME interchangeably) are key players in Colombia's business field, as they make a big contribution to employment and output. Recent estimates show that SMEs provide 67 per cent jobs and 28 per cent output (GDP) in Colombia (Dinero, 2016). Similarly, Bell and Teima (2015) estimate that formal SMEs provide 45 per cent of jobs and produce 35 per cent of output (GDP) in emerging markets, figures that could be higher if informal sector SMEs were accounted for. The aforementioned facts together with SMEs fast adaptability to changing market conditions make them a key player in the production and distribution of wealth (Yoguel and Boscherini, 1996; Soto and Dolan, 2004).
Nonetheless, SMEs face big challenges, as several studies pinpoint SMEs' structural weaknesses, which undermine their innovation capabilities and competitiveness, thus compromising their survival (Restrepo et al.,2016; Vanegas et al., 2018). Increasing market openness, an accelerating rate of technological change, together with a loose management of knowledge assets and human capital, poor qualifications of firm owners and employees, localization and infrastructure disadvantages, all make it difficult for SMEs to prosper in highly competitive markets.
In such a complex market environment, it is believed that SMEs can earn a competitive edge through the added flexibility conferred by its small size. It is argued that this flexibility and fast decision-making create an environment conducive to innovation. Innovation can be either disruptive or incremental. Whatever the type of innovation, the whole point is that the SME needs to have a competitive edge that allows it to outperform competitors, especially bigger incumbents (Rosenbusch et al.,2011).
Hence, we intend to contribute to the debate about the relationship between innovation and performance in SMEs in emerging markets through the survey analysis carried out by FaedPyme (Foundation for the Strategic Analysis and Development of SMEs) in Colombia in 2012 (Galvez et al., 2012). They comprise 403 formal SMEs. This paper analysed owners or managers' perceptions at SMEs about their innovation capabilities, and the relationship of these capabilities with financial and nonfinancial performance. Innovation capabilities are understood as the potential that a firm has to produce, to plan and to execute innovations with the available set of technological and organizational abilities available to the firm (Akehurst et al., 2011).
The paper is structured as follows. First, the literature review is presented. Second, the methodology is outlined. Third, the results are presented. Finally, the paper offers some concluding remarks.
Literature review
Innovation is the development of a new method, idea or product (Merriam-Webster, 2016). Generally speaking, innovation is beneficial for society as a whole because it either improves its productive potential, solves existing problems or needs or just because it makes the consumer better through the availability of new products and services. Hence, innovation is a key driver in the gradual improvement of the material well-being of societies. Indeed, since the seminal work of Solow (1956), it is well-known "that cross-country differences in technology may generate important cross-country differences in income per capita" (Comin, 2008, p. 2).
Thus, in economic growth theory, technological change is credited as a key determinant of the growth in total factor productivity (TFP). TFP refers to the combined contribution of all factors of production to output (Comin, 2008). But, obviously, technological change is driven by innovation. Hence, as innovation drives technological change, which in turn drives TFP growth, then it is considered that innovation is an important determinant of economic growth. This is precisely the view held by endogenous growth models (Romer, 1990).
For instance, Barro and Sala-i-Martin (2000) made a growth accounting exercise in which they decomposed the growth rate of a group of countries in three contributing elements: the contribution from capital, labour and from TFP growth. There, it is seen that in rich countries, TFP tends to make a high contribution to the growth rate of GDP. In Latin America, the case of Chile stands out (38 per cent). In OECD, the case of Japan is prominent example (47 per cent). Colombia, however, showcases a rather low contribution of TFP to the growth rate of GDP (19 per cent).
Turning the attention to the Colombian case, Loaiza and Franco (2012) estimate the main determinants of TFP growth. Globally, it is found that in Colombia technological change is the main contributor to TFP growth, followed by the increases in technical efficiency. However, if as the work of Barro and Sala-i-Martin (2000) shows, the contribution of TFP to the growth rate of GDP in Colombia is relatively low, this probably should stem from the fact that, being technological change the main determinant of TFP growth, technological change is not proceeding at a fast-enough pace in Colombia.
As innovation is a microeconomic phenomenon that occurs at the firm level, then it is important to analyse if innovation processes indeed have an impact on firm performance. So here we turn our attention to the empirical literature on the ties between innovation and performance in SMEs stemming from the realms of industrial organization and management.
According to the structure-conduct-performance (SCP) paradigm in industrial organization, the characteristics of the market structure determine the conduct of the firm, which in turn determine its results. However, this relationship is not unidirectional, as the firm's conduct may also influence the market structure and, hence, its own performance. From this perspective, the firm should adapt to the prevailing structural conditions in its industry or implement a strategic behaviour to be competitive. The uncertainty and intensity of changes faced by SMEs have accentuated the strategic role of innovation, so far as to be considered a key determinant of profitability.
In this vein, the works of Van de Vrande et al. (2009) find that SMEs pursue open innovation because of market-related causes, such as to keep up with clients demands or to keep up with competitors. So, according to the SCP paradigm, profitability differences among firms are explained by innovation-related factors and to the market structure in which firms compete. Therefore, this approach extends strategic management theories, which attribute profitability differences among firms mainly to internal factors, being innovation one of them (Williamson and Winter, 1993).
Innovation and SMEs are closely tied. First, the development of a new idea is the key reason why entrepreneurs establish a new business. Second, "the entrepreneur or small business manager needs to have an innovative edge to compete against bigger incumbents" (Rosenbusch et al., 2011, p. 442). Otherwise, it is likely they will be taken out of business by the Big Fish. Third, SMEs can adjust to environmental changes faster than bigger organization "due to their nimbleness, missing hierarchies, and quick decision-making" (Rosenbusch et al., 2011, p. 442).
However, innovation is a risky endeavour. On the one hand, it requires resources that may be hard to come by a SME. It is well-known that SMEs face tight financial resources restrictions due to credit constraints (Nixson and Cook, 2005; OECD, 2009; OECD, 2015); but they also may face other kinds of resource deficits, such as scarce management resources or limited access to human capital (OECD, 1998; Abdullah, 2000). On the other hand, the results of those investments can be uncertain. So, it is no surprise that SMEs have a high mortality rate. For instance, in the USA "about half of all new establishments survive five years or more and about one-third survive, 10 years or more" (Bureau of Labour Statistics, 2016). In Colombia, just about 50 per cent of new businesses survive to the first year, and 20 per cent survive to the third year (Dinero, 2015).
Taking those facts into account, it is easy to see that big corporations have some advantages to innovate. First, large organizations usually have the "resource slack to absorb failure" and their accumulated experience may help them to better manage innovation projects (Rosenbusch et al.,2011). However, as Govindarajan (2016) points out, "Past success can trap [big] companies into believing what they have done is a blueprint for what they should do". Moreover, SMEs are very important. In Colombia, they represent well above 90 per cent formal businesses and create around 67 per cent jobs (Dinero, 2016). So, it is important to know if innovation indeed improves the performance or results of a SME in Colombia.
At the international level, there is a relatively wide body of empirical studies that try to assess the relationship between innovation and performance in SMEs. To innovate, the firm may use internal resources, external resources or a combination of both. In an empirical study directed specifically to analyse SMEs innovation capabilities, Sternberg and Arndt (2009) suggest that internal inputs are more important than external factors in determining the SME's innovation capability. In particular, they find that firms that participate in an innovation network are more likely to generate process innovations. However, participation in innovations networks does not have an impact on the probability to generate product innovations. Moreover, external regional spending on R&D has a positive impact on product innovation.
Now, the relationship between innovation and performance in SMEs, Rosenbusch et al. (2011) found that performance is not only assessed through objective measures of results but also through subjective ones. This fact could be related to the sensitiveness of SMEs' managers...
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