Problemstatement
Thesignificantcontributionofmicro,smallandmediumenterprises(MSMEs)totheecon omicgrowthhasbeenhistoricallyrecorded,especiallyitsroleinprovidingemploymentopportun ities.D u e t o t h e facto f l a c k i n g u p d a t e fromt h e nationals t a t i s t i c s o n M S M E s i n Vietna ms i n c e J a n u a r y 2 0 1 3 , t h e m o s t recentr e p o r t o f A s i a n DevelopmentBank(2014)u t i l i z e s thefiguresoftheyearof2012andshowsthatin2012, therewereintotal333,835M
S M E s i n operations,accountingfor97.7%of thetotalenterprisesthat paidcorporatetax.
MSMEsectoremployed5.1millionworkersin2012andaccountedfor46.8%oft h e totalworkforce inthecountry.Thesectorobservesanincreaseofnumberandemployeeso f 5 3 % and2 4 % respe ctivelyafterf i v e yearso f t w o - d i g i t growth(from2 0 0 7 t o 2011).ThoughthepercentageoflaborintheMSMEsectorisnotadeq uatetothedominantnumbero f MSMEsinVietnam,itisundeniablethatMSMEstakeacrucialcontrib utiontothenationaleconomy.
– aftert h e wholesale& retailtradeandservicesectorsaccountingf o r 3 9 8 % and2 0 5 % respectiv ely,manufacturingisalabor- intensiveindustry,employingmajorityofemployeesint h e MSMEsector,31.8%oftotalMSMEemp loyees,14.9%oftotaldomesticworkforce.Thisfigurepartlyshows the important role ofmanufacturingMSMEs in theeconomy.
Intherecenttime,manufacturingcompaniesarefacedwithunstableeconomicenvironme ntwithfrequent shocksandincreasingly fiercecompetition.Moreover,theknowledge- basedmechanism, whichhasbeeni g n i t e d since 1990s,hase v o l v e d themarketplaceto be moredynamicandcompetitive.
Innovation is essential for firms to enhance their competitiveness in today's challenging and unstable environment Schumpeter (1950) emphasized the need for companies to innovate to refresh their asset value, a concept acknowledged by researchers even before the term "innovation" gained popularity Since the 1980s, firms have increasingly focused on innovative strategies to navigate fierce global competition (Hodgetts et al., 1998) As a result, both individuals and organizations are now reassessing their innovation strategies and entrepreneurial capabilities to gain competitive advantages (Drucker, 1985; Hult et al., 2003) There is a growing interest in innovation processes and their impacts, as organizations must adapt to shifting customer demands and seize opportunities arising from technological advancements The current dynamic competition is strongly characterized by innovation (Porter, 2000), and research indicates that firm performance and competitive advantages critically depend on their ability to generate, develop, and exploit innovation (Bettis and Hitt, 1995; Helfat and Peteraf, 2003; Voss, 1994).
Thistrendofin no va ti on whichbenefits firmperformanceis,with highprobability,ap plicablef o r large- sizeo r hight e c h n o l o g y enterprisesw h e r e t h e a v a i l a b l e c a p a b i l i t y f o r continuousim provementsareresourceful.However,whetherinnovationtakesanintegralparti n thesuccessofsmalla ndmediummanufacturingenterpriseswhoseinvestmentcapabilityfori n n o v a t i o n s isextremel ylimitedisstillinquestions.Theresearchonthismatterisevenscarcerf o r thedevelopingcountrieswheret hetechnologycontentofcirculatedproducts andservicesarelowerthanhighlydevelopedcountries.
With the spirit offillingtheabove-mentionedresearchgap,this studyutilizesthe datatakenfromt h e S u r v e y o f S m a l l andMediumS c a l e M a n u f a c t u r i n g Enterprises( S M
E s ) i n Vietnamt o delvei n t o t h e valuechaino f i n n o v a t i o n , fromt h e causesofi n n o v a t i o n t o itsconsequencestofirmperformanceoftheenterprisesinquestions.Firstly,thestudyevaluatest h e causesofinnovations,fromfirmcharacteristics,internalinnovationfactorsandexternali n n o v a t i o n factors.Secondly,theimpactofinnovationonfirmperformanceisrevealedwitht h e solutionsfortheinherentendogeneityproblemsbetweeninnovationandfirmperformance.Lastly,ba sedontheacknowledgementofthecausesandconsequencesofinnovation, suggestionsforpromotingandforfruitfulimplementinginnovationsareproposedforattaininghigherfirmpe rformance.
Researchquestions
Theprimarygoalofthisstudyistoestimatetheimpactextentofinnovationperformanc eandto define thekeyfactorsforfirms indecidingthe deployment ofinnovation.U s i n g thepaneldataofMSMEs inVietnam,thestudyconcentrateson threemainquestions:
First,whataret h e causeso f i n n o v a t i o n , d e l v i n g i n t o t h e firmcharacteristics,t h e internalinnovationfactorsandtheexternalinnovationrequirement?
Thescopeofthestudy
Thes t u d y u s e s t h e d a t a s e t takenfromt h e S m a l l andMediumEnterprisesS u r v e y conductedbythecollaborationoftheDevelopmentEconomicsResearchGroup(DERG)oft h e UniversityofCopenhagenandseveralpartiesfromVietnam.Gatheringtheseparatedatafromthef ourSMEssurveyscarriedoutin2007,2009,2011and2013,theresearchformsapaneldata consistingtwoyearsof2011and2013coveringsmallandmedium-sizednon- statemanufacturingenterpriseso f t e n provincesV i e t n a m NamedS M E s survey,however,t h i s s u r v e y alsoconsiststhemicroenterpriseswithlessthanandequalto tenemployees.
Structureof thestudy
This research on innovation is structured into five chapters The introductory chapter outlines the motivation and overall context of the study Chapter 2 presents a critical literature review, covering the definition and classification of innovation, its causes, its impact on firm performance, and a conceptual framework Chapter 3 details the research methodology, specifying the model and approach used to examine the effect of innovation on firm performance and to evaluate the various factors driving innovation Chapter 4 presents the empirical results, divided into two parts: the first part describes the data sources and variable constructions, while the second part discusses the regression results Finally, Chapter 5 summarizes the main findings, along with policy implications and limitations for future research.
Definitionandclassificationofinnovation
Definitionofinnovation
Toestimatetheinnovation’s contributiontothefirmperformance,especially inthem anufacturing area,the definition ofthetermshould beexamined.
Innovation plays a crucial role in corporate performance, as defined by Sink (1983), who identifies it as one of seven key criteria These criteria include effectiveness in managing output, efficiency in handling input, productivity in relation to costs and deliverables, and quality of work life, which reflects employee perceptions of the organization Additionally, innovation is vital for a firm's ability to adapt to both internal and external changes, while profitability measures the difference between revenue and costs Quality assesses the firm's capacity to meet customer requirements Sink emphasizes that innovation must consistently align with a firm's priorities, while other performance criteria may vary in significance throughout different stages of the firm's growth.
Galbraith(1982)showsanotherpointofview.Hedefinesinventionasthecreationofnewide asandinnovations astheprocessofimplementing theseideas.Describinginmoredetail st o whate x t e n t thats o m e t h i n g newa r e consideredasi n n o v a t i o n s , A b e r n a t h y an dUtterback(1982)maintainthatinnovationcanstartfromsmallscope,andthatmanysmalleri n n o v a t i o n s m a y build alargeinnovation.
Asacloserattentiontotheprocesswhereinnovationsoccur,Bessant(1982)’sideaisthata m anufacturingi n n o v a t i o n canb e describedass o m e t h i n g t h a t "changesneithert h e product northebasicprocess,onlysomeelementsintheprocess."Meanwhile,anotherpoint ofviewfromTushman(1982)shows innovationas"anyproduct orprocessnewto abusinessu n i t (firm)."T h e y alsoe m p h a s i z e t h e dynamico f i n n o v a t i o n whichhasdiffer entpattern,amountandtypethroughoutthedifferentproductlifecyclestages:introduction,growt handmaturity.
Schroeder et al (1989) provide a comprehensive definition of innovation in manufacturing by involving 65 manufacturing managers responsible for managing up to five plants in large companies with varying technological applications Their research addresses two key questions: the measurement of innovation in manufacturing and strategies to improve it They define innovation as the implementation of new ideas or changes, whether big or small, that can contribute to organizational objectives This definition encompasses both large and small innovations, acknowledges the risks of failure, and emphasizes the potential to achieve business goals.
TheManualo fInnovationStatisticsofthe OECDin2005, alsoknownasthe Oslomanu alandusedfrequentlyasthebaseforinnovationsurveyforOECDcountriesaswellasm a n y non- OECD countries,statesanotheraspectofinnovation:itsclassification.Inthelatestversionpublishedin2005,t hedefinitionofinnovationismoredetailedwithdescriptionofthedifferenttypesofinnovation:“anew orsignificantlyimprovedproduct(goodorservice),orprocess,a n e w marketingm e t h o d , o r a n e w organizationalm e t h o d i n businesspractices,workplaceorganizationorexternalrelations” Inthepreviousversionin1995ofthismanual,t h e innovationdefinitionislimitedin thetechnologicalproductandprocessinnovationsonly.
Themarketingi n n o v a t i o n andorganizationali n n o v a t i o n aren e w l y a d d e d t o geta m o r e comprehensiveevaluation ofcorporateinnovation.
Inthescopeofthisstudy,thetechnologicalmethodsareputintohighconsiderationandd onotcovertheorganizationalormarketing methods.Thisisalsoamoreappropriateapproa chofinnovationforsmallandmediummanufacturingenterpriseswherethebudgetformarketingisli mited,theemployeenumberisusuallyoptimized,andtheownershipisquitestable.
Maintypesofinnovation
AsstatedintheManualofInnovationoftheOECDpublishedin2005,innovationscanb e class ifiedintofourmaintypesundertwobranches:technologicalandnon- technologicali n n o v a t i o n s
“Aproductinnovationistheintroductionofagoodorservicethatisnewors i g n i f i c a n t l y improved withrespecttoitscharacteristicsorintendeduses.Thisincludessignificantimprove mentsintechnicalspecifications,components andmaterials,incorporatedsoftware,userfriendlinessorotherfunctionalcharacte ristics.”Aproductcanbeconsiderednewifithassignificantdifferencei n characterist icsorusescomparingtothepreviousproductsmanufacturedbyt h e samefirm.Ane xistingproductmayhavesignificantimprovementswhenithaschangesinitscompon entsoritsmaterialsinordertoimprovetheproductperformance.
“Aprocessinnovationistheimplementationofaneworsignificantlyimprove dproductionordeliverymethod.Thisincludessignificantchangesintechniques,eq uipmentand/orsoftware.”
“Amarketinginnovationistheimplementationofanewmarketingmethodi n v o l v i n g significantchangesi n p r o d u c t d e s i g n orpackaging,p r o d u c t pl acement,product promotion orpricing.”
“Anorganizationalinnovationistheimplementationofaneworganizationalm e t h o d i n t h e firm’sb u s i n esspractices,workplaceo r g a n i z a t i o n o r externalrelatio ns.”
Onlytechnologicalinnovationistakenintoconsiderationinthisstudy.Hence,thetwotypesof innovationinquestionincludeproductinnovationandprocessinnovation.Thesetypeso f innovationarer espectivelyknownastechnologicalproductinnovationandtechnologicalprocessinnovatio ninthesecondeditionofthesecondManualofInnovationof theOECDpublishedin1997.Inth escopeofthisstudy,theproductinnovationandprocessinnovationarecalledtechnologicalinnov ation.
Thedefinitionandclassificationofinnovationprovidesanoverviewaboutthei n n o v a t i o n activitiesatfirmlevel.Afterthissection,thestudylimitstothescopetotechnologicalinnovat ion,includinginnovationforproductsandprocesses.Inthenextpart,thes t u d y looksdeeperintothecau sesoftechnologicalinnovations,conducivetothefundamentalbasesfortheanalysisof thecausesoftechnologicalinnovations.
Thecausesoftechnologicalinnovations
Firmcharacteristicsandtechnologicalinnovation
Regardingt h e S M E sector,t h e t w o m a i n characteristicst h a t affectfirmi n n o v a t i o n p erformancearefirmsizeandfirmage.Looking atprobabilityofintroducinginnovationspert h e sizeandageoffirmsmakessenseasSMEsectoro bserveshighrateofentryandexitaswellasofgrowth.Revealingthecorrelationbetween firms i z e orfirmageandi n n o v a t i o n occurrencewouldbenefitsfirmsinmakingdecisionsofimplementinginnov ationtokeepfirmss u r v i v i n g andto buildfirmsstronger.
Therelationshipbetweenfirmsize andfirmin no va ti on mightbe origined fromt h e wo rkofSchumpeter(1942),namelytheSchumpeterianhypothesiswhichisconsistedbyaset oft w o hypotheses:t h e firstaffirmsthati n n o v a t i o n andm o n o p o l y p o w e r havep o s i t i v e relationship;thesecondstatesamorehighlyinnovativecapabilityshowninlargefirmsthan s m a l l o n e s
Research supports the Schumpeterian hypothesis, indicating a correlation between firm size and innovation A 1984 survey of 3,000 Dutch firms with over ten employees revealed that larger firms tend to have lower rates of R&D departments, which are typically seen as crucial for innovation (Kleinknecht, 1989) Similarly, a 1995 study of 209 Israeli industrial firms confirmed that smaller companies face more barriers to innovation, such as capital shortages and limited resources for market forecasting (Shefer & Frenkel, 2005) Additionally, smaller firms are often less informed about public policy measures aimed at supporting innovation A meta-analysis by Damanpour (1992) highlights the positive relationship between firm size and innovation, suggesting that larger firms have greater resources to invest in technological advancements Furthermore, a study of 300 manufacturing plants in Scotland by Love and Ashcroft (1999) found that plant size positively influences innovation.
Smaller firms are often seen as more technologically innovative due to their inherent flexibility and adaptability According to Mintzberg (1979), innovation thrives on cooperation within an organization, which can be more effectively achieved in smaller settings Damanpour (1992) highlights that small firms possess a better capacity for adaptation and improvement compared to larger counterparts, fostering innovation Additionally, the performance and compensation of individuals in small firms are closely tied to the overall firm performance, which can motivate employees, particularly engineers and scientists, to drive more fruitful innovation As organizations grow, they tend to prioritize certainty and structured processes, leading to increased resistance to change and a decline in the likelihood of innovation (Hannan & Freeman, 1984; Downs, 1967).
Sizealsoaffectstheinnovationcapabilityoffirmdifferentlyoverdifferentindustries.A s t u d y conductedbyAcs andA u d r e t s h (1988),u s i n g data fromt h e U S S m a l l BusinessAdmini stration,presentstherelationbetweenfirmsizeandinnovationvariesoverdifferentindustries.T hegroupoflargefirmsismore likelytobeinnovativethantheirsmallcohortsins o m e sectors,suchasf o o d , paperandr u b b e r Int h e o t h e r hands,s m a l l - f i r m i n n o v a t i v e c a p a b i l i t y tendstobetterperformthantheirlargecohortsintheindustri esthatrequirehigherv o l u m e ofinnovativeness,usehighrateofskilledlaborandhavehighrate ofthelargefirmsi n themarket,suchasintheindustriesofmanufacturinginstruments,electronicsorch emicalssector.
Theresearchontherelationshipbetweenfirminnovationandthetimefirmspresentint h e ma rketis much more limitedthanthe onebetweenfirminnovationandfirm size.
Firm size, measured by total employees, and firm age, indicating years in operation, are classic control variables in innovation studies, as larger and more established firms typically possess greater resources for strategic initiatives compared to new or smaller firms (Hagedoorn and Duysters, 2002) Innovations from new entrants and established firms significantly contribute to the growth and evolution of specific industries Theoretical insights have been developed to explain industry dynamics (Audretsch, 1995; Klepper, 1996), while evidence has been found linking a firm's innovativeness to its age Acs and Audretsch (1988, 1990) highlight the crucial role of innovation from entrant firms, and Hansen (1992) shows that firm size is negatively related to innovation output among American firms.
Sørensen and Stuart (2000) were among the first to explore the relationship between firm age and innovation quality, specifically in the semiconductor and biotech industries Their research indicates that older firms tend to have a higher patenting rate, suggesting greater innovation However, they found a negative correlation between firm age and patent citation rates in the semiconductor sector, while a positive correlation exists in biotechnology This discrepancy in patent quality between the two industries was not addressed in their study Similarly, Huergo and Jaumandreu (2004) examined how firm age impacts innovation through productivity growth, revealing that newer firms initially exhibit higher productivity growth rates, which eventually align with the average growth rate Balasubramanian and Lee (200) further analyzed data from 1984 to 1994, focusing on the influence of firm age on innovation metrics.
8)conducttheanalysisconsistingo f 494firmsand180,515patentsofthesefirmsandpredictthatt heinnovationqualityand firmagehasnon- linearnegativerelationshipintheconditionofsmalllearningrateandinertia;i n addition,intheareasofhight echnologicalconcentration,theabove-mentionednegativeage
Internalinnovationfactors
Besidesfirmcharacteristicst h a t areunintentionalfactorsi n generatingi n n o v a t i o n , fir msalsowillfullyadoptvariouspracticesthatcontributedirectlytothedevelopmentoftheiri n n o v a t i v e capability,i n c l u d i n g t h e enhancemento f t h e p r o c e s s andt h e improvemento r intro ductiono f newproducts.T h e f o l l o w i n g p a r t embracesdifferentmeasurest h a t firmse m p l o y tobolsterstheirworkforce andresourcesthatmightcauseinnovation tohappen.
Knowledge, both tangible and intangible, is essential for innovation within organizations, as it shapes their capabilities (Hall, 1993; Thornhill, 2006) Hage and Aiken (1970) highlight that firms with strong knowledge assets have a greater opportunity to create and implement innovations Tsai (2001) found that a working environment that facilitates access to new cross-unit knowledge enhances organizational absorptive capacity, positively influencing business units' innovation and overall performance Furthermore, studies by Freel (2000), Hoffman et al (1998), and Roper et al (2008) emphasize that staff knowledge and skills are crucial for fostering innovation capabilities Additionally, Romijin and Albaladejo (2002) demonstrate that formal education and training programs can significantly enhance product innovation in small-sized firms.
However,thoughitdoesnotdirectlyindicatetheknowledgeassetwithinorganization,thereisa studyraisingtheinferiorroleofknowledgeintheinnovationprocess.Theempiricals t u d y ofLửửfand Heshmati(2002)fromthedatacollectedinthesecondEuropeanCommunityInnovationSurveyshowst hatknowledge- intensivefirmswhichrequireaccesstoandutilizationo f largek n o w l e d g e amounta r e i n t e r e s t i n g l y n o t m o r e i n n o v a t i v e t h a n l a b o r - intensivefirmswhichusealargeamountoflaborandcapital- intensivefirmswhichrequiresalargeamountoffinanceresourcesf o r o p e r a t i n g , controllingf o r d i s c r e p a n c y i n i n n o v a t i o n investmentandhumancapital.
Employeequalificationis anotherformof firmknowledge Investigatingthesmall- s i z e d companiesoperatingindevelopingcountries,Ayyagarietal.(2012) demonstratesfirmscanexpectahigherrateofinnovationiftheirtopmanagerspossessahighered ucationlevelandiftheyrecruitalargerpercentageofemployeeswhohavecompleteduniversityeducat iono r higher.
(1997)summarizet h e innovatione x p e n d i t u r e byfirmi n manufacturingsectori n t o s i x cate gories:expendituresf o r R&Dactivities,expendituresf o r patentsandlicenses,thecostfordesignin g,tooling- upandtrialproduction,expenditureformarketingandamountofinnovativeinvestment,underthe form ofacquisitionnewmachineryandplants.
Besidestakingthetotalinnovationexpenditure,thisstudywillfocusmoreonR&Dinve stmentasthistypeofinvestmentiscostlyandtakestimetogenerateeffects,leadingtohesitationini nvestmentinthecasesofSMEs.Aimingatgeneratinginnovation,R&Dactivitiesconfrontvariousdoubts onthesuitabilityofinvestment.Themainconcernisfromthecostlyinvestmentandinitialtimef o r
R & D t o g e n e r a t e technologicalprocessandt h e n , yieldingbusinessresults.C a n t w e l l andIa mmarino( 2 0 0 3 ) s u p p o s e sensitiveconsiderationo f R&Dinvestmentf o r p e r i p h e r a l region sw h e r e l i m i t e d c u t t i n g - e d g e d s c i e n t i f i c andtechnologicals t r a t e g y andfirmcapabilitytogeneratetechnologicalli nkageswithotherlocations.Sorensen(1999)statest h a t “ R & D i s unprofitablef o r l o w levelso f h u m a n c a p i t a l , andi t b e c o m e s profitableonlywhenhumancapitalreachesathresholdlevel.
Intheotherhand,someresearchesstatethatR&Dtakesacrucialpartindeliveringfirm innovationasinnovationisusuallytheprimarygoalofR&Dactivities.Firminnovationactivities mightbeaffectedbythelearningeffects.Inmoredetails,theinnovativecapabilityo f firmscoulde nhancew i t h t i m e CohenandLevinthal(1989,1 9 9 0 ) statet h a t theR&Dactivitiesmightimpro vethe“absorptivecapacity”offirms.Thesetworesearchersraisedtheterm“absorptivecapacity”asa newperspectiveoflearningandinnovationraised.Itisdefinedast h e a b i l i t y t o acquireknowledgef r o m o u t s i d e o f t h e firmst h a t e n a b l e s firmst o m a k e s o m e t h i n g differently.
Externalinnovationfactors
Firmcharacteristicsandinternalinnovationfactorsaretheresourcesthatenablefirmst o ma kethingsdifferent.However,thesefactorsarerarelythereasonstriggerthewillingtochangefro mfirms.Firmsoperatesin anenvironment withvariouscontactswith its suppliers,customersandcompetitorsthatrequiresfirmstochangeforsurvivingandgrowingbigint he fields.Hence,theimpactofexternalinnovationfactorsisincludedinthisstudyforamorecom prehensiveanalysisabout thecausesoffirminnovation.
Theexternalinnovationfactorsinthispartcoverthreetypes.First,theexternalnetworkw i t h otherf irmsi n t h e sameindustry,t h i s typeo f n e t w o r k i s a p a r t o f theh o r i z o n t a l coopera tionoffirmswiththeirpeers.Second,thespillover pressurefromsuppliersorcustomers,thispressurepartlyshowshowfirmsinteractwiththevertic alrelationshipwhenoperating.Third,thecompetition leveldemonstratesthemarketenviron mentthatfirmsarerunning.
Concerningthespillovereffectfromcustomersandsuppliersoninnovation,basedondataoft hetwowavesin1996and1998oftheCommunityInnovationSurvey,Belderbosetal.
(2004)indicatevariousrationalesbehindthecooperationinR&Dactivities.Theypointoutt h a t the cooperationwithsupplierscontributestotheincrementalinnovationswhichdelivert h e imp rovementinfirmproductivity.Meanwhile,customers,thoughfirmsdonotusuallyhaveformalR&Dcoo peration,areaprecioussourceforfirmtoextractknowledgeinpursuingtheradicalchangestoboostth egrowthininnovativesale.Takingthesimilarpointofview,usingt h e sampleofGermanmanufacturin gfirms,FritschandLukas(2001)discoverthatthesefirmst e n d togettheinvolvementoftheirsuppli erstomaketheeffortincreatingprocessimprovement,inthemeantime,theyusuallyassociatewiththeirc ustomerstogenerateproducti n n o v a t i o n s
Intermsofspillover effectsfr om suppliersoninnovation, CheungandP i n g (2004)c onductempiricalstudiesforChinaenterprisesandleadtotheconclusionthatforeigndirectinvestme ntmakesapositiveimpactundertheformofspillovereffectsthroughthesupplier– customerchannels.A studyofDutchinnovatingfirmsdemonstratesthatthecooperationwith supplierswithfocusonincrementalinnovationsimprovesfirmproductivity(Belderbosetal.,2004).
VonHippel(1988)recognizest h e importanceofcollaborationw i t h c u s t o m e r s i n re ducingt h e r i s k arisingfromt h e marketintroductiono f newproducts.Particularly,t h e collabor ationisextremelycrucialinensuringtheadaptationinusesforthenovelandcomplexproductinnovatio n(Tether,2002).
Numerous studies indicate that leveraging external networks enhances a firm's knowledge base, thereby promoting successful innovation (Freel, 2000, 2003; Hoffman et al., 1998; Romijn and Albaladejo, 2002; Rothwell, 1977) These networks include connections with universities, knowledge institutions, and suppliers, the latter of which has been previously addressed In developing countries, where ties between enterprises and academic institutions may be weak, inter-firm cooperation within the same industry becomes crucial for achieving strategic solutions and advantages, such as addressing resource shortages, mitigating risks, and acquiring inter-firm knowledge (De Jong & Vermeulen, 2006; Hanna and Walsh, 2002; Tether, 2002; Brouwer and Kleinknecht, 1996).
(1998)p r o v i d e empiricalevidencesdemonstratethatusingsocialcapitalenablessmallfirms performs i g n i f i c a n t l y better.Inthemeantime,theutilizationofonlyexternalnetworks withoutmakingadequatechangestotheinternaloperationswouldnotdelivertheexpectedimpr ovementini n n o v a t i o n performance.Belderbosetal.
(2004)showthatthecompetitorcooperationintermso f innovationcanboosttheproductivityperforman ceoffirms.AudretschandFeldman(1996)giveanotheranglet o t h e networkimpacto n i n n o v a t i o n : t h e i n n o v a t i v e activitiesi s m o r e geographicallyconcentratedi n t h e industrieswherethep r o d u c t i o n i s alsogeographically concentrated.W e caninfert h a t comparingtoa firmlocatings e p a r a t e l y f r o m t h e manufact uringzone,firmslocateinaconcentratedmanufacturingareasuchasindustrialzone,t h e rateofinnov ation would behigher.
(2012)investigate19,000firmsands p e c i f y t h a t e x p o s u r e t o foreignc o m p e t i t i o n i s assoc iatedw i t h a higherl e v e l o f firmi n n o v a t i o n
Thecommonpointsofviewabouttherelationshipbetweencompetitiveenvironmentan dinnovationperformanceisstillunsettled.Whilealargeamountofempiricalresearchesi n c l i n e towardsthefactthatcompetitionpositivelyaffectsinnovation (Galdon-
SanchezandS c h m i t z , 2002;Nickell,1996;Blundelletal.,1995;andGeroski,1990),seve raltheoreticalm o d e l s givebackgroundforthefactthatincreasingcompetitivepressuresleadstoa reductioni n R&Deffort(Spence,1 9 8 4 ; andDasguptaandS t i g l i t z , 1980) Formorerecentres earch,Aghionetal.
(2009)showthatthe competitionlevelindicatedbyentryrateintoaspecificindustry,hasopposi ngeffectsonfirmsofdifferentperformance.Whilecompetitionintensitycouldspeedupinnovation performanceofthemore technologicallyadvancedfirms,itcould,however,slowdowntheinnovationperformanceamongth e lessefficientincumbents.
Monopolyis r a r e l y t h e caseo f S M E s Butt h e m o n o p o l y ina n i c h e marketw o u l d c l o s e l y describetheexistenceanddevelopmentofmanySMEs,hencethetheoreticalaboutm o n o p o l y c a n b e n e f i t t h e analysiso f competitionimpacto n i n n o v a t i o n Geroski( 1
9 9 0 ) specifiestheschemethatmonopolyaffectsinnovationthroughtwoeffects:oneiscalledt heindirecteffectwhichislikelytobepositive,theotheriscalledthedirecteffect whichmaynotb e positive.
Hedescribesactualmonopolycanmakeanindirecteffectoninnovativeactivitiesasf o l l o w s : t h e currentm o n o p o l y p o w e r c a n b e a resourcefuls u p p o r t f o r t h e correspond ingm o n o p o l i s t inachievingagivenlevelofmonopolypowerafterimplementinginnovation.The m a i n reasontothatpositiveeffectisthatacurrentmonopolisterectsthenewentrantbarriert h a t maybedurableenoughtoprotectmonopolistinthefuture.Inaddition,thehugecustomersbasemayalsoe nsuresuccessforthe monopolist overitsrelatedrivals.
Geroski (1990) suggests that actual monopolies can significantly impact innovative activities during the post-innovation period On one hand, monopolists may experience positive effects due to their abundant resources, allowing them to hire highly capable employees and access internal financing, which enhances their capacity to respond to market changes while reducing reliance on costly external funding Conversely, there are valid concerns about negative effects stemming from low competition, which can lead to a lack of motivation for improvement, and a limited number of firms pursuing innovation, thereby decreasing the likelihood of new innovations emerging Additionally, monopolists may enjoy high returns from initial innovations but could face diminishing returns from subsequent innovations that compete with existing products, potentially yielding lower returns than those available to new entrants (Arrow, 1962) This opportunity cost can trap capital in existing innovations, slowing the overall response of monopolies to new innovation efforts.
Technologicalinnovation’simpacton firmperformance
Motivatedbytheincreasingcompetitionoftheglobalmarket,organizationsarealwaysi n sear chofthenewapproachesofdoingbusinessasthevalueaddedfromexistingproducts andservicesi s erodedm o r e andm o r e r a p i d l y (Gunday,2 0 1 1 ) Innovationbecomesani ndispensablecomponentforfirmstodealwithdifferentconstraintsthroughoutthevaluechaincreation andwiththecompetitivemarket.Asastrategicorientation,innovationisamethodf o r firmtoo vercometheproblemsandtoaccomplishsustainablecompetitivenessinthemarket(Hittetal., 2001; Kuratko,2005).
Acknowledgingthei mp or ta nt r o l e of innovationto firmoperations,researchersarep a r t i c u l a r l y payingmuchattentiontothisresearchfieldoverthelasttwodecades,thestudiesat tempttodefineinnovation,categorizeitandinvestigateitsimpactsonthefirmscope,forpragma ticresults(Gunday,2011).Innovationhasbeendeterminedasoneoftheimportantfactorsofsucc essforsmallenterprises(Globeetal.,1973;Rothwell,1977).
Numerous studies have established a positive correlation between innovation and firm performance, indicating that higher innovation capability leads to improved corporate outcomes For example, Mansfield (1968) found that innovating firms in the steel and petroleum industries experienced greater growth rates compared to their non-innovating counterparts over a five to ten-year period Similarly, Damanpour and Evan (1984) noted that high-performing firms exhibit a stronger correlation between technical innovations and performance than low-performing firms In Japan, a country known for its historical focus on technology adaptation rather than innovation, Deshpande et al (1993) observed that innovative firms tend to outperform others Additionally, research by Calatone et al (2002) using data from large U.S firms further supports the notion that innovation is positively associated with firm performance.
Technologicalinnovations,including productandprocessinnovations,take consi derableattentionofresearchers.
Small and medium-sized enterprises (SMEs) often face resource constraints, leading them to optimize resource use for maximum productivity and benefits (Wolff and Bett, 2006) Process innovation can stimulate growth, as Baer and Frese (2003) highlight that a supportive climate for initiatives and psychological safety can enhance firm performance An environment that fosters new initiatives and allows employees to express themselves without fear of negative consequences promotes a positive correlation between process innovation and firm performance Conversely, a lack of appreciation for such climates can result in a negative correlation However, Wolff and Pett (2006) found no significant relationship between process innovation and firm growth or profitability among small and medium-sized manufacturing firms in the US.
Inthemeantime,firmperformancecanbeachievedbyenlargingtheexistingproductmarket orbydevelopinganewone.Romano(1990)analyzessmallentrepresesforfactorsaffectingth eproductinnovationandsetsforththatproductinnovationbringscompetitiveedgef o r high- growthfirmstocopewiththecompetitionturbulence.Thecompetentresponsetothetechnologicalevo lutionandmarketinformationthroughproductd e v e l o p m e n t i s affirmed(Iansiti,1995) A studyofWolffandPett(2006)abouttheimportanceofproductandprocessi n n o v a t i o n s indic atesthatthereisapositive associationbetweenp ro du ct improvementandgrowth,andin turnprofitability.
Ingeneral,besidesseveralweaksignalsofsignificantimpactoftechnologicali n n o v a t i o n o n differenti n d e x o f firmperformance,m o s t researchersc o n c l u d e a p o s i t i v e as sociationbetweenproduct andprocessinnovationsonfirmperformance.
• Total assets Total employees Firm age
Innovation in the previous period Employees with degree Innovation expenditures
Spillover pressure from customers and suppliers Level of competition Industry network
Theconceptualframework
Basedontheintegrationofinsightsfromvarious firm- basedtheoriesandempiricalstudiesofinnovations,theframeworkforthecausesoftechnologicali nnovationisillustratedi n Figure2.1.
Innovation factors are crucial for firms, as past innovation performance serves as a valuable learning resource for executing future innovation activities Knowledge assets, often reflected by the percentage of employees holding degrees, play a significant role in this process Additionally, research and development (R&D) investment is identified as a key driver of innovation, warranting its inclusion in the conceptual framework Furthermore, external innovation factors, such as vertical spillover pressure from customers and suppliers, as well as horizontal competition intensity and industry networks, significantly influence a firm's innovative capabilities.
Theframeworkalsodemonstratedtheimpactofinnovationonfirmperformance.Toavoi dtheomittedvariablesproblems,besidestheimpactoftechnologicalinnovation,thestudycoversseveralk eycontrolvariableswhicharethefirmcharacteristics’proxiesth at willbec l e a r l y descri beinthefollowingpartofestimatedmodel.Theresearchwillalsoinvestigatet h e impactofinno vationfactors,bothinternalandexternalon firmperformance.
Ther e l a t i o n s h i p b e t w e e n currentfirmperformanceandtechnologicali n n o v a t i o n , however,getsthep r o b l e m o f simultaneouscausality.Facingw i t h t h e limitedliteratureresolvingt h i s matter,t h i s s t u d y providesa n e w m e t h o d t o addre ssthet w o - w a y causalrelationship,hence,enables toconcludetheimpact thattechnologicali n n o v a t i o n makesonfirmperformance.
Estimatedmodels
Basedontheconceptualframeworkandliteraturereview,theproxiesofeachconceptaredefi nedasfollows.Theindicationoftheseproxiesalsoselectedbasedontheavailabilityo f t h e SMEsdataset.
Innovationi sa d u m m y variable.Innovationi s equalt o 1 i f therei s technologicali n n o v a t i o n intheperiodinquestions,otherwise,equalto0.Thequestionforthisinformationi n thesur veyis:“Hasthefirmintroducednewproducts,mademajorimprovementofexistingproductsorchange dspecification,orintroducednewprocess/newtechnologysincethelastsurvey?”.
InnovationinthePreviousPeriodisdummyvariable,equalto1ifthereistechnologicalin novationin theperiodinquestions,otherwise,equalto 0.
TotalEmployeesisthenumberofemployeesandTotalAssetsisthetotalassetsoft h e or ganization.Bothvariablesarerecordedattheendof theyearinquestions,sametimeast h e firmperformancevariabletobeexplainedlaterinthispart.Bo thvariablesaretheproxieso f firmsize.
KnowledgeassetscanbeexpressedthroughEmployees withDegreeindicatingtheper centageofemployeeswithuniversityorcollegedegreeoverthetotalemployees.DeCarolisandDeeds(1 999)statethat t h e quantity ofemployeesp oss ess in g high- technologicalknowledgeandskillsinacorporations,areasorregionisusuallyconsideredasameas ureofh u m a n knowledgecapital.
InnovationExpenditureiscalculatedastheratioofthetotalexpensefori n n o v a t i o n , includingtheexpensesforR&D,patentsandlicenses,marketingandi n n o v a t i v e investment,undertheformofacquisitionnewmachineryandplants.
R&DInvestmentisadummyvariable,equalto1ifthereisR&Dinvestment,equalt o 0other wise.Thisvariablegivesfirmsamorespecificevidencefordecidingtoi n v e s t i n R&D.
SpilloverPressurefromCustomersandSuppliersisadummyvariable,equalto1i f ther ei s a requirementfromt h e firms’supplierso r customersaboutspecial/ additionalinvestmentsinproductionand/ orinformationtechnologyandhumancapitalupgrading,otherwiseequal to 0.
Levelofcompetitionisequalto0ifthereisnocompetitionatthetimeofsurvey,equalt o 1iftheres pondentsevaluatethatthecurrentlevelofcompetitiondecreasescomparedtot w o yearsbefore, equalto2iftherespondentsevaluatethatthecurrentlevelofcompetitionist h e samecomparedtotwo yearsbeforeandequalto3if therespondentsevaluatethatthe currentlevel of competitionincreasescomparedtotwoyearsbefore.
Revenuei st h e p r o x y f o r firmperformance.T h e naturallogarithmo f revenuei s rec ordedwiththeaimofcontrollingthemagnitudedistributionofrevenueandprovidingbetterinterpretation of theregressionresults.
Thepreviousresearchesstatedi n t h e literaturereviewp r o v i d e f o u n d a t i o n f o r t h e empiricalmodel.The aboveparagraphsshow differentproxies fort he conceptsthat demonst ratecausesofi n n o v a t i o n T o summarize,t h e p r o b a b i l i t y t h a t a firme n g a g e s i n t echnologicalinnovation,includingbothprocessandproductinnovation,isgivenby:
Afterfindingthecausesofinnovation,wewillinvestigatethefinallinkofinnovationinfirm s’valuechain,itishowenterpriseperformanceisinfluencedbyinnovation.Thisstudyu t i l i z e s aug mentedproductionfunctioninconstructingtheempiricalmodel forestimatingtheinnovation- firmperformancerelationship.
LửửfandH e s h m a t i (2002)adoptaugmentedproductionfunctiont o estimatetheimpacto f i n n o v a t i o n o u t p u t s o n firmperformance,applyingt o Swedishm a n u f a c t u r i n g s e c t o r
Estimationapproach
Equation1: Thecausesoftechnologicalinnovation
Asinnovationisabinaryvariable,thestudyappliesthelogitmodelforconductingtheeconome tricregression(Equation1).Theselectedmodelenablespredictionoftheprobabilityo f technologica linnovationoccurringin theSMEsgivenspecificdata.
Thebaseofthelogitmodelassumesthattheprobabilityofpresenceoftechnologicali n n o v a t i o n o n l y dependsonanindexI*whichisunobservable,andthis indexis afunctionoft h e regressors:
Innovationi s equalt o 1;i f Ii*< 0 , therei s n o technologicali n n o v a t i o n , i n o t h e r words,Inno vationisequalto 0.Hence,theprobabilityofthe occurrenceof innovation is:
Theprobabilityis assumed to besymmetric,then:
1+� −𝛽 𝑘 𝑋 𝑘 +𝜀 𝑘 Giventhefirmconditions,theresultswillshowtheexpectedprobabilitythat innovation could betakenplacebased on specificvalueoftheright-handside.
Equation2: Theimpactofinnovationon firmperformance
Theequation2constructedtoevaluatetheimpactoftechnologicalinnovationonfirmperfor mancecontainsaninherentproblem:potentialendogeneity,ortobemorespecific,thesimultaneous causality.Aninnovationcanbringvariousbenefitstotheorganization,suchasgrowthinrevenueor profit.Intheotherhand,satisfactoryfirmperformanceresultsinmoreabundantresourcesavaila bleforinvestinginanddeliveringinnovation.Inthemeantime,poorperformancemayc a u s e tightened budgetf o r i n n o v a t i o n activities,consequently,l e s s i n n o v a t i o n s are stimulated.
Thei n n o v a t i o n andf i r m performancerelationshipcatchest h e attentiono f v a r i o u s researches.However,mostoftheresearchesfocusonthecorrelationbetweenthetwovariablesinsteadof thecausalimpact.Thecausalityis still in question.
Ther es ol ut io n f o r e n d o g e n e i t y problemo f in no va ti on hasb e e n addressedbyso meresearches.Creponeta l
(1998)a p p l y t h e t w o stageleasts q u a r e w i t h markets h a r e anddiversificationasinstrumen tvariablesfortheR&Dintheinnovation andfirmproductivity equationtosolvetheendogen eity.Griffithetal.
(2006)utilizetwoseparateprobitmodelstoestimatethepropensitiesoftheproductandprocessin novation,andthen,forcontrollingthep o s s i b l e endogeneity,theyreplacetheproductandproc essbinaryvariablebytheresultsofthep r o b i t m o d e l s i n t h e augmentedproductionf u n c t i o n I nt h e m e a n t i m e , Roperetal.
( 2 0 0 8 ) arguethatitisnotnecessarytoaddresstheendogeneitybecause“therecursivenatureof thei n n o v a t i o n valuechainsuggeststhatinnovationoutputmeasuresarenecessarilypredetermine dp r i o r t o e x p l o i t a t i o n ; i n o t h e r w o r d t h e i n n o v a t i o n cannotb e e x p l o i t e d u n t i l i t hasbeenintroduced.”
This study introduces a novel approach to address endogeneity issues in innovation adoption among firms, particularly small and medium-sized enterprises (SMEs) in the manufacturing sector The process of deciding on budgets, conducting research, and bringing innovations to market requires time, which affects the overall impact on firm performance For SMEs, the market's response to improved or new products is often delayed as they must also consider competitors' offerings, leading to further time needed for adjusting order volumes and integrating innovations Process innovation, while capable of enhancing productivity and product quality, similarly requires time to influence firm performance effectively Although benefits from process improvements can be realized relatively quickly, obtaining market feedback and achieving performance enhancement takes comparable time to product innovations By incorporating the lag value of innovation in the analysis, this study effectively resolves endogeneity concerns, demonstrating that the lag value does not present a simultaneous causality issue with firm performance.
Besidea d d r e s s i n g theendogenousi n n o v a t i o n variables,t h e suggesteds o l u t i o n als odeliversameaningfulinterpretationfortheresultsoftheempiricalstudy:towhatextentthati n n o v a t i o n contributestothelong- termperformanceoffirm.Thisapproachcanbeconsideredasthemostsubstantialcontributionofthisstu dytothevalueofinnovationtofirmperformancei n general.
Datadescription
Thedatasetusedi n t h i s s t u d y i s collectedfromt h e S m a l l andMediumEnterprises u r v e y realizedbyt h e collaborationo f UNU-
WIDER,t h e U n i v e r s i t y ofCopenhagenandseveralV i e t n a m e s e governmentagenciesandre searchbodies T h i s survey projecti s implementede v e r y t w o yearscoveringaround2 , 5 0
0 s m a l l andm e d i u m - s i z e d non- statemanufacturingenterprisesoperatingintenprovincesofVietnam(withfourprovinces/ citiesint h e North:Ha Noi, Phu Tho,
HaTay(ex)andHaiPhong;fourprovincesintheCentral:NgheA n , QuangNam,KhanhHoa,andLa mDong;andtwoprovinces/ citiesintheSouth:HoChiM i n h cityandLongAn).Manyoftheenterprisesinquestionsarerepeatedf rompreviousyearsoversixtimes ofrecordin 2002, 2005, 2007, 2009, 2011and2013.
This study utilizes the most recent surveys from 2011 and 2013, focusing on new information such as spillover pressure from suppliers or customers By examining two distinct time periods, the research effectively controls for time-variant effects using sparse panel data in innovation studies Additionally, the dataset is refined by removing heterogeneous records related to firm age and revenue, eliminating duplicate responses from both managers and owners (retaining only owners' answers), and excluding firms with over 300 employees As a result, the total observations are narrowed from 5,071 in 2011 and 2013 to 4,088 observations from 2,420 firms.
Standard deviation Minimum value Maximum value
TotalAssets–Naturallogarithm of totalassets(number) 14.172 1.727 6.908 19.567
InnovationExpenditure–The percentageofinvestment onR&D,patentsand licenses,trainingandnew machineryandplants twoyearsbefore(%) 14.144 31.361 0 100
IndustryNetwork–Network with peoplein thesame industry(0/1) 0.847 0.360 0 1
Revenue in the Previous Period Revenue
Innovation in the Previous Period
CompetitionLevel–Equalto0ifthereisnocompetition,1ifthereisdecreasing competition,2ifthereissamelevelofcompetitionand3ifthereisincreasingcompe titioncomparingtothepreviousperiod(0/1/2/3)
Theselectionofinnovationindicatorisnoteworthy.TheFigure4.1showstherecordtimelineand demonstratestheappropriatevariab lesasproxyforinnovationwhenstudyingitsimpacton firmperformance,suchasrevenue.
Theinnovation variable,abinaryvariableequalto 1iftherewasanyinnovationduringAugust2011tillAugust2013,isnotexactinestimat ethefirmperformance– innovationbecausesomeinnovationsmightbeimplementedaftertherevenuerecordedinDecember2012.Hence,t h e Innovationi n t h e PreviousPerio dvariablei s utilized.Furthermore,t h e u t i l i z a t i o n ofInnovationi n t h e PreviousPeriodin
-0.004 0.030 -0.005 0.003 -0.001 -0.040 0.001 0.024 -0.006 0.017 0.011 1.000 evaluatingtheeffectofinnovationonfirmperformanceallowsalongenoughtimespanof14to38monthstoinnovationtomakeanimpacto n firmperforma nce.Lastly,the utilization ofsuchlagvariablecansolvetheinherentendogeneityproblemmentionedin 3.2.2.
RevenueInnovationInnovationin Age Total TotalEmployeesInnovation R&D Spillover IndustryCompetition
Source:Author’sself-calculation thePrevious Period
Concerningthemulticollinearity,ascanbeseenfromthecorrelationmatrixTable4.2,allcoeffi cientsa r e l o w e r t h a n 0 8 Consequently,t h e datasetregressioncanbec o n d u c t e d w i t h o u t t h e problemofmulticollinearity.
Numberofobservationyears Numberoffirms North Central South
TheTable4.3indicatesthatthesampleconsistsof2,420firmsover4,088observations.T h e nu mberoffirmswithtwoobservationyearsismorethandoublethatoffirmwithonlyoneobservationyears.T hedistributionoffirminsurveyisquiteequalacrosstheNorth,CentralandSouthareasofVietna m.
Firmsize Percentageof observations Percentageofi nnovators
AglanceattheTable4.4revealsthattherateofinnovatorsisproportionaltothefirms i z e Ta kingthebiggestpartinthesample(73.26%),theverysmallenterpriseshave27.51%observations withtechnologicalinnovations.Thispercentageislessthantwothirdofthatof small-sizedenterprisesandaround0.45thatof medium- sizedenterprises.ThefigurepartlyrevealstheexpectedpositiverelationbetweentheInnovationan dTotalEmployeesvariables.
Firmage Percentageof observations Percentageofi nnovators
Table4.5showstheyoungerthefirmis, themore innovativeit is.Takingthesmallestparts,thefirmsoflessthanorequaltofiveyearsofoperatingperformhigherrateofin novation.T h e ratioofinnovatorsamongstfirmsofover20yearsofoperatingdecreasessharplyf romt h a t o f theyoungestfirmsgroup,by61.64%.
Table4.6ThepresenceofR&Dinvestment,Spilloverpressurefromsuppliersorcustomers,in dustrynetworkandcompetition
R&D Spillover Industry Presenceof Investment Pressurefrom Network Competition
Thegapi s s m a l l i n magnitudeb u t q u i t e l a r g e relatively.C o n c e r n i n g r e l a t i v e compar isonbetweenthepresenceof theseindicatorsamongstinnovatorsandthatamongstnon- innovator,t h e differencei s largeinc a s e o f R&Di n v e s t m e n t ( 5 t i m e s higher)ands p i l l o v e r p r e s s u r e ( n e a r l y 2 timeshigher),and quitesmall incaseofindustrynetwork.
Regardingt h e presenceo f competition,innovatorsa r e l i k e l y e x p o s e d i n a h i g h e r competitiveenvironmentthannon- innovatorsdo.However,thedifferenceisnotsolarge.Thetechniqueofeconometricregressioninthen extpartwillprovideamorecomprehensiveanglet o t h i s matter.
Empiricalresults
Themeasurementofinnovation
The logit model for panel data is essential for evaluating the causes of innovation, with the fixed effect model being more reliable for panel datasets However, this model restricts the dataset by eliminating firms that show the same innovation record over two observations in 2011 and 2013 Specifically, if a firm has identical innovation variables across both years (all zeros or all ones), its data is excluded from the regression analysis This approach enables the fixed effect model to capture time-variant changes, but it only utilizes 34% of the dataset's observations (1,396 out of 4,088) and accounts for just 29% of the firms (698 out of 2,420) Table 4.7 illustrates the impact of this observation elimination on the selected dataset.
ThelastcolumnofregressionresultoffixedeffectmodelinTable4.7showsonlyfourindepende ntvariableshavesignificantimpactonthegenerationofinnovation:firmage,total employees,innovationinvestmentandspilloverpressure.Theinnovationoftheprevioustwoyears, totalassets,thepercentageofemployeeswithdegree,networkwithotherpeersinthesameindu stryandcompetition donotshowtheimpactful relationshipininnovativenessoffirms.
However,suchobservationseliminationoffixedeffectforlogitmodelmayraisetheproble mofsampleselection.Thus,therandomeffectmodelisconductedtoensurethewholesampleisinclud edandwill beutilizedto estimatethecausesof innovation.
Randomeffectm o d e l s h o ws a mo re significanti m p a c t overt he li st o f independentva riables.Besidesthisfact,oppositetotheresultoffixedeffect,randomeffectalsodemonstratesa positiveimpactofinnovationgeneratedinthepastonthecurrentinnovationc a p a b i l i t y offir m,andapositiveimpactofcompetitiontoinnovation.
Controllingforrobustnessoftheregression,themarginaleffectsarecalculatedbasedo n t herandomeffectmodel.Aglanceatthecolumnofrandomeffectandmarginaleffects,theincreaseinrel iabilityofcoefficientshappentotheexternalinnovationfactors,whilethethisr e l i a b i l i t y le veldecreasesoverthevariablesindicatingfirmcharacteristicsandinternali n n o v a t i o n facto rs.Themarginaleffectsi n differentconditionso f c o m p e t i t i o n andpasti n n o v a t i o n pe rformanceshowsthesameresults.Supposingother variablesareatmeanvalue,t h e marginaleffectscanbeinterpretedasfollows:
Ifthereareinnovation inthepreviousperiod, theprobabilityofinnovationoccurrencei n theincumbentperiodincreasesby34.4%,ceterisp aribus.Innovationinthepastcanb e agreatsourceofreferenceforfirmstomakedecisionofem ployingnewideasinthefuture.
Iffirmageincreasesoneyear,theprobabilityofinnovationoccurrencedecreasesby1.6% ,ceterisparibus.Itcanpartlysupporttheideathattheyoungerfirmsare,themorei n n o v a t i v e l y firmscanperform.
Ift h e percentageofemployeesw i t h degreeincreasesbyo n e p e r c e n t a g e p o i n t , t h e p r o b a b i l i t y ofinnovationoccurrence increasesby1.8%,ceterisparibus.
Ifthepercentageofinnovationexpenditureincreasesonepercentagepoint,thep r o b a b i l i t y ofinnovationoccurrence increasesby1.1%,ceterisparibus.
Ifthereisspilloverpressureofimprovementfromeithersuppliersorcustomers,thep r o b a b i l i t y ofinnovationoccurrence increasesby39.5%,ceterisparibus.
Iffirmssustainnetworkwithpeerswithintheindustry,theprobabilityofinnovationocc urrence increasesby18.9%,ceterisparibus.
Lastly,iffirmsfacewithcompetition,theprobabilityofinnovationoccurrenceincreasesb y1 0 8 % , ceterisparibus.T h e i n n o v a t i o n occurrencei s alsop o s i t i v e l y prop ortionalto thelevelofcompetition.
Theimpactof innovation onfirmperformance
Therandomeffectmodeldescribessignificantimpact of innovation onrevenue.In addition,alltheothervariablesaresignificant,exceptthepresenceofR&DInvestment.Intheo t h e r hand,thefixedeffectmodelindicatesaninsignificanteffectof this relationship.
Furthermore,R&DInvestmentandvariablesin theexternalfactorarenotsignificant.Noticeably,FirmAgehasinverse impactin the twomodel.Theresultsofrandomeffectandf i x e d effectareshown in
Hausmantest(Table4.9)showsthatthedifferenceincoefficientsbetweentherandomeffectan dthefixedeffectmodelissystematic.Hence,thefixedeffectmodelisusedforfurtheranalysis.T h i s m o d e l , however,l e a d s t o a f a i l u r e i n c o n c l u d i n g a s i g n i f i c a n t impactofi n n o v a t i o n o n f i r m performance.
(b) fe (B) re (b-B) Difference sqrt(diag(V_b_V_B))
CompetitionLevel 0.026 0.032 -0.005 0.010 b =consistentunderHoandHa;obtainedfromxtreg B=inconsistentunderHa,efficientunder Ho;obtainedfromxtreg
Nevertheless,firmsunder differentcircumstancesm a y beimpacteddifferently.The analy sisshould beexpandedto somefirmclassifications.
Derivingf r o m t h e factthatfirmswithinnovationhavem o r e competitivenessindiffere ntaspectthroughoutthevaluechain,itisreasonablethatfirmsoperatinginacompetitiveenviron menthaves t r o n g m o t i v a t i o n f o r i n n o v a t i o n t o c a p t u r e t h e c o m p e t i t i v e advantageo vertheircompetitor,resultingbetterperformance.Inaddition,theaboveanalysisalsoshowsthatitis likelythatinnovatorsarefacingwithhighercompetitionlevelthannon- innovators.Therefore,Iclassifyfirmsintotwogroups:Competitiongroupconsistsoffirmsfacin gwithcompetition,atalower,equalorhighercompetitionlevelcomparingtotwoyears beforeandNon- competitiongroupconsistsoffirmsfacingwithnocompetitioncomparingtot w o years before.
Table4 1 0 summarizess o m e characteristicsbetweent w o groups.Iti s o b v i o u s t o r ecognizethatthoughthemeanvaluesofRevenueofbothgroupsarequitesimilar,themeanvaluesofa llothervariablesfromthenon-competitiongroupare lowerthantheonesfromthecompetitiongroup.Especiallythevariablesdenotedforinnovation factors,forexample:theaveragepercentageofemployeeswithdegreeincompetitiongroupisne arlydoublethatofnon-competitiongroup,thefigureis fourtimesforR&Dinvestmentandmorethandoubleforspilloverpressure.
However,tomakeacomprehensive,wewillconducttheregressionwithfixedeffectm o d e l forbothgroups,usingthesametechniqueofaboveregressiontocontrolforendogeneityproblem.
In a dataset of 550 observations, only one case of R&D investment availability was recorded for firms facing no competition, leading to the omission of this variable from the regression results The analysis reveals that innovation does not significantly impact firm performance and may even have a negative effect However, the percentage of labor with a degree, a key driver of revenue, shows a strong correlation at a 99% significance level, indicating that a one-percentage-point increase in skilled labor corresponds to a 5.2% rise in revenue, all else being equal Despite this compelling figure, the small sample size of the non-competition group raises concerns about the reliability of the conclusion.
Thegroupoffirmfacingwithcompetitionhavesignificantimpactofinnovationonfirm performance.Innovationpresencecand r a m a t i c a l l y i n c r e a s e revenueby7 6 % , ceterisparibu s,atthesignificancelevelof95%.Innovationexpenditurealsoshowslimitedimpacto n revenue,o nepercentagepointincreaseininnovationexpenditureexpects0.084%increasei n revenue,ceteris paribus.Firmage,totalassetsandtotalemployeespositivelycorrelatewitht h e revenue.O t h e r var iableshaven o statisticalsignificance.W e cans e e t h a t t h e internali n n o v a t i o n factorsh avepositivesignsinthisregression.Concerningtheexternalinnovationfactors,thoughhavingth epositivesigns,allthe threeproxiesarenotsignificantstatistically.
Basedontheknowledgecapturedintheliteraturereviewandempiricalresults,thischapte rw i l l summarizet h e k e y findings,p r o v i d e t h e p o l i c y implicationsandindicatet h e researc hlimitationsandsuggestionsforfuturestudies on thisarea.
Mainfindings
Usingdatacollectedfrom2,420smallandmediummanufacturingfirmswith 4,088obser vationsin2011and2013intenprovincesinVietnam,thisstudyaimstofindthecausesandconsequenc esoftechnologicalinnovationatfirm-level.
This study categorizes the causes of technological innovation into three groups: firm characteristics, internal innovation factors, and external innovation factors Larger firms, indicated by total assets and number of employees, are more likely to innovate, while younger firms demonstrate a higher probability of innovation compared to older, established ones Additionally, firms' efforts in hiring qualified employees, investing in innovation expenditures, and conducting R&D are positively correlated with innovation likelihood External factors also play a crucial role; firms experiencing pressure from suppliers or customers, collaborating with industry peers, and facing higher competition are more inclined to innovate.
Concerningt h e consequencesoftechnologicalinnovation,itisevidentthattechnologicalin novationaffectfirmperformanceinapositiveway.Byusingthedynamicdatao f innovationintheprevious period,theresearchsolvestheproblemsofsimultaneouscausalitybetweenfirmperformanceandinnovat ion.Theresultsalsoshowthepositiverelationbetweens o m e theinternalandexternalinnovationf actorsandfirmperformance,thoughonlyi n n o v a t i o n e x p e n d i t u r e shows statisticallysignificantfigure.
Policyimplications
Implicationsfor SMEs
Facingw i t h i n c r e a s i n g competitionandgrowingmarketdemands,S M E s arerecom mendedtotakeinitiativesintechnologicalinnovationforimprovingrevenues.Todoso,S M E s canco nsiderfollowingimplications:
First,firmsneedtotakeadvantagesoftheinnovationappliedinthepastforgraspingl e s s o n learntandm a k i n g continuousimprovement,i n termso f technologicali n n o v a t i o n , i n c l u d i n g bothproductinnovationandprocessinnovation.
Second,asinnovationisbeneficialtorevenueenhancement andfirmageisnegativelycorrelatedtofirminnovation, firmswithlong- establishingtime shouldexamine their innovativec a p a b i l i t y a n d searchf o r m e t h o d o f creatinganda p p l y i n g m o r e technologi cali n n o v a t i o n i n operation.
To enhance innovation, firms should leverage internal resources by increasing the percentage of employees with degrees to improve human capital Investing in training for current staff can also be an effective strategy Additionally, allocating resources towards innovation activities such as machinery, equipment, plants, training, and research and development (R&D) is highly recommended Among these factors, R&D plays a crucial role; despite the low percentage of firms investing in R&D, it is significantly correlated with the firm's innovation capabilities.
Fourth,firmsmaytakeadvantagesofdemandingsuppliersandcustomerstoimprovefirmc apability,i n c l u d i n g firminnovativeness.S M E s cangetm o r e i n f o r m a t i o n byjoining diffe rentassociationsorkindsofseminarsthatarerelatedtodifferentprocessoffirmvaluechain.Liste ningt o customers’feedbacksi s alsoa goodchannelf o r f i r m t o i m p r o v e t h e i r performancewit htechnologicalimprovement.Theverticalimprovementpressuresfromsuppliersandcustomerss h o u l d b e greatsourcesf o r firmst o f i n d newwayso f p r o v i d i n g productsand tobetterposition firm capabilitywith innovation.
Fifth,keepingcontactwithotherfirmsin thesameindustriescanbeagoodmethodtos o l vecurrentfirms’issuesandexchangeapplicationofn ewtechnologicalinnovation.This channelhasbeendeveloped with varietyof industryassociations.
Implicationsforgovernment
First,improvingtheeducationqualitytoequipfuturequalifiedlaborwithknowledgeands killsthatarerequiredbyfirmsare inherentlycrucialtoeconomicgrowthingeneral,andi n t h i s case,t o firminnovationi n specific.
N o t j u s t fulfillingt h e currentl a b o r demand,educationsystemss h o u l d alsob e capablet o p r e d i c t t h e p o t e n t i a l requirementst o b u i l d appropriateprograms.Educationali n s t i t u t e s s u c h ascollegesandu n i v e r s i t i e s s h o u l d b e encouragedtoconnectwithfirmsf orgettingfeedbacks,cooperatingintrainingcurriculumandcollaboratinginR&Dactivitiesformorete chnologicalinnovation.
Second,governmentc a n stimulatet h e v e r t i c a l impacto n firmi n n o v a t i o n byencour agingforeignf i r m s w i t h newt e c h n o l o g y t o operateandm a k e a s p i l l - o v e r effectvertically.T h e p re se nc e o f foreignfirmsmayraise th e competitionlevel.Fortunat ely,t h i s competitionexposureeffectwill alsobenefitfirminnovativeness.
Limitationsandfutureresearches
Thoughsolvingawiderangeofcorporatemattersrelatedforinnovationfornon- statemanufacturingSMEs inVietnam,therearesomelimitations forfuture improvements.
Thedataset,thoughbeingapaneldataset,embracestwoyearsinquestiononly.Thisselect ionismainlyexplainedbytheavailabilityofimportantdataofoneexternalinnovationfactor,thes pill-overpressurefromsuppliersandcustomers.Futureresearchcanexpandthetime- spanbyremovingsuchfactorfromtheempiricalmodel.Additionally,extendingthetime- spancanalsohelpresearcherstounderstandmoreabouttheinnovationactivitiesatfirm- leveli n differenttimecontext,e.g.beforeandaftertheworldrecessionin 2007.
Themeasurementofinnovationcanbechangetothequantitativeoneinsteadofthecu rrentbinaryvariables.Forinstances,therevenueofinnovativeproductsorthepercentageo f ne wproductsoutput overtotaloutput,etc.However,thereis currentlynosurveyprovidingsuchdata.Thisapproach,nevertheless,canbeused if futureresearchescanconductsurveytogatherprimaryinformation.
Besidestechnologicalinnovation,including productinnovation andprocessi n n o v a t i o n , futureresearchesc a n considera b o u t non- technologicali n n o v a t i o n , i n c l u d i n g organizationalinnovationandmarketinginnovatio n.Nonetheless,thisapproachgetsthesameconstraintasthe above- mentionedapproach:dataunavailability.
Inaddition,otherindicatorsoffirmperformancecanbeputintoconsiderationforam o r e comprehensivev i e w aboutt h e impacto f i n n o v a t i o n o n firmperformance.Differentindicat orscanalsoincreasetherobustnessoftheconclusionontheinnovation– firmperformancerelationship.
Lastly,researchersinterestedinthefirminnovationaspectscanexpandthescopeoft h e studytofindtheeffectivefinancialresourcesforinnovationactivities.Byrevealingthisinfor mation,theresultingimplicationsarevaluableforbothfirmsandgovernmentinmakingdecisionofw hichsources should beutilized forfinancinginnovation.
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