Knowledge sources as determinants of firm level innovation in vietnam an empirical study

INTRODUCTION

Background

There is no doubt about the advantages that innovation can bring to a nation. OECD (2007) reported strong evidence for a positive relationship between innovation and national competitiveness Innovation plays an essential role in economic growth and is an indispensable factor to contribute to creating more jobs More broadly, both past theory and practice suggest that countries will follow different development trajectories, depending on their ability to identify and capture technological progress. Applying new technology translates technological and scientific advances into more productive economic activity As such, it is not surprising that many OECD member countries have adopted national strategies to boost innovation and enhance their economic performance though increased productivity and growth.

The vital role of innovation is not only affirmed in OECD countries but also developing countries OECD (2012) There is a plethora of reasons why innovation is important for developing and emerging countries (OECD, 2012) For example, innovation in agriculture plays an important role in reducing poverty and promoting economic growth Other advantages that innovation can bring to those countries are creating more jobs, improving welfare, access to business opportunities, reaching the world technological frontier in many industries, and especially having the way to avoid “middle income traps”.

The Asian development bank (ADB) (2014) states that countries fall into the middle-income trap if they are unable to move from a low-cost to a high-value economy, making it difficult for them to compete with both low-income and high- income countries The ADB (2014) also stresses the vital role of innovation to avoid the middle-income trap as it raises productivity and promotes structural change The ADB (2014) mentions Vietnam is a lower-middle-income country, which needs to increase the productivity of capital, land and other resources to avoid falling into the middle-income trap as well Eric Sidgwick, Country Director of ADB in Vietnam,

10 said it was too early to say whether Vietnam was trapped in the middle-income trap, but the country needed policies to create higher incomes and increase labor productivity.

Recently, some emerging economies have become significant actors in the global innovation system Given the importance of innovation for economic growth, it is of utmost importance to understand the determinants of successful innovation In order to gain that understanding innovation needs to be studied at the level at which it is generated, namely the firm level.

At firm level, the ability to innovate leads to the wealth generation capacity. Innovations reduce production cost and improve quality of firms’ goods and services. Numerous empirical studies suggest that innovation enhances firm performance because the product of innovation increases firm competitiveness and the process of innovation transforms a firm’s internal capabilities making it more adaptive to change (Neely & Hii, 1998) De Jong and Brouwer (1999) confirmed the same idea in their empirical research with small and medium enterprises (SMEs) Those SMEs work in an environment of changing consumer preferences, increasing competition and changing technological requirements, in order to achieve business goals such as profit and growth, having a continuous flow of successful innovations is crucial for them. They build their competitiveness position by offering high quality products and services that match their customers’ demand, so they need a permanent flow of innovations.

As mentioned above, there are plentiful studies on innovations However, only a limited number of studies are conducted in developing countries especially in the case of Vietnam Vietnam has been known as a poor country that suffered many wars along its history In 1975, Vietnam became independent, but the economy was in an atrocious condition The first five - year plan mission was to build a technical infrastructure and form a new economy that could improve people’s lives However,the economy was not improved significantly and after two five – year plans it fell into crisis From 1975 to 1985, Vietnam had low economic growth with an annual increase of 4.6% and domestic production did not meet demand (Nguyen Quang Ngoc, 2006).

In 1986, the Vietnamese Government started “Doi Moi” period to change the situation After more than 20 years of economic reform, changing from a centrally planned economy into the market economy, Vietnam has undergone significant economic growth and become a lower ‘middle-income’ country in 2010. Vietnam has been one of the fastest growing countries in the past 20 years, but in terms of "development quality", it has not been achieved like other countries such as Korea, India or China According to Nguyen Xuan Thanh from Fulbright University in Vietnam, the country can develop more only thanks to technology enterprises although this journey may last for decades more Notwithstanding, the Government of Vietnam has set a target, namely, to become a middle-income industrialized country by 2020 To achieve this ambitious goal, there is a need for a more effective application of science, technology and innovation in the economy in order to drive productivity growth and diversification in production (Nguyen Anh, Nguyen Mai, & Doan Hung, 2013) or in the other words, this is the time the country should pay attention to innovation.

In lieu of the lack of research regarding innovation in developing countries,

In Vietnam, there is a specific dearth of firm-level innovation studies (Nguyen NgocAnh, Nguyen Dinh Chuc & Nguyen Duc Nhat, 2011; Nguyen Ngoc Anh, PhamQuang Ngoc, Nguyen Dinh Chuc & Nguyen Duc Nhat, 2008; Nguyen Thi PhuongLinh, Nguyen Ke Nghia, Do Thi Dong, & Nguyen Thi Tuyet Mai, 2019) Moreover,firms are the dominant economic actors that drive innovation, and particularly the commercialization of innovations, it is necessary to have a study on innovation at the firm level In addition, with innovation firms can develop and create more value for the nation such as creating jobs, improving welfare, access to business opportunities, reaching the world technological frontier which could bring social benefits for a country Hence, there is a call for more innovation studies in Vietnam than ever before.

Previous studies have shown that some firms are more capable of developing innovations than others This research attempts to understand the reason behind that and aims to fill in the gap in research in firm level innovation generally and contributes to literature regarding the significance of firm’s innovation determinants by deeply investigating the relationship between innovation and one of the key determinants – knowledge sources for innovation at firm level By doing so, the author expects to provide empirical evidence for policy makers in Vietnam to foster innovation at macro level.

Problem Statement

Innovation has received much attention over the last decades as it is considered as a source for economic development Most studies conducted in this area focus on developed countries even though for (firms on) developing countries innovation also is of crucial importance in order to grow and become internationally competitive However, the difference in stages of development can be a barrier when applying the outcomes of studies in developed countries and in developing countries.

Moreover, most of these studies, also those done in Vietnam, are about understanding innovation process at the macro level and provided limited or out of date empirical evidence for policy makers They predominantly focus on national innovation systems and government innovation policies Researches on innovation inVietnam begins from early 2000s, though, most of the examinations is about innovation in agriculture field (Chairatana & Sinh, 2003; Martin, Castella, Anh,Eguienta, & Hieu, 2004; Spielman & Kelemework, 2009; Van Linh, 2001) Recently,innovation studies are getting more attention in macro level and other fields as well(Nguyen Ngoc Anh et al., 2011; Nguyen Ngoc Thang et al., 2013; Phan Thi ThucAnh, 2014 However, there is still very little evidence about what drives firm level innovation in countries like Vietnam Therefore, this research includes firm level variables in order to analyze the relative importance of different resources that affect firm level innovation and access the capabilities of a firm to utilize these resources.

Moreover, it is necessary to understand determinants of innovation in Vietnam to provide empirical inputs for evidence-based policy makers Innovation is important as firms with innovation normally develop very fast and hence create lots of job opportunity which we could consider as one of the social benefits for a country.

The case of Vietnam is especially salient to analyze as it has changed from a central planning regime where the central government decided output targets and prices, domestic and international trade with bureaucratic controls to a more market- based economy since 1986 Thirty years after the enactment of Vietnam’s “Doi Moi” (renovation) policy in 1986, the country has increased economic liberalization and achieved structural reforms needed to modernize the economy and to produce more competitive, export-driven industries State-owned enterprises now account for roughly 40% of GDP Vietnam has enjoyed rapid economic growth, which has been among the fastest in the world, with a mean of 6.4 percent a year since 2000. Remarkably, it has been transformed from one of the poorest to a lower middle- income country (Cao Sinh Viet et al.,2016).

With a population of almost 93 million people (GSO, 2018), Vietnam is a densely populated developing country with 34.6% of the population living in urban areas Even though its poverty has declined significantly, the country is working to create jobs to meet the challenge of a labor force that is growing every year by more than one million people As mention above, Vietnam is now dealing to escape theMiddle-income trap which is the stage where an economy has overwhelmed the low- income threshold (below US $ 1,025/person) to grow into a middle-income country(US $ 1,025 - US $ 12,475/person), but stuck At this level of income, it is impossible to continue to rise up to become a high-income country (over 12,475USD/person) This trapping has factors such as: no longer has the advantage of cheap labor costs as low-income countries; There is also no advantage in terms of infrastructure, high level human resources and modern technology - technology like high-income countries Vietnam has moved out of the low-income countries group since 2008 (based on GDP per capita in that year reaching USD

1,145/person) However, it is believed that Vietnam is still face to the risk of middle -income trap and the highly recommend solution is to rely on innovation and technology firms (Ngo Thang Loi, 2019).

Although Vietnam does have firms and industries actively engaged in innovation, the overall innovation system is weak Vietnam ranks eleventh out of twelve East Asian countries in terms of human resource capacity (3.79 out of 10) reported by OECD & The World Bank (2014) Firms in transition economies exhibit a number of striking differences with firms in developed countries, such as a lack of complete discretion to acquire and allocate resources and little knowledge and experience to compete in a competitive, market-based economy (Peng, 2000). Performing this research with empirical data in Vietnam, the author can evaluate factors that affect innovation in Vietnam and compare with advanced economies. This is in line with the Ministry of Science and Technology (MOST) of Vietnam as in recent year, they has identified firms as the center of innovation which could creative innovation, in which, attributing importance to technological innovation to increase productivity and competitiveness of enterprises and nation.

In addition, Quintane et al.(2011) has stated that innovation is knowledge based outcome In their research, they emphasized the vital role of knowledge as well as the source where the knowledge come from Furthermore, our Party has determined since early 90’s Vietnam need to associate industrialization and modernization with the development of the knowledge-based economy, in which the whole country should "promote industrialization and modernization with the development of the knowledge-based economy and environmental protection."(Document of the 11th National Congress of the Communist Party of Vietnam) The party emphasized that technological development and knowledge related to that are really a fundamental driver of the process of rapid and sustainable development.Hence, study related to knowledge sources for innovation in Vietnam is really in critical need.

To sum up, there are four main reasons that the author would like to conduct this research They are: (1) innovation related-knowledges are public goods and firms could benefit from diffusion these knowledge; (2) Majority of firms in Vietnam are small and medium size, i.e they lack of resources for conducting innovation; (3) Social benefits could be improved if evidence-based industrial policies create better changes and assessing resources for firms which are pursuing innovation activities;

(4) Good evidence-based policies grounds on understanding the determinants of innovation.

Study Objective

The main objectives of this dissertation are:

• To review the literature on innovation and the determinants of innovation especially knowledge sources for innovation at firm level.

• To analyze the current situation of innovation of manufacturing firms in Vietnam

• To identify the knowledge sources that manufacturing firms in Vietnam use for innovating and test the relationship between those knowledge sources and innovation outcome.

• To propose several solutions for manufacturing firms as well as policy makers in order to foster innovation in Vietnam based on empirical evidence.

Study process

This study was conducted with 6 steps as following:

Step 1: Literature review: Review all related studies and summarize the result of those studies.

Step 3: Designing questionnaire to interview firm managers on innovation at firm level.

Step 4: Selecting database available to use secondary data

This study use data from The World bank survey for innovation in Vietnam Step 5: Data analyzing using Excel and Stata

This step conducted to test the hypotheses and analyze the impact of independent variables on dependent variable.

Use the results from step 5 to compose this dissertation.

Scope of Study

This study focuses on innovation in manufacturing firms in Vietnam. Manufacturing firms are considered as a basic economic unit, the cell of the national economy At this level, product creation activities take place - providing these types of products - for social needs The role of those firms in a market economy is undeniable Manufacturing firms is usually seen as any firms use components, parts or raw materials to produce a finished product It is defined by Kenton (2018) that firms which create or assemble finished goods for sale on a large scale Those firms can utilize a quantity of methods, including human and engine labor, and biological and chemical progressions, to make raw materials into finished products by using tools.

It is said that production or production of material wealth is a major activity of human economic activities It is defined as the process of making a product for use, or for trade The concept of manufacturing firms is those that use resources and production materials in combination with the application of science and technology to produce commodity products to meet market demand (Nguyen

The reason why the author focus on manufacturing firms is because Vietnam has increasingly turned into a manufacturing hotspot in Asia mostly with electronics, thanks to its comparatively large and low-cost labor force, constant political atmosphere, geographical advantages, attractive tax regime, and open trade policies from the government Data in 2017 shows that manufacturing production increased 14.4% while the first two quarters of 2018 observed Vietnam’s ongoing manufacturing successful at 12.9% (BBGV, 2018) They also mentioned that Vietnam is having important advantages to encourage its industrial development including steady and substantial foreign direct investment stream and a youthful healthy and low-cost labor force Multinational organizations attempt to find their way out of the reliance on China - the manufacturer of the world, hence countries in ASEAN are a good opportunity as they carry certain parallels On the other hand, Vietnam is a country that does offer many competitive advantages contrast with other countries in ASEAN.

One of the leading advantages is that Vietnam offer low minimum wages. (BBGV, 2018) reported that the widest minimum wage gap in 2018 between Vietnam and Thailand is roughly $50 per month Correspondingly, manufacturing industries in Vietnam have been perceiving a remarkable growth Moreover, Vietnamese policy makers understand the role of global integration, hence, they are welcoming international businesses, and attempting to give those firms the same opportunities as the local firms If they have evidence from firm level, they could issue more appropriate policies in the future Hence, this study aimed to provide policy makers in Vietnam data support related to this field.

When mention determinants of innovation at manufacturing firms, literature shows studies on either or both exogenous and endogenous factors (Avermaete et al.,2004; De Jong & Vermeulen, 2006) However, the scope of this study is to focus on the impacts of knowledge sources for innovation, namely internal knowledge sources, external knowledge sources, and regional knowledge sources The reason is because innovation is a knowledge-based activity It is explained by the knowledge- based view theory as the firm is assumed as an institution for integrating knowledge and knowledge performs vital role in production This is also supported by the concept “knowledge-based economy” This found back to the early 1960s of the last century, pioneered by Fritz Machlup and Peter Drucker Over the past five decades, there has been much research to identify and explain the mechanism of this economy In the past few years knowledge economy has been chosen as the development strategy of many countries, both developed and developing countries including Vietnam In the knowledge economy, the main principles, ways and factors that govern economic activities are human knowledge Other names such as knowledge-based economy or knowledge-driven economy give us a more intuitive understanding with emphasis on fundamental role and influence of knowledge in economics (Godin, 2006).

The author would like to use product innovation as an indicator for innovation outcome as it is the highly familiar and commonly been used in manufacturing sector (OECD, 2018; OECD/Eurostat, 2005) Product innovation includes methods, techniques and processes to implement incremental improvements to existing products and services including making evolutionary changes to products that use existing technologies and organizational capabilities Moreover, Cooper and Kleinschmidt (1987) declared that product innovation is especially needed for firms to compete with their counterparts in the same fields Dougherty (1992) stated that the exercise of product innovation is envisioned of as the establishment and development of knowledge which connects market and technological opportunities.

In addition, product innovation is considered as a key determinant of firms’ sustainable development in many recent studies (Danneels, 2002; Laursen, Masciarelli, & Prencipe, 2012).

These indicators are selected as dependent variables to indicate the impacts during 2013-2016 This study focuses on firm-level data in Vietnam in order to deliver critical evidence that complement macro data The survey conducted by the World Bank in 2015-2016 dealing with 996 firms in Vietnam.Later, the author took 300 manufacturing firms to interview for the following innovation survey There are some missing variables when merging the data and the study finalized with consists of 294 firms Correspondents of the surveys located in four Vietnamese regions, which are the Red River Delta, North Central area and Central coastal, South East and the Mekong River Delta.

Contribution of Study

This research analyses the impact of different knowledge sources of product innovation in Vietnam using firm-level data Hence, it can help to answer the question that whether all kinds of knowledge sources have significant relationship with innovation or only specific one Firms in Vietnam could base on that and decide who and where they should take knowledge from if they intend to do innovation.

Secondly, this study could also be a good evidence for policy makers to understand the determinants of innovation especially the impact of knowledge sources for innovation Innovation related knowledges are public foods and firms could benefit from the diffusion these knowledges.

Moreover, while most firms in Vietnam are small and medium size, they could lack of resources for conducting innovation To understand what could hinder innovation at firm level means we could provide grounds for new industrial policies and create social benefits for firms which pursuing innovation activities.

Limitation of Study

This study has some limitations that the author would like to highlight First, the data is based on information about innovation related activities of firms from

2013 to 2016 This issue cause difficulty to analyze firms’ innovativeness sustainability as well as evaluate the prior innovation history.

Moreover, because some of the independent variables refer to the same period as the dependent variable, causality may not be inferred The observed firms are private firms and mostly are SMEs Consequently, this study might only see part of the total range of firms In addition, given the cross-sectional nature of the data there is little the research can do in terms of endogeneity.

Finally, the sample size after merging the ES and the ICS become too small to test with a subset (e.g., by size, by age, by location, etc.) for a better understanding of innovation in Vietnam However, this could shed the door for further research as pursuing innovation is the only way to boost the economy and preventing it from falling into the middle-income trap.

Organization of the Dissertation

This dissertation is divided into six chapters, which will be further subdivided into sections, and they are organized in the following manner.

The introductory part briefly presented problem statement, objective, scope of study, limitation of study and dissertation organization, respectively as shown in Chapter 1.

Chapter 2 will review both theoretical and empirical literature on innovation and determinants of innovation at firm level In the theoretical section, it firstly categorizes innovation and types of innovation, then there is a summary on determinants of innovation especially knowledge sources for innovation

The following part of this dissertation will first provide an overview of the theoretical framework and hypotheses in Chapter 3, methodology and data collection in Chapter 4 Next in Chapter 5, the analysis will be reported together with the results summary Lastly, the author provides a discussion on the results and conclusion inChapter 6.

LITERATURE REVIEW

Research on Innovation in the world

The groundwork of modern term “innovation” starts from 1930s, Joseph Schumpeter – a famous economist mentioned that innovation should be distinguished invention, innovation means “development” and “new combinations” (Schumpeter, 1934b) He announced the idea of so-called “new combinations” which refer to “the introduction of a new product or a new quality of a product, a new method of production, a new market, a new source of supply of raw materials or half- manufactured goods” (p.66) Schumpeter set the foundation for most of the work on innovation in the world, he emphasized the vital role of changing to the new and better positions or methods but base on the resources that firms have such as knowledge, human resources, capital and other Even though Schumpeter mentioned innovation as new combinations in almost of all of his writings, he also identified innovation “as the setting up of a new production function” (p.679) Most definitions of innovation given by Schumpeter related to new combinations or production functions are considered rather wide and vague It is said that it reflected his 'struggle' to know the complications of technological development (Hagedoorn, 1996). Consequently, it is no surprise that Schumpeter' s effort to define innovation has been criticized by numerous authors However, the role of his study in innovation research history is very critical and has set a basic ground for various research works later.

Until 1980s, Peter Drucker stated in his book that innovation is a key tool for entrepreneurs to advance over their competitors (Drucker, 1985) Drucker opinion is in line with Schumpeter’s as he also agreed that innovation should not be misunderstood with only invention, innovation means accepted to changes and open new opportunities which could be established from products, services, processes or technologies Peter Drucker’s opinion of entrepreneurship as a method that has a knowledge ground and that pursues to empower organizations to transform while remaining faithful to their missions Hence, innovation at the end is the specific tool of entrepreneurs Moreover, innovation is the specific mission of the firm All together they utilize change as an opportunity to do something different and create better performance for firms.

In early 2000, innovation studies are getting much attention as innovation is of key importance for an organization’s survival (Eveleens, 2010) He said innovation is needed by the firms that want to compete for market share or profit or public organizations that need to improve their services However, innovation is not easy all the time Eveleens listed few reasons such as innovation efforts over time could gave us a host of failed innovation projects or even enormous corporations that once were the forerunners and creators of whole markets have unsuccessful to be competitive when changes happened He explained that an organization which is so engaged with their normal track - what they are good in they might become trapped in those frequency Firms are not be able to adapt when the outside environment changes. Underlining the extensive range of background, Eveleens (2010) listed twelve different models that he thinks could represents innovation studies in the past 40 years Then, it is verified whether the model had an empirical foundation, if it was based on prior theoretical research, or both Correspondingly, the main type and sector of the innovation is established The models are observed in Management books and scientific journals beyond the help of scientific search engines in combination with searching further in references.

The type of innovation varies considerably among the models Most of the innovation process models are largely based on radical products and processes in the private sector However, in modern economies in which services are getting more important, other types of innovations (incremental and/or services) are considered as well.

Table 2.1: List of innovation models

Fairly large with an own R&D department and a distinctive senior management

Van de Ven and Poole

Prior research Product Private Fairly large

Private and public Large and small

Services Public Large case studies.

Experience Product, process Private Large

Model based on theory, verified in practice.

Based on empirical experience of the authors

Both large and small organizations

There is evidence in literature proved that innovation might be affected by both internal and external factors Avermaete et al (2004) observed the determining factors of product and process innovation in small food manufacturing which are commonly viewed as working in a matured and not so hi-tech zone In this area, R&D activities are restricted, and patenting is exceptional The authors used in-depth survey among 177 EU firms Firms are divided into four groups which are non- innovators, traditionals, followers and leaders They used multiple logistic regression to classify the drivers of product and process innovation in the firms At the end, the outcomes emphasize the crucial role of the skills of the workforce, the company's investment in know-how and the utilization of external sources of knowledge. However, there is no proof of a significant correlation between the types of the entrepreneur and the innovation performance of the firm.

Hussen and Çokgezen (2019) also do research related to what factors could affect innovation at firm The paper tries to find the answer for the following: “(i) Do firm’s internal factors such as size, age, ownership, R&D spending, and exporting significantly predict the propensity of firms to engage in innovative activities inEthiopia? (ii) Do firm’s external factors, namely, access to finance and competition,significantly predict the propensity of firms to engage in innovative activities inEthiopia?” They used the data conducted in Ethiopian firms and logistic regression model to analyze the data collected The results revealed that inner factors such as firm size, employee education level, technology adoption capability of administrators, on-job training, and R&D outflows have a significant positive effect on both types of innovations, whereas private and foreign ownership found to be significant for only process innovation Assessments also indicated that gain access to finance has a positive significant impact on product innovation The impact of the competition level is negative significant only on process innovation The key finding is that ignoring their statistical significance, all explanatory variables affect both process and product innovation in the identical direction, perhaps because of the positive correlation between the two type of innovation.

Another study from Korea related to determinants of innovation from Choi and Lim (2017) empirically discovers the connection between innovation performance and the internal and background aspects leading technological innovation in manufacturing small and medium-sized enterprises (SMEs) in metropolitan areas of Korea This study used structural equation modeling (SEM) and based on firm-level data from the Korean Innovation Survey performed by the Science and Technology Policy Institute in 2012 The results of the study showed that innovation capacity in SMEs was optimistically linked to scientific innovation accomplishment The research mentioned SMEs’ skills and technology acquisition as contextual factors which are also positively influences firm innovation performance The paper found that SMEs’ innovation capacity is a fractional mediator between skills and technology acquisition and technological innovation performance in SMEs Furthermore, the findings demonstrate that the relationship between public policies, government and SMEs’ innovation performing is facilitated by SMEs’ inner capacity of innovation Hence, it is means that all four factors namely “skills and technology acquisition and government and public policies” are critical contextual reasons can improve innovation performance at firms This paper offers guidelines for policy makers that they need to compose policies which could support directly and indirectly boost innovation and then could foster economic growth and development regional or world while.

Research on innovation could also be categorized in term of sources for innovation, especially innovation idea Some researchers believed that innovation could only generated by the firms themselves or they follow resources- based view (RBV) Barney (1991) stated that there are three categories of firm resources including: physical capital resources, human capital resources and organizational capital resources In his study, emphasized that resources must have certain conditions in order to enable firms to sustain their competitive advantages namely: rareness, value, imperfect imitability and non- substitutability Barney argued that sustained competitive advantage derives from those resources These resources and capabilities can be regarded as packages of tangible and intangible assets, involving firms’ management skills, firms’ organizational processes and routines, and the information and knowledge that firms control To sum up, firm's internal processes generate a resource package which can become the means of creating and maintaining a competitive advantage.

Literature shows several studies in innovation related to resources-based view theory.

First, the RBV of the firm offered the logic for hypothesizing that firms will have different longitudinal patterns of manufacturing innovation adoption in plants (Bates & Flynn, 1995) Bates and Flynn (1995) also hypothesized that early innovators were to have higher levels of competitive performance and their research results provided support for the hypotheses This study provided support for the presence of a strategy of building resources through manufacturing innovations over an extensive period The innovations were adopted in an "S" curve pattern, the common pattern for innovation diffusion TQM, JIT and supplier reduction involve principally of information technology and alterations in the process layout Employee engagement and manufacturing strategy are administrative innovations for the reason that they deliver the way that managers and operators deal with manufacturing decision making The "S" form of innovation adoption reveals there is a "first mover" advantage to any innovation which improves performance in general while the length of that advantage varies by innovation and the scope of the advantage may not be recognized This paper suggests that any innovation should be implemented as quickly as possible, given the firm's capacity to innovate.

Tarafdar and Gordon (2007) found that information system firms competencies affect process innovation in an organization This could be clarified by RBV theory as Tarafdar and Gordon (2007) identified six different competencies to test their affection on facilitating innovation in those firms This paper has two objectives The first objective is to establish the value of the competency perspective of the RBV for analyzing how technologies and associated managerial resources and mechanisms (IS) can affect the success of process innovation Next, it aims to understand how certain IS competencies control an organization’s ability to create, build and implement process innovation The author based on longitudinal and exploratory case data from two process innovations at an American healthcare organization This study has found the evidence between inner firm resources and innovation.

Terziovski (2010) used RBV to explain why manufacturing SMEs could create competitive advantage by utilizing the creative idea from their employees for developing differentiated manufactured goods in niche marketplaces. According to Terziovski (2010), innovation strategy and formal structure can be considered as key drivers in manufacturing SMES and SMEs in manufacturing sectors tend to advance their accomplishment when they progressively imitate bigger firms but still keep in track to their strategy and their formal structure This study revised the literature relating to innovation in manufacturing firms in order to identify appropriate constructs to formula the basis for the development of a theoretical model, and applied the resource-based view of the firm to give explanation on the manner in which manufacturing SMEs mature competitive advantage in comparison with large firms Terziovski (2010) argued that manufacturing SMEs progress competitive advantage through their employees’ creative potential to develop differentiated products for niche markets while large manufacturing firms on the other hand grow competitive advantage based on cost efficiencies expanded through formalized structures and systems The results demonstrate that there is a positive relationship between innovation strategy and formal structure and significant predictors of the performance of SMEs in the manufacturing sector Therefore, formalization is indeed important for manufacturing SMEs in order to improve their performance Formal systems and procedures are important as well due to the fact that they have a tendency to add clarity to employees’ roles, control to employee commitment, and finally lead to effectiveness of organizations.

Bakar and Ahmad (2010) try to answer the matter about which resources of a firm pays most to performance of product innovation The authors adopted the RBV and considered both tangible and intangible assets in firms Bakar and Ahmad (2010) intentioned on the resources of the firm as factors for achievement in product innovation Therefore, the evaluation of the product innovation could be recognized by using pointers in the performance of product innovation Bakar and Ahmad (2010) named six different strategic resources including “physical reputational, organizational, financial, human intellectual and technological” The findings supported the RBV point of view that firms should concentrates on immaterial resources as the foremost drivers for their better performance which include product innovation as one the performance indicators Meanwhile, intangible resources like reputation of a product are hard to obtain and cultivate or imitate by competitors Product reputation which blends with innovative activities could bring excellent product innovation performance because reputation deceits in client's way of thinking (Bakar & Ahmad,2010).

These above researchers believe that innovation should come from inside the firms and the firms should strengthen their innovation ability by trusting on their own resources.

However, there are also other line of the literature believed in knowledge- based view (KBV) when they study innovation It is typically true in the knowledge economy The term "knowledge economy" was first introduced in 1990 in a United Nations report The first person to raise the concept of knowledge economy was Mr Daniel Bell and later many authors mentioned this issue In the OECD's "Knowledge-based knowledge economy" report, "Knowledge economy is an economy built on the basis of production, distribution and use of knowledge and information." APEC (2000) and Godin (2006) mentioned the following characteristics of a Knowledge economy:

- In the knowledge economy, economic growth is primarily in depth, the subject is knowledge laborers, trained, well equipped with modern knowledge, understanding advanced science and technology.

- Key economic sectors are material production and service industries based on knowledge and high technology These economic sectors generate high-value, high- knowledge products, accounting for a large proportion of GDP In particular, the service sector is the economic development and generates the greatest income in GDP; in particular, knowledge services such as scientific - technical research, design, consulting, finance, post and telecommunications develop rapidly.

- Social investment is mostly allocated to science - technology (especially high technology) and education and training Knowledge of human society and science and technology develops at a high level and perform a very high position in socio- economic development.

Research on Innovation in Vietnam

Studies on innovation in Vietnam starts from early 2000s, however, most of the studies is about innovation in agriculture field (Chairatana & Sinh, 2003; Martin, Castella, Anh, Eguienta, & Hieu, 2004; Spielman & Kelemework, 2009; Van Linh,

2001) The reason behinds it might be because Vietnam had just opened its economy and agriculture still played the main role.

Recent years, innovation is getting much attention in macro level and other fields as well.

Nguyen Ngoc Anh et al (2011) wrote that Vietnam has long been chasing its far-reaching trade liberalization program which has directed to poverty reduction and fast economic growth The study mentioned that Vietnam has set the fundamentals of a market economy and actively contributed in the globalization process by opening up the economy to international streams of capital and trade in products and services after more than 20 years reforming. Under the emergence of the market-based economy with proper institutions, steady macroeconomic environment and the backing of the government for business development tolerate Vietnam in various area.

First, it has revealed the potential of the agriculture sector as Vietnam now has become the world's third largest rice exporter Second, it has encouraged the growth of a luminous domestic private sector Third, it brings together a significant amount of foreign investment Finally, the country could achieve its comparative advantages and earn more advantages from international trade Vietnam is now known as one of the most prosperous developing countries in terms of poverty alleviation and economic progress Moreover, innovation has considered an imperative factor for generating and preserving the competitiveness of nations and firms since long time Firms in Vietnam have to face with increasing international competition; hence, innovation has grown to be a central focus of firms’ long-term strategies It could help firm compete in global markets and face the challenges and opportunities of change in markets and technologies Therefore, in their paper, Nguyen Ngoc Anh et al (2011) also examines the impacts of trade liberalization on innovation activities by SMEs which play major role for Vietnam’s future economic development This research used the recently released Vietnam Small and Medium Enterprise Survey and found that innovation is strongly influenced by trade liberalization In the paper, the author pinpointed two ways for the trade liberalization

– innovation linkages which are FDI and trade The research results showed the impacts of trade liberalization on innovation are essential and significant however, it also depends on the channels and proxies used.

Another study observed how market demand influence green product innovation, and firm performance in the background of Vietnamese motorcycle industry industry (Lin, Tan, & Geng, 2013) Lin et al (2013) tried to answer two main questions related to the relationship between market demand, firm performance and a firm’s green product innovation The authors used a total of 208 valid questionnaires from four biggest foreign motorcycle firms in Vietnam The results concluded that market demand is positively significant correlated to both green product innovation and firm performance, whereas green product innovation performance is positively correlated to firm performance as well Furthermore, Lin et al (2013 also classified three different types of green product innovation and deliberates their effects on market demand and firm performance.

Nguyen Ngoc Thang et al (2013) established a paper to development the understanding and exercise of knowledge-based management in Vietnam by studying two Vietnamese agricultural companies The study delivered illustrative examples of how knowledge-based management, chasing a vision that nurtures creativity and innovation by workforces, could eventually achieve the profitability objective of the business and add value to the community’s quality of life as well The author used the SECI model as the parameter for examination, they found that knowledge creation processes were influenced by a set of factors including leadership, teamwork and Ba, corporate culture, and human resource management.

Other studies focus on the conditions for innovation It is said that innovation is money consuming and risky, firms should have long-term vision and solid purpose not just focusing on short-term improvements However, many Vietnamese firms could not do it (Phan Thi Thuc Anh, 2014) This paper offered some significant insights on innovation characteristics of firms in Vietnam It helps to enhance our understanding of firm innovation generally and knowing characteristics of firms’ innovation in a developing nation by giving example in Vietnam The author reviewed previous literature on innovation at the firm level as well as literature on the business environment in developing countries and in Vietnam and recommends four propositions on characteristics of firm innovation After that, she supervised two Vietnamese firms, in which, one firm operates in software industry and the other operates in electronic game industry She utilized a triangulation of data collection methods including field observations, documents, and direct personal interviews for each case The results show evidence supported the proposed propositions and help her to recommend some important implications for the Vietnamese government and companies.

Nham Tuan et al (2016) states that innovation, involving product, process, marketing, and organizational innovation within a firm, is believed as crucial component for enduring and expanding Innovation activities could bring value and comparative advantages for firm success Hence, the very first duty of researcher is to understand the role of innovation on firm performance This research has mission to explore the impacts of innovation on the different facet of innovation performance as well as their consequences to firm performance This study uses primary data from questionnaire survey The authors used questionnaire survey which has four main parts including general information, innovation activities, innovative performance, and firm performance The paper focuses on firms in supporting industries of mechanics, electronics, motorbike and automobile The respondents are firm directors or CEO The survey was conducted between April and May 2014 with 78.7% of the true response rate They used reliability, factor analysis and regression in this paper.

Nham Tuan et al (2016) applied fruitfully the model which assuming innovation is a process, then defined innovation by the impact of innovation activities on innovative performances In addition, the research established the optimistic influence of innovative performance on firm performance It also provided an empirical signal of the relationship between innovation and firm performance Nham Tuan et al (2016) suggested that practitioners should keep in mind that organizational innovation and process innovation are further imperative influences affecting innovative performance and firm performance than product and marketing innovation Hence, firms should pay attention to mobilize resources and create development in firm structure and production processes.

Voeten (2016) provided an overview of small business innovation inVietnam He said that most of the people perceive Vietnam’s comparative advantage are labor-intensive and light manufacturing This advantage has been critical to the extraordinary successes of numerous other East Asian economies In his study, he emphasized that household firms, which account for the majority of Vietnam’s private segment, are mostly too minor to compete in foreign markets In addition,public enterprises are commonly too unbending and unproductive to keep pace with dynamic global needs However, Voeten (2016) believed private SMEs - large enough to be effective while small enough to be flexible so they are the key to rapid export-oriented industrialization He found that those private SMEs are innovative,and they could achieve further succeed Those firms are aware of state-of-the-art technology however cannot afford too expensive equipment Moreover, those that have strong financial condition are reluctant to invest in machineries because of uncertainty in both micro and macroeconomic terms Therefore, that the government’s duty to ensure an ongoing stable regulatory environment.

Nguyen Van Thang et al (2016) proposed two questions in their paper which are: “Do knowledge creation practices lead to firm innovation in the context of emerging economies?” and “what are relationships between knowledge creation practices, innovation and firm financial performance?” The authors concentrate on organizational practices, rather than investment on R&D In addition, the study draws on the knowledge-based perspective and Nonaka’s theory of knowledge creation to propose a model linking knowledge creation, innovation and financial performance of firms and then, test the proposed model in the context of Vietnam, an emerging economy The authors tested their models in a sample of 529 Vietnamese firms and found that firms’ knowledge creation has significant impacts on product innovation, organizational innovation, and marketing innovation One of the most popular type is product innovation which also found to contribute expressively to the firm’s financial performance.

Figure 2.1 Research model in Nguyen Van Thang et al study

Source: Nguyen Van Thang et al (2016)

Nguyen Van Thang et al (2016) suggested that it is not necessary to invest a lot of money on innovation as sometimes innovation can be promoted with a budget

Firm Finan cialPerf orma nce investment from firms Application of SECI practices is an evidence from the study as it helps firms boost all three kind of innovation including product, organizational, and marketing innovation Firms may not realize that they are creating knowledge all the times as they often engage in socialization, externalization, combination, and internalization processes Firms should practice knowledge creation for innovation drive If firms could keep it in mind when operating, more valuable knowledge can be generated In addition, firms should also keep a diverse workforce with an open environment where employees can raise their idea freely On the other hand, Nguyen Van Thang et al (2016) also gave suggestion for policy makers in Vietnam that they should create an environment to foster firm innovation as it has become critical for Vietnam to overcome the “middle income country” trap The government could support by building a strong national innovation system in which different constituencies such as research institutes, universities, and firms are interacted for information sharing, technology diffuse on and knowledge creation.

According to Tran Hoai Nam et al (2017) innovation is well-thought-out as an essential element of sustainable competitive advantage in the hastily changing atmosphere Due to increased global competitive pressures, increasing product range and declining product life cycles, firms are now concentrating more than ever before on the new product development success aka product innovation If firm could have speedy, efficient launch of successful new products, they could maintain business success, market leadership, high competitiveness and sustainable growth in this dynamic environment Nevertheless, the authors states that research on innovation are very infrequent in Vietnam Most of the study are broad reports which don’t include underlying analyses of innovation at firm level, especially determinants for innovation Consequently, the authors want to focus on examining critical successful considerations for innovation at firm level in Vietnam This paper used primary data through questionnaire survey from November 2015 to February 2016 which has respondents were firm senior managers This paper establishes a supply capability creation process that has not been mentioned previously in the literature.

Mai Le Thuy Van et al (2018) study on current state of technological innovation of Vietnamese enterprises They mention in their study that with the increasing trend of globalization as well as the appearance of the 4.0 industrial revolution, technological innovation is a very urgent issue for the whole technology industry of a country and for Vietnamese businesses as well It can be said that technological innovation becomes a key factor in ensuring the long-term survival, as well as the position and maintenance of competitiveness of enterprises. Technological innovation makes the product quality of the business increase, meeting the increasingly stringent requirements of customers In addition, when applying modern technologies to production, it will reduce labor costs per unit of product, thereby lowering product costs, improving product competitiveness in the market Understanding that, many Vietnamese enterprises have started to replace their products and services with new, improved and more innovative products and services However, the current situation of technological innovation of enterprises is still slow Businesses are facing challenges in terms of financial resources, human resources, and government policies on the path of technological innovation Therefore, the study of the status of Vietnam technology innovation activities, pointing out the limitations and thereby making some suggestions for businesses and especially the authorities is a necessity Mai Le Thuy Van et al.

(2018) describe the factors affecting the decision on enterprise technology innovation The main research method is qualitative analysis, specifically descriptive statistics Research results indicate that about 31% of enterprises implement product innovation and 46% of enterprises implement process innovation In addition, only about 25% of businesses provide training to employees and about 10% of enterprises have external cooperation in technology innovation, innovation environment and limited support policies for businesses.

THEORY FRAMEWORK

Definition of Innovation

In last century, Schumpeter (1934, p.66) defined innovation as the “the introduction of new or improved products, production techniques, and organization structures as well the discovery of new markets, and the use of new input factors”. Later, Schumpeter added an explanation for that definition that innovation means

“development,” and “new combinations of new or existing knowledge, resources, equipment, and other aspects” Schumpeter idea is that “innovation” must be differentiated from “invention” The explanation for that because he figured out innovation is a specific social activity, or “function,” taken within the economic scope as well as for profitable intentions, whereas “inventions in principle can be carried out all over the place and without any intent of commercialization”. Therefore, in Schumpeter theory, innovation are original combinations of knowledge, resources, and any other things that subject to efforts at commercialization Innovation is the combined activity that he had labeled as the firm function and duty To sum up, these are final answers to innovation and long- run economic transformation according to Schumpeter.

Twenty years later, Thompson (1965, p 2) simply specifies that “Innovation is the generation, acceptance and implementation of new ideas, processes products or services” After those initial discussion of innovation, the next author is , He defined in his book that “Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service.

It is capable of being presented as a discipline, capable of being learned, capable of being practiced Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation, and they need to know and apply the principles of successful innovation.” Therefore, it is in line with Schumpeter that innovation “is not just about inventions or about new technology” Innovation is “about new business opportunities” formed “through new technologies, products, services, processes, business models” and other things Moreover, “innovation is not something that just occurs by itself but is a planned or regular process that needs discipline and that can be learned” and experienced Finally, if firms want to be successful in innovation, they must be taking the initiative and pursuit for the foundations of innovation to utilize those sources In conclusion, “innovation is a process for creating and introducing something new, novel, or advanced with the intention of creating value or benefit and innovation is a process that begins with a new idea and concludes with market introduction” (Shah, Gao, & Mittal, 2014).

Damanpour (1996, p 694) states in detail that “Innovation is conceived as a means of changing an organization, either as a response to changes in the external environment or as a pre-emptive action to influence the environment. Hence, innovation is here broadly defined to encompass a range of types, including new product or service, new process technology, new organization structure or administrative systems, or new plans or program pertaining to organization members”.

However, the most popular definition of innovation come from OECD as it mentioned in various studies in innovation (Arundel & Kemp, 2009; Barasa et al., 2017; Bayona-Saez, Cruz-Cázares, García-Marco, & Sánchez García, 2017). OECD/Eurostat (2005) clearly supports those above definitions when they declare that “an innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.”

OECD/Eurostat (2005) states that the least requirement for an innovation is that the product, process, marketing method or organizational method must be new or improved significantly to the firm This embraces products, processes and methods that firms are the initial to develop and those that have been implemented from other firms or organizations.

Hence, in this study, the author follows the latest definition from OECD/Eurostat (2005) as this is most up to date and well accepted in most of the recent studies (Bayona-Saez et al., 2017; Blind, 2009; Camisón & Villar-López,

At firm level, the ability to innovate leads to the wealth generation capacity. Innovation can reduce production cost and improve the quality of firms’ goods and services Numerous empirical studies suggest that innovation enhances firm performance (Artz, Norman, Hatfield, & Cardinal, 2010; Hitt, Hoskisson, & Kim, 1997; A Neely & Hii, 2012) Shah et al (2014) emphasize that innovation is important because it outcomes in new business creation, which finally brings economic growth This is also very true when the new businesses are new start-ups and even when they are new businesses within existing firms Recently they called them intrapreneurship These start-ups or existing enterprises benefit from these innovations because they increased revenues and incomes Moreover, they could aggregate growing in the national and global economy.

Under the increasingly dynamic business environment, which is very complex and unpredictable, where technology, globalization, knowledge and changing competitive approaches could affect on overall performance (Hitt et al.,

2001, Scott, 2000) (Hitt et al., 2001, Scott, 2000) That is also the reason why many firms are seeking new ways of conducting business aka innovation This is especially true with firms in manufacturing sector as innovation help them to generate wealth and also bring opportunities that firms should seek to exploit (O'Regan, Ghobadian,

Types of Innovation

Garcia and Calantone (2002) state that academics usually believe that they have started to know the process of developing innovations and it doesn’t matter what they name them Innovation has been categorized as radical, incremental, really new,discontinuous and imitative innovations, as well as for architectural, modular,improving and evolutionary innovations.

Academics classify an innovation as either radical or incremental by defining the degree of change associated with it (Chang, Chang, Chi, Chen, & Deng, 2012; Forés & Camisón, 2016; Madjar, Greenberg, & Chen, 2011).

Radical innovation is defined as the kind of innovation that creates fundamental changes in the activities of an organization or an industry It represents clear partings from existing practices If a firm has highly radical or competence- destroying innovations, they may significantly increase environmental ambiguity and consequence in the transformation of that firm or industry (Gopalakrishnan & Damanpour, 1997).

On the other hand, incremental innovations merely call for marginal departure from existing practices They mostly strengthen the existing capabilities of firms (Gopalakrishnan & Damanpour, 1997) (Gopalakrishnan & Damanpour, 1997.

There have been differentiated among factors for radical and incremental innovations, most of the studies examined the originality or radicalness of ideas The different results for two types of innovation are creativity procedures and the two measures may capture different types of creativity Therefore, the distinction between the radical and incremental appears in the innovation literature may hold with respect to individual-level creativity as well (Madjar et al., 2011).

This dissertation found interested in the category from OECD/Eurostat

(2005) as they identified innovation in four areas which are product, process, marketing and organizational This way is used more frequently in recent literature (Apergis, Economidou, & Filippidis, 2008; Arundel & Kemp, 2009; W M Cohen & Klepper, 1996).

Product innovation is defined as “a good or service that is new or significantly improved This includes significant improvements in technical specifications, components and materials, software in the product, user friendliness or other functional characteristics” (OECD/Eurostat, 2005, p 48) It is now well established from a variety of studies that the ability of firms to introduce product innovation is considered to be a key determinant of organizational performance and sustainable development (Danneels, 2002; Laursen, Masciarelli, & Prencipe, 2012).

According to OECD/Eurostat (2005), product innovations can exploit new technologies or knowledge, or can be developed by new uses or mixtures of present technologies or knowledge Both goods and services are referred to the term

“product” Product innovations contain equally the introduction of new goods and services and momentous improvements in the functional or user features of prevailing goods and services.

Process innovation is “a new or a significant improved production or delivery method” (OECD/Eurostat, 2005, p 49) Firms could create powerful advantage from process innovation by doing in ways which are better (Tidd, Bessant, & Pavitt, 2005) A notable example of process innovation is IKEA with their production and delivery process which could help them to compete with its slow build -to- order competitors. IKEA could produce their products faster and cheaper than their competitors by changing the way the company addressing the market need and improving information sharing to understand their customers better (Kopczak & Johnson, 2003).

The existing literature on process innovation focuses particularly on how it could help to improve firm’s performance (Baer & Frese, 2003; Gunday, Ulusoy, Kilic, & Alpkan, 2011) Cohen and Klepper (1996) state that process innovation could decrease the firm’s average cost of production This is in line with OECD/Eurostat (2005) as they state that process innovation indeed could be aimed to lower unit costs of producing and delivering Moreover, Chi (1994) mentioned that process innovation come from organization’s routine could create firm’s competitive advantage as it is a tacit knowledge which is hard for competitors to copy.

Marketing innovation is defined in Oslo Manual as is the application of a new marketing method including significant changes in product design or wrapping, product pricing, placement or promotion for that product and service An organization usually uses marketing innovations to address better to customer needs, expose new markets, or position new product on the market in order to rise firms’ sales (OECD/Eurostat, 2005).

An organizational innovation is the execution of a new organizational technique when firms perform their business, in their workplace or dealing with their external relations Organizational innovations aims to surge a firm’s performance by dropping administrative expenses or transaction costs, refining workplace gratification as well as labor productivity, and advancing access to nonreadable assets or dropping suppling costs (OECD/Eurostat, 2005).

Notwithstanding, product and process innovations are most familiar in the business sector, hence it is the sole focus in various studies.

Determinants of Innovation

3.3.1 Following Resources Based view theory

Data from several studies suggest that firms’ resources have a significant relationship with innovation performance, however, not all resources are equally important to govern firm success and performance (Bakar & Ahmad, 2010) Several lines of evidence conclude that intangible resources are imperative determinants for firm’s achievement Those assets confirmed by RBV that must be scarce, specialized and difficult to trade, imitate, or valuable (Barney, 1991; Bates & Flynn, 1995; Tarafdar

In general, tangible resources embrace firm’s capital, access to capital, firm’s location, real estate owned by firms such as buildings, warehouse and other accommodations Intangible resources include of knowledge, skills, reputation and other firm’s dynamic ability like proactiveness, innovativeness and risk seeking ability.

Table 3.1: Firms resources Tangible resources Intangible resources

• Real estate owned by firms

• Reputation and other firm’s dynamic ability

One of the initial published papers in entrepreneurship defined firm’s resources following resource-based view that are human, social, physical, organizational and financial resources (Greene, Brush, & Brown, 1997) However, later one in their study, Bakar and Ahmad (2010) categorize firm’s resources into six strategic resources including:

Bakar and Ahmad (2010) conducted their model using those resources as the independent variable and product innovation performance as the dependent variable.

The results showed some in line with RBV point of view as intangible resources, particularly “product reputation” is proved to be main indicators for product innovation performance This indicator is considered exclusive since it was hard to get and copy by others Additionally, reputation deceits in customer thoughts which are abstract and distinguish one firm with other firms The study also found that firms with more employees having opportunities in obtaining product reputation more than smaller firms because they could get financial assistance easier and they tend to have more qualified personnel in product innovation and research and developments.

3.3.2 Following Knowledge based view theory

Following KBV, firms is believed that could get better performance based on knowledge (Grant, 1996b) Fagerberg, Fosaas, and Sapprasert (2012) mentions that thousands of studies in innovation field have shown the affection of knowledge on innovation Many authors have emphasized the vital role of knowledge in building and sustaining innovation (Quintane, de Castro, Casselman, Reiche, & Nylund, 2011; Schulze & Hoegl, 2008) As such, innovation is defined as a knowledge-based commodity Hence, firms need to have knowledge to innovate and thus to profit from innovation (Lundvall, 2007, 2009).

The vital role of knowledge is confirmed in many other studies, Zhou and Li

(2012) conclude in their paper that firms with a wide-ranging knowledge base is more probable to attain radical innovation in the presence of internal knowledge sharing rather than market knowledge acquisition On the other hand, firms with a deep knowledge base tend to be more capable of developing radical innovation through market knowledge acquisition rather than internal knowledge sharing. Moreover, Du Plessis (2007) emphasize that “innovation is extremely dependent on the availability of knowledge and therefore the complexity created by the explosion of richness and reach of knowledge has to be recognized and managed to ensure successful innovation”.

Firms could get knowledge from different sources including internal knowledge sources and external knowledge sources (Battke, Schmidt, Stollenwerk,

& Hoffmann, 2016) Another way to distinguish knowledge source is follow knowledge context, hence they divided knowledge sources into critical technology, operations and market knowledge (Agarwal & Shah, 2014) Additionally, many researchers realize that the firm’s innovative activities getting support from their clients, suppliers, cooperative research organizations and even competitors (Lundvall, 2009) Innovation activities of firms are rooted into each other’s systems. Hence, sharing knowledge or information could lead to the cooperative development of innovative outcomes and better performance of firms.

Although the RBV struggles that a firm’s inner resources are necessary in nourishing competitive advantage Giving a brief review of the relevant academic literature we can see an expanding trend on resource application research that recommend value can solitary be obtained from resources by using them in a cleverer mode than the rivals (Barasa et al., 2017) Hence, knowing what information available from outside and learning from that seems to be a major influence on firm innovative outcome.

This is also in line with KBV that the role of knowledge becomes more and more essential Knowledge is believed to be a at most important resource of firms that could influence firm accomplishment (Agarwal & Shah, 2014; Argote, Ingram, Levine, & Moreland, 2000; Oerlemans & Knoben, 2010) Current studies also concentrate on the effect of knowledge at nation level and highlight that firms could lessen poverty by leading to the knowledge based-economy (Cooke, 2001; Godin, 2006; Lehrer, 2018) In addition, in Vietnam, right from the 90s of the twentieth century, the Communist Party of Vietnam determined:

"The revolution of modern science and technology is taking place strongly,attracting all different countries" Most recently, the Party has determined to associate industrialization and modernization with the development of the knowledge-based economy: "Promote industrialization and modernization with the development of the knowledge-based economy and environmental protection." (Document of the 11th National Congress of the Communist Party of Vietnam), in which the Party affirms, scientific and technological development is really a fundamental driver of the process of rapid and sustainable development Thus, it can be seen from the beginning, our Party attaches great importance to creating motivation for the formation and development of the knowledge economy.

The development of the knowledge-based economy in Vietnam is a major strategic change: transforming the economy from resource-based to primarily based on human knowledge and creative capacity With available resources, using new knowledge and new technologies to make more, better and more efficient Natural resources are restricted, the capacity to create of human being is limitless.

Therefore, the author would also want to test the relationship between knowledge sources and innovation in the context of Vietnam to see if it is in line with previous studies.

Knowledge sources

Knowledge source is defined as “a source from which knowledge, with practical applications can be obtained, such as know-how, know what, know where, and so forth.” (Rodríguez-Elias et al., 2009, p.6).

A number of authors have emphasized the vital role of knowledge in building and sustaining innovation (Leonard-Barton, 1995; Quintane et al., 2011; Schulze &Hoegl, 2008) In addition, innovation is defined as a knowledge-based commodity.Hence, firms need to have knowledge to innovate and thus to profit from innovation(Lundvall, 1988, 1992) Therefore, this study also focuses on the impact of knowledge on innovation In doing so, it uses three different sources of knowledge: internal knowledge sources, collaborative knowledge sources and regional knowledge sources.

Internal knowledge sources for innovation have been researched extensively in developed and developing countries alike (Barasa et al., 2017; Baumann & Kritikos, 2016; De Oliveira Cabral, 2010; Roper, Love, & Bonner, 2017; Svetina & Prodan, 2008) Internal knowledge sources could be generated from internal R&D which has become a classical explanation for innovation in the sense that firms with higher level of internal R&D are expected to be more innovative(Caloghirou, Kastelli, & Tsakanikas, 2004; Frenz & Ietto-Gillies, 2009) Another example of internal knowledge source are managers’ experience and skills With their experience and skills, managers understand and response effectively with changes in their competitive environment Additionally, managers could rely on their experience and skills accumulated over time to make decision in identifying innovation opportunities (Bantel & Jackson, 1989; Liu & Buck, 2007; McGee & Dowling, 1994).

Collaborative knowledge sources have been relevant to innovation generation and firms are aware of the necessity of establishing R&D collaboration to obtain expertise which cannot be generated in-house (Frenz & Ietto-Gillies, 2009).Collaboration with other firms and institutions in R&D is a crucial way to make external resources usable (Becker & Dietz, 2004; Bougrain & Haudeville, 2002).Several lines of evidence suggest that there is a positive influence between collaborative knowledge sources and innovation (Becker & Dietz, 2004; Frenz &Ietto-Gillies, 2009; Laursen & Salter, 2006) However, collaborative knowledge sources do not always bring benefits to firms When collaborating with universities,firms’ achieved benefits may be insignificant and the promised knowledge transfer may not happen, because universities might collaborate with competing companies or unintended flows of knowledge and confidentiality issues might occur (McAdam, O’Hare, & Moffett, 2008).

Data from several studies suggest that regional knowledge sources influence firms in improving their innovation (Boschma, 2005; Cantwell & Iammarino, 2000;Moulaert & Sekia, 2003) Regional knowledge refers to knowledge that firms can obtain even when they do not enter any proactive collaboration with others When firms locate in close proximity or in the same region, they can gain benefits such as(a) opportunity to access to specialized labor, (b) opportunity to access to specialized inputs, (c) opportunity to access to technology spillovers, and (d) opportunity to access to greater demand The first three types of benefits bring firms unique or efficient access to the supply of necessary resources including knowledge resources(McCann & Folta, 2008).

Hypotheses

As explained above, different sources of knowledge can have a different effect on firm-level innovation Following this line of thought, the author hypothesizes that in a transition country like Vietnam, with a weak innovation system, knowledge even plays a more vital role compared to advanced economies. Below, the author develop hypotheses that link the different knowledge sources to innovation.

The ability of firms to create knowledge internally could lead them to be more innovative and successful (Nonaka & Takeuchi, 1995) The resource-based view also emphasizes the important role of internal knowledge sources, which could be generated from human resources (employee training, managerial experience and skills) and technology resources (Barney, 1991; Wright, McMahan, & McWilliams,

1994) Moreover, Porter (1991) mentions the needs for firms to upgrade their internal advantages to sustain and extend competitive advantages When firms are in a highly competitive environment, they are forced to innovate and by developing internal knowledge continuously, firms could create temporary knowledge monopolies. Besides, firms that invest in R&D extend their internal knowledge base, which also allows them to increase their innovation output (Barasa et al., 2017; Baumann & Kritikos, 2016; De Oliveira Cabral, 2010; Roper et al., 2017; Svetina & Prodan,

2008) Within the context of Vietnam, the author also proposes that internal knowledge sources, such as internal R&D and managerial experience, will influence product innovation positively.

Many recent studies have shown a positive relationship between internal knowledge sources from R&D, manager experience and firm innovation (Austin, 2002; Barasa et al., 2017; Frenz & Ietto-Gillies, 2009; Goedhuys, Janz, & Mohnen,

2013) When opening up their economies, most developing countries make their manufacturing firms face the fierce competitive conditions of globalization Hence, firms in those economies need to have the ability to assimilate, master and improve technologies to provide the international market with high quality products That ability is affected by several factors including internal R&D and the quality of management (Goedhuys et al., 2013) Goedhuys et al (2013) state that firms conduct internal R&D as an alternative to imported technology or build up absorptive capacity to benefit from outside R&D, while qualified managers help firms in converting research results into marketable products and absorb external market information.

Moreover, managers play a vital position in analyzing the situation to understand and describe a firms’ economic performance Managerial experience is generally considered to be an important input for successful innovation (Schilirò,2010; Shane, 2003) It also reflects an important tacit skill required to select the most promising innovation projects (Custódio, Ferreira, & Matos, 2017) Hence, the managerial ability to manage the resource portfolio into bundles of unique capabilities that can be leveraged within a certain competitive environment is critical for developing new innovative products (Ireland & Webb, 2007) As such, this study argues that prior experience in innovative activities provides managers a basis to more fully understand the challenges of innovation, which makes these managers more tolerant of the uncertainty and ambiguity it brings (Birkinshaw, Hamel, & Mol, 2008)

The author formulates the following hypotheses:

Hypothesis 1a: The stronger a firm’s internal R&D, the higher the likelihood that that firm produces a product innovation.

Hypothesis 1b: The longer time the top manager of a firm working in this sector, the higher the likelihood that that firm produces a product innovation.

Various scholars, most prominently in the literature on open innovation, have emphasized that firms are likely to face difficulties when innovating in isolation and suggest that firms gain access to their most valuable knowledge through collaboration (Greco, Grimaldi, & Cricelli, 2015; Hamel & Prahalad, 1994; Shan, Walker, & Kogut, 1994; West & Bogers, 2014) Doloreux and Lord-Tarte (2013) even state that the closed or linear model where firms rely on only internal R&D has become obsolete and is considered insufficient in today’s market Indeed, firms can benefit from innovative activities of competing firms, academic institutions and supply chain partners (Isaksson et al., 2016) Laursen and Salter

(2006) also showed that firms that access a broader range of collaborative knowledge sources (e.g collaborating with universities, competitors, and customers) and use them more deeply, increase their innovation performance. Hence, instead of creating new knowledge internally firms can also combine or recombine their existing knowledge with that of others to create new combinations of knowledge (Oerlemans & Knoben, 2010).

In this study, the author expects the level of collaborative knowledge,whether from inside or outside the supply chain, will benefit a firm’s innovative performance However, the degree to which knowledge from inside or outside the supply chain affects innovation might be different It has been demonstrated that joining alliance networks can enhance firm learning and innovation (Ahuja, 2000; Soh, 2003; Walker, Kogut, & Shan, 1997) Pittaway, Robertson, Munir, Denyer, and Neely (2004) emphasize that network relationships with suppliers, customers and intermediaries are vital factors affecting firms’ innovation performance and productivity, as different partners control different sources of knowledge and information, which will influence firms differently Furthermore, firms that do not collaborate nor exchange knowledge, limit their knowledge base in long term. Several lines of evidence suggest that collaborative knowledge sources are critical not only to create in-house innovations, but also for learning about innovative work practices that other organizations have done or adopted (Biemans, 1991; Erickson & Jacoby, 2003) Empirical findings from South African firms showed that these firms used different external sources, including (1) business organizations: buyers, suppliers, competitors, consultants and sectoral institutes; (2) technological knowledge sources: public research labs, universities, innovation centers; and (3) codified knowledge sources: patents, electronic databases (Oerlemans & Knoben,

Using knowledge from competitors and suppliers seems to increase the number of innovations within a firm, while others sources such as universities and institutes have less effects on the innovative potential of firms (Oerlemans & Knoben, 2010; Doloreux and Lord-Tarte (2013) (Oerlemans & Knoben, 2010; However, Laursen and Salter (2006) also provided evidence for an inverted U-shape relationship between the number of collaborative knowledge and innovative performance In addition, they also found a curvilinear effect related to how deep firm’s use collaborative knowledge They concluded that when firms adopt too many collaborative knowledge sources or if firms use more than three sources of collaborative knowledge deeply in their innovative activities, the declining returns are likely to begin Evidence from several recent studies found an inverted U-shape as well (Bayona-Saez et al., 2017; Chiang & Hung, 2010; Garriga, Von Krogh, &Spaeth, 2013) However, given our specific research context in a lower middle- income country with a still underdeveloped technological environment, the amount of collaborative knowledge sources is probably more restricted compared to more advanced countries This means that the author does not expect that firms are confronted with external information overload Yet, given the negative effect of over- search on innovation in developed countries, the study tentatively explores the existence of this relationship in Vietnam in a separate analysis (in line with Bayona- Saez et al (2017); Hung and Chou (2013); Laursen and Salter (2006)) ) The author formulates the following hypotheses:

Hypothesis 2a: The stronger a firm’s collaborative knowledge gained from inside the supply chain, the higher the likelihood that that firm produces product innovation.

Hypothesis 2b: The stronger a firms’ collaborative knowledge gained from outside the supply chain, the higher the likelihood that that firm produces a product innovation.

Access to resources that are not internal to the firm can also stem from simply being located in a region where many other firms are located, a so-called agglomeration Within that region, firms could take advantage of available specialized labour, specialized inputs, technological spill-overs, and demand market thickening thickening (McCann & Folta, 2008) A large body of research shows that tacit knowledge can be implanted in geographic regions, enabling firms within these regions to draw from this knowledge (Boschma, 2005; Sorenson & Baum, 2003;Tsuji & Miyahara, 2010) Additionally, social scientists have long recognized the importance of geography for innovation (Doloreux & Lord-Tarte, 2013; Frenken, vanOort, Verburg, & Boschma, 2005; Funk, 2013; Laursen et al., 2012) Being in scientific communities and recruiting skilled employees provide knowledge that help firms innovate and generate competitive advantage McCann and Folta (2008) state that if firms are located in clusters, there is a pooled market for workers with specialized skills, which benefits both workers and firms.

Moreover, when firms require specialized inputs such as tools, suppliers, manufacturing facilities or services, being in the same region with other firms in the same or similar fields would help them to reduce transaction costs Schumpeter

(1934) mentioned that proximity is helpful as it enables access to diverse knowledge that firms can recombine in novel ways to make discoveries Furthermore, the benefit of being in the same region with other firms can help a firm to stay informed of technological knowledge, which help them to be more innovative (Funk, 2013). Proximity is considered an important condition for knowledge sharing, transfer and technology acquisition (Gertler, 1995) Firms’ innovation processes can change remarkably across regions (Doloreux & Lord-Tarte, 2013) Being close to firms from the same or similar industry could bring firms benefits in terms of labor market pooling and transport cost savings At the same time, being with firms from outside its industry could provide firms with knowledge spillovers (Beaudry & Schiffauerova, 2009) For those reasons, the author supposes that when firms are located in a region with more firms or a region with high levels of R&D activities, it is more likely for them to innovate.

Hypothesis 3a: The stronger the knowledge base of the region a firm is located in the higher the likelihood that that firm produces a product innovation

Hypothesis 3b: The higher the population of the region a firm is located in the higher the likelihood that that firm produces a product innovation

Research model

Innovation has been studied as an indicator for firm performance in numerous studies (Artz et al., 2010; Calantone, Cavusgil, & Zhao, 2002; Darroch,2005; Hitt et al., 1997; Kasseeah, 2013) It is broadly viewed as one of the most important springs of sustainable competitive advantage in an progressively changing milieu, because it leads to firm’s improvements, creates continuous advances that benefits firms to survive, lets firms to develop more speedily, be more efficient, and finally be more profitable than their competitors who do not innovate Hence, a firm’s capacity to generate innovations has consistently been considered a source of sustained competitive advantage (Barney, 1991) Additionally, innovation often originates from the exchange and recombination of knowledge Therefore, firms need to acquire new knowledge from numerous sources to continuously generate innovations and maintain their competitive edge (Porter, 1990).

Moreover, the increasing of knowledge-based economies has directed to the growth of the ‘knowledge-based view’ theory This theory suggests that knowledge is the core source of firms’ competitive advantage and therefore the ability to generate knowledge is one of the most significant abilities of firms (Grant, 1996a) Under this hypothesis, firms could be considered as knowledge creating hub (Nonaka

Firm-level resources allow firms to distinguish themselves from their competitors and develop a competitive advantage According to the resource-based view (RBV) of the firm, this is only possible, however, when resources are valuable, rare, inimitable and non-substitutable (Barney, 1991) Even though knowledge is crucial for all type of firms, the exact type of knowledge that is most useful might differ between larger and smaller firms Large companies engaged in internationalization pay particular attention to internal knowledge as a source of innovation (Scaringella, 2016) SMEs on the other hand are resource-constraint so they need to draw on knowledge networks that tie a broad set of partners, customers and suppliers together to take advantage of innovation resources As such, these firms could benefit from an ‘open innovation’ approach.

According to to ChesbroughChesbrough (2003, p XXIV) “open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as firms look to advance their technology.” Hence, open innovation refers to the capability of firms to connect with other actors and develop connections in order to make use of external sources and ideas (Chesbrough, 2003; Sakkab, 2002) Firms that are solely focused on internal knowledge sources, miss opportunities and potentially suffer from lock-in of existing ways of doing business (Uzzi, 1997) Several recent studies suggest that a growing number of firms pursue an open innovation strategy, which means involving both inbound activities (focusing on external knowledge sources and collaboration with external stakeholders) and outbound activities (generating knowledge through R&D for own uses and commercializing innovations) (Greco et al., 2015; Schroll & Mild, 2012; West & Bogers, 2014) In a related stream of literature, Boschma (2005) and Asheim and Isaksen (1997) and argue that firms can learn and gain external knowledge by being located in a region with other firms Hence, knowledge might flow from various sources, which can be internal, collaborative and regional sources.

Internal knowledge sources could be generated by firms through in-house R&D activities, employee training or managers’ experience (Chen & Huang, 2009; Frenz & Ietto-Gillies, 2009; Martínez-Ros & Orfila-Sintes, 2012) Collaborative knowledge sources could come from collaborative activities between firms and their counterparts from inside the supply chain, such as competitors, suppliers and customers, or from outside the supply chain, such as universities and research institutes (Lin, Hung, Wu, & Lin, 2002) Regional knowledge sources come to firms from the information available in the region where firms are located, because knowledge may spill over across firms, especially when the distance between them is small (Boschma, 2005; Knoben & Oerlemans, 2006) Boschma (2005) states that short distances could bring people together, favor information contacts and facilitate the exchange of tacit knowledge Hence, within the same region, firms could have access to specialized labor sources and gain knowledge from their expertise.Furthermore, more recent attention has focused on the effect of internal firm dynamics, inter firm linkages and regions on innovation (Doloreux & Lord-Tarte,2013; Giuliani, 2006; Wang & Lin, 2012) Similarly, this study therefore aims to simultaneously test the relationship between three different sources of knowledge(internal, collaborative and regional) with innovation.

In this study, the author focuses on product innovation, which is defined as “a good or service that is new or significantly improved This includes significant improvements in technical specifications, components and materials, software in the product, user friendliness or other functional characteristics” (OECD/Eurostat, 2005, p 48) Illustrations of product innovation might contain new product's inventions; technical condition and quality enhancements made to a product; or the attachment of new components in that product, materials or desirable functions into a current product.

It is now well established from a variety of studies that the ability of firms to introduce product innovation is considered a key determinant of organizational performance and sustainable development (Danneels, 2002; Laursen, Masciarelli, &Prencipe, 2012).

Knowledge from inside the supply chain (from customers, competitors, suppliers)

Knowledge from outside the supply chain (Universities, Research institutes)

- Knowledge benefit from the position of the firm even when firms do not enter in any collaboration

Figure 3.1: Research model with all the variables

Source: The author composed and designed

METHODOLOGY AND DATA COLLECTION

Research context

Although Vietnam has grown astonishingly in the past three decades, the transition to a flourishing and modern economy has only just begun Vietnam has per capita income still accounting for only a little part of the global average, the country is attempting to maintain its fast-growing path and follow the direction of other successful East Asian economies to join the ranks of high-middle income countries for the past half-decade Even though Vietnam has every potential to achieve this goal, victory is not by itself The population is aging rapidly, which moderate labor productivity Moreover, slow investment growth is weighing on Vietnam's medium- term growth potential How to cope with the resistance of domestic structures? According to the political report of the 10th Central Committee of the Party at the 11th National Congress of the Party, Vietnam needs to steer the external environment changing, where global trade structures are shifting, breakthrough technology, rapid innovation, and Climate change is shaping opportunities and creating new risks for the country.

Whether Vietnam can continue to maintain previous growth or not, this is extremely important Although growth is not the goal that the government are aiming for, growth is a necessary condition for the wider development It is the basis needed for creating jobs, alleviating poverty and mobilizing resources to invest in health, education and other social goals Vietnam have some advantages that we should not forget which are a geographic location, an open economy, a young and largely labor force in rural areas, and a high level of domestic savings Therefore, the country has conditions for high and sustainable growth Nonetheless, in order to take advantage of these fundamentals, the government needs to regularly focus on policy and institutional reforms targeted at creating increased productivity, effective investment in human capital and physical capital, sustainable and efficient use of natural resources.

Recently, the big trends are global transforming forces, shaping the future world by profound influence on businesses, society, economy, culture and human life Hence, Vietnam should be able to identify success, analyze and has action to face those major trends to build a long-term dynamic development strategy that contributes to successful economic development due to the fact that Vietnam is likely to be the country most affected by major global trends.

Vietnam is one of the most open countries in the world, with trade to GDP ratio reaching nearly 200% and FDI inflow accounting for about 7% of GDP in 2018 (GSO, 2019) Regarding geopolitical position and trade structure, Vietnam may be more vulnerable to climate change and US-China trade tensions Therefore, The Central Theoretical Council (2019) suggest four major global trends that Vietnam needs to consider in the next two decades which are population movement, disruptive technology, the rise of China and climate change.

We could see the vital role of innovation especially breakthrough technology which could be defined as emerging technologies that cause a change in costs or access to products or services, or quickly change the way we collect information, produce or interact operative (Lientz & Rea, 2016) Vietnam are currently in the midst of the 4th industrial revolution, characterized by rapid technological diffusion, multi-technology convergence, and emergence of global platforms Breakthrough technology is often based on technology and digital products, but they can go beyond the connection and potential of the internet This includes modern production methods such as robotics, artificial intelligence, and the internet of things They also include advances in nanotechnology and biotechnology - and new production lines such as batteries, drones, solar panels, self-driving cars, and exotic materials (Lientz

The vast opportunities will be associated with innovation and technological breakthroughs that contribute to expanding access to global markets, creating new goods and services, transforming production processes, changing business models, and make a significant impact on development.

The economic and social transformation that innovation and especially breakthrough technology could bring is that they could accelerate development of a country If a country cannot compete in the future global economy, they will be left behind Hence, to take advantage of the potential of new business models, ways of providing services, and shifting the source of competitiveness, Vietnam need to have a multi-sector and multi-pronged approach to increase opportunities especially foster innovation and technology for the country.

Assessing innovation policy in Vietnam

In the 2017-2018 Global Competitiveness Report carried out by the World Economic Forum (WEF), Vietnam's institution was awarded 3.8 out of 7 points, ranked 79th out of 137 economies, behind Laos (62/137) and Thailand (78/137). Additionally, the 2016 World Bank's Easy Business Index also showed difficulties in the business process in Vietnam such as starting a business (ranking 119/189), protecting investors (ranking 122/189), and tax (ranked 168/189) These obstacles have made business activities in general and innovation activities of firms in particular difficult Phung Xuan Nha and Le Quan (2013) in research on innovation of Vietnamese enterprises also pointed out the main obstacles that many businesses often encounter when conducting innovation, in which the unstable state policy, high risk of innovation and lack of legal protection accounted for 80 percent and 70 percent respectively US Embassy (2018) reported that despite various efforts made the government, intellectual property in Vietnam is yet to be effectively safeguarded.

In 2017, the piracy software rate for the IT industry remained at 74 percent – a concerning record in comparison with other manufacturing destinations in the world.These are major barriers to the development of science and technology, technological innovation in Vietnam.

In recent years, the Ministry of Science and Technology (MOST) has identified firms as the center of innovation (creative innovation), in which, attaching importance to technological innovation to increase productivity and competitiveness of enterprises and nation Policies and laws on science and technology have focused on promoting businesses to renovate technology and production processes The national technology innovation program by 2020 has more than 50 technology innovation projects in diverse fields, in the form of a leading enterprise, cooperating with research institutes, universities or receiving transfer technology from abroad for technological innovation.

In addition, the 3 parties linkage policy (Chính sách ba nhà) about the collaboration between universities, the government and firms announced at the 16thConference of Science and Technology in 2019 emphasizes that innovation could only boosted and bring fruitful results when 3 parties work in harmony For the State,they have investment programs on R&D (research and development), infrastructure investment, laboratories and most importantly, development of science and technology policies As for entrepreneurs, they have financial resources,knowledgeable market, venture capitalists With universities, they have human resources, advanced training programs, etc Each party has its own strengths and needs a model of cooperation and cooperation to create high-value commercialized products Vietnam could build up an environment to foster innovation by enforcing this policy as there are many other foreign countries do it very well There are numerous policies in Vietnam related to innovation listed in Table 3.1

Table 4.1: Key Policy Documents related to innovation in Vietnam

Parliament and Party promulgated documents

Innovation and growth-related contents Notes

Law on Science and Technology

Encouraging innovative activities, technical improvements, production rationalizing and innovation (Article 47)

National technological innovation program (Article 38)

National technological innovation fund (Article 39)

Tax policies to promote technology transfer activities and other encouragements (Article

The goal of technological innovation and the measures to promote high technology application (item a, Clause 2, Article 9, Article 10, Article 11, Article 12)

General conditions for protected industrial designs are new, innovative, capable of industrial application (Article 63)

Central Resolution 6 in the development of science and technology

The specific objectives of science and technology in 2020 (Paragraph b, Section 2)

Decision 1342/QD-TTg (5/8/2011) on the establishment of National

Introduction of the national technology innovation fund and operational support funding for organizations, individuals and businesses doing research, transfer, innovation and technological perfection (Article 2)

Decision 677/QD-TTg (10/5/2011) approving the national technological innovation program until 2020.

Missions until 2015 and 2020 on technological innovation (Part I)

Decree 122/2003/ND-CP on established national scientific and technology development fund

Financial support methods from the fund for scientific missions and extraordinary new technologies (paragraph b of Article 13)

Decree 119/1999/ND-CP of the

Government on incentives for firms to invest in science and technology

Encouraging technological innovation, manufacturing new products (Article 1, Paragraph 3 of Article 4)

(11/08/2013): To approve the program of science and technology market development until 2020

Regulations on science and technology market (Section 1, Part I)

Decision 418/QD-TTg (2012) approved the development strategy of science and technology in the period of 2011-2020

Development of science and technology market associated with enforcement of intellectual property law to promote the commercialization of applicable research results and technology development,encourages scientific creativity and technology (Section 1 & Section 4, Part I)

Decision 1244/QD-TTg (2011) on the approval of the direction, goals and tasks of science and technology in the period of 2011-2015

The target number of registered patent protection increased 1.5 times compared with the period 2006-2010 (Section 1, Part II)

Decree No 56/2009/ND-CP on support for the development of small and medium enterprises

Innovating, technological capacity building, increasing number of technical qualifications (Article 9)

Decision 2441/QD-TTg (2010) on the approval of the national product development program until 2020

National product development based on new technology and high technology (Section 1, Article I)

Decree 115/2005/ND-CP, amended by Decree 96 provides for autonomy, self-organization and accountability of public science and technology organisations

Strengthening accountability and enhancing positivity, proactivity, dynamic, creativity for science and technology organisations and their heads (Paragraph 1, Article 2)

Decision 68/2005/QD-TTg on the approval of supporting the development of the intellectual property program for firms

Supporting firms in creating and developing intellectual property for innovative achievements of science – technology. Encouraging creative work in firms; delevering intellectual property information to research activities, science – technology innovating (Article 1, Section 2)

Decision 2204/QD-TTg on the approval of supporting

Supporting the development and application of management processes, results, scientific development of intellectual property program in the period of

2011-2015 research products to enhance the value of intellectual property Supporting to exploit science - technology information and intellectual property for research, development, manufacturing and merchandising (Paragraph d, đ, Section 2, Article 1)

76/2007/QD-UBND of The City

Ho Chi Minh City Science and

The loaned objects (Section 2.2) HCM

Beside Ho Chi Minh City, there are many provinces / cities in Vietnam have science and technology development fund to support businesses, organizations and individuals to carry out science and technology activities.

Circular 15/2011/TT-BTC (9/2/2011) Establishing, organizing, operation, management and using science and technology development fund guidelines for enterprises.

Decree No 80/2007/ND-CP: About science and technology enterprises

Decision 592/QD-TTg (22/05/2012): To approve the supporting development program for science and technology enterprises and state-owned science and technology institutions in implementing autonomy and self-responsibility.

Decision 735/QD-TTg (2011): To approve the scheme of international integration of science and technology until 2020

Decision 12/2011/QD-TTg dated 24/02/2011 of the Prime Minister on policies to develop some supporting industries.

Decision 34/2007/QD-BCN of the Ministry of Industry (The Ministry of Industry and Trade at present), July 31, 2007, regarding the approval of supporting industry development planning to 2010, with a vision to 2020.

Decision 1483/QD-TTg dated 26 January 08, 2011 of the Prime Minister on supporting industry list of product development priorities

Decision 1556/QD-TTg October 17, 2012 the Prime Minister approved the project: Supporting small and medium enterprises to develop in the field of supporting industry.

Circular 96/2011/TT-BTC dated 07/07/2011 of the Ministry of Finance guiding the implementation of financial policies for the development of some supporting industries

Decree 87/2010/ND-CP dated 13/8/2010 of the Government detailing the implementation of some articles of the Law on Export and Import Duties

Decision 5487/QD-UBND (24/11/2011) on supporting interest rate after investing in Hanoi for enterprises

Decision 522/QD about the approval of the Science and Technology Development Fund in Binh Dinh Province

Decision 36/2006/QD-TTg dated 02/08/2006, of the Prime Minister on promulgating the Regulation on management of the supporting program to develop the intellectual property of enterprises.

Source: The author collected and designed

Even though the Government has had several preferential policies, typically the National Technological Innovation Fund established under the Decision1342/QD-TTg dated 5/5 8/2013 has the function of preferential loans, loan interest support, capital support for enterprises transferring technology research and innovation However, the sponsorship of such policies and funds for technology innovation is still limited Research results of Luong Minh Huan and Nguyen Thi Thuy Duong (2016) show that enterprises rarely access capital from the state budget to implement technology improvement activities, despite the chapter’s government funds and funds for this issue In addition, the government development fund for enterprises require that local authorities must have reciprocal capital while the locality has no reciprocal capital, so there is no fund This makes the policy seems not to be useful as it should be.

Methodology approach

Descriptive approach aims to examine and screen variables in the original research model While econometric approach can verify the logic and rules of observations in the study, helping verify the hypotheses mentioned above.

To measure the dependent variable, the author uses a dummy variable that takes the value of “1” if a firm has introduced any new or significantly improved innovative product and “0” if otherwise Hence, a binary logistic regression model is chosen for analysing the data.

Logistic regression is defined as an appropriate regression method used when the dependent variable is dichotomous (binary) It is similar with all other regression analyses and known as a predictive analysis It is used to illustrate data and to demonstrate the relationship between one dependent dichotomous variable and one or more nominal, ordinal, interval or ratio-level independent variables.

Peng, Lee, and Ingersoll (2002) mentioned that “logistic regression is well suited for describing and testing hypotheses about relationships between a categorical outcome variable and one or more categorical or continuous predictor variables In the simplest case of linear regression for one continuous predictor X and one dichotomous outcome variable Y, the plot of such data results in two parallel lines, each corresponding to a value of the dichotomous outcome”.

The simple logistic model has the form: logit(Y) = natural log(odds) = 𝐿𝐿 ( 1− 𝐿

4.2.2 Innovation research used logit regression

The method that the author used in this research has been used in previous studies using similar data structures (Ayyagari, Demirgỹỗ-Kunt, & Maksimovic, 2011; Barasa et al., 2017).

For instance, Ayyagari et al (2011) used regression model to estimate for firm i in industry j in country k is “Innovation i,j,k = α +β1Firm Size Dummiesi,j,k +β2Agei,j,k +β3Corporationi,j,k +β4Number of Establishmentsi,j,k +β5Capacity Utilization Dummiesi,j,k +β6Ij +β7Ck + εi,j,k, for firm i in industry j in country k. The variables are described as follows: Innovation is one of the following variables: Developed a major new product line Upgraded an existing product line, Introduced new technology that has substantially changed the way that the main product is produced, Opened a new plant, Agreed to a new joint venture (JV) with foreign partner, Obtained a new licensing agreement, Outsourced a major production activity that was previously conducted in-house, and Brought in-house a major production activity that was previously outsourced are all dummy variables that take the value 1 if the firm undertook the corresponding innovation, and 0 otherwise”.

Barasa et al (2017) also used analogous method in their study that “a logistic regression model is used for analysing the data due to the binary nature of the dependent variable” Their survey asked respondents whether the firm produced any new or significantly improved product or service in the last three years and then asked the innovative product or service can be new to the firm or new to the market.They used a dummy variable that takes the value of “1” if a firm has introduced any new or significantly improved innovative product or service and “0” if otherwise.

Data collection

We test our hypotheses using Vietnam empirical data from two main sources:

(1) The World Bank Enterprise Survey (ES) conducted from November 2014 to April

2016 and (2) the Innovation Capabilities Survey (ICS) performed between October

2016 and February 2017 Since the 1990’s, The World Bank has operated firm level surveys called The ES focusing on a country’s business atmosphere and investment climate in 148 countries, covering and they have collected data of over 155,000 firms in those countries Among those countries, 139 countries have been evaluated following the standard methodology and this allows researcher to be able to compare across time and across countries Data from the survey are utilized to generate statistically significant corporate environment indicators which could be comparable across nations Moreover, the ES are likewise applied to construct a panel of firm data that could bring about its feasible to trace adjustments in the business situation over time It can also allow researcher to assess the impact of improvements.

However, only until 2005 The World Bank had started to apply the standardized instruments to establish comparability of data across all countries This survey collects data that came from experiences of firms together with perception of enterprises about the corporate environment and investment climate This firm-level survey encompasses non-agricultural formal and private-sector businesses.

The second survey - The ICS is organized as a follow-up and corresponding to the ES To form the ICS, The World Bank handpicked respondents accidentally from the ES sample In Vietnam, The World Bank picked 300 manufacturing firms as the sample size The ICS focuses on innovative activities and innovative capabilities of manufacturing firms The standardized questionnaires have been translated into local languages and back translated into English to check its accuracy.

The ICS is a partnership between the Tilburg University and the EnterpriseAnalysis Unit (DECEA) of the Development Economics Group of the World Bank.Tilburg University conducted a broader project to review the innovative capability of manufacturing businesses in nine nations which are Kenya, Ethiopia, Ghana, Tanzania and Uganda in Africa; Bangladesh, India, Indonesia and Vietnam from Asia The author had a chance to join Tilburg University project in Vietnam so she could access the data after they collected all data in February 2017.

The 2016 Vietnam ICS takes aim at studying the innovative activities and innovative capabilities of manufacturing firms in Vietnam This survey collected firm-level data using an appropriately designed questionnaire and go after the global methodology of survey design by DECEA This survey has been conducted in Vietnam since 2015 by the World Bank Group Data from the 2016 Vietnam ICS be able to be linked to the 2015 Vietnam ES by using the “idstd” variable, permitting a deeper analysis of the links between innovative capabilities, innovation and the accomplishments of manufacturing firms in Vietnam.

The most important purpose of the ICS project is to gather firm-level data from manufacturing firms in Vietnam to have better understanding about:

• Information sources and inspiration for innovative activities of firms in manufacturing sector.

• Key elements hindering innovative capability in the manufacturing firms.

• Firms ability to discover, obtain and utilize knowledge for innovative outcome and output.

• Entry to foreign markets and companies’ innovative capability.

The follow-up survey focuses on innovative activities and innovative capabilities of manufacturing firms To ensure for accuracy, the standardized questionnaires are translated into local languages and back translated into English after that.

The ICS’s sampling strategy go along with the standard global methodology of stratified random sampling in the ES Nevertheless, sample is taken from manufacturing businesses included in the Vietnam Enterprise Survey in 2015.Consequently, experiment is stratified established on firm location and size.Businesses are picked from all the four regions encompassed in the ES It spreads across small (5 to 19 employees), medium (20 to 99 employees) and large (100+ employees) enterprises The interview conversion rate was almost 46%.

The World Bank used stratified random sampling, which means all population are groups within homogeneous group and they selected within each group by using simple random methodology This way is more accurate and could help to reduce the error of estimation than the simple sampling methods Furthermore, unbiased estimates could be obtained from different subdivisions of the population with some known level of precision This method helps to obtain unbiased estimates from different subdivisions of the population with some known level of precision as well as obtain unbiased estimates for the whole population In most cases, stratified sampling is more precise and may produce a smaller bound on the error of estimation than using a simple sampling method The World Bank used firm size, geographic region within a country and business sector as the strata for the two surveys.

The surveys come up with self-reported data which have both advantages and disadvantages One benefit is that: “For many purposes, the simplest and most accurate way to discover what a person does is to ask him” (March and Simon, 1993, p 163) Therefore, the use of perceptual approaches has the advantage that the research may have a moderately high level of validity It could be understood by the fact that the questions can be posed and address directly the underlying nature of the construct to be measured Moreover, data provided by a single informant also captures situations and conditions within firms with a high level of detail and specificity (Lyon, Beffa, Blanc, Auling, & Aragno, 2000) Another advantage is that respondents taking part in the survey are often the most knowledgeable persons in the organization to provide the information (Lyon et al., 2000) (Lyon et al., 2000).

On the other hand, the data supplied by single respondents could be highly tricky as it may introduce the common method bias problem which is the potential inflation of correlations between measures accessed via the same method and may be especially problematic in self-reported data In addition, self-reported data from a

North Central area and Central coastal, 71, 24% single respondent is known as functional bias Dissimilar types of respondents may understand things differently, such as how their firms should score on the dimensions measuring innovation modes (Lyon et al., 2000) Therefore, this could be one of the limitations of this study.

The data for this study is merged from the most recent version of the ES and the ICS conducted in Vietnam Unsurprisingly, the data contain missing observations, hence our analyses used fewer observations than the full sample.

In this research, the author used the data for Vietnam in this survey by merging the most recent ES and ICS surveys in Vietnam At the beginning, the ES sample for Vietnam is 996 firms Later, the author took 300 manufacturing firms to interview for the ICS Lastly, after merging our dataset, there are some missing variables and the study finalized with consists of 294 firms The survey was conducted in four Vietnamese regions, which are the Red River Delta, North Central area and Central coastal, South East and the Mekong River Delta.

Figure 4.1 Distribution of the realized sample by region

Source: The author composed and designed

The data is analyzed by using logit and tobit models Logit models are applied when the dependent variable is binary (process innovation present yes/no) whereas tobit models are utilized for censored dependent variables (percentage of sales from new products).

The software to deal with the data is Stata which is a general-purpose statistical software package Stata was created in 1985 by StataCorp and most of its users work in research, especially in economics.

Variables

Dependent Variable: Innovation is measured by using the question “From fiscal year 2011/2012 thru 2013/2014, did this establishment introduce any new or significantly improved product or service?” from the ICS The author codes a variable equal to one if firms respond affirmatively and a variable equal to zero if firms respond negatively to the question The author defined product innovation following the OSLO manual (OECD, 2005) in which product innovation as the market introduction of products that are either “new to the firm” or “new to the firm's market” Our definition of innovation has been used in a range of prior studies and our measure of innovation is in line with previous studies such as Barasa et al (2017); Hussen and Çokgezen (2019)

Independent variables: Internal knowledge sources The author measures internal knowledge sources using internal R&D and top manager experience InternalR&D has been using as the explanatory variable for innovation output in many studies (Crépon, Duguet, & Mairessec, 1998; Frenz & Ietto-Gillies, 2009) InternalR&D is defined as creative work undertaken to increase knowledge for developing innovative products and processes Moreover, the author also uses top manager experience as another explanatory variable for internal knowledge sources It has been shown to have a relationship with innovation (Bantel & Jackson, 1989;Daellenbach, McCarthy, & Schoenecker, 1999; Li, Lin, & Huang, 2013) The author used questions from the ICS to measure these variables Internal R& D is measured with the question: “Between fiscal year 2011/2012 and fiscal year 2013/2014, did this establishment conduct internal R&D?” The author codes it equal to 1 if firms choose yes and zero otherwise 1

For manager experience the author used: “how many years of experience working in this sector does the Top Manager have?” The author wanted to use more persisted measure such as the degree of the managers however due to limited access to the information and also other research have done the similar method so this research follow the line (Barasa et al., 2017; Choi & Lim, 2017; Hussen & Çokgezen, 2019).

Collaborative knowledge sources: Collaborative knowledge that is generated inside the supply chain of a firm such as competitors, suppliers and customers was measured by the following questions respectively: “Thinking about innovation, has this establishment used information or ideas from competitors for any innovation activity undertaken between fiscal year 2011/2012 and fiscal year 2013/2014?” (Question b1b); “Thinking about innovation, has this establishment used information or ideas from suppliers for any innovation activity undertaken between fiscal year 2011/2012 and fiscal year 2013/2014?” (Question b1c); and “Thinking about innovation, has this establishment used information or ideas from customers’ feedback for any innovation activity undertaken between fiscal year 2011/2012 and 2013/2014?” (Question b1j) The author constructed the variable similar with the

‘breadth’ variable used in studies of and by creating a combination of three sources of collaborative knowledge Each source is coded as a binary variable where 0 means

“NO” and 1 means “YES” The sources coded are then added up to maximum of 3 where 0 means non-usage and 3 means using all three sources.

Collaborative knowledge generated from outside a firm’s supply chain such as universities and research institutes is measured by the question “Thinking about

1 Clearly, using richer measurements instead of a dummy variable would be preferable However, the response rate for more detailed questions pertaining to R&D is very low Specifically, only 16% of the firms provide such information The reason for this high missingness is that Vietnamese firms are very sensitive to disclosing detailed information about their operations and performance. innovation, has this establishment used information or ideas from universities and research institutes for any innovation activity undertaken between fiscal year 2011/2012 and fiscal year 2013/2014?” (question b1e) The author code the variable equal to 1 if the answer is yes.

Regional knowledge sources: Regional knowledge sources are measured with regional R&D and firm location Regional R&D is measured using the mean of internal R&D over regions as firms could take advantage of being in the same region with other firms when they can enjoy technological diffusion, information and knowledge flows among them (Funk, 2013; Laursen et al., 2012) In addition, the author used the question “size of the locality?” to measure firm location It is emphasized that the city size where firms are located could affect the level of innovation (Feldman & Audretsch, 1999; Taylor, Derudder, Saey, & Witlox, 2006) The author recoded location equal to 1 if the answer is a city with population less than 50,000, equal to 2 if the answer is a city with population ranges from 50,000 to 250,000, equal to 3 if the answer is a city with population ranges from 250,000 to 1 million, and equal to 4 if the answer is a city with population over 1 million This study follows Beaudry and Schiffauerova (2009) and Baptista and Swann (1998) In their study, they use population as a proxy for agglomeration effects.

Control Variables: The author measured the control variables using information from the ES.

Firm size: Firm size is used as a control variable in various studies and support the finding that the larger the firm is the higher its level of innovation Data from several studies suggest that because of having more employees, firms can benefit from economies of scale in innovation (Ayyagari et al., 2011; Barasa et al.,

2017) Moreover, investment in R&D could be affected by firm size as large firms are more likely to secure the funding needed for large scale R&D (Shefer & Frenkel,

2005) Hence, in this study, the author also uses firm size as one of the control variables and check for consistency with previous studies The question that the author used is: “how many permanent, full-time individuals worked in this establishment?”.

Firm age: firm age has been found to have a significant effect on innovation (Balasubramanian & Lee, 2008; J A Hansen, 1992) It is widely believed that a major proportion of industrial R&D is undertaken by larger and older firms. However, it is also observed that in the high-tech industrial branch, a large number of startups that are young and relatively small engage intensely in innovative activities (Shefer & Frenkel, 2005) Furthermore, Huergo and Jaumandreu (2004) claim that entrant firms tend to present the highest probability of innovation while the oldest firms tend to show lower innovative probability Thus, this study aims to investigate the relationship between firm age and innovation to figure out if any connection exists based on empirical data of firms in Vietnam In this study, this study calculated firm age by taking the difference between 2015 and the year in which the establishment began operations Table 4.1 provides an overview of our variables.

(Avermaete et al., 2004); (Baumann & Kritikos, 2016);

Product innovation Firm introduced any new product or service: "1" Yes "0" No ICS

Top manager’s number of working experience year in this sector

Internal R&D Dummy variable: "1" Yes "0" No ICS B01

Innovation developed with competitors, customers, and supplier: "1" if b1b is Yes, 2 if b1b and b1c or b1j is Yes and “3” if all b1b, b1c and b1j are Yes, "0" none of the three is “Yes”

Competitors Information or ideas from competitors: "1" Yes "0" No ICS B1b

Suppliers Information or ideas from suppliers: "1" Yes "0" No ICS B1c

Information or ideas from customers’ feedback: "1" Yes "0"

Information or ideas from universities and research institutes: "1" Yes "0" No

% of firms conducting internal R&D within a region using mean of the internal R&D over the 4 regions in Vietnam

City with population of less than 50.000 equal “1”

City with population from 50.000 to less than 250.000 equal “2”

City with population from 250.000 to less than 1 million equal “3”

City with population over 1 million equal "4"

Age Number of years since establishment ES B5

Size Number of permanent, full time employees ES L1

Source: The author composed and designed

RESEARCH RESULTS

General description of the ES and ICS sample

5.1.1 Distribution of firms by sector and region

Vietnam is a country in Southeast Asia with an area of 332,698 km 2 It is divided into 63 provinces and municipalities in six regions, which are: Northern midlands and mountain areas, Red River Delta, North Central area and Central coastal area, Central Highlands, Southeast and Mekong Delta However, the ES survey was conducted in only 4 regions: Red River Delta, North Central area and Central coastal, South East and Mekong River Delta One possible reason for that is because those 4 regions are highest in population density and included 5 municipalities which are Hanoi, Hai Phong, Da Nang, Ho Chi Minh and Can Tho.

Table 5.1 reports the number of firms in each region in the ES sample The South East region has the largest number of firms, followed by Red River Delta The explanation for that could be because the South East includes Ho Chi Minh city the biggest city in term of population (8.426 million people) and the Red River Delta includes Hanoi – the capital of Vietnam and also ranks second in term of population (7.588 million people).

Table 5.1: Distribution of firms by region

Region Number of firms Percent

North Central area and Central coastal

Table 5.2 shows the sectoral distribution of firms in each region The largest number of firms is in the manufacturing industry across all 4 regions The smallest area

Total 996 100 number of firms can be found in Retail Services The South East region has the highest number of firms in Manufacturing with 219 firms, which is understandable because that region contains the majority of big industrial zones in Vietnam The Other Services sector has the largest number of firms in the Red River Delta One possible explanation is that the geographical location of the Red River Delta contains two out of five municipalities in Vietnam, which are Ha Noi and Hai Phong The Mekong River Delta has lest in both Retails Services and Other Services, which can be the result of that location containing smaller cities and it does not have a long coastal area for tourism development as the North Central area and Central coastal area.

This table also reveals that Garments is the largest sector with 150 firms and the South East has the greatest number of firms with 53 firms The possible reason to explain that is Garments in Vietnam is usually for exporting Moreover, the biggest harbor (Cat Lai) and the busiest airport (Tan Son Nhat) in Vietnam are in Ho Chi Minh city of this region Moreover, the highest number of firms in this sector proves why Vietnam is in the top 5 of exporting garments Food, Fabricated metal products, and Nonmetallic mineral products follow Garments with a remarkable number of firms, respectively 143, 143 and 142 firms.

Without any doubt, in this sample the Red River Delta region again has the largest number of firms in all the three sectors This could be explained asHanoi - the capital of the country and also is one of the most condensed population areas - and Hai Phong - a big harbor city and with many industrial zones - are in this region.

Table 5.2: Distribution of firms by sector and region

Table 5.3 displays the distribution of firm size in each region Size stratification was defined by the World Bank as follows: micro (less than 5 employees), small (5 to 19 employees), medium (20 to 99 employees), and large (100 or more employees).

Table 5.3: Distribution of firms by size and region

Micro Small Medium Large Percent

North Central area and Central coastal

Table 5.4 shows the descriptive statistics from several variables picked from the ES Half of the firms have less than 27 fulltime employees and 25% of the firms have less than 100 fulltime employees in 2014, which means that the majority of firms in our sample are small and medium sized enterprises The largest firm has 17,000 fulltime employees, which is an impressive number in Vietnam The firms’ age shows a quite young business environment with 50% of the firms being less than

11 years old The firms’ turnover differs substantially ranging from a minimum of 50 million VND (2,000 EUR) to the maximum of 28,200 billion VND (1.1 million EUR) The labor productivity of firms has a median of 460 million VND against the mean of 1.48 billion VND The growth in turnover in the 2011-2014 period reported at a rate of 12.5% while there was no change in employment at 50% percentile.

*Turnover is reported in Vietnam Dong and is divided by 1,000,000.

**Labor productivity is calculated as Turnover 2014 divided by number of fulltime employees in 2014

In this part, the ICS is used as the main source for our measures and the EU-

28 enterprises data based on the Community Innovation Survey (CIS) for the period

2010 through 2012 (ec.europa.eu) is used for comparing some of the figures.

Table 5.5 shows surprising differences in reported rates of innovation In particular, the average rate product innovation in Vietnam is markedly higher than the average rate of innovation observed in EU-28 Cirera and Muzi (2016) argue that such high levels of self-reported innovation in developing countries partly arise from a rather subjective definition of an innovation in the surveys, especially since innovations are likely to be more incremental and less radical.

North Central area and Central coastal area 31%

Table 5.6 represents how product innovation is distributed across the different regions Most of the firms that claim that their products are new to their firm and in Vietnam are in the Red River Delta, while firms in the Mekong River Delta report the lowest percentage A possible reason is that firms in Red River Delta can access resources easiest due to their strategic location On the other hand, measures in international column, the highest percentage is in the South East region, mainly because firms in this region export their product more compared to the other regions.

North Central area and Central coastal area 29.6% 25.4% 5.6% 71

Table 5.7 illustrates the reasons why firms introduce their main innovative products and services Firms in all four regions reported very high scores on extending the range of products or services with an average of 94.3% The second reason is to open up new markets or increase market share (90.5%) Competition follows as the third reason why firms offer product innovation Firms in Red River Delta reported the lowest score in regulation (28.3%), which means that complying with regulations or standards is not their objective to develop innovative products. Firms in the South East region have the highest figures for almost all reasons (more than 58%) Firms in the Mekong River Delta reported the highest figure for replacing a product or service already offered by the firm (66.7%).

Table 5.7: Objectives of product innovation

New markets Cost Competition Regulation

Replace stands for replacing a product or service offered by the firm was the main objective; Range means to extend the range of products or services offered by the firm New markets is to open up new markets or increasing market share; Cost to decreasing production costs or costs of offering a service; Competition illustrates offer products and services already offered by competitors; Regulation is to comply with regulations and standards; Sales drop means decreasing demand for other products and services N is the number of firms reporting on the reasons for product innovation.

Table 5.7 shows the main reasons for introducing firms’ most innovative process The main reason why firms introduce process innovation is for increasing the quality of products or services (95.3%) Among the four regions, firms in the South East represent the highest number (98.4%) The second most popular reason is to increase the total production or amount of services offered Firms score lowest in terms of decreasing the cost of production or offering service One possible explanation is that products and services in Vietnam is already relatively low.Therefore, it is not easy to reduce it more However, with an average of 67.9%, it is still possible an important reason for firms when they consider introducing innovative processes.

The ICS reported a low number of firms with patent registration in the period of 2011-2014 Out of 300 firms, 271 (92.8%) have no patents The rest of the firms (7.2%) reported less than 10 patents applied in this period This survey also reported a mean of 0.14 employee that was hired specifically for delivering new or improved products or processes The activities associated with the development or production of product or process innovations are also shown in table 5.8 The most important innovation activities are the purchase of new equipment, machinery or software. Firms in the South East region have reported the highest number, nearly 85% Formal training for employees and Market Introduction of innovation to employees are following respectively with 36% and 32% Once again, South East firms reported relatively high numbers in all most all columns The reason why firms in Vietnam have low scores in number of patents applied could be the result of the low percentages in both Internal and External R&D (15.5% and 5% respectively).

Mkt Intro of Others N Equiment &Patents innovatn

5.1.3.3 Sources of information for innovation

Table 5.9 shows the sources of information for firms’ innovation The three most important sources are feedback from customers (165), the internet (147) and Products or services available in the market (128) Parent firms are the least important source, which might be because there were few firms in the survey that have parent firms Only 48 firms reported sources of information for innovation coming from universities or research institutes That might imply an institutional void, which are the weak linkages between firms and universities and/or research institutes in Vietnam.

Table 5.9: Sources of information for innovation

North Central& Central South g RiverMekon

Source Delta coastal area East

Descriptive statistics of the sample merged from ES and ICS

The descriptive statistics and correlation matrix for all variables are provided in Table 5.11 The firms in our sample have an average age of 13.73 years old and the average number of employees is 148 A large majority of the firms are located in a city with population over 1 million (84%) Most of the firms do not conduct internal R&D (83.45%) 57% of the firms have collaboration inside their supply chain while only 16% of the firms have collaboration outside the supply chain The World Bank conducted the survey in 4 Vietnamese regions, which are the Red River Delta, North Central area and Central coastal, South East and Mekong River Delta The South East region has the largest number of firms with 105 firms, next is the Red River Delta with 89 firms These two regions are overrepresented, probably due to the presence of the two biggest cities in the country: Ho Chi Minh city and Hanoi Regional knowledge creation has an average of 16.65.

37% of the firms in our sample reported that they have introduced new products The average rate of product innovation in Vietnam is markedly higher than the average rate of innovation observed in EU-28 (23.7%) Cirera and Muzi (2016) argue that such high levels of self-reported innovation in developing countries partly arise from a rather subjective definition of an innovation in the surveys, especially since innovations are likely to be more incremental and less radical.

Table 5.11: Descriptive statistics and correlations

Knowledge Sources and Product Innovation

A binary logistic regression model is used for the hypotheses Model 1 is a baseline model, in which the author included only control variables to evaluate the independent variables explanatory value The author added internal knowledge sources in Model 2 Model 3 tests the effect of collaborative knowledge sources.Model 4 includes the regional knowledge sources Model 5 assesses the effects of all independent variables simultaneously Given that the AIC/BIC indicate that model 5 has the best model fit, the results is mainly interpreted based on this model Table5.12, 5.13 and 5.14 report all the results of the models In order to check for multicollinearity, it is required to calculate VIFs The mean of VIF is 1.26, which is well below 10 as are all individual VIFs As such, multicollinearity is not an issue in this study’s data.

Table 5.12: Logistic Regression Result of the baseline model

Our results show that the control variables (firm age and size) have no significant association with firms’ likelihood to innovate With regard to the direct effect of internal knowledge sources on innovation, this study finds that internal R&D is positively and statistically significant correlated with firm innovation Hypothesis 1a is supported: a firm’s likelihood to innovate increases when there is an increase in internal R&D On the other hand, for hypothesis 1b the result is positive, but not significant Therefore, the study could not say if managerial experience of firms in Vietnam has any relationship with innovation.

With regard to the relationship between collaborative knowledge sources and product innovation the results confirm that a firm’s collaborative knowledge gained from inside the supply chain (customers, suppliers, competitors) is positively related to with product innovation of that firm On the other hand, it shows no significant relationship between collaboration with universities or research institutes and innovation mention that in developed economies, firms can rely on a variety of institutions to minimize market failure, while firms in emerging markets are, for example, confronted with institutional voids, i.e weak linkages between firms and universities and/or research institutes As such, hypothesis 2a is strongly supported, while there is no support for hypothesis 2b.

Table 5.13: Logistic Regression Results of each individual knowledge source models

For regional knowledge sources the study finds no significant relationship between regional R&D, product innovation Hence, the author could not accept hypothesis 3a However, the location of firms is significant positively correlated with product innovation Firms in a city with larger populations are likely to produce more product innovation than their counterparts in less crowded cities That might be explained by the fact that in big cities more facilities and infrastructure are available for firms to utilize Moreover, in densely populated cities, firms might be able to find more suitable personnel who bring new knowledge (Glaeser & Mare, 2001) As such,hypothesis 3b is accepted.

Table 5.14: Logistic Regression Results of the all independent variables simultaneously model

As mentioned in our theoretical background several studies from the open innovation literature, suggest that specific sources of knowledge might be more relevant than others and that over-search of external knowledge might be detrimental to innovation (Bayona-Saez et al., 2017; Hung & Chou, 2013; Laursen & Salter,

2006) To probe the existence of such effects in our setting, the author performed two additional explorative analyses Specifically, the author checked the impact of the knowledge sources separately and tested for an inverted U-shape effect The results of these analyses are reported in Table 5.15 With regard to the former, this study found that only knowledge from customers is positively and significantly associated with product innovation This is in line with the study of Doloreux and Lord-Tarte

(2013), which emphasizes that the tastes of customers are paramount and customer ideas are a highly important source of information for product development With regard to the latter, the results in Table 5.15, which are plotted in Figure 1,demonstrate an inverted U-shape relationship between knowledge from inside the supply chain and product innovation Moreover, the author tested whether the point estimate for the highest value of knowledge use differs significantly from the second highest score and find a significant different (p=0.003) This indicates that the downward sloping part of the inverted U-shape is statistically significant and that this study truly finds negative relationship of high levels of usage of knowledge from the supply chain That means searching for knowledge from collaboration is important,but too much openness might have a negative impact on product innovation The author finds this correlation highly surprising given the low-tech environment that she studies and the limited number of different knowledge sources that this study distinguishes The author will get back to the implications of this finding in the discussion section below.

Inside supply chain knowledge-squared

# of inside the supply chain knowledge sources used

All reported standard errors are robust clustered standard errors at the regional level

Figure 5.1: Product innovation and using knowledge sources from the supply chain

Pr ed ict ed pr ob ab ilit y of pr od uc t in no va

CONCLUSION AND RECOMMENDATION

Conclusion

The World Bank (2019) reported that after the economic and financial struggles from the global financial crisis in 2008, Vietnam stated to have macroeconomic stability and had emerged as a prospering low-income economy and strong exporting country Foreign investors all over the world are eager to come to Vietnam, ask to participate and contribute to the prosperity of Vietnam Poverty continues to deteriorate, and social indicators improve as people become increasingly able to access basic services in education, health care, and important infrastructure.

Behind such positive news are worries about the future for the country Due to the fact that Vietnam has an average per capita income of only 40% of the world's average income, there is still a long way to go for the country to catch up with other countries in the region In many years from now, the demand for rapid growth will remain However, although the economic has recovered in recent years, the current development trend is still not sharp It is shown through the decline at different levels in productivity, labour force and development of investment Although many countries might be jealous of Vietnam's growth, it is still too low for Vietnam to achieve its goal of becoming a high-middle-income country by 2035 More importantly, Vietnam's slowing growth seems to have occurred earlier than other East Asian economies, which have maintained higher levels of growth when they are at Vietnam's current income levels (Tran Tho Dat, 2019).

Increasing labour productivity - the main driver of GDP growth in the early stages of transition in Vietnam - is still low Labour productivity growth has retrieved somewhat in latest years thanks to the enlargement of the FDI sector, and the shift of manual workers from agriculture to services and manufacturing However, the growth in productivity is still fairly weak, reflecting the regular inefficiencies in allocating resources in Vietnam economy Growth accounting on a series of assumptions demonstrate the rate of increase in aggregate factors productivity over the past decade has been generally at a low level Labour productivity has crawled down GDP growth, although there are many differences in productivity levels and growth rates within and between sectors, as well as within and between firms.

Meanwhile, there is a growing body of literature that recognizes the pivotal role of innovation (Apergis, Economidou, & Filippidis, 2008; Ayyagari, Demirgỹỗ- Kunt, & Maksimovic, 2011; Bengtsson & Johansson, 2014) Innovation is considered crucial for economic development and poverty alleviation (OECD, 2012) Moreover, Chaminade, Lundvall, Vang, and Joseph (2009) state that innovation is a fundamental requirement for developing countries to catch up with its middle- and higher-income economies (Chaminade, Lundvall, Vang, and Joseph (2009) Furthermore, preceding research in Vietnam also proved the critical role of innovation in this country (Phan Thi Thuc Anh, 2014; Nguyen Van Thang et al.,2016; Tran Hoai Nam et al., 2017).

Different lines of literature show different determinants of innovation, however there is one agreement among them that research and development play a critical part in innovation at firm level However, research and development are the least conducted activities of firms in Vietnam to innovate technology of production (Nguyen Thi Bich Lien and Nguyen Thanh Huong, 2017) This reflects the limited research and implementation capacity of firms In theory, R&D activities carried out by firms include research aimed at innovating products or production processes; or research to create technology to manufacture products or upgrade imported technologies and production processes to suit specific conditions.

The results of the study confirm the vital role of internal R&D in Vietnamese manufacturing firms for product innovation It also reveals that a firms’ collaborative knowledge gained from inside the supply chain is positively correlated with the likelihood that firms produce product innovation These findings are in line with findings from a study conducted in South Africa (Knoben & Oerlemans, 2010) This finding somewhat also is in line with Voeten (2016) in the way that firms could gain knowledge for innovation from their competitors Other studies on knowledge sources for innovation such as Nguyen Van Thang et al (2016) and Than Thanh Son et al (2019), knowledge comes from outside of the firms which may include knowledge from their supply chain, could affect firm’s innovation outcomes possitively Hence, the need to create a network with customers, suppliers and competitors to enhance product innovation is highly relevant to firms in developing countries.

This study found no significant relationship between collaborative knowledge gained from outside the supply chain and product innovation This is not uncommon in developing countries, as firms hardly engage in collaborative activities with knowledge institutes (London, 2011) This may be due to a lack of capabilities to negotiate, learn and share information with each other (London, 2011). Furthermore, Bauer (2011) finds that the collaboration between firms and knowledge institutes in Vietnam is not always effective In addition, it is reported by OECD and The World Bank (2014) that the physical infrastructure in universities and state research institutes in Vietnam remains undeveloped Another issue is that the Vietnamese educational system is still unrelated to market needs and of low quality. Together, this makes it extremely challenging to engage in collaborative activities or to reap the benefits of such activities A more fundamental problem might be related to the fact that Vietnam still has characteristics of a central planning economy. Regarding previous studies on innovation Vietnam, Voeten (2016) also share a line with this finding as most of the firms in his research mentioned their difficulty in collaborate with universities or research institutes in innovation.

Prior studies have also noted the importance of the location of firms (Asheim

& Gertler, 2005; Isaksen & Onsager, 2010; Reuer & Lahiri, 2013) In line with this literature, our results show that firm location is positively associated with innovation.Being located near other firms might facilitate inter-firm interactions and linkages among these firms It is also easier to engage in all kinds of ties in a populous region.One of the explanations why regional R&D does not work in the case of Vietnam is that knowledge-producing organizations and states agencies are generally slow and reluctant to exchange information and knowledge Moreover, the information is scattered in different agencies, ministries and research institutes, while there is limited regional coordination, no data compilation or editing Hence, those obstacles cause firms to have to spend much time and money to get access to knowledge (Bauer, 2011).

As explained by Khanna and Palepu (2005, 2010), there is a high degree of information asymmetry in emerging markets, which might be the reason why collaboration outside the supply chain and regional R&D sources does not work The presence of institutional voids hinders firms to reap the benefits of potential collaborative activities Similarly, Vrgovic, Vidicki, Glassman, and Walton

(2012) mention the vital role of institutions when firms seek actors with whom they should collaborate They argue that firms in developing countries often have limited information sources and lack of financial resources to gather relevant information Firms in emerging markets, like Vietnam, need to have three markets functioning well: product markets (soft and hard infrastructure), capital markets (information and financial intermediaries) and labor markets (such as educational institution, placement agencies, employment regulations, unions) (Khanna & Palepu, 2010)

This study has some limitations that the author would like to highlight First, the data is based on information about innovative activities of firms between 2013 and 2016 This made it difficult to analyze the sustainability of firms’ innovativeness and evaluate the prior innovation history Moreover, because some of the independent variables refer to the same period as the dependent variable, causality may not be inferred The observed firms are private firms and mostly are SMEs Consequently, the study might only see part of the total range of firms In addition, given the cross- sectional nature of our data there is little the author can do in terms of endogeneity. Finally, the sample size after the author merged the ES and the ICS become too small to test with a subset (e.g., by size, by age, by location, etc.).

Recommendation

In the report “Positioning Vietnam development”, Prof.Dr Ngo Thang Loi said that Vietnam is now near the middle of developed countries with low middle- income levels The country has per capita income still lower than the average of low middle-income countries The industry structure by GDP is more backward than the common sense of this group The results of some aspects of social progress still lie in the averages of low middle-income countries However, the government of Vietnam has set the target to become a developed country at the level of high middle-income countries by 2030 Achievements are based on rapid economic growth associated with increasing quality and efficiency by exploiting new growth incentives In order to achieve the ambitious goal that the government set, there are many missions need to be fulfill including an innovative manufacturing sector (Ngo Thang Loi, 2019).

Moreover, Recently, General Secretary and President Nguyen Phu Trong signed the Resolution 52-NQ / TW on behalf of the Politburo on several guidelines and policies to actively participate in the Fourth Industrial Revolution The wave of 4.0 Industrial Revolution as well as the explosion of digital technology is being evaluated as a "golden" opportunity for Vietnam to close the development gap with developed countries The 4.0 Industrial Revolution will create a dramatic change in the distribution of production resources, production and consumption patterns In order to obtain the fourth Industrial Revolution, boosting innovation at firm level indeed is a very important mission in Vietnam.

Vietnamese enterprises are still quite limited in technology innovation, the number of enterprises implementing innovation is relatively In particular,enterprises have not paid adequate attention to R&D and training human resources.This stems from the limited financial resources of Vietnamese enterprises, which are difficult for enterprises to spend on innovation activities with high costs and risks especially opportunity cost The majority of these activities are from firm’s capital, the involvement of external sources is very small.

The internal resources of Vietnamese firms for innovation are weak, so it is necessary to coordinate with external partners such as universities and research institutions Research institutions such as universities are places where knowledge is concentrated with high-quality human resources, cooperating with these institutions to help firms solve some problems of innovation in the context of resources. Moreover, it can create economy of scale, avoiding duplication in the process of researching and launching new products as well as facilitating the dissemination of innovation results However, the situation of cooperation between firms and these organizations is limited, most businesses choose internal innovation.

After reviewing relevant policies in prior section, although policies to support enterprises to innovate technology have been quite adequate, but still limited, the support of policies in practice has not been as expected Besides, the business environment is not favorable, the regulations and laws are still difficult for businesses to reduce the dynamism and innovation of enterprises.

From a policy perspective, this study also has implications More than 80% of the firms in the sample do not engage in any internal R&D, regardless of its importance for innovation This may be due to the fact that they lack the financial means to invest in internal R&D Private firms find it very difficult to get access to credit (Le Phuong Nu Minh, 2012) Moreover, Le Xuan Dinh et al (2016) report that Vietnam’s state budget spending on science and technology in 2015 is about 763 million USD, equal to 1.52% of the total state expenditure This amount is very small in comparison with other countries The Vietnamese government could implement policies that help to enhance the quality of universities and research institutes as well as create opportunities for them to collaborate more with private sector firms In most developed countries, universities and research institutes are vital sources of knowledge for innovation (Doloreux & Lord-Tarte, 2013; Greco et al., 2015) Hence, policy makers in Vietnam could develop policies based on the principle of innovating by networking and by exploring the potential of social capital across different regions (Morgan, 2007).

To sum up, the government should have policies to support businesses in innovation activities as following:

Firstly, the government should focus on solving financial problems for firms. There should be sources to fund innovation for firms The source of funding can be expanded in many different forms, not only from the owner's equity Firms need to grasp information on financial support policies of the Government, investors as well as credit institutions to mobilize capital The Government should have a policy of granting a limit from the state budget to buy high technology, need more capital and transfer it to firms in the form of incentives such as loan interest support in accordance with current financial conditions A note when implementing programs to support capital for firms regarding technological innovation is transparency, clarity in support, ensuring businesses can capture information about support programs At the same time, processes and records should be as simplified as possible, not discouraging businesses in accessing state capital.

Secondly, the government should continue to promote programs and policies to support firms in technology innovation They need to strengthen the dissemination of information on mechanisms and policies to support firms, raise awareness of firms about the need to innovate to improve firm capacity in a competitive environment and importation society.

In addition, firms usually face complications in accessing capital, partly because the procedures are too complicated and other parts are lack of information, so it is necessary to simplify procedures for firms to access to capital and create conditions to provide adequate information on preferential policies, support from the state through different channels such as television, newspapers, communication channels, forums, seminars, seminars on capital support for businesses as well as procedures to be able to access capital rapidly The authorities need to build an equivalent "playground" based on clear, strict and transparent regulations Creating a transparent, disciplined public system, removing unnecessary procedures, causing problems for businesses Thus, innovation activities can take place effortlessly and effectively.

Many tax incentive policies need to be considered and added, such as: Corporate income tax incentives based on income calculated on products as a result of science & technology activities and creative innovation, incomes from intellectual property rights wisdom is invention, useful solution; preferential import and export taxes on components, spare parts, machinery and equipment imported to assemble into machines for scientific research and technological development Besides, clearly instructing spending of the science & technology development fund of enterprises, giving autonomy, self-determination to use the fund for activities of scientific research, technological innovation, creative innovation, investment in innovative start-ups directly serving operations production and business of the enterprise The State needs to support firms in implementing projects of technological innovation, creative innovation, research and development through the National Science and Technology Programs, National Technology Innovation Fund

Thirdly, although the result shows no significant relationship between knowledge sources from universities, the reason maybe because the government has not paid enough attention into this The government has established the policy “three parties’ linkages” recently but it is not active sufficiently, there should be other legal document to enact this relationship between research institute, universities and enterprises Collaborative relations between them are all forms of direct or indirect interaction, of a personal or organizational nature between universities and businesses in order to support each other for the benefit on both sides: Cooperation in research and development; Stimulate the dynamic movement of lecturers, students and professionals working in businesses; Commercialize research results; Construction training program; support creative and organizational governance efforts The cooperative relationship is understood as transactions between universities and production and business organizations for the benefit of both sides Promoting this cooperation and exploiting its value can help the school solve financial difficulties, help businesses gain or maintain a competitive advantage in today's dynamic market. Moreover, this relationship also contributes to the nation's economic growth and meets the labor market's demands in this dynamic environment.

Hence, the government could issue some policies to strengthen links between businesses and partners, especially universities in training human resources and cooperating technology innovation Businesses need to be aware of the need to associate and coordinate with partners in product development The role of research institutions and research universities need to be emphasized because this is a high concentration of scientific content Firms should actively seek, contact these partners for agreement and cooperation; At the same time, building a good and long-term cooperative relationship between businesses and organizations The coordination between the actors in the innovation system including universities and businesses play an important role, so it is necessary to have policies to promote cooperation between universities and firms together. Government levels play an intermediary role in connecting universities and businesses by regularly organizing technology fairs, conferences and seminars with the participation of universities and businesses to serve more effectively the demand for technology supply and demand.

From a practical perspective, it is useful to remind managers that investing in internal R&D might help them to increase the level of innovation in their firms.R&D is closely connected with the creation of new products and production technologies that have a direct effect on the nation's growth rate and the sustainable development of the business The relation between internal R&D and innovative output has been proven in preceding research It is well understood that firms that spend in R&D broaden their scientific and/or technical knowledge ground, which grants them to construct and acquire new innovative products or services.

This research has once again, confirmed this critical role of internal R&D. Firms need research and development activities and to find appropriate solutions to gain competitiveness and meet the practical requirements set out in the current integration and globalization environment Hence, in every firm, they should have R&D department which is an indispensable part, they could be organized in hard form such as having technical department, technology department or R&D department or organized in the form of research projects and programs in the enterprise in collaboration with research institutes, technical universities, etc No matter what form is organized, the number of people working in the R&D department of each firm is always the most skilled engineers and technicians so they could create something new or improved.

R&D is closely connected with the creation of new products and production technologies that have a direct effect on the nation's growth rate and the sustainable development of the business The sources of investment for R&D are from the State, businesses and external funding In developed countries, the average ratio of R&D investment from the state budget to the non-state sector is about 1: 4, while in Vietnam, this ratio is estimated at 5: 1, meaning that R&D activities in Vietnam are still mainly invested by the state (Nguyen Thi Bich Lien & Nguyen Thanh Huong,

2017) Regarding the critical role of R&D, firms in Vietnam should also consider raising the organizational fund for these activities if they want to have fruitful outcomes.

Limitations of the research

The open innovation literature suggests that over-search might have a negative effect on innovation (Bayona-Saez et al., 2017; Hung & Chou, 2013; Laursen & Salter, 2006) Indeed, although the author did not formally hypothesize about this possible effect, she was surprised to learn that even in a low-tech environment too much openness had a negative correlation with product innovation. This negative correlation of over-search might be related to the fact that the firms in the sample operate in environments where external knowledge availability is at a relatively low level This means that the costs associated with finding more partners do not outweigh the benefits Hence, especially in the context of developing countries, collaborating more intensely with partners could be more useful than finding additional partners.

Several limitations to the study suggest avenues for future research One of the possible future research topics is to analyze the effect of knowledge sources over a longer period As the author could only access the data base from 2013 to 2017, the future study could be for 10 or even 15 years Future research could also use panel data to examine the causal effects of different knowledge sources on innovation output Another possible topic could be to analyze the impact of knowledge sources on state owned firms and compare these findings with private firms What could be the different between private enterprises and stated owned firms? That might not only the size but also other conditions such as the ability to access knowledge sources.Finally, this research data size finally come up with only 300 firms then the author could not access the subsets hence she also encourages large-scale studies to provide more detail on the nature of innovation, the various types of knowledge sources and increase the number of observations to be able to test with various subsets of populations (regions, age or size).

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