Innovation and exports of vietnamese SMEs evidence from firm level data

Researchcontext

The 'Doi Moi' (renovation) policy, initiated under economic reform pressures, led to a comprehensive and radical transformation in Vietnam by 1989 The country shifted from a centrally planned economy to a socialist-oriented market economy, focusing on stabilization and openness This transition resulted in rapid economic growth throughout the 1990s, with Vietnam emerging as one of the fastest-growing countries globally, achieving an impressive annual average growth rate of 7.76% Vietnam's remarkable achievements have facilitated its successful integration into the international economy.

Sincelaunchingtherenovationprogrammeintheearly1990s,smallandm e d i u m - s i z e d enterprises(SMEs)emergeasadynamicforce,theyaccount fora l a r g e p r o p o r t i o n o f V i e t n a m e s e e n t e r p r i s e s Inl i n e w i t h r e n o v a t i o n policy,theyareontopofstructuredtransformation.Inthemeanin gofd e v e l o p m e n t , t h e r e f o r m o f economice n v i r o n m e n t h a s p o s i t i v e l y a f f e c t e d e n t i r e V i e t n a m e c o n o m y i n g e n e r a l a n d o n thed e v e l o p m e n t o f s m a l l a n d medium- sizedenterprisesinparticular.Vietnamesesmallandmedium- sizedenterprisesandtheprivatesectorarecontinuouslythemainenginesofc o n t r i b u t i o n togrowthinVietnameconomy.

Withthedominantforceintheeconomy,smallandmedium- sizedenterprisesareplayingacriticalrole,whichhasoverwhelmedVietnamec onomy’sdevelopment.Atendof2015,thenumberofsmallandmedium- sized enterprises a c c o u n t s f or 98% 2of e n t i r e e n t e r p r i s e s inn a t i o n w i d e ; the v e l o c i t y ofthenumberofsmallandmedium- sizedenterprisesintheperiod2 0 0 0 -

SmallandMediumEnterprisesWorkingGroupMeetingorganized13September2017inHoChiMinhCity(link:https://apecceosummit2017.com.vn/45th-small-and-medium-enterprises- working-group-meeting-104.html ) wealthd i s t r i b u t i o n , p o v e r t y a l l e v i a t i o n , a n d i n n o v a t i o n a s w e l l T h e r e f o r e , theybecome ani m p o r t a n t p a r t o f then a t i o n a l d e v e l o p m e n t a n d h a v e b e e n viewedasthebackboneoftheeconomy.

In the early stages of transition, Vietnamese small and medium-sized enterprises faced numerous constraints typical of an underdeveloped country, including a lack of production land, capital, market information, skilled labor, modern technology, and investment However, the open-door policy has gradually dismantled traditional barriers, allowing these enterprises to seize opportunities for global integration In the era of globalization and technological advancement, they now face increased challenges and competition from international counterparts This situation has prompted extensive debate among scholars and policymakers, emphasizing the importance of innovation as a vital strategy for firms to create and sustain a competitive advantage Therefore, studying innovation is essential for Vietnamese small and medium-sized enterprises within the context of globalization.

Problemstatement

In Vietnam, small and medium-sized enterprises (SMEs) play a crucial role in the economy, contributing significantly to job creation, labor market growth, and reducing regional development gaps However, SMEs face numerous challenges, including high production costs, poor product quality, low innovation levels, limited access to finance, and inadequate management skills These obstacles hinder their competitiveness in both local and global markets, exacerbated by regulatory barriers and difficulties in accessing technological advancements.

The globalization process has significantly transformed, enhancing countries' access to new information and markets both domestically and internationally Vietnam's economy has integrated into the global economy, offering substantial opportunities for small and medium-sized enterprises to engage in production chains However, many of these enterprises lack full awareness and do not adequately recognize the benefits of participating in production chains, viewing it merely as a survival tool rather than a means to add value and improve production efficiency Additionally, globalization has led to capital flows into developing countries, increasing opportunities for foreign entities to exploit domestic markets, which in turn intensifies competition in host countries Nevertheless, globalization and competition do not always pose threats to local enterprises; instead, they can motivate firms to enhance operational effectiveness and productivity Consequently, innovation and participation in regional or global production chains are essential strategies for firms to thrive.

Theinnovationisextremelyimportantfordevelopmentandsustain ingtheproductivity,growth,anddevelopmentofacountryingeneralaswellasafirm i nparticular.Inthemacrolevel,theinnovationistheshortestwaytofillthed e v e l o p m e n t g a p b e t w e e n c o u n t r i e s F o r f i r m l e v e l , t h e r e c o g n i t i o n o f i nnovationisavitalfactor.Alargenumberofstudieshavedocumentedthatinno vationisakeydrivertoleadanincreaseincompetitiveadvantages.

7 andtrade,innovationandproductivity,orfindingthedeterminantseffect oninnovation.Infact,studiesofther e l a t i o n s h i p b e t w e e n t h e i n n o v a t i o n a n d subcontractorarealittle,especiallyinthedevelopingworld.Subcontractingac tivitiesarebecomingakeyfactorofindustrializationinmostcountriesint h e world.IntheOrganizationforEconomicCo-

OperationandDevelopment(OECD)c o u n t r i e s , s u b c o n t r a c t o r s a r e c r u c i a l elementsf o r establishingp r o d u c t i o n v a l u e c h a i n s T h e i n t e g r a t i o n c o m p a n i e s r e q u i r e t h e i r subcontractorshavingtheinnovat ivenesstocontributetovaluechains C o n t r a c t o r s andsubcontractorstoget hersetupanecosystem,whichisformedindustrialclustersf o r d e v e l o p m e n t a n d e n h a n c i n g c o m p e t e n c i e s Inw h i c h , innovativeactivitiesareaprimaryconce rn.

InVietnam,subcontractorsarefirmsthatalmosttakepartinthep r o c e s si n g , a s s e m b l i n g , o r manufacturingp e r i p h e r a l p r o d u c t s f o r l a r g e co mpanies(e.g.multinationalcorporations),orforeigndirectinvestment( F D I ) e n t e r p r i s e s E x c l u d i n g s e v e r a l i n d u s t r i e s t h a t involvedt h e f o r e i g n - investedsector,mostdomesticmanufacturingenterpriseshaveoperatedinthelowa d d e d - v a l u e i n d u s t r i e s I n a d d i t i o n , mosts u b c o n t r a c t o r s l a c k t h e c ohesionori t i s veryw e a k A c c o r d i n g l y , t h e i r c o m p e t i t i v e a n d i n n o v a t i v e capabilitiesarelow(evenincognition).Duetolowinnovativeability,Viet namesesmalla n d m e d i u m - s i z e d e n t e r p r i s e s c o n c e n t r a t e o n l o w l a b o r - c o s t o r l a b o r - i n t e n s i v e p r o d u c t i o n a c t i v i t i e s t h a t theyh a v e t h e c o m p e t i t i v e ad vantagecomparedtoregionalcounterparts.

Manypapersfocusonanalyzingtheroleofthesubcontractorind ev el o p ed cou nt ri es (e g OECD countries) w h e r e the de v e l o p m e n t andth etechnologicaldegreearevery high,andtheyinvolveintoglobalvaluechainsf r o m t h e i n i t i a l s t a g e s ( e g

Research on manufacturing subcontractors within Vietnam's small and medium-sized enterprises (SMEs) sector is notably scarce Most studies focus on subcontracting activities in more established industries such as automobile, electronics, and electricity, where enterprises tend to be larger and more mature Existing theories often fall short in examining the innovation capabilities of Vietnamese SMEs due to significant knowledge and technology gaps This study aims to provide valuable insights and encourage policymakers and scholars to further explore this area, ultimately enhancing the competencies of Vietnamese SMEs and their subcontracting activities.

Researchobjective

Sincetheinnovationplaystheimportantroleinthesurvivalandmainta insthecompetitiveadvantageforthesubcontractor,sothemaino b j e c t i v e i s t o e x p l a i n t h e i n n o v a t i v e n e s s o f t h e m t h r o u g h s u b c o n t r a c t i n g activities.For thatreason,the thesis willdiscusstheissue involvedthesubcontractingactivitiesofVietnamesesubcontractorintheSMEsect ort h r o u g h subcontractingagreementsandinvestigatetheirknowledge - creationabilitiest h r o u g h t h e a b s o r p t i v e c a p a c i t y t h a t e n h a n c e t h e i n n o v a t i o n likelihoodofthefirm.

Firstly,t h e t h e s i s w i l l e x a m i n e t h e i n n o v a t i v e n e s s i n s u b c o n t r a c t i n g activitiesofthesubcontractorthroughsubcontractinga greements.Inwhich,t h e subcontractingrelationships,withcontractorsinthedom esticandforeign- i n v e s t sectors,areseparatedintotwogroups.Basedonthat,thethesisspecif ically a s s e s s e s t h e s u b c o n t r a c t i n g a c t i v i t i e s a t w h i c h s e c t o r a r e morel i k e l y toi n n o v a t e S e c o n d l y , t h e t h e s i s w i l l i n v e s t i g a t e t h e i n n o v a t i o n o f subcontractorsa c r o s s b u i l d i n g t h e k n o w l e d g e b a s e t h a t w i l l f o r m t h e absorptivec a p a c i t y o f t h e firm.M o r e s p e c i f i c a l l y , t h e t h e s i s e x a m i n e s t h e elementsofqualitymanagement,educat ion,andtrainingactivitieswillcontributetotheabsorptivecapacity.

Basedontheliterature,the thesiswillconductotherdeterminantfactorst h a t affectedtheinnovationof thefirm.Next, aregressionmodelwillbebuilt tot e s t t h e i n f l u e n c e o f s u b c o n t r a c t i n g a c t i v i t i e s o n t h e i n n o v a t i v e n e s s o f subcontractorintheSMEsector.I n a d d i t i o n , t h e t h e s i s wills u g g e s t implicationsthatmaysupporttoimprovethedevelopmentofsubco ntractorsinparticularandentireVietnameseSMEsingeneral.

Researchquestion

Forthe reas on st hat m e n t i o n e d a b o v e , th is t h es i s aims toe v a l ua t e t he innovativenessofthesubcontractoranddrawimplicationsforhelpingthemtor ec o g n i ze andbuildanappropriatestrategyfortheinnovationprocess.Accord ingly,theresearchquestionofthisthesisis:

Howdosubcontractingactivities influenceontheinnovative nesso fV i e t n a m Smalla n d M e d i u m - s i z e d e n t e r p r i s e s ’manufacturingsubcontractors?

Scopeofthestudy

Toachieveobjective, t h i s thesis m a i n l y concentrateso nexplori ngt h e e ff e ct ofsubcontractingactivitiesoninnovationdecisionofthesubcontra ctori n manufacturingsectorofVietnamesesmallandmedium- sizedenterprises.T h e da ta us e d f or t h i s t h e s i s e x t r a c t e d fromtheri ch

Structureofthesis

Afterintroductionchapter,therestofthesisstructuredasfollows.Chapt er2providestheliteraturereviewin ge ne ra l andempirical re vie w ofi nnovationandsubcontractingactivities.Chapter3presentsthemethodologya n d modelingstrategies.Chapter4presentstheempiricalresultsandchapter5 isthe conclusion.

Theoreticalframework

In recent years, globalization has significantly transformed, enhancing access to information and new markets both domestically and internationally This shift has led to increased global competition and the emergence of new organizational forms to manage global value chains Traditional value chains are increasingly fragmented, allowing smaller firms to capitalize on specialized activities Many authors argue that firms are reorganizing internally to adapt to these changes, with information technology driving larger firms to adopt leaner structures by reducing hierarchical rigidity As the world becomes more interconnected, firms are more inclined to outsource non-core activities to subcontractors or shift labor-intensive production to low-cost countries like China and India Furthermore, the OECD notes that organizational changes are necessary to adapt to technological advancements and facilitate innovation processes, ultimately enhancing firm performance Both technological change and internationalization serve as platforms that enable smaller firms to engage in innovative activities, making them more flexible and dynamic.

There- organizingproductionchainistakenplaceeitherinsideoro ut si d e ofthefir ms(Chen,2017).Thisleadstoassignlaborreasonablyandthusincreasesouts ourcingincentives.Theoutsourcingactivitybecomesmorea n d morepopulari n m ostenterprises Totakethe adv an tag eo fp ro du ct io n c o s t , firmsd e c i d e t o o u t s o u r c e t h e i r c e r t a i n f u n c t i o n s , n o n -

10 c o r e p r o d u c t i o n activities,orevenentireproductionstagestoexternalpro viders.Theseactivitiesha ve madethecur re nt ec on om ice nv ir on me nt, in wh ich

Research has shown several reasons behind a firm's decision to outsource its production processes According to Abraham and Taylor (1993), companies often rely on external suppliers to reduce labor costs, especially when their internal labor expenses are high Additionally, firms may outsource when their output temporarily exceeds current capacity due to seasonal or cyclical demands In contrast, during normal operations, firms typically prefer to maintain their core workforce and avoid outsourcing Furthermore, companies may choose to outsource when specialized services from suppliers can provide economies of scale that are not achievable through in-house production Additionally, firms may opt to outsource to address technical challenges in their assembly lines or to manage peak workloads They might also engage subcontractors for high-skill expertise, advanced equipment, or specialized parts that they lack, ultimately focusing on their core activities to maximize returns (EIM, 2009).

Int h e g l o b a l i z a t i o n e r a , w h e n t e c h n o l o g y a n d p r o d u c t i o n t e c h n i q u e s h a v e c h a n g e d r a p i d l y , t h e p r o d u c t l i f e c y c l e b e c o m e s shorter( B a y a r ỗ e l i k , T a ş e l , &Apak,2014),andproducts becomemoresophisticated(EIM,

2009);firmst h u s a r e f a c i n g thef i e r c e c o m p e t i t i v e n e s s T a k i n g i n t o t h e f a c t t h a t innovationisan important f act or f or companies’surv ival I n n o v a t i o n helpsfirmsadapttheinstabilityofexternalenvironm ent.Moreover, innovationisthekeydriverf o r creatingand maintainingc

12 ompetitivea d v a n ta g e , gr ow th , a n d development.Asaresult,theinnovatio nplaysacriticalroleforfirmstothegrowthofoutputandproductivity.

SUB - CONTRACTOR SUB - CONTRACTOR SYSTEM

Innovationinsubcontracting

Innovation is crucial for maintaining competitive advantage, productivity, and growth for both firms and nations It encompasses a broad range of areas within the economy, including technical, economic, scientific, organizational, financial, and commercial fields, and is not limited to high-technology products The motivation for innovation often stems from the need to gain market power or survive in highly competitive markets It involves continuous learning, creation, and invention, incorporating factors such as new technology, patents, new manufacturing processes, and creative design Ultimately, the success of innovation lies in the commercialization of new or improved products or services that deliver enhanced customer value (Carlson & Wilmot, 2006).

( 1 9 3 4 ) anditalsohasdevelopedintheproductionfunctionasthestudieso fSolow(1957).In theyears1990,Romer(1990) developedthegrowthpattern ofeconomiesint h e e n d o g e n o u s g r o w t h m o d e l b a s e d o n t h e t e c h n o l o g y ch an g e B e s id e s , italso is approachedtogrowth theories ofmanyeconomistso rintheinternationaltradetheoryofKrugman(1979).The oriesandmodelso f p r o d u c t i o n h a v e s e e n i n n o v a t i o n a s t o t a l f a c t o r p r o d u c t i v i t y ( T F P ) t o expl ain thedifferencesindeve lopment througheconomies.Forthedevelopedcountries,theyhavetokeepinnovationinor dertosustaincompetitivea d v a n t a g e a n d “ m u s t c o n t i n u a l l y i n n o v a t e , n o t j u s t t o g r o w , b u t e v e n t o maintaint h e i r r e a l i n c o m e s ” (

The progress of new products in less developed and developing countries is often hindered by a significant technological gap (Krugman, 1979) These countries primarily acquire technology through transfers from developed nations (Cassiman & Martinez-Ros, 2003) According to the learning-by-exporting hypothesis, firms in developing countries adapt new technologies and engage in innovation by learning from their foreign contracts or sub-contracts (Palangkaraya, 2012) Ghazala and Zulkhibri (2015) highlight that international trade enables firms in host countries, particularly developing nations, to participate in technology transfer via foreign direct investment (FDI), joint ventures, or multinational companies In these contexts, attractive FDI strategies are often contingent on local government commitments, encouraging foreign firms to transfer more advanced technologies than what multinational corporations typically provide Additionally, the risk of nationalization in some developing countries often results in multinational corporations transferring older or less advanced technologies compared to those available in developed countries.

At the firm level, studies on innovation emphasize its definition, nature, research and development (R&D) activities, and productivity According to Harris and Moffat (2011), R&D not only fosters innovation but also generates intangible assets for firms by facilitating the learning and absorption of new knowledge Cohen and Levinthal (1990) echo this sentiment, viewing innovation as a byproduct of R&D efforts Innovation serves as a crucial differentiator among firms, allowing innovators to achieve higher returns compared to non-innovators As a result, firms are incentivized to maximize profits by seeking investment opportunities and expanding their markets (Teece, 1986) Additionally, innovation is considered a key indicator of economic performance, enabling firms to obtain and maintain a competitive advantage in both domestic and global markets through monopolistic positions Furthermore, innovative firms act as price-makers (Hirsch & Bijaoui, 1985) and have the discretion to decide whether to enter foreign markets (Cassiman & Martinez-Ros, 2003).

Intheviewofbusinessandmarketing,marketsizeandstructureareak e y determinantofsuccess.Market- orientationfirmshaveconsidereddoingthe research markettoexplorepotentialcustomer’s needs andwantsbyusingsk i l l s andresourcesthemselves.Inthis context, thos efirmscandetectnewk no wl ed ge andtechnologies.Fromthatpoint,newpro ductsorimproveexistingp r o d u c t s o r p r o c e s s w i l l b e i n n o v a t e d t o s a t i s f y c u s t o m e r n e e d s T h e r e f o r e , LeBarsetal.

Whilet h e i n n o v a t i o n o f t h e l a r g e c o m p a n i e s i s h e a v i l y g i v e n r i s e t o R& D activitiesandpatents,theinnovationofsmallfirmsmostlyhasbasedo ntheinteractionofexternalenvironment andinternalforcewithinfir ms.Theinternalforceisusuallythecore- competencies(Cohendet&Llerena,2005)t h a t comefromentrepreneurs’ abilitiesandskilledstaffs(Avermaete,Viaene,

&Morgan,2004).Forinnovation studiesinsmallfirms,theinnovationhastob e s u i t a b l e f o r firm’sa t t r i b u t e s a n d h u m a n r e s o u r c e s.Moreover,innovativenessinsmallfirmsl a r g e l y d e p e n d s o n thefactors of externale n v i r o n m e n t s , suchasinformationorotherinputs.Theexternalenv ironmentisveryo f t e n r e l a t e d tothei n f o r m a t i o n t h a t firmsm a y o b t a i n f r o m t h e i r customers,clustersor f r o m doingmarketresearch T he r e issomeevidence

15 provedthatalthoughtheexternalinformationsupportstheinnovationitshouldb e t a k e n i n t o a c c o u n t t h e r e l e v a n t s e c t o r s a n d t h e q u a l i t y o f inform ation.Therefore,thosefactors areveryimportantforinnovativenessofthesmallfirms S o m e sc h o l a r s sug ges te dt h a t the Q SE (Qualified S c i e n t i s t a n d E n g i n e e r s ) i n d i c a t o r h a v e s e e n a c a p a b i l i t y o f s c i e n c e a n d t e c h n o l o g y w i t h i n f i r m s Y e t , o t h e r r e s e a r c h e r s p r o v e d t h a t Q S E i n d i c a t o r s s e e m l e s s suitable forfirmsthatarelowandmediumtechnology(Avermaete,Viaene,

( 2 0 0 4 )a l s o s t a t e t h a t t h e i n n o v a t i o n r e c o g n i t i o n o f t h e e n t r e p r e n e u r isinfluencedbyseminalworkofSchumpeter(1934,1942)andMascitelli(2000).Heillustratesthatentrepreneur’sabilitiesareverypowerfulf o r sm allenterprisesbecausetheirrecognitionofinnovationisveryimportanttosetupthecom petitivestrategies.

Theroleofthesubcontractorinthesupplychainanditsinnovativecapabil

Thedevelopmentofnewtechnologiesandproductiontechniquesmake enterprisesi n c r e a s i n g t h e specializedcapability.M e a n w h i l e , t h e c o m p e t i t i v e n e s s isseveremoreandmorebynotonlypriceorquality,butalsobyt e c h n o l o g i c a l f e a t u r e s o f p r o d u c t s a n d customers’s a t i s f a c t i o n I n t h i s c o n t e x t , largeenterprises,ononehand,tendtofocusonactivitiesthatcre atehighaddingvalue,suchasR&D,design,marketingand,ontheotherh and,delegate specializedsubcontractorstotakeresponsibilitiesforothe rp r o d u c t i o n phases.Forsomereasons,whilethelargefirms activelymoveoutt h e i r resourcestothedevelopingworldandcollaboratewithlo calenterprisesforp r o d u c t i o n , thel o c a l e n t e r p r i s e s a s s u b c o n t r a c t o r s uset h e i r o w n e n t i r e resourcestoa s s o c i a t e w i t h t o e x p l o i t t h e e c o n o m i c s o f s c a l e O n t h e o t h e r hand,thesesubcontractingrelationships

Figure 2 The mutual benefit relationships between subcontractors contractors and

Greater market share Improved national

& international competitiveness Increased revenue Job creation Product differentiation

& capital productivity Greater organizational productivity Economic of Scale Focus on strategic and core activities (R&D)

Cost reduction Response to fluctuation

Improved labor & capital productivity Increased output Economic of Scale

– Benefit of Subcontractors Source: EIM (2009) moderntechnologyandequipment.Asresults,theyhaveleaned,develo pedn e w skillsandcharacteristics,andincreasedthecompetitiveness

(Kumar&Subrahmanya,2011).Thus,thisshapesreciprocalrelationshi psbetweenprimecontractorsandsubcontractors ( E I M , 2009).T he mu tu al benefit r e l a t i o n s h i p s betweencontractorsandsubcontractorsare illustratedinfigure2asbelow.

Figure 3 Structure of subcontracting system

SC SC SC SC SC SC

Star-shaped structure Tier-shaped structure

Therelationshipbetweenthecontractorsandsubcontractorsisimportantt o b u i l d a n e f f i c i e n t s t r u c t u r e T w o i d e a l s t r u c t u r e s isb a s e d t o o r g a n i z e subcontractingsystemarestar-shapedandtier- shapedstructure(seefigure3)( L a h t i n e n , 2001).

 Inastar- shapedstructure,subcontractorsareorganizedasawidenet work wi ththeoriginalequipment manufacturer(OEM) Thesubcontra ctorsandOEMcontactdirectlywitheachother,inw h i c h theOEMplay sthecentralroleininformationandmaterialf l o w s Thisstructurerestri ctsseveralindirect subcontractors.Thestructurewillbeefficientifapplyinginthecasest hatcustomero f f e r s highlyfluctuateorenvironmentalchang ebecauseofeasys h i f t i n g

 At i e r - s h a p e d s t r u c t u r e i s o r g a n i z e d a s a pyramidv e r t i c a l o r g a n iz a t i o n withmultilayersubcontractors.Inthisstructure,theOEMplaystworoles:controllingtheend-useproductsand monitoringthefirst- tiersubcontractors.Thisstructurehasappliedwi d el y inthe as se m b l y manufacturing ( a u t o m o b i l e , e l e c t r o n i c s , aircraft …)du ringlastdecades.Thisisanarrowstructureaimstor edu c e thenumbe rofdirectsubcontractorsandsuppliersatfirst- tierlevel.Thestructureiswellknownas“Toyotamodel”.

(iii) Thed i s t i n c t k i n d s o f p r o c e s s n e x u s e s tot h e o t h e r i n t h e sup ply

Duringl a s t d e c a d e s , t h e s t r u c t u r e a n d e v o l u t i o n o f thesubcon tractorhavebeenanevidenttrendtowardsthetier- shapedstructurethatisthegoalofO E M tonarrowthenumberofsubcontractorsandsup pliersdownbecausethel a r g e s i z e firmsa r e o r g a n i z e d t o o c o m p l e x l y a n d difficulty.T h e r e f o r e , t h e tier- shapedstructureisbeingbecomethebestpracticemodelforsupplychaini n thecaseo fcomplexproducts.Theefficiencyofinformationflowsofthismodelfacilita testhetechnologyexchangebetweenOEMandsubcontractorsa n d supportst hesupplychainparticipantstomanagemoreeasily.

Thes u b c o n t r a c t o r is,i n r e c e n t year,n o t onlyd e l e g a t e d t o p r o d u c e p e r i p h e r a l orsimpleproductsbutalsomanufacturedhighly specializedp ro du ct s r e q u i r e d k n o w l e d g e - i n t e n s i v e c o n t e n t s I n t h e p a p e r o f

Bocquet (2011) highlights a gap in empirical research regarding the role of subcontractors within the emerging "collaborative outsourcing mode," which is primarily based on arm's length transactions While studies emphasize the importance of subcontractors in production networks, their capacity for innovative application and technology transfer remains underexplored (Lahtinen, 2001) Subcontracting is increasingly vital for developing innovative solutions and enhancing productivity and performance for both contractors and subcontractors However, the lack of empirical studies on this subject indicates a need for further investigation (Lahtinen, 2001; Bocquet, 2011).

Therearemanybasictheoriesrelatedtoapproachingtheimportantroleoft hesubcontractorintheeconomy.AccordingtoKimura(2001),hesuggestedt hetheoreticalbackgroundtosubcontractingbyfourapproaches T h e firstapp roachistransactioncosttheory,thesecondisnetworkingapproach,thethirdis gametheoryapproach,andthefourthistheeconomicso f informationapproach.

In the initial approaches, the author highlighted that the selection of subcontractors was influenced by their own specified resources, including particular asset sets, specialized technologies, or even unskilled labor Additionally, long-term relationships can help firms save costs associated with market transactions The game theory perspective emphasizes that subcontractor relationships depend on the stable and interdependent nature of subcontracting agreements The final theory discussed revolves around trust, allowing firms to reduce monitoring costs In contrast, Bocquet (2011) presented two approaches to subcontracting; similar to Kimura (2001), she applied transaction cost theory to demonstrate that subcontracting primarily serves as a cost-reduction mechanism, viewing subcontractors through a traditional lens.

Transactioncost theory(TCE)

Accordingtothetransactioncosttheory,theeconomictransactionsaref ormedbyorganizationalmodethatallowsfirmstocomparebetweeninternalc o s t a n d e x t e r n a l c o s t i n o r d e r t o makea n optimald e c i s i o n b a s e d o n t h e as sumptionthathumanisopportunismandboundedrationality.

Inthepaper“Thenatureofthefirm”,Coase(1937)explainwhyfir mexistsa n d f i r s t m e n t i o n s t h e t e r m “ t r a n s a c t i o n c o s t ” P r e v i o u s e c o n o m i s t s a r g u e d thattherewasaneconomicsystem,inwhichit automaticallyoperatedbya“pricemechanism”.Inthiscontext,pricemechani smplaystheroleofprivilegeint h e a l l o c a t i o n o f r e s o u r c e s H o w e v e r , i n t h i s c a s e , p e o p l e s t i l l anticipateitsoperationintheshort- termtocopewithit.Owingtotheo p e r a t i o n o f r e s o u r c e a l l o c a t i o n , c

20 o s t o f o r g a n i z i n g productionp r o c e s s i s differ en t f o r similarp r o d u c t s C o a s e s h o w e d that“ therei s a c o s t o f u s i n g

The article discusses the establishment of a firm to replace the traditional price mechanism with a more effective approach It highlights that long-term contracts offer greater advantages over short-term contracts by reducing risks and transaction costs However, predicting contingencies remains challenging The firm also faced short-term issues while making decisions on whether to "make or buy" services If transaction costs were higher, the firm opted to conduct activities internally, leading to an increase in size measured by the number of transactions Conversely, if external providers offered lower transaction costs, the firm would outsource activities, resulting in a decrease in size.

Int h e p e r s p e c t i v e o f t r a n s a c t i o n c o s t e c o n o m i c s t h e o r y , t h e f i r m i s described asaneconomicorganizationwithincentiveisin creasingeconomicefficiencybyr e d u c i n g t r a n s a c t i o n c o s t s ( W i l l i a m s o n O E , 1 9 8 9 ) K n i g h t (1941)a l s o s t r e s s e d t h a t , i n g e n e r a l , t h e e c o n o m i c c o n c e r n o f a p e r s o n iscommonlyexpectingtheirtasksandt heirbusiness“efficient”.

Williamson (1989) identified two key characteristics of agents involved in economic transactions: bounded rationality and self-interest, which often lead to opportunistic behavior In contrast, Herbert Simon described bounded rationality as a condition where individuals are "intendedly rational, but only limitedly so" (Simon, 1961, p xxiv) This concept highlights the limitations of human cognitive abilities and language within a firm, which restrict individuals' capacity to foresee all possible contingencies and evaluate their optimal actions effectively.

T h e l a t e r o b s t r u c t s t h e i d ea l c o m m u n i c a t e d en vi ro nm en t f o r k n o w n - k n o w l e d g e T h e s e l i m i t a t i o n s c r e a t e i n f o r m a t i o n -

22 e x c h a n g e mechanism b e c o m e s t o o c o s t l y ( C o h e n d e t & L l e r e n a , 2 0 0 5 ) Williamsons t a t e s thatindividualhumanbeingshave“intend edrationality”totheire c o n o m i zi n g a c t i v i t i e s H e a l s o c i t e d t h e q u o t e s o f H e r b e r t Simon[Simon

(1975,p.199)]thatnaturalnatureofhumanbeingsislimitedknowledgethat“ or gani zati on s areusefulinvestmentsfortheachievementofhumanpurpose”( W i l l i a m s o n O.,1989).Ontheotherhand,self- interestbehavioristakenintoa c c o u n t tor e a c t toi n f o r m a t i o n f r o m e x t e r n a l e n v i r o n m e n t F u r t h e r m o r e , i t encouragesaslybehaviorandfirmthu splansmanipulativestrategytotakea d v a n t a g e s Evidently,self- interestbehaviorexpressesas“opportunism”,“ m o r al hazard”,and“agency”(Wil liamsonO.E.,1989).

Transactioncostdiffersdependingonboth(1)thenatureoftransactions, and(2)thegovernancestructure.Differenttransactionsrequired i f f e r e n c e s o f a t t r i b u t e s o f t r a n s a c t i n g p u r p o s e T h e r e f o r e , g o v e r n a n c e structureisestablishedtoresolveasymmetricinformation.AccordingtoW i l l i a m s o n (1989),therearethreemaindimensionstodescribeattributesofthen a t u r e o f t h e t r a n s a c t i o n a r e ( 1 ) t h e f r e q u e n c y o f t r a n s a c t i o n ,

( 2 ) t h e uncer tai nty oftransaction,and(3)thespecificityofassets.Wi lliamsonalsoe mp h a si z e s thatalthoughallofthemarecritical,thespe cificityofassetsisthemostimportant(WilliamsonO.,1989).Hehasclassifi edassetspecificityint ofivetypes,including(1) site specificity;(2)physicalasset specificity;(3)humana s s e t specificity;

( 4 ) d e d i c a t e d a s s e t ; a n d ( 5 ) b r a n d n a m e c a p i t a l T r a n s a c t i o n costeconomicsalsosuggeststhetransactionasbasiccomponento fanaly sisthatrequiresalternativegovernancestructuresto determinetransac tingactivities.Governancestructureisasthewayorganizedtomakeac o n f i g u r a t i o n t h r o u g h t h r e e ways:( 1 ) t h e f r e q u e n c y ( v i a m a r k e t ) ,

( 2 ) theun ce r tai n ty d e g r e e andtype( v e r t i c a l i n t e g r a t i o n ) , a n d ( 3 ) t h e c o n d i t i o n o f a ss e t specificity(viacontracts).

Similartoprincipaltheory,inthetransaction costt h e o r y , ther e l a t i o n s h i p s betweenfirmsisasymmetric,andinforma tionisimperfectwhicha l l o w s o p p o r t u n i s t i c a g e n t t o f i n d rent- seeking,s o firmn e e d s t h e g o v e r n a n c e structure toavoid theseproble ms.In thisperspective,firmsareco n si d er ed a s “ p r o c e s s o r o f informa tion”meanst h a t i f t h e i n p u t o f i n f o r m a t i o n isthesame firmwillproducethesameresultof action,However,

CohendetandLlerena(2005)haverejectedthatpointandconsiderfirmasar a tion al e n t i t y ( C o h e n d e t & L l e r e n a , 2 0 0 5 ) T h e a d o p t a t i o n o f t h e w a y toa p p r o a c h t h e t r a n s a c t i o n c o s t theoryast h e c o n t r a c t u a l a p p r o a c h a n d behavioral assumptionofboundedrationalityshowthatcognitive capabilitieso f a g e n t s i s limited.T h i s a p p r o a c h i s o b v i o u s l y e x t r e m e l y r e s t r i c t e d ; thea s s u m p t i o n s e e m s t o ignorel e a r n i n g a n d i n n o v a t i v e c a p a b i l i t i e s o f firms.Somes c h o l a r s s t a t e d t h a t e v e n i n s u c h c i r c u m s t a n c e t h e p a s s i v e l e a r n i n g p r o ce s s i s s t i l l t a k e n p l a c e byi m p r o v i n g p r o c e s s e s w i t h i n f i r m ( B o c q u e t , 201 1;C o h e n d e t & L l e r e n a , 2 0 0 5 ) F o r t h i s r e a s o n , itn e e d s c o m p l e m e n t e d theoriestoe x a m i n e t h i s p r o b l e m i n t h e e x t e n s i v e s c o p e ; t h i s a l l o w s u s toanalyzelearningcapabilitiesoffirmdeeply.

Knowledge-basedtheory

Inrecent years,sc i e nc e andtechnology arer a p i d l y developing;iti saf o u n d a t i o n t o e c o n o m i e s a n d i n d u s t r i e s tob u i l d a n e w e c o n o m i c g r o w t h modelb a s e d o n t h e k n o w l e d g e F o r t h a t , scie nceandtechnologicald e v e l o p m e n t l e a d industriestop a c e int h e n e w p e r i o d T h e d e v e l o p m e n t trendpermitsthem exploittheadvantageofglobalvaluechainandtheinternationalmarket( A D B , 2 0

1 4 ) T h e v a l u e c h a i n s a r e r e q u i r i n g a l a r g e r p r o p o r t i o n ofknowl edgethanever.Productionanddistributionactivitiesoffirmsr e f l e c t t h i s t r e n d byi nv est in g a n d a p p l y i n g hi- teche q u i p m e n t , u s i n g skilledlaborinordertoenhanceproductivityandg rowth.Shortly,itissaidthatknowledgeisadriverofthedevelopmentofanenterpris e,oracountry.

(2008)statethatknowledgeandinformationaresimilar;b o t h knowledgea ndinformationhavecommonfeaturesasthesystematicness,replicationandr eproductioninlowcost,externality( d e p en d i n g onnumberofpeople), a

24 n d theyareto ohardtoevaluate Neverthel ess, knowledgeisnotadirect synthesisofinformation, itisd i f f e r e n t i a t e d otherresourcesbygeneratingf romthehumaninteractions.Thek n o w l e d g e i s an extensiveconceptthus needsto understandinspecificsense.Manytheoriesofinformationstillhaveviewedo rganizationasa‘processor

24 ofinformation’.Thistheories’visionhasobservedhumanisas‘noise’thusn e e d s toeliminateoutoftheprocessorforefficiency.CohendetandLlerena( 2005)indicatedthatthisisanorrowvisionthatignorethemechanismoftheknow ledgec r e a t i o n ( C o h e n d e t & L l e r e n a , 2 0 0 5 ) O n t h e o t h e r h a n d , som escholarshaveviewedknowledgeisasubstance Nonakaetal.

(2008)arguethathumanplaysanimportantroleofcreatingtheknowledge,soh esuggestst h a t themoreunderstandthehumannature,themoreperceivetheknowled ge.T h e differencesofthesubstanceresourcesandinformationarebyutilizatio no fhumanbeing.

In academic research, many scholars emphasize the significance of firms as learning organizations, which is crucial for achieving and sustaining competitive advantage (Cohendet & Llerena, 2005; Cohen & Levinthal, 1990) While various studies analyze the learning capabilities within organizations and networks, aiming to strengthen competitive advantages, they often overlook the processes involved in knowledge generation and the establishment of organizational networks (Dyer & Nobeoka, 2000) Furthermore, the configuration and formation of inter-organizational learning remain underexplored, despite the critical role of external knowledge sources in knowledge creation across different organizational levels, including nations and industries (Cohen & Levinthal, 1990).

Atacertainthresholdoflearninglevel,theorganizationalroutineshavebeen formed,develop a n d apply newknowledge inordertocommercializ ethep r o d u c t s a n d s e r v i c e s ( C o h e n & L e v i n t h a l , 1 9 9 0 ; C o h e n d e t &

25 ineisas“ar e g u l a r p a t t e r n o f i n t e r a c t i o n s a m o n g i n d i v i d u a l s t h a t p e r m i t t h e t r a n s f e r , recombination,o r c r e a t i o n o f specializedknowledge”,a n d “ a c o o r d i n a t e d , r e p e t i t i v e setoforganizationalactivities”(Levin,2002).Yet,DyerandN obeoka,

The creation of knowledge is not solely indicated by the year 2000; rather, it highlights the importance of learning routines in facilitating the transfer of knowledge A case study on Toyota illustrates that production networks are more effective than individual firms in this knowledge transfer due to their diverse expertise The definition underscores the significance of learning and knowledge management, suggesting that knowledge is generated through organizational routines, which serve as the foundation of a firm These routines enable firms to consistently process knowledge, transforming existing information into new insights (Cohen & Levinthal, 1990; Cohen and Llerena, 2005) In this transformative process, Cohen and Llerena (2005) emphasize the critical role of organizational routines.

(1) Organizationalr o u t i n e s a s t h e s h o r t c u t tor e m e m b e r t h e s p e c i f i c d im e n s i on s o f r o u t i n e s ( m o t i v a t i o n , c o g n i t i o n , a n d c o o r d i n a t i o n ) t o d o t h e tasks.

(2) Organizationalr o u t i n e s a r e asa w a r e n e s s instrumentsthata l l o w allocatingthescarceresource sintheorganization,andviewedasafiltertoeliminateunnecessaryanduneffic ienttasks.

(3) Organizationalr o u t i n e s m u s t b e p l a c e d i n c r u c i a l “ c o n t e x t - dependent”.Theroutinesoccuratagivenandparticularplace,inwhichthe co ntex t i s t h e p r i n c i p a l matter,a n d t h e l o c a t i o n ( i e , ino r g a n i z a t i o n s orc o m m u n it i e s ) i s c r i t i c a l tor e c o g n i z e t h e s p e c i f i c d i m e n s i o n s a s w e l l a s t o g rasp t h e o r g a n i z a t i o n a l s t r u c t u r e T h e r e i s a g r o w i n g c o n s e n s u s t h a t organizationroutinestakeplaceinorganiza tionsorcommunities,anditisanoutcomecomesfromtheregularinteractionsatth eindividualando r g a n i z a t i o n a l levels.

The interaction between individuals and organizations aims to transform personal knowledge into collective knowledge that can be codified and shared within an organization Through organizational routines, individuals absorb existing knowledge to develop new insights Knowledge is generally classified into two primary types: explicit and tacit Explicit knowledge pertains to easily codifiable information, while tacit knowledge involves skills acquired through education, training, experiences, and practices, making it challenging to codify and evaluate According to the OECD (1996), knowledge can be categorized into four types: know-what, know-why, know-how, and know-who.

 ‘Know- what’arethingsthatareavailableintherealworld.Knowledgeofth iskindisusuallycalled‘information’.

 ‘Know- why’i s m entioneda b o u t n a t u r e o f s c i e n c e a n d s o c i e t y T h i s kindofknowledgeistoexplainthephenomenaandcausesoft hingsorexpressthedevelopmentofproductioninmostindustries

 ‘Know- how’isrelevanttoabilities,skillstocarryoutatask.Itisa l so t h e se c r e t o f a p e r s o n o r o r g a n i za t i o n totakea n a d v a nc e d position.Iti sthussignificantineconomies.

 ‘Know-who’referstoinformation thatwhoknows w h a t and/ or wh o k n o w s h o w t o dow h a t T h a t t h e r e a s o n whyt h i s k i n d o f knowledgeis gr ow in g critical B ec a u se w h e n know- howisincreasinglyimportant,know- whobecomethedeterminantfactort o k n o w w h e r e i s p o s s i b l e g e t a c c e s s e x p e r t i s e a n d applyadv an ced knowledgeefficiently.

Explicitknowledgeis r e l e v a n t tok n o w - w h a ta n d know- whyandtacitk n o w l e d g e co n s i s t of k n o w - h o w an dknow- who There aren um er ous waysandmethodtoembracewholetypesofknowl edgethatarementionedabove.

Explicitknowledgecanbelearnedbyeducationalsystem(e.g.un iv ers it ies, co l l e g e s) , t r a i n i n g (e.g.o n - t h e - j o b t r a i n i n g , v o c a t i o n a l c e n t e r ) , orr e a d i n g books.T h i s k n o w l e d ge i s p r i m a r i l y a f o u n d a t i o n f o r p r a c t i c e s W h i l e , t a c i t k n o w l e d g e o b t a i n e d f r o m thes p e c i f i c o r s p e c i a l i z e d e n v i r o n m e n t F o r instan ce,theemployeesinanorganizationareapprenticedtobetheskilledwo rkerst h r o u g h t r a i n i n g s y s t e m u n d e r thes k i l l e d mastero r e x p e r t s So mes k i l l s w i l l b e t r a i n e d i n s p e c i a l i z e d e d u c a t i o n a l e n v i r o n m e n t s T h r o u g h t h e interactionbetweenindividualsororganizations,allkindsofkno wledgecanb e s h a p e d a n d d e v e l o p e d ( C o h e n & L e v i n t h a l , 1 9 9 0 ; C o h e n d e t & L l e r e n a , 2005;Dyer& N o b e o k a , 2 0 0 0 ; O E C D , 1 9 9 6 ; N o n a k a & T a k e u c h i , 1 9 9 5 ; Non ak a,Toyama,&Hirata,2008).

Ing e n e r a l , k n o w l e d g e i s createdf r o m t h e l e a r n i n g a n d a c c u m u l a t i n g processo f e x i s t i n g k n o w l e d g e a n d e x p e r i e n c e s ( C o h e n a n d & Levinthal,1 9 9 0 ; Cohendet&Llerena2005;Bocquet,2008).No naka(2008)arguedthatk n o w l e d g e isaprocessevenif,knowledgeisasubstanceas specificproducts,i t hashadthedevelopmentprocessfromtheexistingproductto becomenewp r o d u ct throughuser’sexperiences(Nonaka,Toyama,&Hirata,2008).

Cohen and Levinthal (1990) posited that an individual's initial related knowledge significantly influences their ability to evaluate, embrace, and convert external knowledge into valuable insights, thereby enhancing a firm's innovative capabilities This process, known as absorptive capacity, is shaped by research and development (R&D) activities and production processes, enabling organizations to gather new knowledge and integrate it with existing expertise The effectiveness of absorptive capacity relies on the "knowledge structure," which encompasses prior knowledge and positive interactions within and outside the firm Trained personnel play a crucial role as translators of information, absorbing and diffusing new knowledge throughout the organization However, the organizational absorptive capacity is contingent upon the competencies of these translators and the knowledge gap between them and lower-skilled workers A disparity in background knowledge among individuals can hinder effective information transmission, emphasizing the need for a collective level of relevant background knowledge within the organization to facilitate efficient knowledge absorption.

&L e v i n t h a l , 1 9 9 0 ; p 1 3 2 ) T h a t m e a n s d i a l o g u e i s ane f f e c t i v e c ommunicationtooltotransmitthecommonsharedknowledgeandexpertisethr oughimages,signs,andsharedlanguage.

According to Cohendet and Llerena (2005), knowledge is developed through an accumulating process, emphasizing that organizational competencies are intentionally created, maintained, and preserved While they align with Cohen and Levinthal's (1990) perspective that knowledge is a process and recognize the organization's role, they argue that individuals cannot fully comprehend complex production processes Therefore, firms play a crucial role in coordinating this information This coordination generates a significant amount of knowledge that is then disseminated among all members of the organization engaged in interactions.

Obviously,inspiteofthe factthattwoapproachesarecompletelyd i f f e r e n t , bothcontributethecommonv iewpointthatknowledgeisgeneratedthroughexperiencesa n d byt h e i n t e r a c t i o n b e t w e e n t a c i t k n o w l e d g e a n d ex p l i ci t k n o w l e dg e Tacitknowledgeandhumansubjectivityofanindividualaree x t e r n a l i z e d t o f o r m t h e e x p l i c i t k n o w l e d g e a n d o b j e c t i v i t y ino r d e r t o s harea n d c o m b i n e N o n a k a e t a l.

( 2 0 0 8 )s u g g e s t t h a t t a c i t k n o w l e d g e a n d e x p l i c i t knowledgeinteract witheachotherinorder tocreateanoneness.It islikeaniceberg inwhichexplicitknowledgeisastheunderwaterpartandtacitknowledgeisasabov ewaterpart.Theinteractionactivitiesareinadynamicd i al e c t i c al p r o c e s s o w i n g t o o p p o s i t e a t t r i b u t e s o f t a c i t a n d e x p l i c i t k n o wl e d g e Asaresult,newknowledgeiscreatedinthisdynamicprocess.

Inthisstagetacitknowledgeof individuals’issharedtoeachother whattheytogetherexperienceindailyinteractiontocreatenewknowledg e.Becau se thetacitknowledgeistoohardtogeneralizeaswellasitsinher entfeaturesrelatedtospecificdimensions,tacitknowledgeonlysharesbetwe enindividualshavethesameexperiencesbyf i v e senses.K n o w l e d g e i n t h i s p r o c e s s isonlygraspedbytheperceptionandaction(notexcludingconflict).T h e experiencesincorporateotherknowledge,puttingoneselfintocustomer,su pplier,andevencompetitor’splace.Thosethingsoftenaretakenplaceinaplace w hereeveryone liveand/orworktogetherforalongtime.Forinstance,a p p r e n t i c e s h i p oron-the- jobtrainingrelatedtothisstage.

This stage outlines the process of making tacit knowledge explicit through socialization, where individuals clarify their own tacit knowledge using ideas, imagery, metaphors, and analogies (Lindsay & Norman, 1997) Once this explicit knowledge is successfully articulated, it is shared among groups within the organization Dialogue and face-to-face communication become crucial, enabling individuals to exchange ideas and beliefs while receiving feedback to enhance their articulation skills Cohenen and Levinthal (1990) also highlight that effective communication in an organization requires individuals to have a common shared language and symbols, developed from their collective knowledge and expertise.

Atthisprocess,explicitknowledgeisdocumentedanditcanbetra nsmittedint h e f o r m o f d o c u m e n t s , e m a i l , d a t a b a s e s Int h e c o m b i n e d st a g e , f o r m e d e x p l i c i t k n o w l e d g e a n d e x p l i c i t k n o w l e d g e g a t h e r i n g f r o m internala n d e x t e r n a l o r g a n i z a t i o n , w h i c h a r e c o m b i n e d , a r r a n g e d o r pr ocessedtob e c o m e a complexs y s t e m i z a t i o n T h i s p r o c e s s i n c l u d e s t h e b r e a k i n g c o n c e p t s d o w n i n t o ‘small’notionsa n d t h e n attachingthemtoo r g a n i z a t i o n a l ph ilosophya n d / o r activitiesinordertomaketheexplicitkn owledg e moree f f i c i e n t l y syste mized.T h e c o n f l i c t oc c u r s i n t h i s p r o c es s w i l l besolvedlogically.Com binationpermitsentireorganizationaccesssystemizedexplicitknowledge.

Afterg e n e r a t i o n , e x p l i c i t k n o w l e d g e iss h a r e d i n e n t i r e o r g a n i z a t i o n , and thenitisconvertedtotacitknowledgeintheinternalizatio n.Thisareasorganizationalr o u t i n e s w h i c h e x p l i c i t k n o w l e d g e i s a p p l i e d a n d u t i l i z e d i n the actualizedconditions,afterthat,becomesfundamentals for newpr o c e ss e s Therefore,explicitknowledge,suchasnotionsofproductorp r o d u ct i o n process,hastobeactualizedbytheaction,refection,andpracticetof o r m i n d i v i d u a l ’ s o w n t a c i t k n o w l e d g e T h e n e w t a c i t k n o w l e d g e ( h a s c o m p l e m e n t e d andabsorbed) canbe continuouslyshare dt h r o u g h newe x t e r n a l i z a t i o n inordertobeginanotherSECIprocess.

ItmustbeunderstoodthatSECIprocessisknowledge- creationspiral.Inthisspiral,tacitandexplicitknowledgeisenlargedthroughfou rdimensions.T h e spiralwillbeincreasinglygrowingintheconditionthatfourdi mensionso f SECIarecontinuously developed.Nonaka etal.

(1995,2008)claimthatthek n o w l e d g e i s c r e a te d t h r o u g h S E C I p r o c e s s p r o c e e d s ac r o s s i n t e r a c t i v e co mmu nities, andgoesacrosstheregio

31 nal,subsidiaries’boundaryevenor g a n i z a t i o n al I t c a n b e t r a n s f e r r e d o u t s i d e t h e o r g a n i z a t i o n , a n d t h e o r g a n i z a t i o n a l knowledgeinteractsw itheachotherintheknowledge- creationprocess(Nonaka,Toyama,&Hirata,2008;Nonaka&Takeuchi,1995).

Insummary,theliteratureshavereviewedtheprocessofsharpinga nddevelopmentofsubcontractorandimportantroleoflearningandknowledg e- c r e a t i o n processes,andmostauthorshavesharedacommonviewthatknow ledge isgeneratedbytheinteractionsbetweenentities The learningandk no wled ge- cr eatio n pr ocesses andtheabsorptivecapabilitiesofafirmarethekey d e t e r m i n a n t s t o e x p l a i n t h e i n n o v a t i o n o f a firm.E s p e c i a l l y , f o r t h e subcont ractorsthatisthemainpointtotakeintoaccountinthisthesis.

Empiricalreview

Regardlesso f t h e analysismethodso f s t u d i e s , t h e r e a r e s e v e r a l e m p i r i c a l studieshaveindicatedtherelationshipbetweentheinnovationand subcontractinga g r e e m e n t s M o s t o f r e s e a r c h e r s h a v e u s e d d a t a s e t s c o m e f r o m t h e manufacturing sectortoexaminethefactorsthateffectonthep r o c e s s andproductinnovations uchasBocquet(2011),Avermaete,ViaeneandMorgan(2004).

Int he s t u d y ofB o c q u e t ( 2 0 1 1 ) , sh e a n a l yz e d 9 3 smallm a n u f a c t u r i n g firmsinFrancetoinvestigatetheabilitiesofproductandprocessinnova tionbasedo n t h e s u b c o n t r a c t i n g r e l a t i o n s h i p s

Research indicates that subcontractors involved in the contractor's product conception process are more likely to innovate compared to traditional subcontractors focused solely on cost reduction This trend suggests that subcontractors are increasingly taking on greater responsibilities for mutual commitment The study highlights that organizational practices and R&D activities influence innovation, albeit in an unclear manner Specifically, quality management positively affects process innovation, and subcontractors dedicated to quality management and logistical tools are more likely to innovate Thus, effective quality management is essential for subcontractors to successfully collaborate with contractors However, this assertion may not hold true in all cases.

33 hattheorganizationalpracticesdoalwayseffectoninnovation.T h e innovationisaff ectedbyR&Dactivitiesandtrainingisveryclearinthisstudy.WhileR&Dactiviti escompletelyaffectedontheprocessinnovation, thetraininghadapositivelysignificantimpactontheproductinnovation.Thes t u d y s h o w s t h a t t h e m a j o r i t y o f t h e i m p a c t e d f a c t o r s h a v e i d e n t i f i e d thep r o c e s s i n n o v a t i o n isthemorei m p o r t a n t objecto f smallfirmst hant h e p ro d u ct innovation.

& D activities.H o w e v e r , theR&Deffortofinnovativefirmsgaverisetothe collaborationw i t h customersandresearchinstitutes.Surprisingly,there sultsofthisstudyshowthattheeducationandexperiencesofthemanagerdon otaffectinnovation.Similartootherstudies,thisstudyindicatesthatthenum berandp r o p o r t i o n ofhighskilledemployeeshadthetendencytostimulateth einnovativenessofinnovativef i r m s T h e o r e t i c a l l y , i n v e s t m e n t i n k n o w

- h o w o b v i o u s l y createsinnovation Theresult ofstudyisin linewith itshypothesisw h e n i t also indicated that expenditure in training andmarketingmakesfirmsinnovative.

Chapter2demonstratesthattheexistingliteraturesofthesubcontractingand i n n o v a t i o n b a s e d o n t w o maint h e o r i e s o f T C E a n d k n o w l e d g e - b a s e d t h e o r y a r e i n a d e q u a t e l y s u p p l i e d t o e x p l a i n t h e impa cto f s u b c o n t r a c t i n g activitiesoninnovationofsubcontractorinViet nameseSmallandmedium- s i z e d enterprisessector.Becausetheunderlyingassumptionsoftheprevio ustheoreticala n d empiricalstudieshavenotyete n c o m p a s s e d t h e c o n t e x t o f Vietnam,thisthesisthereforeconstructanappropriateanalyticalframe workb a s e d ontheliteraturesanddatasetofVietnameseSmallandmedium-sizedenterprisestoidentifyanddiscussthisperspective.

Dataandsample

Vietnam's small and medium-sized enterprises (SMEs) comprise approximately 90% of households and 63% of the SME sample as of 2015, predominantly operating in an informal legal status The majority are micro firms, with less than 10 employees, representing 72% of the sample, while small and medium-sized firms account for 22% and 6%, respectively These enterprises are distributed across three regions in Vietnam, primarily engaged in the food and beverage, fabricated metal products, and wood industries Employment growth in the informal sector lags behind that of formal groups Vietnamese SMEs are considered the backbone of the economy, contributing 98% of the total, yet their development does not match that of state-owned enterprises (SOEs) or foreign direct investment (FDI) enterprises Therefore, targeted research and policies are essential to enhance their growth potential.

Therea r e m a n y v a r i o u s d e f i n i t i o n a n d measureo f S M E a c r o s s countries;e a c h c o u n t r y h a s a d i f f e r e n t c r i t e r i a , S M E i s d e f i n e d b a s e o n numberofemployees,totalasset,capital,annualturnover…

There is no uniform standard for defining Small and Medium-sized Enterprises (SMEs) globally For example, Indonesia and Ireland categorize SMEs based on the number of employees and annual turnover, while some countries set the threshold at fewer than 500 employees, and others at 250 According to the World Bank, SMEs are classified as businesses with zero to 200 employees, encompassing both formal and informal enterprises In Vietnam, SMEs are defined as firms with a business license in accordance with the law and are classified into three categories: Micro, Small, and Medium-sized enterprises, as outlined in Decree 56/2009/ND-CP.

Micro Small–sized Medium–sized

Numberof employees Totalcapital Numberof employees

D e n m a r k i n V i e t n a m T h i s datasetisconcentrated oncharacteristics ofm a n u f a c t u r i n g sectorso fSME.T h e s u b s e q u e n t s u r v e y b a s e d o n t h e p r e v i o u s o n e s t h a t b u i l t o n i n - d e p t h interviewsmoret h a n 2,500s m a l l andmediumsizedn o n - s t a t e e n t e r p r i s e s o p e r a t i n g int h e m a n u f a c t u r i n g s e c t o r o f V i e t n a m I t w a s e m p l o y e d i n 1 0 pr ov in ces andcitiesinVietnamincludi ngHanoi,HaiPhong,HoChiMinh,H a Tay 4 ,PhuTho,NgheAn,QuangNam,K hanhHoa,LamDong,andLongAn

Vietnamesesmalla n d medium- sizede n t e r p r i s e s d a t a i s a r i c h d a t a s e t containingalargenumberofVietna mesesmallandmedium- sizedenterprises’c h a r a c t e r i s t i c i n f o r m a t i o n H o w e v e r , t h i s i s a n u n b a l a n c e d a t a sincesome firms haveceasedtoprovide theirinformation for several reasonss u ch asmergers,shutdown,noresponse,or,newfirmsestablishedinmi ddles u r v e y p e r i o d T h e d a t a i s c o l l e c t e d byi n t e r v i e w i n g d i r e c t l y w i t h a mainq u e s t i o n n a i r e Thisthesisusesonlyone-yearfirm- levelsurveydatain2015f ro m thesurvey.

Thereisalittledataandempiricalstudyforinvestigatingthepatternofsubc ontractorinVietnameseSMEsectoringeneralorinnovativenessoftheminparticular Therefore,theresearchusethedataofsubcontractorsisdrawnf r o m Vietn ameseSmallandmedium- sizedenterprisesoftheyear2015.Theb a s e conditionofanobservationto drawisafirminthedatasetmustbeasubcontractorandhasatleastonesubcontrac t.Thedrawnsamplehasshowedt h a t thenumberofobservationsofsampleis271 Thepurposeoftakingthesampleisbecausethethesisfocusesonlyonthesubcon tractorinVietnameseSmallandmedium- sizedenterprisessector.Fortunately,thenumberofo b s e r v a t i o n s ofsa mpleinprovincesisnotmuchbiascomparingtotheentireo b s e r v a t i o n s

H o w e v e r , this does notmeanthat the results will reflect exactlycompleteVietnameseenterprises.

Definition andclassification

Theresearchproblemstatesinthisthesishavetwokeyconceptsthatareinnovatio n,andsubcontracting.Eachoftheseconceptshasdefinedandc l a s s i f i e d diffe rentlyinvariousstudies.Inthisthesis,subcontractorisapartofsmalla n d m edium- sizede n t e r p r i s e s , i t t h u s i s n e c e s s a r y tof i n d s p e c i f i c d e f i n i t i o n a n d c l a s s i f i c a t i o n o f t h e s e importantc o n c e p t s t o e n s u r e t h a t t h e rese archf i n d i n g s a r e v a l i d a n d a p p r o p r i a t e i n t h e s i s ’sg o a l E a c h o f definitions followingunderstoodandadoptedinpointofviewofthisthesis.

Innovation is a broad and multifaceted concept that varies in definition based on the specific research objectives of different studies This variability often leads to ambiguity, as authors define innovation in ways that align with their particular fields or domains of study For example, some scholars view innovation as a combination of sub-processes, while others see it as a management process involving the development of ideas, technology, manufacturing, and marketing Additionally, many researchers recognize innovation as a creative process, highlighting its diverse interpretations across various industries.

AccordingtoOECD(2005),innovationconsistsoffourtypesincludingp r o d u c t innovations,processinnovations,organizationalinnovations,andmarketin ginnovations T he firmis calledin no va ti vef ir m orin no va to r ifit h a s t oimplementatleastoneoffourtypesofinnovationduringtheperiodofsur v ey ( O

E C D , O s l o Manual: Guidelinesfor Collecting and InterpretingInnovationData,3rdEdition,2005).

Followingp r e v i o u s s t u d i e s o f i n n o v a t i o n o f t h e firm,t h i s t h e s i s co n c en t r at e s ontwotypesofinnovationthatareproduct(newproducts andimprovingtheexistingproducts)a n d p r o c e s s I n a d d i t i o n , thist h e s i s c o n c e n t r a t e s toa n a l y z e theimpacto f s u b c o n t r a c t i n g a c t i v i t i e s o n t h e innovativenessoftheenterpriseinmanufacturingsector,forthispurpose,theth esisbases on the definition ofproduct and processinnovation following theguideofOsloManualasbelow.

Accordingt o t h i s d e f i n i t i o n , t w o p r i m e c h a r a c t e r i s t i c s t h a t n e e d s t o co n s id e r a s u b c o n t r a c t o r b e i n g t h e i n n o v a t i v e f i r m a r e i m p l e m e n t e d a n e w p r o d u ct ( o r p r o c e s s ) o r s i g n i f i c a n t l y i m p r o v e d p r o d u c t ( o r p r o c e s s ) T h a t meansiffirmeitherimplem ented anewproductorprocesso r significantly improvedproductorproces sisviewedasaninnovationsubcontractor.

Innovation canbe measuredbyvariouswaysbasedonthestudiedscopeordomain.Thetraditional measuredindicatorsofinnovationarenumberofr e s e a r c h anddevelopm ent(R&D),patents(Bleaney&Wakelin,2002),expenditureforR&D,orthem easuredindicatorsoftheinnovationofSMEa r e i d e n t i f i e d byt hr ee d i m e n s i o n s i n c l u d i n g i n p u t , o u t p u t a n d i m p a c t (Hyvarinen1990).

Thei n n o v a t i o n c a n bei n f l u e n c e d bya n u m b e r o f reasons;F i r s t , i f analyzingtheinnovationintermofproduct,reasonsmaybeeconomic factors,suchascost,revenue,investmentor/ andlegalfactors,suchastrade,t a x , unionlaws.Inaddition,activitiesthatareim pulsesorobstaclestoinnovation areidentifiedasdominantfactors. Second,ifanalyzinginnovationi n termofprocess,theabilitiesoffirmasthelearni ngorknowledge- creationp ro cess arethereasonsforinnovationprocess(OECD&Eurostat,2005). 3.2.2 DefinitionofSubcontracting

Thereislittleliteratureprovidessufficientdefinitionandinformationofsubc ontractinginbothatc o u n t r y andinternationallevel.T h i s meanst h a t t h e r e i s u n o f f i c i a l s t a t i s t i c s ( K i m u r a , 2 0 0 1 ) o r d e f i n i t i o n a n d c a t e g o r y o f subcontractorandcontractoraswell( E I M , 2 0 0 9 ) A c c o r d i n g t o B o c q u e t ( 2 0 1 1 ) , i t i s d i f f i c u l t t o r e s e a r c h thes u b c o n t r a c t i n g d u e t o t h e d i s t i n c t o f defini tio n, complexity,a n d u t i l i z a t i o n

L a c k o f commonu n d e r s t a n d i n g o f o f f i c i a l d e f i n i t i o n o f s u b c o n t r a c t i n g c a n l e a d t o l i m i t a t i o n i n c l a s s i f i c a t i o n , studyingandmakin gpoliciesforthissector Theconceptof subcontractingisintensiveandhomogeneous 5 Otherconceptshavelinkedsubco ntractingintoth e valuechainfromtherawmaterialstage,throughthemanufacturing ,totheend- useproducts.ThisthesisbasedonthedefinitionofEIM(2009)toapplyf o r anal ysisasfollowing:

“Subcontractingoccurswhenoneenterprise(contractor,orprincip al)delegatesa n o t h e r e n t e r p r i s e ( s u b c o n t r a c t o r , o r s u p p l i e r ) , f o r a g i v e n productcycle,toperformapart,element,servicetoinco rporateafinalproducto n t h e m a r k e t a c c o r d i n g t o c o n t r a c t o r ’ s g u i d e , t e c h n i c a l o r commercialspecifications”.

Subcontractorsareagroupofenterprisesdiversifiesintermofstructure,charac teristic,s e c t o r ofactivity,e t c B a s e d o n t h e s u b c o n t r a c t i n g c o n t r a c t therearetwokindsofrelationshipthatarelong- termrelationshipandarm’slengthr e l a t i o n s h i p O w i n g t o k e e p i n g l a s t c o n t r a c t s , s u b c o n t r a c t o r s e n g a g e d e ep l y contractors’activities,suchas developingtechnicalcapacity,

40 enhancingt e c h n o l o g i c a l a b i l i t i e s f o r i n t e g r a t i n g w i t h c o n t r a c t o r s , c r e a t i n g k n o w le d g e t o makec o n t r a c t o r s ’ p r o d u c t s to b e v a l u a b l e C o n v e r s e l y , f o r arm’sl e n g t h c o n t r a c t , d u e tot h e u n c e r t a i n t y s u b c o n t r a c t o r s onlyp r o v i d e somekindsofperi pheralproducts.Incontrast,Kimura(2001)basedonthec o n c e p t ofsubc ontractorinJapantodrawaconclusionthat“subcontractingisal o n g - t e r m a g r e e m e n t A o n e s h o r t t r a n s a c t i o n c a n n o t bec a l l e d a subcontracting”.

Theempiricalstudy ofBocquet(2009)showedtwogroupofsubcontractorast w o clusters,s h e hasl a b e l e d astraditionalsubcontractinga n d collaborative o u ts o u r c i n g T h e fi r stcluster isr el ate dt o t h e basic ch aracter i stics o f s u b c o n t r a c t i n g c o n t r a c t s , i n t e r - f i r m s p r a c t i c e s a n d t o o l s T hes e c o n d c l u s t e r i s t h e i r a b s o r p t i v e c a p a b i l i t i e s O t h e r t w o c a t e g o r i e s o f subcontractorsareclassifiedbyt heviewpointofcontractorsarethesupplier’scapabilitiesandstrategicposition.

Accordingt o E I M ( 2 0 0 9 ) , b a s e d o n t h e i m p o r t a n c e o f s u b c o n t r a c t o r , someauthors 6have classifiedsubcontractorintotwokindsthatarethec a p a c i t y andspecializedsubcontractor.

 Capacitysubcontractor:Thiskindofsubcontractorisrelevanttoa r m ’ s lengthrelationship.Inthis kind,bothcontractorandsub contractortogethersharetheirbenefit.T h e c o n t r a c t o r r e l i e s ons ubcontractorstoasarisk- sharingtoolandbuffers.Whereas,subcontractorwillbenefitfromusi ngtheirsparecapacityandtheeconomicsofscale.

 Specializedsubcontractor:Thiskindofsubcontractorisrelevant to long- termrelationship.Inthisrelationship,thecontractorconsider sthe su bc on tr act or as a par tn er whop ossesse s specializedk n ow -

41 h owa nd has adequatee q u i p m e n t andexperts tosupportandf acilitatecontractor’sstrategies.

Figure 5 The level of subcontractor in chain structure

SUB-CON SUB-CON SUB-CON

Third- & lower-tier SUB-CON SUB-CON SUB-CON SUB-CON

 First-tier- u s u a l l y large firms:t a k i n g e n t i r e r e s p o n s i b i l i t i e s f o r t h e system,productdevelopment,andJITdeliveries

 Second-tier- u s u a l l y Smalla n d m e d i u m - s i z e d e n t e r p r i s e s : o p e r at i n g in thenarrow rangeof supplychainwhererequireslessex p e r ti s e andspecialization

 Third-and lower-tier- usuallysmallandmicrofirms:workinginlesssophisticatedareasinterm ofcompetencies

Researchmethodology

Most subcontractors in the Vietnamese SME sector are primarily households and limited companies, resulting in low competitive and innovative capabilities These entities account for 81% of subcontractors, highlighting a significant issue in their engagement with innovative activities Research indicates that a firm's innovative capacity can lead to competitive advantages and even market monopolies However, due to constraints in information and technology, their innovative cognition is insufficient to modernize outdated production methods, unlike their counterparts in other ASEAN countries Consequently, Vietnamese manufacturing subcontractors not only diminish their competitive edge but also their ability to absorb new knowledge in production.

Duetotheimportantroleoftheinnovationofanenterpriseforsurvivalan d c o m p e t i t i v e a d v a n t a g e , t h i s studyin ves ti gat e t h e i n n o v a t i v e n e s s o f t h e VietnamesesubcontractorinSMEsectorbyapproachingtheinnovationthr ough subcontractingactivitiesbytwomaindirectionsofthesubcontractor.Firstly,t h e s t u d y c a t e g o r i z e s t w o k i n d o f s u b c o n t r a c t i n g a g r e e m e n t s ( s u b c o n t r a c t i n g fordomesticcontractorsandsubcontractingforforeign- investc u s t o me r s ) S e c o n d l y , t h i s t h e s i s con si der s t h e i n n o v a t i v e n e ss of t h e subcontractorthroughlearningandknowledge- creationabilities.Inaddition,S E C I modelistakenintoaccountasacompleme nttoexplainthecreationofknowledgeinanorganization.Besides,thedetermi nantfactorsthatinfluenceinnovationarereviewedincludinginthemodel.

Int r a d i t i o n a l l y , s u b c o n t r a c t i n g a c t i v i t i e s largelyrelyo n o u t s o u r c i n g decisionso f t h e c o n t r a c t o r s I n t h e c o n t r a c t o r ’ s p o i n t o f v i e w , t h e y a r e t h e devi ce o f c o s t r e d u c t i o n , r i s k s h a r i n g , o r t h e b u f f e r w h e n t h e d e m a n d i s fluctuated( A b r a h a m & T a y l o r , 1 9 9 3 ; EIM,2 0 0 9 ) Abrahama n d Taylor( 1 9 9 3 ) s t a t e t h a t , t h e r e a s o n s f o r contractingo u t o f t h e f i r m a r e tot a k e b en e f i t s fro mcostreductionandoutsidespecializedsuppliers.

There are two main types of subcontractors: capacity and specialized subcontractors, distinguished by their position in the supply chain and the nature of their relationship with contractors The responsibilities of subcontractors vary depending on their tier within the chain structure, where lower tiers are guided by higher tiers in the production process For instance, system suppliers or first-tier enterprises are responsible for the design and manufacture of original equipment, while second-tier subcontractors produce critical parts, and lower-tier firms focus on peripheral products According to Bocquet (2011), lower-tier firms face challenges in maintaining efficiency due to the high costs associated with marketing incentives and bureaucratic processes Contractors aim to mitigate their dependence on subcontractors, particularly for standardized peripheral products, often relying on arm's length contracts for these activities In this context, the interactions between buyers and sellers are traditional transactions, where transaction cost theory becomes relevant for participants.

Thep e r s p e c t i v e o f t r a n s a c t i o n c o s t a p p r o a c h d o e s n o t v i e w t h e innovationasthe priorityandmentionthe innovative capabilities ofthefirmsi t mainlyfocusesonexplaining thetransactionmechanism to reduce the cost.CohendetandLlerena(2005)indicatedthattheunexpectedrisk,inthiscase ,is theknowledge transferthatisvirtuallynotpresentedinthisrelation ship.Someresearchersstatedthateveninsuchcircumstancethepassivelea rningp r o c e s s iscanstilltakeplacebyimprovingprocesseswithinfirm(B ocquet,2011)andtheinnovativeprocessisseenasaby- productofthelaborassignment(Cohendet&Llerena,2005).

Thereisanexistenceofmanydifferentviewsoftheknowledgeofthefi rm.Somescholarshavethoughtthatthefirm’sroleisnotonlyseekingthec o s t r eduction(Coase,1937)butalsogenerating,saving,andutilizing

44 knowledge.Variousresearchershaveidentifiedthatthecompetitiveandinnovati vesuccessofa f i r m isthecollaborationwithotherduetoo bserv at ion , o r i n t e r a c t i o n w i t h c u s t o m e r s (Dyer& N o b e o k a , 2 0 0 0 ) Similarly,Nobe okaetal.

(2002)showthatthelearningopportunitiesofthef i r m arepositiverelatedt othenumberoftheircustomers.Clearly,knowledgeisa keyf a c t o r t o d e t e r m i n e t h e s u c c e s s o f a n enterprise( O E C D , 1 9 9 6 ) t o e n h a n c e productivityanddri veinnovativeactivities.

Bocquet( 2 0 1 1 ) a r g u e d t h a t t h e l o n g - t e r m r e l a t i o n s h i p s b a s e d o n t h e subcontractingagreementsarethepro misetopromoteinnovationsothatthesubcontractorscanbenefitinthefuturef romsubcontractingagreementr e n e w a l s Moreover,theefficiencyoft heinteractionbetweentwopartiesofthesubcontractingagreementisgive nrisetoorganizationalroutinesaswellastherent- seekingandprinciples.Intheory,organizationalroutinesarethefirm’sf undamentalsofthetransformativeprocessfromexistingknowledgeton e w knowledg e(Cohen&Levinthal,1990;Cohendet&Llerena,2005;Dyer

&Nobeoka,2000).Therefore,itfacilitatesthetransferandshareknowledge (Bocquet,2011).Inthisview,thecoordinationofthequalityassurancea ndq u a l i t y c o n t r o l p r o c e d u r e s o f p r o d u c t i o n a r e v i e w e d a s o r g a n i z a t i o n a l routinesa s w e l l asthep r o m i s e o f s u b c o n t r a c t o r s i n s u b c o n t r a c t i n g r elat io nships I t i s i m p o r t a n t t o g u a r a n t e e r e q u i r e d r e s u l t s c o n s i s t e n t w i t h wholeactivitiesofbothcontractora ndsubcontractor.

Inliterature,t h e a b s o r p t i v e c a p a c i t y i s a d e t e r m i n a n t f a c t o r o f subcontractingrelationships(Bocquet,2008;2011).Theliteratureshowt hatt h e absorptivecapacityoforganizationsisbuiltonindividual’sinitialrelate dk n o w l e d g e , thea s s e s s i n g a n d e m p l o y i n g t h e e x t e r n a l k n o w l e d g e , a n d applyingtocommercializedproducts.Inaddition,thetrainedperson nelwitha d v a n c e d t e c h n i c s a r e a l s o t h e s o u r c e toc o n t r i b u t e d i

Trained personnel are crucial for bridging knowledge gaps within organizations, as highlighted by Cohen and Levinthal (1990) In long-term partnerships, suppliers often integrate with contractors, enhancing their absorptive capacity by leveraging the contractor's accumulated knowledge This relationship resembles that of a firm and its subsidiary, where contractors bolster suppliers' capabilities in areas such as quality improvement, cost reduction, and technological advancements Expanding background knowledge through external connections frequently leads to successful innovation opportunities (Bocquet, 2011).

Previousp a p e r s h a v e skippedt h e a n a l y s i s oft h e r o l e o f c r e a t i o n o f humanintheorganization(Nonakaetal.,2008).Lackofresearchof k n o w l e d g e - c r e a t i o n p r o c e s s i s a s i g n o r i n g t h e c r i t i c a l s o u r c e o f Smalla n d med ium-sizedenterprisesformakingdecisionand/ ortakingpartininnovativea c t i v i t i e s asw e l l a s , f o r p o l i c y - m a k e r s top r o p o s e d e v e l o p m e n t policiesf o r t h i s s e c t o r T h e i n n o v a t i v e r e c o g n i t i o n i s veryi m p o r t a n t f o r e n t r ep r en e u r ; thi smeansthatpreciserequirementswillbeproposedtogeneratea n i n n o v a t i o n ( Q u i n t a n e , C a s s e l m a n , R e i c h e ,

& N y l u n d , 2 0 1 1 ) No n a k a ( 1 9 9 5 , 2 0 0 8 ) a p p r e c i a t e s t h e r o l e o f managersw h o playp o w e r f u l roleini n t e r c h a n g e a n d c r e a t e k n o w l e d g e i n thee n t e r p r i s e I n t h e p a p e r o f CohenandLevinthal (1990), theys howthatmanageris as“ g a t e k e e p e r ” ofin fo rmat io n flows withint h e i r g r o u p a n d b e t w e e n f i r m a n d theexternalen v ir o n m en t Theysuggestthatthe competencyofmanageristo convertnewk n o w l e d g e intosimplekindsandthendiffuseintheirgrouporo rganization.Theseauthorshaveseenmanageristhepersonwhotransformsinform ationtoconstituteabsorptivecapacityofanorganization.

AccordingtoNonaka(2008),thedifferenceamongfirmsisnotonlyduetothefi rms’resourcesbutalsoduetothevisionofitsleaderabouto r g an iz a t io n al future.Forthetraditionalproductionfunction,thecompetitiveadvantagesareno tonlybasedonthefactors ofinputorthescaleandscopeofa firmbutalsoinnovation.Theinnovationisc reatedfromthecontinuously innovativeprocess.Intheseverelycompetitiveandopenedglobalmarket,theinnovati veprocessisalsoseenasanintangible asset.Insuchassets,manageriala n d t e c h n i c a l k n o w l e d g e a r e d e t e r m i n a n t factorsf o r s u c c e s s o r f a i l u r e

7.I n t h e v i e w o f c l a s s i c a l e c o n o m i c s , w h i l e l a b o r , c a p i ta l , m a t e r i a l s , andresourcesarethemainfactorsofinput,knowledge is,nonetheles s,justth ef a c t o r t o e x p l a i n thet o t a l f a c t o r p r o d u c t i v i t y ( T F

P ) ; itc a n r a i s e t h e p r o d u c t i v i t y ofafirmandcreatethedifferencecrossfir msifinputfactorsaret h e same.Currentstudiedmodelsexamineknowledgeisthe crucialfactorofi n p u t intheproductionfunction.Ontheotherhand,knowled geisaplatformt oc r e a t e n e w t e c h n o l o g i e s , i n n o v a t i o n I n v e s t m e n t i n k n o w l e d g e l e a d s t o risingcompetitiveadvantages(e.g.capacity,innov ativeabilities)andincreasethenewknowledgeabsorptivecapabilitiesofafirm(OEC D,1996).

In Vietnam, small firms and subcontractors face significant challenges due to the dominance of state-owned enterprises (SOEs) and foreign direct investment (FDI) companies, which control key industries and create a crowded-out effect on domestic businesses (Thangavelu, 2016) Many subcontractors operate at the second or third tier of supply chains, often prioritizing cost reduction over essential processes that ensure quality, such as managing defects and inventories This focus on cutting costs leads to a neglect of investments in human and physical capital, hindering their development into professional producers Consequently, subcontractors typically engage minimally in knowledge creation, adhering only to the technical specifications set by contractors They mainly concentrate on enhancing manufacturing processes to maximize profits, although this issue does not affect all industries, particularly those focused on export-oriented products.

J.Teece(2007)op.cit. whichallowforeigncontractorscollaboratingwithlocalsubcontractors.Asar e s u l t , f o r e i g n c o n t r a c t o r s ha v e theincentivetotransfertheknow- howa n d technologya n d subcontractorshaveopportunitiestoimprovetheirskill s( B i n h &L i n h , 2 01 1) I n add it io n, t h e sp i l l o v e r e f f e c t s a n d th e d i f f us i o n o f technologyfromforeign-investedsectoralsohavepositiveaffecton thelocalsubcontractors.Asaresult,thesubcontractorintheforeign- investedsectorismorelikelytoinnovativethanthecounterpartsinthepurelydo mesticsector.H o w e v e r , Thangavelu(2016) provesthatthespillovereffectproductivityandtechnologyofmultinationalcorporat ions(MNCs)ismoreeffectivethanothero n e s bythetechnicalassistanceandem ployeeturnover.Thereareexistenceo fd i f f i c u l t i e s f r o m l o c a l c u l t u r e s , k n o w l e d g e g a p s , t e c h n i c a l infrastructurethathindertheknowledget ransferfromthecontractortothesubcontractor.T h e r e fo r e , theabsor ptivecapacity ofthe subcontractor isveryimportanttoassimilatetechnolo gyfromforeigncontractors.

Fort h o s e r e a s o n s , b a s e d o n t h e o r i e s a s m e n t i o n e d a b o v e t h e t h e s i s focusest h e s u b c o n t r a c t i n g activitiest o b u i l d a n a n a l y t i c a l f r a m e w o r k t o examineho wsu bco nt ra ct in ga c t i v i t i e s a f f e c t t h e in no va ti ven esso f t h e subcontractor.Besidetheapp roachedmaintheories,thethesisalsoexaminesthedeterminantfactorsthatinflue ncetheinnovativenessofafirm.

Number of subcontracts Total revenue from subcontracts Subcontracts with foreign-invested enterprises

Quality Management Professional employees Training existing workers Education of Entrepreneur

Size of firm Investment Sales Location Wage Networks Industries

Vietnamese small and medium-sized enterprises (SMEs) are primarily characterized by their specialization, with approximately 11% producing two or more types of products Enterprises located in industrial zones exhibit a higher rate of specialization that tends to increase with the scale of the business The development of new products is rapidly rising, while improvements to existing products are declining In 2015, 42.8% of surveyed enterprises reported engaging in at least one form of innovation The primary motivation for these innovations is to respond to competitive pressures, with a significant focus on introducing new products and enhancing existing ones However, activities aimed at innovating new processes or introducing new technologies remain minimal.

Thet a b l e 5 s h o w t h e numbero f e n t e r p r i s e s h a s t h e r e l a t i o n s h i p w i t h f o r eig n - i n v est e n t e r p r i s e s a c c o u n t s f o r 1 0 p e r c e n t o f sample.T h e r a t e s o f innovationseem notdifferentfromthesampleofsubcontractors.However,t h e r e isnoticeablerate t h a t is the rateof i n t r o d u c e newtechnologyorn ewprocessishighersignificantlythanthesample.

Mosto f p a p e r s studyt h e i n n o v a t i o n byt w o maint y p e s p r o d u c t a n d processinnovations,suchasBocquet(2008,2011),EIM(2004),Wei ò(2003),Martinez-

Ros(2000),BosmaandWit(2004).TheresearchofWeiò( 2 0 0 3 ) s h o w s t h a t t h e f i r m w i l l i n n o v a t e i f t h e p r o d u c t s h a v e l o w l e v e l ofdifferenti ationtoadaptthefiecercompetitionundertheconditionthatinnovative costislow.In contrast,atthelowcompetitivelevelfirmwillhavet h e t e n d e n c y t o i m p r o v e t h e e f f i c i e n c y byd o i n g p r o c e s s i n n o v a t i o n T h e empiticalstu dyo f Martinez-

The study measures innovation as an output rather than inputs or impacts, using nominal data collected from a survey Innovation is categorized into three types, with a variable value of 1 assigned if a subcontractor engages in any of these innovations, and 0 otherwise Although the innovations are classified into three categories, they primarily fall under two main types: product and process innovation The relationship between these two types remains ambiguous, with some scholars suggesting a close connection while others disagree This thesis focuses solely on the innovative capabilities of subcontractors without analyzing the effects of subcontracting agreements on specific innovations In essence, a subcontractor is considered innovative if it has undertaken any of the three innovation types, which include introducing new products, improving existing products, or implementing new processes or technologies at the time of the survey Thus, the innovation variable (INNO) is a dichotomous variable, taking a value of 1 for firms that engage in these activities and 0 otherwise.

Followingtheanalyticalframeworkasmentionedabove,themethodtosub contractorsapproachinginnovativenessisbytwodirections:basedonthetransacti oncosttheoryandknowledge-creationcapabilities.

According to transaction cost theory, subcontractors can be categorized into two types: traditional subcontractors and those considered suppliers or partners Traditional subcontractors primarily focus on cost reduction and engage solely with domestic contractors In contrast, the second category of subcontractors collaborates with foreign-invested companies, emphasizing their role as partners Key variables defining this group include the number of subcontracting agreements (SUBCONTRACTS), revenue generated from these agreements (SUBCONTRACTS_REVENUE), and the relationships established with foreign-invested companies (SUBCONTRACTS_FOREIGN).

(2002),thefirmthatcollaborateswithnumerouscustomersismorelikelytod ev e lo p i n n o v a t i o n T h a t meanst h e firmc a n e x p l o i t m o r e l e a r n i n g opportunitiesfromtheircustomers(Bocquet,2011).Baseonthis view,itisexpectedt h a t t h e n u m b e r o f c o n t r a c t s i s a positiver e l a t i o n s h i p w i t h innovation.

According to the knowledge-based theory, a firm's innovativeness enhances its absorptive capacities and knowledge creation processes, with quality management (QUAL_INT) serving as a vital organizational routine To develop the absorptive capacities of both the firm and its individuals, the background of the staff, particularly their skills, is essential Employees must possess adequate education to effectively evaluate external information and knowledge, assimilate it, and apply it to commercial outcomes Research consistently demonstrates that qualified employees are key drivers of innovation (Umidjon, Shuhua, Jayathilake, & Renyan, 2014) Additionally, training (TRAINING) is crucial for bridging knowledge gaps within the workforce and boosting the firm's absorptive capacities.

Inaddition,theeducationaldegreeofentrepreneurs(ENTREPR_EDU)isatypeoffirm’scapability.Itisexpectedthatthehigheducationaldegreeof

53 entrepreneurallows she/he havethe abilitytoevaluate andgive the importantd e c i s i o n toinnovation.Moreover,itissaidthateducationbackgro undoftheentrepreneuri s veryi m p o r t a n t t o c o g n i t i v e c a p a b i l i t i e s o f i n n o v a t i o n o f a firm.Nonakaelal.

In 2008, it was suggested that a leader's primary role is to establish a future vision for the organization Entrepreneurs, who manage various daily tasks, must possess a range of educational qualifications and skills to effectively address challenges Consequently, highly educated entrepreneurs are expected to invest significantly in research and development, while also strategizing to navigate risks and opportunities Additionally, education plays a crucial role in shaping the tacit knowledge essential for fostering innovation within an organization This tacit knowledge enables leaders to utilize 'know-how' and 'know-who' in their executive roles, driving the knowledge-creation process within the organization.

Assistancenetworksinthisthesisplaytheroleassourcesofknowledgeo f t h e s u b c o n t r a c t o r s T h i s a s s i s t s s u b c o n t r a c t o r s a p p r o a c h t h e o u t s i d e information andresourcestoenrich theinternalsources(Bocquet, 2011).Thepopulars o u r c e s t h a t t h e s u b c o n t r a c t o r s veryo f t e n a p p r o a c h t o a s s i s t themselvesarebusinesspeopleinthesamesector(ASSIS T_SAME),banks( A S S I S T _ B A N K ) , andlocalgovernment(ASSIS T_LGOV).Duetotheconstraintso f Smalla n d medium- sizede n t e r p r i s e s , t h e s e s o u r c e s a r e n e c e s s a r y tocomplementinfo rmationorknowledgeforthesubcontractor.

,Williamson( 1 9 8 9 ) s u g g e s t s t h a t t h e p h y s i c a l a s s e t t h a t r e q u i r e d p r o d u c i n g th e s p e c i a l i z e d p a r t s orc o m p o n e n t s i s asp h y s i c a l a s s e t s p e c i f i c i t y T e e c e (19 96 )claimsthattodevelopthenewproductsfi

54 rmhavetoinvestinassetsand/ornon- redeploytheexistingassets.Hesuggeststhesourcesthatfinancet h e newpro ductdevelopmentprogramsandinnovationareinternalfreecash flowa n d e q u i t y ( T e e c e D J , 1 9 9 4 ) O n t h e o t h e r h a n d , t h e i n v e s t m e n t i n equipmentisalsotheresultofresearchanddevelopmentactivitiesorlearningr ou ti nes inthefirm.Basedontheseviews,equipmentinvestment(INVEST _EQ)andsales(SALES)arethefactorsaffectinnovation.

Firmsize(FIRM_SIZE):Thetransactioncosttheorystatesthatthesizeo f t hefirmisdependedontheefficientdegreeoforganizationorofanopenmarket.

Transaction cost theory differentiates between the efficiency of a firm and the marginal cost of additional transactions, highlighting the firm's size as a key characteristic of these transactions (Coase, 1937) This theory suggests that the size of a firm influences its operational efficiency, although it lacks a clear explanation for this relationship Many researchers argue that firm size is a predictor of innovativeness, with some studies indicating that larger firms may positively impact innovation due to their access to greater capital resources.

Baber&Alegre,2007;RogersM ,2 0 0 4 ) I n a n o t h e r view,i t i s i n d i c a t e d thatsmallerf i r m s h a v e h i g h incentivestoinnovatebyvirtueoftheirf lexibilities(RogersM.,2004).Thef i r m i s measuredbym a n y ways,t h e mostme asurementi s t h e numbero f workerss u c h a s t o t a l w o r k f o r c e , s u c h a s R o g e r s M

( 2 0 0 4 ) ; B e l e n z o n a n d P a t a c c o n i (2008),anotherbytotalsales.Follo winguppreviousstudies,thes i z e variableismeasuredbythenumberofemp loyeesoftheindividualfirm.Meanwage:Averagew a g e oftheinnovativefirms are higherthanthenon- innovativef i r m s F o r i n n o v a t i v e f i r m s , i t r e q u i r e s t h e h i g h - q u a l i f i e d s t a f f s andhighqualityofhumanresourcestomeettheinnova tiveneeds.Wakelin

( 1 9 9 8 ) s u g g e s t s t h a t meanw a g e h a s thep o s i t i v e r e l a t i o n withh umancapital.Aghionetal.

No Independentvariables Description Measurement Unit Acronyminstata Expec tedsig n

Numberofsubcontractsin2 0 1 4 Thatmeansif thenumber ofsubcontractsisp o s i t i v e with thenumberofrelationshipbetwe enfirm andcustomers.

Subcontractsofforeign- investedenterprises.Itisexpecte dthattherelationshipwithforeig n-investedenterpriseswill beassistedabouttechnologytran sferorknow- howhigherthandomesticfirms

4 Qualitymanagement Firmhaveaninternationallyrecog nizedqualitycertification Absolutenumberofcertificates offirm Credit QUAL_IN +

No Independentvariables Description Measurement Unit Acronyminstata

6 Training Firmn o r m a l l y traint h e i r exi sting workers( m o r e t h a n 5 0%)

Dummy:= 1 ifDegreeofu n i v e r s i t y orhig herandhigher=1;0:Otherwise

Locationofcustomerin2014of themostimportantproducts(i n t ermofvalue) insamecommune

Percentage customerin2 01 4 of the mostimportantproducts

Totalsaleo f t h e firmi n 2014 i n termo f a b s o l u t e numb er

12 Meanwage Averagemonthlywagefor aproductionworkerin 2014 Expendituresonaveragem o n t h l y wageasabsolute

No Independentvariables Description Measurement Unit Acronyminstata

13 Meanwagesquare Squareaveragemonthlywagef o r aproductionworkerin2015 Expendituresonaveragem o n t h l y wageasabsolutenumber ( intermofsquare)

Numberoftimesfirmcontacted assistin 2014relatedto business peopleinthesamesectorasabs oluten um be r times NETWK_SAME +

Numberoftimesfirmcontacted assistin 2014relatedto bankofficialsasabsolutenumb er times NETWK_BANK +/-

2014relatedtopoliticiansandc ivilservantsasabsoluten u m b e r times NETWK_LGOV -

17 Metalindustry Firmoperatingin fabricatedmetalproducts Dummy:1,Metalindustry,0oth erwise METAL +

18 Wood industry Firmoperatingin woodproducts Dummy:1,Woodindustry,0 otherwise WOOD -

Subcontractorsw i l l d e c i d e t o i n n o v a t e i f t h e y r e a l i z e t h a t ther e t u r n s theycangetexceedthecosttheysuffer.Inthiscase,theycanenjoyprofits.

Amongthem,innovatorcanearnmoreprofitsthanthefirmcannotdo therefore,ex p e c t e d p r o f i t s o f a firmi w i t hi n n o v a t i o n (Π 𝐼 )m u s t b e higher thanwithoutinnovation(Π 𝑁 ),thatis:

4 3 p e r centofsubcontractorsinnovate insurvey period.Itmeansthatth eytakeatl ea s t o n e typeo f i n n o v a t i o n : p r o d u c t i n n o v a t i o n o r p r o c e s s i n n o v a t i o n , o r improvedexistingproduct.Becausetheinnovationtakesthev aluesofzeroor onetherefore,thisthesisusestheprobitmodeltoestimatingtheprobabilityt oinnovate.

Thiss t u d y a i m e d t o f i n d o u t t h e subcontractinga c t i v i t i e s a n d contractor’sknowledgeabilitiesmayaffectinnovation.Thus,subcontractin gactivitiesandcontractor’sknowledgeabilities are asmainexplanator yv a r i a b l e s toexplaininnovativecapabilitiesofthefirm.

Besides,thedifferencesbetweensectorsandlocationsareattributedt oincentivesandpreferencesgivenbyattractivepoliciesoflocalgovernmentsa n d specialfeaturesofeachsector.Forinstance,somehighlabor- intensitiveindustriesasw o o d a r e l e s s i n n o v a t i v e t h a n t h e f a b r i c a t e d metali n d u s t r i e s since thefabricatedmetalindustryhastofollow the customer’sblueprintandcomplicatedspecifications,theenterprisethusinvest smoreinmachinesandhumancapital.

+𝛽 3𝑖 SUB_FOREIGN 𝑖 +𝛽 4𝑖 QUAL_INT 𝑖 + 𝛽 5𝑖 SKILLED 𝑖 + 𝛽 6𝑖 TRAINING 𝑖 +𝛽 7𝑖 ENTREPR_EDU 𝑖 +𝛽 8𝑖 𝐼 𝑉𝐸� ��_𝐸𝑄 𝑖

+𝛽 9𝑖 FIRM_SIZE 𝑖 +𝛽 10𝑖 SALES 𝑖 + 𝛽 11𝑖 MEANWAGE 𝑖 +𝛽 12𝑖 MEANWAGE_SQ 𝑖 +𝛽 13𝑖 ASSET_LOCA 𝑖

Thed e p e n d e n t v a r i a b l e i n t h i s t h e s i s i s t h e c a t e g o r y v a r i a b l e t h a t meansittakesvalue of1and0.In fact,itcanbechosene it he r L O G I T orP R O B I T modeltoregressbecauseofthesimilarresults.Acco rdingtoG u j a r a t i (2011),thetailofthelogisticdistributionisfatterthantheprobit’s it meansthattheconditionalprobabilityof𝜋𝑖approaches0and1attheh i g h e r ratei n p r o b i t M o r e v e r , i n t h e p r o b i t modelt h e p r o b a b i l i t y d i s t r i b u t i o n i s nomala n d t h e p a r a m e t e r s a r e o f t e n e s t i m a t e d byt h e m a x i m u m l i k e l i h o o d method.Thus,thisthesisappliesthePROBITmodeltoestimatetheeffect ofsubcontractingactivitiesandcontractor’sknowledgeabilitiesoninnovation.

Similartomanyotherstudies,duetothedependentvariabletakevalueo f onea ndzero,thisthesisareusingthePROBITmodeltorunregression.T hesoft wareundertakestheregressionisSTATAversion13.0.

Variable Obs Mean Std.Dev Min Max

T h e t a b l e illustratesa l m o s t r e s u l t s a r e s t a t i s t i c a l l y s i g n i f i c a n t a t 1 0 % , 5 % , a n d 1 % exceptfortheINVEST_EQ,ASSIST_BANK,andW OOD.

Thenumberofobservationsofthismodelis72meansthattheresomemis singobservationsofseveralindependentvariables.Theprobabilityofchi- s q u a r e iszeromeansthatallparametersinthemodelaredifferentfromzero.T h e

P s e u d o R 2 = 0 6 0 9 4 ( 6 0 9 4 % ) meansthatt h e a p p r o p r i a t e d e g r e e o f vari abl es inthemodelisrelativelyhigh.

The regression analysis reveals that in the first group, variables related to subcontracting agreements, subcontractors, and subcontract revenue are statistically significant at 5% and 1% However, the findings indicate an unexpected adverse impact of subcontracting activities on innovation This aligns with transaction cost theory, suggesting that subcontractors of domestic enterprises rely on traditional relationships and do not engage in innovation-related activities Consequently, subcontracting efforts primarily focus on essential requirements set by the contractor, such as cost reduction, just-in-time delivery, and quality Additionally, the high costs and time demands associated with innovation may deter subcontractors from pursuing innovative practices within this relationship.

Theinfluenceofsubcontractingactivitiesontheinnovation etheirp r o d u c t i v i t y byreducing i n e f f i c i e n c i e s , a n d / o r r ec r u i t i n g e m p l o y e e s o f foreign-investedcompanies,and/ orimitatingthetechnologyf r o m f o r e i g n - investedcompanies(Marcin,2007;Thangavelu,2016).Inthe other hand,thep r o d u c t s thatproducedinthiscasealmostsupplyforothersubcontra ctorsasintermediatep r o d u c t s o r onlyford o m e s t i c marketw he r e t h e p r o d u c t s p e c i f i c a t i o n s a r e l o w e r t h a n t h e i n t e r n a t i o n a l markets.

The relationship between subcontractors and foreign contractors, based on subcontracting agreements, significantly enhances productivity and innovation among subcontractors compared to those working with domestic contractors At a 5% significance level, it appears that foreign contractors have successfully transferred knowledge, leading to increased efficiency among subcontractors This interaction fosters a positive productivity effect on domestic subcontractors within the same sector, driven by skilled labor turnover and knowledge dispersion.

&Pham,2010;Kumar&Subrahmanya,2011;T h a n g a v e l u , 2 0 1 6 ) T h e e m p i r i c a l r e s u l t s ofC h e n a n d D é m u r g e r ( 2 0 0 2 ) showt h a t t h e p r o d u c t i v i t y of t h e s u b c o n t r a c t o r s t h a t a r e d o m i n a t e d byt h e foreign- investedenterprisesishigherthanitscounterpartsthathavether e l a t i o n s h i p wi ththedomesticcontractor.Inthiscase,thesubcontractorsareseenassuppliersor partnersratherthantraditionalsubcontractors.

Subcontractors operating in sectors dominated by foreign-invested enterprises or producing high-precision products must possess skilled workers and utilize technology-based production processes This necessitates that subcontractors have relevant knowledge and experience to engage in close interactions with their contractors In turn, contractors support their subcontractors by transferring technology and knowledge, as well as providing technical and managerial training.

Quality certification (QUALI_INT) exhibits a statistically significant but adverse impact on innovation, particularly in product innovation, as highlighted in Bocquet's studies (2008, 2011) While quality management practices negatively affect product innovation, they show a positive relationship with process innovation This suggests that quality certification primarily reflects a subcontractor's commitment to a contractor rather than enhancing the innovative process Furthermore, if subcontractors invest all their resources into obtaining certification, it can lead to a lack of incentive for innovation Consequently, subcontractors often engage in hierarchical relationships, focusing on maintaining quality, cost, and delivery goals by adhering to technical standards and specifications, rather than enhancing their innovative capabilities.

Variables and measurement

Vietnamese small and medium-sized enterprises (SMEs) are primarily characterized by specialization, with approximately 11% producing two or more types of products Enterprises located in industrial zones exhibit a higher rate of specialization, which tends to increase with the scale of the business The development of new products is rapidly accelerating, while improvements to existing products are on the decline In 2015, 42.8% of the surveyed enterprises reported engaging in at least one form of innovation The primary motivation for innovation among these enterprises is to address competitive pressure, with a significant focus on introducing new products and enhancing existing ones However, activities related to innovating new processes or introducing new technology remain minimal.

Thet a b l e 5 s h o w t h e numbero f e n t e r p r i s e s h a s t h e r e l a t i o n s h i p w i t h f o r eig n - i n v est e n t e r p r i s e s a c c o u n t s f o r 1 0 p e r c e n t o f sample.T h e r a t e s o f innovationseem notdifferentfromthesampleofsubcontractors.However,t h e r e isnoticeablerate t h a t is the rateof i n t r o d u c e newtechnologyorn ewprocessishighersignificantlythanthesample.

Mosto f p a p e r s studyt h e i n n o v a t i o n byt w o maint y p e s p r o d u c t a n d processinnovations,suchasBocquet(2008,2011),EIM(2004),Wei ò(2003),Martinez-

Ros(2000),BosmaandWit(2004).TheresearchofWeiò( 2 0 0 3 ) s h o w s t h a t t h e f i r m w i l l i n n o v a t e i f t h e p r o d u c t s h a v e l o w l e v e l ofdifferenti ationtoadaptthefiecercompetitionundertheconditionthatinnovative costislow.In contrast,atthelowcompetitivelevelfirmwillhavet h e t e n d e n c y t o i m p r o v e t h e e f f i c i e n c y byd o i n g p r o c e s s i n n o v a t i o n T h e empiticalstu dyo f Martinez-

The thesis measures innovation primarily as an output rather than inputs or impacts, utilizing nominal data collected through surveys The innovation variable is assigned a value of 1 if a subcontractor engages in any of three categories of innovation—new product introduction, existing product improvement, or new process/technology implementation—and 0 otherwise Although the innovations are categorized into three types, they primarily fall under two main categories: product and process innovation The relationship between these two types remains ambiguous, with some scholars suggesting a close connection while others dispute this For the purpose of this study, the focus is solely on the subcontractor's innovative capacity, without examining the effects of subcontracting agreements on specific innovations Thus, a subcontractor is considered innovative if it undertakes any of the identified types of innovation during the survey period.

Followingtheanalyticalframeworkasmentionedabove,themethodtosub contractorsapproachinginnovativenessisbytwodirections:basedonthetransacti oncosttheoryandknowledge-creationcapabilities.

According to transaction cost theory, subcontractors can be classified into two main categories Traditional subcontractors primarily focus on cost reduction and typically engage in contracts with domestic contractors In contrast, another category of subcontractors acts as suppliers or partners to contractors, primarily serving foreign-invested companies Key metrics for this group include the number of subcontracting agreements (SUBCONTRACTS), revenue generated from these agreements (SUBCONTRACTS_REVENUE), and the relationships maintained with foreign-invested companies (SUBCONTRACTS_FOREIGN).

(2002),thefirmthatcollaborateswithnumerouscustomersismorelikelytod ev e lo p i n n o v a t i o n T h a t meanst h e firmc a n e x p l o i t m o r e l e a r n i n g opportunitiesfromtheircustomers(Bocquet,2011).Baseonthis view,itisexpectedt h a t t h e n u m b e r o f c o n t r a c t s i s a positiver e l a t i o n s h i p w i t h innovation.

According to knowledge-based theory, a firm's innovativeness fosters its absorptive capacities and knowledge creation processes, with quality management (QUAL_INT) being a key organizational routine To enhance these absorptive capacities, it is essential that staff possess adequate education and skills, enabling them to evaluate, assimilate, and apply external information and knowledge to commercial outcomes Research consistently indicates that qualified employees are vital drivers of innovation (Umidjon, Shuhua, Jayathilake, & Renyan, 2014) Additionally, training (TRAINING) plays a crucial role in bridging knowledge gaps within the workforce and improving the firm's absorptive capacities.

Inaddition,theeducationaldegreeofentrepreneurs(ENTREPR_EDU)isatypeoffirm’scapability.Itisexpectedthatthehigheducationaldegreeof

53 entrepreneurallows she/he havethe abilitytoevaluate andgive the importantd e c i s i o n toinnovation.Moreover,itissaidthateducationbackgro undoftheentrepreneuri s veryi m p o r t a n t t o c o g n i t i v e c a p a b i l i t i e s o f i n n o v a t i o n o f a firm.Nonakaelal.

In 2008, it was suggested that a leader's primary role is to create a future vision for the organization Entrepreneurs, who manage numerous daily tasks, must possess various skills and educational backgrounds to effectively address challenges Consequently, highly educated entrepreneurs are expected to invest significantly in research and development, as well as strategize to navigate risks and seize opportunities Education is a crucial resource for shaping the tacit knowledge that is vital for fostering innovation within an organization This tacit knowledge enables leaders to leverage 'know-how' and 'know-who' in their executive roles, driving the knowledge-creation process within the organization.

Assistancenetworksinthisthesisplaytheroleassourcesofknowledgeo f t h e s u b c o n t r a c t o r s T h i s a s s i s t s s u b c o n t r a c t o r s a p p r o a c h t h e o u t s i d e information andresourcestoenrich theinternalsources(Bocquet, 2011).Thepopulars o u r c e s t h a t t h e s u b c o n t r a c t o r s veryo f t e n a p p r o a c h t o a s s i s t themselvesarebusinesspeopleinthesamesector(ASSIS T_SAME),banks( A S S I S T _ B A N K ) , andlocalgovernment(ASSIS T_LGOV).Duetotheconstraintso f Smalla n d medium- sizede n t e r p r i s e s , t h e s e s o u r c e s a r e n e c e s s a r y tocomplementinfo rmationorknowledgeforthesubcontractor.

,Williamson( 1 9 8 9 ) s u g g e s t s t h a t t h e p h y s i c a l a s s e t t h a t r e q u i r e d p r o d u c i n g th e s p e c i a l i z e d p a r t s orc o m p o n e n t s i s asp h y s i c a l a s s e t s p e c i f i c i t y T e e c e (19 96 )claimsthattodevelopthenewproductsfi

54 rmhavetoinvestinassetsand/ornon- redeploytheexistingassets.Hesuggeststhesourcesthatfinancet h e newpro ductdevelopmentprogramsandinnovationareinternalfreecash flowa n d e q u i t y ( T e e c e D J , 1 9 9 4 ) O n t h e o t h e r h a n d , t h e i n v e s t m e n t i n equipmentisalsotheresultofresearchanddevelopmentactivitiesorlearningr ou ti nes inthefirm.Basedontheseviews,equipmentinvestment(INVEST _EQ)andsales(SALES)arethefactorsaffectinnovation.

Firmsize(FIRM_SIZE):Thetransactioncosttheorystatesthatthesizeo f t hefirmisdependedontheefficientdegreeoforganizationorofanopenmarket.

Efficiency differs from the marginal cost of additional transactions for a firm and the cost of those transactions in the open market (Coase, 1937) Transaction cost theory views the size of the firm as a characteristic of transactions and lacks a clear explanation for the firm's size Many researchers suggest that firm size is a predictor of innovativeness, with some studies indicating that larger firms may positively influence innovation due to their greater capital resources.

Baber&Alegre,2007;RogersM ,2 0 0 4 ) I n a n o t h e r view,i t i s i n d i c a t e d thatsmallerf i r m s h a v e h i g h incentivestoinnovatebyvirtueoftheirf lexibilities(RogersM.,2004).Thef i r m i s measuredbym a n y ways,t h e mostme asurementi s t h e numbero f workerss u c h a s t o t a l w o r k f o r c e , s u c h a s R o g e r s M

( 2 0 0 4 ) ; B e l e n z o n a n d P a t a c c o n i (2008),anotherbytotalsales.Follo winguppreviousstudies,thes i z e variableismeasuredbythenumberofemp loyeesoftheindividualfirm.Meanwage:Averagew a g e oftheinnovativefirms are higherthanthenon- innovativef i r m s F o r i n n o v a t i v e f i r m s , i t r e q u i r e s t h e h i g h - q u a l i f i e d s t a f f s andhighqualityofhumanresourcestomeettheinnova tiveneeds.Wakelin

( 1 9 9 8 ) s u g g e s t s t h a t meanw a g e h a s thep o s i t i v e r e l a t i o n withh umancapital.Aghionetal.

No Independentvariables Description Measurement Unit Acronyminstata Expec tedsig n

Numberofsubcontractsin2 0 1 4 Thatmeansif thenumber ofsubcontractsisp o s i t i v e with thenumberofrelationshipbetwe enfirm andcustomers.

Subcontractsofforeign- investedenterprises.Itisexpecte dthattherelationshipwithforeig n-investedenterpriseswill beassistedabouttechnologytran sferorknow- howhigherthandomesticfirms

4 Qualitymanagement Firmhaveaninternationallyrecog nizedqualitycertification Absolutenumberofcertificates offirm Credit QUAL_IN +

No Independentvariables Description Measurement Unit Acronyminstata

6 Training Firmn o r m a l l y traint h e i r exi sting workers( m o r e t h a n 5 0%)

Dummy:= 1 ifDegreeofu n i v e r s i t y orhig herandhigher=1;0:Otherwise

Locationofcustomerin2014of themostimportantproducts(i n t ermofvalue) insamecommune

Percentage customerin2 01 4 of the mostimportantproducts

Totalsaleo f t h e firmi n 2014 i n termo f a b s o l u t e numb er

12 Meanwage Averagemonthlywagefor aproductionworkerin 2014 Expendituresonaveragem o n t h l y wageasabsolute

No Independentvariables Description Measurement Unit Acronyminstata

13 Meanwagesquare Squareaveragemonthlywagef o r aproductionworkerin2015 Expendituresonaveragem o n t h l y wageasabsolutenumber ( intermofsquare)

Numberoftimesfirmcontacted assistin 2014relatedto business peopleinthesamesectorasabs oluten um be r times NETWK_SAME +

Numberoftimesfirmcontacted assistin 2014relatedto bankofficialsasabsolutenumb er times NETWK_BANK +/-

2014relatedtopoliticiansandc ivilservantsasabsoluten u m b e r times NETWK_LGOV -

17 Metalindustry Firmoperatingin fabricatedmetalproducts Dummy:1,Metalindustry,0oth erwise METAL +

18 Wood industry Firmoperatingin woodproducts Dummy:1,Woodindustry,0 otherwise WOOD -

Analyticalmethod

Subcontractorsw i l l d e c i d e t o i n n o v a t e i f t h e y r e a l i z e t h a t ther e t u r n s theycangetexceedthecosttheysuffer.Inthiscase,theycanenjoyprofits.

Amongthem,innovatorcanearnmoreprofitsthanthefirmcannotdo therefore,ex p e c t e d p r o f i t s o f a firmi w i t hi n n o v a t i o n (Π 𝐼 )m u s t b e higher thanwithoutinnovation(Π 𝑁 ),thatis:

4 3 p e r centofsubcontractorsinnovate insurvey period.Itmeansthatth eytakeatl ea s t o n e typeo f i n n o v a t i o n : p r o d u c t i n n o v a t i o n o r p r o c e s s i n n o v a t i o n , o r improvedexistingproduct.Becausetheinnovationtakesthev aluesofzeroor onetherefore,thisthesisusestheprobitmodeltoestimatingtheprobabilityt oinnovate.

Thiss t u d y a i m e d t o f i n d o u t t h e subcontractinga c t i v i t i e s a n d contractor’sknowledgeabilitiesmayaffectinnovation.Thus,subcontractin gactivitiesandcontractor’sknowledgeabilities are asmainexplanator yv a r i a b l e s toexplaininnovativecapabilitiesofthefirm.

Besides,thedifferencesbetweensectorsandlocationsareattributedt oincentivesandpreferencesgivenbyattractivepoliciesoflocalgovernmentsa n d specialfeaturesofeachsector.Forinstance,somehighlabor- intensitiveindustriesasw o o d a r e l e s s i n n o v a t i v e t h a n t h e f a b r i c a t e d metali n d u s t r i e s since thefabricatedmetalindustryhastofollow the customer’sblueprintandcomplicatedspecifications,theenterprisethusinvest smoreinmachinesandhumancapital.

+𝛽 3𝑖 SUB_FOREIGN 𝑖 +𝛽 4𝑖 QUAL_INT 𝑖 + 𝛽 5𝑖 SKILLED 𝑖 + 𝛽 6𝑖 TRAINING 𝑖 +𝛽 7𝑖 ENTREPR_EDU 𝑖 +𝛽 8𝑖 𝐼 𝑉𝐸� ��_𝐸𝑄 𝑖

+𝛽 9𝑖 FIRM_SIZE 𝑖 +𝛽 10𝑖 SALES 𝑖 + 𝛽 11𝑖 MEANWAGE 𝑖 +𝛽 12𝑖 MEANWAGE_SQ 𝑖 +𝛽 13𝑖 ASSET_LOCA 𝑖

Thed e p e n d e n t v a r i a b l e i n t h i s t h e s i s i s t h e c a t e g o r y v a r i a b l e t h a t meansittakesvalue of1and0.In fact,itcanbechosene it he r L O G I T orP R O B I T modeltoregressbecauseofthesimilarresults.Acco rdingtoG u j a r a t i (2011),thetailofthelogisticdistributionisfatterthantheprobit’s it meansthattheconditionalprobabilityof𝜋𝑖approaches0and1attheh i g h e r ratei n p r o b i t M o r e v e r , i n t h e p r o b i t modelt h e p r o b a b i l i t y d i s t r i b u t i o n i s nomala n d t h e p a r a m e t e r s a r e o f t e n e s t i m a t e d byt h e m a x i m u m l i k e l i h o o d method.Thus,thisthesisappliesthePROBITmodeltoestimatetheeffect ofsubcontractingactivitiesandcontractor’sknowledgeabilitiesoninnovation.

Similartomanyotherstudies,duetothedependentvariabletakevalueo f onea ndzero,thisthesisareusingthePROBITmodeltorunregression.T hesoft wareundertakestheregressionisSTATAversion13.0.

Descriptive statistics

Variable Obs Mean Std.Dev Min Max

RegressionResults

Resultsinterpretation

T h e t a b l e illustratesa l m o s t r e s u l t s a r e s t a t i s t i c a l l y s i g n i f i c a n t a t 1 0 % , 5 % , a n d 1 % exceptfortheINVEST_EQ,ASSIST_BANK,andW OOD.

Thenumberofobservationsofthismodelis72meansthattheresomemis singobservationsofseveralindependentvariables.Theprobabilityofchi- s q u a r e iszeromeansthatallparametersinthemodelaredifferentfromzero.T h e

P s e u d o R 2 = 0 6 0 9 4 ( 6 0 9 4 % ) meansthatt h e a p p r o p r i a t e d e g r e e o f vari abl es inthemodelisrelativelyhigh.

The regression results indicate that in the first group, subcontracting agreements, SUB_CONTRACTS, and SUB_REVENUE variables are statistically significant at 5% and 1% However, the findings reveal an unexpected adverse impact of subcontracting activities on innovation This aligns with transaction cost theory, suggesting that subcontractors of domestic-owned enterprises rely on traditional relationships and do not engage in innovative activities Consequently, the subcontracting efforts of both subcontractors and domestic contractors primarily focus on essential requirements set by the contractor, such as cost reduction, just-in-time delivery, and quality Furthermore, the high costs and time demands associated with innovation may lead subcontractors to prioritize these immediate operational needs over innovative endeavors.

Theinfluenceofsubcontractingactivitiesontheinnovation etheirp r o d u c t i v i t y byreducing i n e f f i c i e n c i e s , a n d / o r r ec r u i t i n g e m p l o y e e s o f foreign-investedcompanies,and/ orimitatingthetechnologyf r o m f o r e i g n - investedcompanies(Marcin,2007;Thangavelu,2016).Inthe other hand,thep r o d u c t s thatproducedinthiscasealmostsupplyforothersubcontra ctorsasintermediatep r o d u c t s o r onlyford o m e s t i c marketw he r e t h e p r o d u c t s p e c i f i c a t i o n s a r e l o w e r t h a n t h e i n t e r n a t i o n a l markets.

The relationship between subcontractors and foreign contractors, as established through subcontracting agreements, significantly enhances productivity and innovation among subcontractors At a 5% significance level, it appears that foreign contractors have successfully transferred knowledge, leading to improved performance for subcontractors compared to those working with domestic contractors This interaction fosters a positive productivity effect within the domestic subcontracting sector, driven by skilled labor turnover and knowledge dispersion.

&Pham,2010;Kumar&Subrahmanya,2011;T h a n g a v e l u , 2 0 1 6 ) T h e e m p i r i c a l r e s u l t s ofC h e n a n d D é m u r g e r ( 2 0 0 2 ) showt h a t t h e p r o d u c t i v i t y of t h e s u b c o n t r a c t o r s t h a t a r e d o m i n a t e d byt h e foreign- investedenterprisesishigherthanitscounterpartsthathavether e l a t i o n s h i p wi ththedomesticcontractor.Inthiscase,thesubcontractorsareseenassuppliersor partnersratherthantraditionalsubcontractors.

Subcontractors operating in sectors dominated by foreign-invested enterprises or producing high-precision products must possess skilled workers and utilize technology-based production processes These requirements necessitate that subcontractors have relevant knowledge and experience to engage in close interactions with their contractors In return, contractors support their subcontractors by transferring technology and knowledge, as well as providing technical and managerial training.

Quality certification has a statistically significant but adverse impact on innovation, particularly in product development, as noted in Bocquet's studies (2008, 2011) While quality management practices negatively influence product innovation, they are positively associated with process innovation This suggests that quality certification primarily reflects a subcontractor's commitment to a contractor rather than enhancing the innovative process Additionally, if subcontractors focus their resources solely on obtaining certification, their innovation efforts lack motivation Consequently, subcontractors tend to engage in hierarchical relationships, prioritizing quality, cost, and delivery by adhering to technical standards and specifications rather than enhancing their innovative capabilities.

Skilled staff play a crucial role in enhancing innovation within organizations, as evidenced by research indicating that higher skill levels correlate positively with research and development (R&D) activities A study by Yang and Chen (2012) highlights that in Indonesian manufacturing firms, the ratio of skilled workers, particularly white-collar employees, significantly impacts R&D efforts The educational qualifications of employees contribute to the knowledge base of both individuals and firms, aligning with the knowledge-based theory that emphasizes the importance of qualified personnel in fostering innovation, not only in medium and large enterprises but also among small subcontractors Furthermore, Cohen and Levinthal (1990) assert that an individual's prior knowledge enhances their ability to assess and utilize external knowledge, transforming it into valuable insights for the organization.

8 See more(Avermaete&Morgan,2004) commercializedt h i s k n o w l e d g e i n t o t h e p r o d u c t s M o r e o v e r , b a s e d o n t h e vi ews’ofNonakaetal.

The background and expertise of staff play a crucial role in bridging the knowledge gap between top managers and workers, facilitating the transmission of codified information Small firms, constrained by resources, rely heavily on the knowledge available from skilled staff, which supports their capacity for unlimited innovation Educated staff are essential for the creation and dissemination of knowledge, serving as a foundation for innovation According to the SECI model by Nonaka (1995), middle-up-down managers act as a vital link between leaders and frontline workers, playing a key role in the knowledge creation process by connecting leaders’ visions with practical applications Ultimately, educated staff are fundamental to the SECI model, driving the organization's knowledge creation efforts.

TRAINING:T h e r e g r e s s i o n r e s u l t o fT R A I N I N G v a r i a b l eh a s t h e sign ifi cant levelof

Training activities of subcontractors significantly influence innovation, with Dyer and Nobeoka (2000) highlighting that subcontractors gain valuable knowledge through these programs The hands-on training in manufacturing environments not only enhances the skills of personnel but also contributes to building a robust knowledge base that directly impacts an organization’s absorptive capacity (Cohen & Levinthal, 1990; Dyer & Nobeoka, 2000) This absorptive capacity is crucial for fostering innovation within the organization Additionally, research by Bocquet (2008, 2011) emphasizes the notable effect of training on product innovation, although it appears to have a lesser impact on process innovation.

The variable ENTREP_EDU has a statistically significant negative impact on innovation, possibly because entrepreneurs are not directly involved in manufacturing, which fosters an innovative environment According to Nonaka (2008), the entrepreneur's role is to build a future vision, while the knowledge creation process is often managed by middle managers Additionally, due to their higher education and experience, entrepreneurs may exhibit risk-averse behavior in a highly competitive landscape As managers or owners, they face numerous daily challenges, with constraints such as finance, skilled labor, and managerial capabilities hindering their participation in innovation Despite receiving support from peers and local government, significant barriers remain, particularly in accessing bank loans for innovative activities, which may deter entrepreneurs from taking risks.

In short,fortheknowledge- basedapproach,theinnovationofsubcontractorseemstohavegeneratedfromthea bsorptivecapacitiesrathert h a n fromknowledge- creationprocessthatSECImodeldescribed.

* FIRM_SIZE:theFIRM_SIZEvariablehasthepositiveimpactonthein novationa t t h e s i g n i f i c a n t l e v e l o f 1 0 % T h a t meansi f t h e r a t e o f t o t a l employeeso f s u b c o n t r a c t o r i n c r e a s e s , t h e i n n o v a t i o n p r o b a b i l i t y w i l l t a k e p l a c e I t a l s o meanst h a t l a r g e r f i r m s a r e t a k e n i n t o a c c o u n t p o s s e s s moref i n a n c i a l resourcesandhumancapital(Pla-

Barber and Alegre (2007) highlight that larger firms tend to attract extensive knowledge and develop better absorptive capabilities compared to smaller firms, leading them to invest more in innovative activities (Rogers, 2004) Empirical research by Rogers (2004) utilizing probit regression demonstrates that firm size positively influences innovation in manufacturing firms Similarly, Yang and Chen (2012) apply the probit model to examine the relationship between R&D and firm size, revealing a positive correlation in Indonesian manufacturing firms Additionally, Harris and Moffat (2011) also confirm that firm size has a positive relationship with innovation.

The SALE variable has a statistically significant adverse influence on innovation at a 5% level, indicating that as subcontractor sales increase, the likelihood of innovation decreases Research shows a positive relationship between a firm's productivity, measured by sales per total employees, and innovation However, the regression model reveals that increased sales can lead to a decline in innovative efforts This may be due to subcontractors adhering to traditional agreements with strict specifications, limiting their ability to innovate Additionally, subcontractors may prioritize profit maximization by investing in existing technologies rather than engaging in innovative activities.

* MEANWAGEa n d M E A N W A G E _ S Q : T h er e s u l t s s h o w t h a t a t thesignificantlevelofless1%,theMEANWAGEandMEANWAGE _SQv ari ab le s havethehighstatisticallysignificant.Thisreflectstheresultsarei nlinew i t h e c o n o m i c t h e o r y I n t h e e m p i r i c a l s t u d y ofA g h i o n e t a l. (2017),theyusetheR&Dinvestmentasanindicatorofinnovativenesstoillus tratesthatthefirmthathasintensitiveinnovationpaythehigherwageonavera ge.

Becauseworkerswhoworkforinnovativefirmshavehighereducationa nds k i l l s t h a n t h e a v e r a g e l e v e l M o r e o v e r , a c c o r d i n g t o t h e t r a n s a c t i o n c o s t theory,payinghighaveragewagemeansincreasingthela borcost,thereforew h e n themarginalcostofinnovationishigher thantheinnovativecostoftheopenmarketthefirmwillmakethedecisionofpurc hasingratherthandoingin-house.

The ASSET_LOCA variable significantly influences innovation, demonstrating a positive impact at a statistical significance of 10% Many studies highlight that small subcontractors face challenges due to the long distances separating them from contractors While contractors typically operate in industrial zones near major transport routes, subcontractors often lack the resources to establish similar facilities This geographical co-location is crucial for subcontractors, as it enhances their ability to share knowledge and receive support from customers Additionally, subcontractors must meet just-in-time production demands, which can be problematic According to knowledge-based theory, increased interaction fosters greater knowledge creation, benefiting both contractors and subcontractors through risk-sharing and complementary resource combinations Moreover, transaction cost theory, as articulated by Williamson (1989), further underscores these dynamics.

70 ownthatt h e s i t e s p e c i f i c i t y w h e r e i s p l a c e d n e a r b y c u s t o m e r s h e l p i n g t h e m t o reducethe costsoftransportation andinventory.Therefore,thesubcontractor

*INVEST_EQ (EquipmentInvestment):Accordingtotheknowl edge- b a s e d view,thethesisassumedthattheinvestmentinequipmentisaresultoflearnin groutinesinthe organization.H o w e ve r , theregressionresultshows t h a t t heINVEST_EQisstatisticallyinsignificant.Itmaybethefactthatthesubcontr actori n v e s t e d i n e q u i p m e n t ino r d e r t o e x p l o i t t h e e c o n o m i e s o f scaleratherthanfocusontheinnovativeoutcomes.

Ther e s u l t s s h o w t h a t A S S I S T _ S A M E a n d A S S I S T _ L G O V v a r i a b l e s arestatistically significantattheless5%levelof si gn if ic an ce Thatmeanst h e a s s i s t a n c e ofbusinesspeopleinthesamesectoristhemostusefulbecausethei rknowledgeandexperiencescouldsupportthesubcontractortog e t informati onthatismuchmorenecessary Itmaybeofthefactthatth e internalresource sofVietnameseS m a l l andm e d i u m - s i z e d e n t e r p r i s e s a r e constraintthey,therefore,relylargelyupontheextern alknowledgenetworkst o b e r e c e i v e d t h e a s s i s t a n c e s ( R o g e r s M , 2 0

0 4 ) O n t h e o t h e r h a n d , t h e assistanceo f p o l i t i c i a n s a n d c i v i l s e r v a n t s , i n f a c t , s e e m n o t much.Theymaybehelpthefirmfindthegoodlocat ionorsupportthemtoparticipateint h e industrialfairsorothergeneralinform ation.Theassistanceofgovernmentforinnovationastheresultshowedbutn otmuchforthesubcontractorinSMEsector.T h e m a j o r i t y o f governmentf o r Smalla n d m e d i u m - s i z e d enterprisesvirtuallyf o c u s ontheassistanceprogramsbutt h o se p r o g r a m s d i d n o t meett h e e x p e c t a t i o n o f e n t e r p r i s e s 10 I n c o n t r a s t , A S S I S T _ B A N K v a r i a b l e i s n o t s t a t i s t i c a l l y s i g n i f i c a n t ; i t , i n a d d i t i o n , isn e g a t i v e r e l a t e d t o i n n o v a t i o n A c t u a l l y , t h e a

71 ssistanceo f t h e b a n k f o r thesubcontractorisnotmuchmentionedinstudies.Theli mited financeisoneofthebigproblemsofSmallandmedium- sizedenterprises,ingeneral,andofsubcontractor,inparticular.Especially,th eyseemtoeitherunderestimatethe

71 feasibilityoforoverestimatetheriskofthesubcontractor’sinnovativeproj ectsbecausetheir understandable abilityoftechnologyisinadequate toe v a l u a t e theprojectsorcomplicatedblueprintsofsubcontractors.Moreove r,investmentininnovationactivitiesis theventureinvestmentanditisdifficultt o capturethecostandefficiency.Further more,thebankalwaysrequiresthecollateralforabankloanthatthesmallfirmsd onothave.Inthisview,theb a n k i s u n w i l l i n g t o d i s b u r s e f o r i n n o v a t i o n d u e t o t h e r i s k o f i n n o v a t i o n ( R o g e r s M.,2004).

Subcontractors in the fabricated metal industry significantly influence innovation, with a statistically significant impact of 5% Previous research indicates that engineers from both subcontractors and contractors, who collaborate closely, are more adept at interpreting technical drawings (Nobeoka, Dyer, & Madhok, 2002) In certain sectors, manufacturers require high precision and specialization, prompting subcontractors to invest in advanced equipment and training to gain a competitive edge Additionally, the fabricated metal products sector demands more detailed and complex products, making subcontractors more inclined to innovate.

* WOOD:Incontrast,inthesectorofwoodproducts,thesubcontractorsalmost supplyw o o d p r o d u c t s w i t h s e v e r a l s i m p l y p r o c e s s i n g s t a g e s ( e g drying,anti- termitestages),orevendirectsupplytherawwoodenproductsf orotherp roducers.Therefore,inthissector,itisentailedunskillfulworkersan d s i m p l e equipment.Consequently, subcontractorsareunlikelytoinnovatebecause itistoocostly.

Conclusion

Theaimofthisthesisistoexaminetheeffectsofsubcontractingactivitieso n t h e i n n o v a t i v e n e s s o f V i e t n a m smalla n d m e d i u m - s i z e d enterprises’manufacturingsubcontractorsintheyear2015.Thiss tudycontributest o t h e l i t e r a t u r e o f V i e t n a m e s e s u b c o n t r a c t o r s t h r e e r e a s o n s t o o p e n anewdirectionofstudyforthesubcontractorinVietna meseSmallandmedium- sized e n t e r p r i s e s Firstly,b e c a u s e Vietnamesesmalla n d m e d i u m - s i z e d e n t e r p r i s e s a c c o u n t f o r moret h a n 98%t h e n u m b e r o f

Vietnamese enterprises are the backbone of the country's economy, serving as a flexible force that generates a significant number of jobs This study highlights the importance of knowledge creation within small firms and recognizes the relationship between knowledge and innovation As Vietnam integrates deeply into the international economy, particularly within the ASEAN Economic Community (AEC), it faces both substantial opportunities and challenges for small and medium-sized enterprises This integration necessitates innovation across all enterprises to establish sustainable competitive advantages in a rapidly changing technological landscape.

Byusing the probitmodelto runtheregressionto find outthe effects ofsubcontractingactivitieso ntheinnovativeness ofm a n u f a c t u r i n g subco ntractorsintheVietnamesesmallandmedium- sizedenterprisessector,thestudyshowsthatregressionresultsareveryinteresting.

Firstly,i t s h o w s thats u b c o n t r a c t i n g a c t i v i t i e s h a v e a f f e c t e d t h e innovationofsubcontractors.Thesubcontractorstakingpartinsubco ntractinga c t i v i t i e s i n t h e f o r e i g n - i n v e s t e d s e c t o r a r e morei n n o v a t i v e thancounterpartsinthedomesticsectora re.

The education and training of staff are crucial for fostering innovation within a firm Subcontractors that prioritize investment in human resources and training are more likely to achieve innovative outcomes Research indicates that a higher skill level among employees correlates with increased innovativeness The educational qualifications and training activities of staff serve as a foundational knowledge base for both individuals and the organization This aligns with the absorptive capacity theory, emphasizing the importance of qualified personnel with science and technology expertise in driving innovation, applicable to both medium and large firms as well as small subcontractors Furthermore, educated staff possess the ability to evaluate, embrace, and transform external knowledge into practical applications, facilitating the commercialization of this knowledge into products Additionally, educated employees act as a vital link between leadership and the workforce, enhancing communication and collaboration within the firm.

The background of an entrepreneur can negatively impact innovation, as their role primarily involves shaping a future vision while relying on middle and upper management for knowledge creation Entrepreneurs often face daily challenges, including constraints related to internal resources such as finances, skilled labor, and managerial capabilities, which can hinder their involvement in innovation Additionally, if subcontractors focus solely on certification, their resources may be insufficient for engaging in innovative activities Furthermore, subcontractors' adherence to traditional agreements, which impose strict specifications and guidelines from contractors, can adversely affect their ability to innovate.

Inaddition,firmsizeisfactormakesinnovativeprobabilityincreasinglyb e c a u s e theypossessmorefinancialresources,humancapitalandattracttheextensiv ek n o w l e d g e T h e d i s t a n c e b e t w e e n thes u b c o n t r a c t o r a n d itscust omersi s a c r i t i c a l f a c t o r o f survival.Theadvancedlocationisv e r y importantforthesubcontractor’sopportunitytosharemoreknowledgeandr e c e i v e morea s s i s t a n c e f r o m t h e i r c u s t o m e r s a n d h e l p s t h e s u b c o n t r a c t o r s meetthejust-in- timeproductioncondition.Therefore,firmsizeandlocationa l s o c o n t r i b u t e t o t h e i n n o v a t i v e n e s s o f t h e s u b c o n t r a c t o r S u b c o n t r a c t o r ’ s activitiesthatareassistedbytheirnetworkingmay generatethelikelihoodofinnovationbecausethenetworkingassistanceis theimportantsourcetocreatetheinnovativenessofthesubcontractor.

Finally,intheprocessofcreatingknowledgefortheinnovationofthesubco ntractor,theSECImodelofNonakaallowsexplainingthecreationoft h e kn owledgebutitseemscostandtimeconsumingmorethanbuildingtheabsorptiv ecapacitiesofthesubcontractor.

Implications

Firstly,Vietnamesegovernmentshouldpromulgatedetailedr e g u l a t i o n s toattractmorehi- techindustriesfromforeigninvestorsandpromotethemtotransferadvancedtec hnologiestothedomesticenterprises.T h e s e p o l i c i e s s u p p o r t t o f i l l t h e innovationg a p f o r smalls u b c o n t r a c t i n g firmsbyr e l a x i n g t h e t a x t o promotei m p o r t i n g a d v a n c e d e q u i p m e n t a n d technologiesand protectingthecopyrightingfortheinnovation.Organizingt h e o f f i c i a l seminars,w o r k s h o p s , a n d c o m m e r c i a l f a i r s ist o c o n n e c t t h e investors,contractors,supplierstogetherinordertoc r e a t e t h e p r o d u c t i o n n e t w o r k s andreducethetransactioncosts.Moreover,thelocalgovernment sp lantoconnectandbuildtheconnectivelyregionalindustrialclusterssothatth econtractorsandsubcontractorscanmeeteachothermoreeasily.

State-owned banks play a crucial role in assisting small and medium-sized enterprises (SMEs) in accessing financial resources, while local governments provide expert evaluations for their innovation projects SMEs often struggle to secure loans due to a lack of collateral, making long-term financing essential for their investment in innovation Additionally, local governments propose various support programs aimed at enhancing SMEs' understanding of business and trade laws, improving management skills, and offering legal and technological advice.

Entrepreneurs managing subcontracting firms should prioritize investing in human capital and training activities to enhance employee skills and knowledge, which will ultimately strengthen the firm's absorptive capacity The innovative capabilities of staff are essential for success in subcontracting, as these activities are crucial for competitive advantage The findings indicate that entrepreneurs should engage deeply and empower middle managers in the innovation process to drive successful outcomes.

Limitations

Althoughthisstudyhasachievedtheinsightfulobjetiveofthenatureo f themanufacturingsubcontractors intheVietnameseSmallandmedium- sizedenterprisessectortocontributetheliterature.Therehavemuchworkstobedonetou nderstanddeeplyonthissubject.

Firstly,theobservationsdrawingfromtheSMEdatasetandomittin gi n f o r m a t i o n o f t h e r e s p o n d e n t s r e d u c e t h e n u m b e r o f o b s e r v a t i o n s i n t h e regressionmodel.Yet, thecharacteristics o f these fir msarerelatively h o m o g e n e o u s comparingtothedataset.

Secondly,duetothe numberofobservationsandomitting informationo f t h e r e s p o n de n t s , t h e t h e s i s c a n n o t e v a l u a t e t h e i m pa c t o f s u b c o n t r a c t i n g activitiesoneachkindofinnovationtogivethesubcontractora morespecifics t r a t e g y forimprovingtheircompetitiveadvantage.

Thirdly,sincethedatasetisnotspecificallydesignedforVietnames esubcontractors,t h i s s t u d y doesnotcomprehendallaspectso f V i e t n a m e s e enterprises.Itthusdoesnotshowcompletelytheinformationofinnovati ono p e r a t i n g andmanagingprocessesaswellascannotevaluatetheinnov ationef fici enci es.

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Expression :Pr(INNO),predict() dy/ dxw.r.t.: SUB_CONTRACTSSUB_REVENUESUB_FOREIGNQUAL_INTSKILLEDTRAININGENTREPR_EDUFIRM_SIZEINVEST_EQSALESMEANWAGEME ANWAGE_SQASSET_LOCAASSIST_SAMEASSIST_BANKASSIST_LGOVMETALWOOD dy/dx