Determinants of product innovation activity the case of vietnamese SME firms

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLAND VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS Determinants of Product Innovation Activity: The case of Vietnamese SME Firms BY DANG THUY TRANG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, May 2015 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS Determinants of Product Innovation Activity: The case of Vietnamese SME Firms A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By DANG THUY TRANG Academic Supervisor: LE CONG TRU PhD HO CHI MINH CITY, May 2015 ABSTRACT This study examine two manors of product innovation including improving existing product and making new product with the scope of Vietnamese SME's firms The aim of this study is to figure out what determinants have significant impact on each type of product innovation and whether correlation between these two manors exists Determinants are categorized into internal and external factors The first group includes age, experience of entrepreneur, firm size, training cost, and R&D cost The second group includes competition level, outsourcing cost, external consultant, networking, knowledge of market/marketing cost, and export orientation Bivariate-probit model is used for attaining research's purposes above The model is applied on 1418 SME's firms which are separated into five sections: textile & shoes, food manufacturing and processing, mechanics and electricity, wood processing and all other sections Five factors are figured out to have significant influence on product innovation activity of firms including firm size, age of entrepreneur, export, competition level and network Marginal effect calculated from bivariate-probit regression are helpful evidence for firms to adjust significant determinant to improve their innovation performance ABBREVIATION R&D Research and Development SMEs Small and Medium Enterprises CIEM Central Institute for Economics Management OECD Organization for Economic Co-operation and Development MIT Ministry of Industry and Trade CONTENTS I INTRODUCTION .7 I.1 Problem statement I.2 Research objectives I.3 Research questions I.4 Scope of the study I.5 Structure of the study CHAPTER II: LITERATURE REVIEW 10 II.1 Innovation 10 II.1.1Definition of innovation 10 II.1.22 Popular indicators of innovation activity in SMEs: 10 II.1.3Classification of innovation: 12 II.1.4Characteristics of innovation activities in developing country 12 II.1.5Comparison between large enterprises and SMEs based on indicator of product innovation 13 II.2 Product innovation 14 II.2.1 Definition of product innovation 14 II.2.2 Classification of product innovation 14 II.3 Reviews of Related Theories 15 II.4 Reviews of Empirical Studies 17 II.4.1 Determinants of product innovation 17 II.4.2 Empirical review of methodology 30 CHAPTER III: RESEARCH METHODOLOGY AND DATA .36 III.1 Data and sample 36 III.2 Variables and Measurement 36 III.2.1 Dependent variable 36 III.2.2 Independent variables 37 III.3 Analytical approach 41 III.3.1 3.1 Empirical model, estimation method 41 CHAPTER IV EMPIRICAL RESULT .45 IV.1 Innovation activity of SMEs in Vietnam 45 IV.2 Data description 46 IV Descriptive statistics 47 IV.4 Regression Results 50 IV.5 Marginal effects 55 CHAPTER V: CONCLUSION AND RECOMMENDATION 58 V.3 Recommendation 59 V.4 Limitation and Future Research 60 REFERENCE 61 LIST OF TABLES Table 1: The innovativeness indicators for SMEs in different dimentions .11 Table 2: Comparison between large enterprises and SMEs based on indicator of product innovation .13 Table 3: Dependent variables 37 Table 4: Determinants of Product Innovation 40 Table : Innovation Rates in Manufacturing SMEs .45 Table 6: Number of observations with improved and new product 46 Table 7: Four cases of combination between improving existing product and creating new product 46 Table : Descriptive statistics 47 Table : Correlation between some independent variables 49 Table 10 : Summary of results from bivariate - probit regression 50 Table 11: Marginal effect .55 LIST OF FIGURES Figure 1: Conceptual Framework 35 Figure 2: Methodology model 44 I INTRODUCTION I.1 Problem statement International economic integration allows more firms to be established and more foreign firms to enter domestics market Under such intensive competition pressure, firms need to continuously innovate their products to attain comparative advantage from other opponents This is due to limited life cycle of individual product and more arising demand of customers M Banbury and Mitchell (1995) proved that the more often firms create new products, the better they perform and the higher their probability of surviving in long term is This is applicable for both small and large firms (Vermeulena, De Jong, & O'shaughnessyc, 2005) Chris Freeman and Soete (1997) - even asserted that ‘not to innovate is to die’ Due to such important role of innovation, a large amount of studies have been done to identify factors having influence on product innovation of small firms (Martinez-Ros,1999; Jong, 2006; Fritz,1989; Vega-Jurado, Gutierrez-Gracia, Fernandezde-Lucio & es-Henriquez, 2008; Hadjimanolis,2000; Freel, 2000) It requires more than expenditure on R&D for attaining improved or new products Factors with considerable influence on innovation activity that should be taken into account include firm size, production technology ( ratio of sales over fix assets), origin of ownership, spending on market insight (Avermaetea, et al., 2004) How much these factors may affect innovation activity is not equal and depends on economic section of firms Thus, a model simulating impacts of aforementioned elements is necessary to be established While there are a range of international researches addressing this topic, number of papers on such matter at Vietnamese scale is quite limited As Vietnam is a developing country, a moderate technical progress may result in huge increase of firm' sale or market share (Hadjimanolis, 2000) Thus, a model applying this matter for Vietnamese scenario is essential to be devised This paper is expected to achieve that target Both Vietnamese enterprises and policy makers can utilize results of this paper First of all, enterprises can refer to this model when they are in need of promoting innovation for their product As the model points out specific elements and the level such elements need controlled This is also a useful guidance for policy makers In detail, being aware of influential elements of each industry allow policy makers to make proper decision to assist innovation of that specific section I.2 Research objectives: The study is expected to figure out determinants with significant impact on product innovation activity of Vietnamese SMEs and influential level of each factors By understanding the interaction between the internal and externals factors having impact on product innovation, enterprise’s leaders may adjust firm’s strategy to adapt to characteristics of environment to gain the highest performance in product innovation activity I.3 Research questions There are two main questions addressed in this study The first one is what indicators have considerable impact on product innovation behavior of firms The second one is to which extent product innovation is influenced by these factors I.4 Scope of the study The study examines Small and Medium enterprises across Vietnam with data extracted from SMEs survey 2011 I.5 Structure of the study This paper includes five chapters The first chapter - Introduction presents the issue and background of the issue addressed in this paper, then discussing research objective Chapter II–Literature review presents the theoretical and empirical foundation of the topic which aims at creating a conceptual framework for the research This part explains the definition of innovation, product innovation, theoretical and empirical theory about determinants of product innovation activity of firms, the methods applied to measure product innovation Chapter III – Research Methodology focuses on the method, data description and the analytical model applied in this paper Chapter IV– Findings and Discussions discuss the regression results and marginal effect of each factor on product innovation probability The final part Chapter V–Conclusion and Recommendations suggest policies for policy makers and for top management of firms when they want to increase the rate of innovating product CHAPTER II: LITERATURE REVIEW II.1 Innovation II.1.1Definition of innovation According to Hyvarinen (1990), innovation activities involve both internal and external activities of firms with the target of creating new products, enhancing existing products, process, governance or marketing Most of innovation activities originate from research and development (R&D) Some may be acquired by firms via other sources such as licensing, seminars, consultants, customers, providers Technologies can be applied in various ways in each firms When technology is aware at a broader sense rather than relating to products only, innovation activities will play a key role in development of SMEs (OECD, 1982) II.1.2Popular indicators of innovation activity in SMEs: There are three popular proxies usually used to indicate levels of innovation: input, output and impact These indicators could be analyzed in general or particular meaning and measured by quantity or quality The measurement units used most frequently are number and rate Among various inputs of producing, time, capital and labor are the common factors used to measure effectiveness of innovation Because these factors can be collected more easily and exactly than others belong to output or impact, the input method is preferred than the other two methods The second indicator- output involves in analyzing straight outcome of innovation, creation, expertise, proficiency and absorption of technique The typical proxy of output is patent as its data can be found in most country’s statistic system However, patent is not the most significant in all companies and all industries Some innovations may not be registered for patents Besides, patent refers to invention rather than innovation Output method sometimes utilized number of license as indicator The last and the latest among three methods is impact indicators This method relates to innovation in larger aspect and refer to qualitative outcomes rather than quantity Impact is comparison between cause and effect of innovation and the variation of sales, capital, productivity, development, etc of firm 10 V.3 Recommendation Besides providing evidence for firms to improve their innovation performance, this study result also suggests some policies that government or competent authority can apply to enhance general innovation performance of SME firms Some policies are as follows: Firstly, Ministry of Industry and Trade (MIT) may facilitate firms to increase its network by supporting establishment and operation of Associations in specific industry These association will connect producers, suppliers of the same industry with one another Such organizations also allow firms to share information of new technique or experience and know how to improve their products Once connected, firms may have chance to cooperate with each other in co-investing in capital intensive technique to produce advanced product Besides, MIT can support organizing more convention, fair, workshop, etc….Those event will provide firms more opportunity to meet, discuss and share with each other method to innovate their products International trade has been proved to create more chance for firms to innovate their product Vietnam Trade Promotion Agency has actively proceeded many activities to bring more export opportunity to Vietnamese firms They has organized a range of trade fairs at various provinces to promote local producer to export their own products Agency of this organization abroad also timely update demand of foreign market for domestic producer as well as connect international buyers to Vietnamese sellers Such activities should be continued and even extended so that more local products can approach foreign consumers Firm size has been certified to positively affect product innovation activity of firms Large firms have better condition in applying modern producing method to manufacture advanced product Most SME firms find obstacle in mobilizing capital Thus Center Bank should issue policies to enable SME firms even at distinct areas to have chance to borrow capital More efficient law on micro finance should be applied so that SME firms can approach capital from these sources easily and effectively Maintaining a competitive market is another method competent authority can apply to ensure enhance innovation activities of firms A monopoly market where firms are not freely to enter will discourage existing firms from innovating their product Once a purely competitive market are maintained monopoly or government support are removed, firms will be stimulated to create better product to gain more market share In sum up, this study proposes some policies that should be applied or continued to promote innovation among SME firms Such policies will not only enhance firm's performance but their consequences will increase government budget, increase wealth fare of the whole society V.4 Limitation and Future Research Due to limitation of data, the research doesn't include some determinants that theoretically have influence of product innovation such as customer demand, origin of firm ownership, technical capital In further research, a survey with sufficient data should be proceed to take into account above determinants Dependant variables are measured by binary 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APPENDIX REGRESSION RESULT OF BIVARIATE PROBIT MODEL Seemingly unrelated bivariate probit Log likelihood = -1188.2523 Coef Std Err z Number of obs = 1418 Wald chi2(28) = 101.56 Prob > chi2 = 0.0000 P>|z| [95% Conf Interval] Improve Size Outsource Export 0025921 0010238 2.53 0.011 0005854 0045988 -.0101437 0063588 -1.60 0.111 -.0226067 0023193 3653418 1357312 2.69 0.007 0993136 63137 Age Training Marketingc~t Techconsul~t Competitio~l RDcost Network Food Texttile Machenic Wood -.0066609 5.80e-06 -.0006101 0033541 7.12e-06 0007287 -1.99 0.047 -.0132348 -.000087 0.81 0.415 -8.15e-06 0000197 -0.84 0.403 -.0020383 0008182 4292693 3732695 1.15 0.250 -.3023254 1.160864 0529834 1.13e-07 0039952 0322503 3.40e-07 001194 1.64 0.100 -.0102261 0.33 0.739 -5.54e-07 3.35 0.001 0016549 1161929 7.80e-07 0063355 -.191632 0932415 -2.06 0.040 -.374382 -.0088819 4510734 1370317 3.29 0.001 1824961 7196507 3829974 0974162 3.93 0.000 1920652 5739296 4538843 1227238 3.70 0.000 21335 6944186 _cons -.3142293 1903068 -1.65 0.099 -.6872238 0587653 Newproduct Size Outsource Export 0021085 0014503 1.45 0.146 -.000734 004951 -.0093644 0121036 -0.77 0.439 -.033087 0143582 1051068 2095069 0.50 0.616 -.3055193 5157329 002415 0.44 0.662 -.0084022 -0.26 0.791 -.0000111 -.0017611 0055191 4.98e-06 0021363 -0.82 0.410 -.0059481 0132322 8.44e-06 0024259 2129067 5285567 0.40 0.687 -.8230454 1.248859 -.0161634 -0.30 0.764 -.1217777 -0.40 0.692 -3.63e-06 0001495 0538858 1.54e-06 0009453 0.16 0.874 -.0017032 0894509 2.41e-06 0020023 -.1338128 1520214 -0.88 0.379 -.4317693 1641437 -.3531656 2639243 -1.34 0.181 -.8704476 1641165 0143226 154726 0.09 0.926 -.2889348 3175801 -.4310093 2576404 -1.67 0.094 -.9359753 0739567 _cons -1.639435 3097723 -5.29 0.000 -2.246577 -1.032292 /athrho 1518747 0735957 2.06 0.039 0076297 2961196 rho 1507176 0719239 0076296 2877575 Age Training Marketingc~t Techconsul~t Competitio~l RDcost Network Food Texttile Machenic Wood -1.32e-06 -6.11e-07 Likelihood-ratio test of rho=0: chi2(1) = 4.30469 Prob > chi2 = 0.0380 MARGINAL EFFECTS IN CASE: FIRM HAS IMPROVED PRODUCT AND NO NEW PRODUCT Marginal effects after biprobit y = Pr(Improve=1,Newproduct=0) (predict, p10) = 39900699 variable Size Outsou~e Export* Age Training Market~t Techco~t* Compet~l RDcost Network Food* Texttile* Machenic* Wood* dy/dx Std Err .0008585 -.0033023 1311145 -.0026094 2.23e-06 -.0001369 1453818 0205997 7.37e-08 0014829 -.064518 1886171 1437164 1925768 00039 00243 0521 00127 00000 00029 14123 0122 00000 00045 03422 0526 03736 0473 z 2.23 -1.36 2.52 -2.06 0.84 -0.47 1.03 1.69 0.50 3.31 -1.89 3.59 3.85 4.07 P>|z| [ 95% C.I ] 0.026 0.173 0.012 0.040 0.403 0.637 0.303 0.091 0.619 0.001 0.059 0.000 0.000 0.000 000104 001613 -.008056 001451 028995 233234 -.005095 -.000124 -3.0e-06 7.5e-06 -.000706 000432 -.131421 422185 -.003315 044515 -2.2e-07 3.6e-07 000605 002361 -.131579 002543 085517 291717 070486 216947 099878 285276 X 21.8484 5.17509 083921 43.5987 1168.05 8.67489 008463 2.60273 6508.46 34.4154 212976 071932 169252 093794 MARGINAL EFFECTS IN CASE: FIRM HAS NEW PRODUCT AND NO IMPROVED PRODUCT Marginal effects after biprobit y = Pr(Improve=0,Newproduct=1) (predict, p01) = 02109573 variable Size Outsou~e Export* Age Training Market~t Techco~t* Compet~l RDcost Network Food* Texttile* Machenic* Wood* dy/dx 0000495 -.0002454 -.0026452 0002372 -1.70e-07 -.0000705 0002724 -.0017455 -3.05e-08 -.000068 -.0027338 -.0167055 -.0064373 -.0185567 Std Err .00007 00057 00882 00026 00000 0001 02456 00255 00000 00005 0068 00539 006 00504 z 0.71 -0.43 -0.30 0.91 -0.64 -0.71 0.01 -0.68 -0.43 -1.37 -0.40 -3.10 -1.07 -3.68 P>|z| [ 95% C.I ] 0.475 0.667 0.764 0.364 0.522 0.478 0.991 0.494 0.669 0.171 0.688 0.002 0.283 0.000 -.000086 000185 -.001364 000873 -.019941 01465 -.000275 00075 -6.9e-07 3.5e-07 -.000265 000124 -.047861 048406 -.006748 003257 -1.7e-07 1.1e-07 -.000165 000029 0106 -.016067 -.027276 -.006135 -.018201 005326 -.028431 -.008683 X 21.8484 5.17509 083921 43.5987 1168.05 8.67489 008463 2.60273 6508.46 34.4154 212976 071932 169252 093794 70 MARGINAL EFFECTS IN CASE: FIRM HAS NEITHER NEW PRODUCT NOR IMPROVED PRODUCT Marginal effects after biprobit y = Pr(Improve=0,Newproduct=0) (predict, p00) = 55407808 variable Size Outsou~e Export* Age Training Market~t Techco~t* Compet~l RDcost Network Food* Texttile* Machenic* Wood* dy/dx Std Err -.0010652 0042201 -.1421976 0023727 -2.10e-06 0003095 -.1701818 -.0190155 -1.38e-08 -.0014975 0768248 -.1617316 -.1451314 -.1609722 00039 00246 05193 00129 00000 00029 13884 01242 00000 00045 03498 05258 03745 04725 z -2.72 1.71 -2.74 1.84 -0.79 1.06 -1.23 -1.53 -0.09 -3.33 2.20 -3.08 -3.87 -3.41 P>|z| [ 95% C.I 0.007 0.087 0.006 0.066 0.431 0.290 0.220 0.126 0.925 0.001 0.028 0.002 0.000 0.001 -.001833 -.000607 -.243978 -.000158 -7.3e-06 -.000263 -.442303 -.043362 -3.0e-07 -.002379 008272 -.26478 -.218542 -.253584 ] -.000297 009048 -.040417 004904 3.1e-06 000882 10194 005331 2.7e-07 -.000616 145378 -.058683 -.071721 -.06836 X 21.8484 5.17509 083921 43.5987 1168.05 8.67489 008463 2.60273 6508.46 34.4154 212976 071932 169252 093794 MARGINAL EFFECTS IN CASE: FIRM HAS BOTH NEW PRODUCT AND IMPROVED PRODUCT Marginal effects after biprobit y = Pr(Improve=1,Newproduct=1) (predict, p11) = 02581919 variable Size Outsou~e Export* Age Training Market~t Techco~t* Compet~l RDcost Network Food* Texttile* Machenic* Wood* dy/dx 0001572 -.0006725 0137282 -5.45e-07 4.09e-08 -.0001021 0245276 0001612 -2.93e-08 0000826 -.009573 -.0101799 0078523 -.0130479 Std Err .00008 00064 01563 0003 00000 00011 05017 00287 00000 00005 0067 01039 00992 00926 z 1.99 -1.05 0.88 -0.00 0.14 -0.92 0.49 0.06 -0.37 1.50 -1.43 -0.98 0.79 -1.41 P>|z| [ 95% C.I 0.047 0.293 0.380 0.999 0.888 0.360 0.625 0.955 0.712 0.132 0.153 0.327 0.429 0.159 2.1e-06 -.001926 -.016908 -.000579 -5.3e-07 -.000321 -.073811 -.005473 -1.9e-07 -.000025 -.022712 -.030552 -.011587 -.031204 ] 000312 000581 044365 000578 6.1e-07 000116 122867 005796 1.3e-07 00019 003566 010192 027291 005108 X 21.8484 5.17509 083921 43.5987 1168.05 8.67489 008463 2.60273 6508.46 34.4154 212976 071932 169252 093794 (*) dy/dx is for discrete change of dummy variable from to 76 CORRELATION Newproduct Improve Size Outsource Export Age Techstaff Managerial staff MP staff Training Marketing cost Techconsultant Competition level RDcost Network Owner New product 1.0000 0.0579 0.0423 -0.0200 0.0238 0.0064 0.0216 0.0563 0.0427 -0.0046 -0.0077 0.0141 -0.0093 -0.0112 0.0091 0.1348 Improve 1.0000 0.1212 -0.0514 0.1105 -0.0806 0.1132 0.1210 Size 1.0000 0.0030 0.4052 -0.0586 0.6009 0.6455 0.1309 0.0436 0.0259 0.0297 0.0357 0.6969 0.0971 0.3656 0.0030 0.0107 0.0939 0.1348 0.0172 0.1017 -0.3121 Managerial MP staff staff -0.0598 Training Outsource Export Age 1.0000 -0.0310 0.2875 1.0000 -0.0699 0.3494 -0.0884 0.0343 0.0390 0.1532 -0.0039 -0.0255 0.3551 0.1261 0.1969 -0.0002 -0.0882 0.0141 0.0199 0.0065 -0.0025 -0.0105 -0.0248 -0.0008 0.2658 -0.0045 0.0328 0.0935 0.0039 -0.0356 -0.3552 1.0000 0.0286 0.0068 0.0247 0.0370 Marketing cost Techconsultant Techstaff 1.0000 0.5931 0.9030 0.1129 0.2041 0.0196 -0.0559 0.0202 0.0802 -0.0692 Competition level Managerial staff 1.0000 MP staff 0.8814 1.0000 Training 0.1960 0.1708 1.0000 Marketing cost 0.2125 0.2331 0.0783 1.0000 Techconsultant 0.0105 0.0171 -0.0042 0.0035 1.0000 Competition level -0.0317 -0.0497 0.0199 0.0062 0.0042 1.0000 RDcost 0.0251 0.0252 0.0101 0.0086 -0.0061 -0.0199 Network 0.1040 0.1025 0.0134 0.0570 -0.0096 -0.0336 Owner -0.2226 -0.1345 0.1133 0.1348 0.5604 RDcost Network Owner RDcost 1.0000 Network 0.0075 1.0000 Owner -0.4485 1.0000 ... Determinants of Product Innovation Activity: The case of Vietnamese SME Firms A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS... examine two manors of product innovation including improving existing product and making new product with the scope of Vietnamese SME' s firms The aim of this study is to figure out what determinants. .. enterprises and SMEs based on indicator of product innovation 13 II.2 Product innovation 14 II.2.1 Definition of product innovation 14 II.2.2 Classification of product innovation