The relationship between small and medium sized enterprises’ characteristics and their innovative capacity evidences from firms in quang ninh province

VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERISTY HOANG VAN TRUNG THE RELATIONSHIP BETWEEN SMALL AND MEDIUM-SIZED ENTERPRISES’ CHARACTERISTICS AND THEIR INNOVATIVE CAPACITY: EVIDENCES FROM FIRMS IN QUANG NINH PROVINCE MASTER’S THESIS VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERISTY HOANG VAN TRUNG THE RELATIONSHIP BETWEEN SMALL AND MEDIUM-SIZED ENTERPRISES’ CHARACTERISTICS AND THEIR INNOVATIVE CAPACITY: EVIDENCES FROM FIRMS IN QUANG NINH PROVINCE MAJOR: PUBLIC POLICY CODE: 8340402.01 RESEARCH SUPERVISOR: Dr VU HOANG LINH Hanoi, 2021 PLEDGE This Master thesis represents my own work in accordance with Vietnam National University regulations All sources, both cited and paraphrased, are properly acknowledged throughout the thesis All translations are mine or taken from a source is clearly identified in the main text and the references Student signature Student name July, 2021 ACKNOWLEDGMENT I would like to express my sincere gratitude to my supervisor Dr Vu Hoang Linh He has been accompanying me in each stage of the thesis, from discussing the right approach to commenting on the final draft I also want to thank Vietanalytics and MASSEI, where I am currently affiliated with, for allowing me to access the DDCI Quang Ninh 2019 data for the purpose of academic research I really appreciated those informal discussions that I had with the directors of the companies Those discussions have cumulated in the topic of this thesis I owe a big thank to the Thesis Defense Committee Members, especially Dr Nguyen Thuy Anh, Dr Dang Quang Vinh, and the Referees, for giving me lots of constructive comments and questions Finally, I am thankful to the tremendous encouragements from my family, friends, and colleagues They have been the reasons why I can work so persistently in completing the thesis TABLE OF CONTENTS LIST OF TABLES i LIST OF FIGURES ii LIST OF ABBREVIATION iii CHAPTER : INTRODUCTION 1.1 Context 1.2 Objectives .3 CHAPTER : LITERATURE REVIEW 2.1 Innovation .6 2.2 Innovation Value Chain CHAPTER : METHODOLOGY 11 3.1 Dependent variables 11 3.1.1 Composite variables .11 3.1.2 A continuous variable 15 3.2 Explanatory variables for SMEs’ innovation value chain in Quang Ninh 15 3.2.1 Binary variables 15 3.2.2 Continuous explanatory variables 18 3.3 The probit model 19 3.4 The Data 21 3.5 Descriptive statistics 23 CHAPTER : RESULTS AND FINDINGS 27 4.1 Relationship between firms’ characteristics and each phase of the IVC 27 4.2 The relationship between firms’ characteristics and the overall IVC 29 CHAPTER : DISCUSSIONS AND POLICY IMPLICATION 32 5.1 Discussion 32 5.2 Limitation of the research 35 5.3 Policy Implication .36 REFERENCES 38 LIST OF AUTHOR’S PUBLICATION 40 APPENDIX 41 LIST OF TABLES Table 3.1 The set of questions evaluating the IVC links in the DDCI Quang Ninh 2019 survey (Original Vietnamese - English translation) 11 Table 3.2 Descriptive statistics of the binary variables (%) 24 Table 3.3 Descriptive statistics of the continuous variables 25 Table 4.1 Estimation Results of Simple Probit Model and Marginal effects (ME) 28 Table 4.2 Estimation Results of the OLS model 30 i LIST OF FIGURES Figure 2.1 The Innovation Value Chain framework .8 Figure 3.1 Distribution of the sample 23 ii LIST OF ABBREVIATION DDCI: GSO: IVC: PAPI: PAR Index: PCI: SMEs: WB: WBES: District and Department Competitiveness Index General Statistics Office Innovation Value Chain Provincial governance and Public administration performance Index Public Administration Reform Index Provincial Competitiveness Index Small and Medium-sized Enterprises World Bank World Bank Enterprise Survey iii CHAPTER : INTRODUCTION 1.1 Context The World Bank’s “Vietnam 2035” report (WB, 2016) recommends that enhancing the capacity of the demand side of innovation, particularly for the private sector, is the key solution for Vietnam to develop an innovation-led economy The rationale for this direction is that all efforts on science and technology development should be demand-pushed, otherwise, in the worst case, they would be costly and create worthless ventures Therefore, to support innovative capacity of the businesses, the government should facilitate factors that will help them to be more adept at creating and absorbing innovation In general, Vietnamese enterprises, especially small and medium-sized enterprises (SMEs), are less innovative than expected at the country’s level of development (based on current GDP per capita)1 (WB, 2020) Although SMEs have been increasingly recognized as central contributors to the economy since they account for about 96% of Vietnamese firms and employ 47% of the labor force, they appear to be weaker in terms of innovation when compared with other types of enterprises A World Bank Enterprise Survey between 2014 – 2016 (WBES, 2015) showed that Vietnamese SMEs’ involvement in innovation activities was quite common (53% carrying out at least one type of innovation), but most of them were not R&D-backed and relatively small in investment (median of investment is only 100 million VND) Most of their product innovation is of “frugal nature” and focuses only on minor adjustments of the existing products rather than creating entirely new products to the market (OECD, 2021) This is understandable since most of the Vietnamese SMEs lack adequate resources and capacities to be able to conduct fundamental/radical innovation activities However, the experiences of successful economies like Taiwan, Germany, and Singapore prove that SMEs can become the engine of national innovation and economic growth The boom of high-tech sectors in the U.S during the post-World War There were also some selected countries including China, Indonesia, Thailand, Malaysia, Turkey for comparison II period can also be attributed to SMEs, and many of which have become global brands such as Google, Microsoft, Intel (Nguyen, et al., 2020) In recent years, the government of Vietnam has carried out many policy incentives to enhance national innovation, and SMEs, especially startups are increasingly receiving attention The first law on supporting businesses, passed by Congress in 2017, was for SMEs and largely focused on startup businesses2 For SMEs that apply, operate, or develop high technologies, there are some types of incentives but mostly come in the form of preferential taxes (WB, 2020) In addition, there are some specific national initiatives that are particularly aimed at startups like Project 844 from 2016 and Vietnam Silicon Valley from 2013 These projects represent the efforts to create linkages between innovators and investors, addressing the financial obstacles to innovative startups in Vietnam Moreover, Project 844 by the Ministry of Science and Technology has involved a large number of provincial governments This is the main initiative by the government to support the developing innovative startup ecosystem in Vietnam until 2025 As for the role of provincial governments in improving the local business environment, Quang Ninh province has recently emerged as a role model in Vietnam The province has been successful in keeping its leading positions in multiple sets of indexes that measure the effectiveness of the local authorities, such as the PCI (Provincial Competitiveness Index), PAPI (Provincial governance and Public administration performance Index), or PAR INDEX (Public Administration Reform Index), in four consecutive years Moreover, the province is also famous for its fastgrowing economy From 2016 to 2020, its GRDP has been standing at over 10%3 per year; and its GDP per capita was 6,135 USD in 2019, roughly times higher than that of an average Vietnamese Currently, Quang Ninh has become one of the major economic hubs in the North of Vietnam and will likely play more important roles in the upcoming years However, so far, there is no separate formal legal documents to support startup businesses since they are generally treated as a category of SMEs Despite severe impacts of the COVID-19 pandemic, in 2020, the growth rate was 10.05% with local authorities is only significantly detrimental to the Idea sourcing phase (12% less likely to be in the strong group) This proves our theory that firms who think that having cordial relationship with local government is advantageous in assessing to important information and documents, are less likely to be interested in sourcing new ideas to solve business problems On the other hand, paying Informal payments to the local authorities shows statistically significant negative correlation with firm’s capacity in the Conversion and Diffusion phases, while the Idea phase is not significant The coefficient is highly negative at the Conversion phase (-0.50) and the marginal effect is -20% with 1% statistically significant level As for the Diffusion phase, the marginal impact is also large (-12%) These results show that firms having to pay the authorities to get things done are more likely to be weak in executing innovative projects and diffusing the innovative results Table 4.1 Estimation Results of Simple Probit Model and Marginal effects (ME) Idea generation Conversion Diffusion Variables Coeff ME Coeff ME Coeff ME 0.11 0.05 0.03 0.01 -0.07 -0.03 0.13 0.05 0.37** 0.14** 0.51*** 0.22*** Labor >10 0.10 0.04 0.14 0.06 0.24** 0.10** Private 0.14 0.06 -0.50 -0.19 -0.27 -0.10 Service -0.02 -0.01 0.05 0.02 0.05 0.02 0.09 0.04 0.21 0.08 0.05 0.02 Increased investment in IT Investment >10 billlion VND in 2018 in QN Highest manager’s higher education 28 Idea generation Conversion Diffusion Variables Coeff Relationship with local authorities Informal ME -0.27*** -0.11*** Coeff ME Coeff ME -0.12 -0.05 -0.09 -0.04 -0.14 -0.06 0.00 0.00 0.01 0.00 -0.02 0.00 0.15*** 0.05*** 0.13*** 0.04*** 0.10*** 0.04*** Age -0.01 0.00 -0.01 0.00 -0.02 -0.01 DDCI scores -0.01 0.00 0.01 0.00 0.01 0.01 Constant 0.43 payments Annual revenue in 2018 (Ln) Management capacities -0.50*** -0.20*** -0.30*** -0.12*** -0.73 -0.68 ***, **: One and five percent statistically significant level respectively 4.2 The relationship between firms’ characteristics and the overall IVC The results of running the OLS model shows that the variable Age has a negative coefficient of 0.01 at 1% statistically significant level This means that, on average, firms with one year older decrease 0.01 points lower Firms having invested more than 10 billion VND in the province is 0.11 points higher than that of the other firms, while the IVC scores of firms with more than 10 labors is also higher than that of micro firms 0.06 points at 5% statistically significant level In the same way, better managed firms also have higher IVC scores, with one score increased in the management capacities is associated with an increase of 0.04 points in the IVC’s scoreboard In other word, firms that apply good practices or tools in management tend to be stronger when it comes to innovation 29 Two variables related to business environment still show statistically significant negative relationship with the IVC The Informal payment variable shows a more negative association (-0.14) with higher statistical significance This finding reconfirms the detrimental impacts of bribery on innovation found in the previous research Noticeably, the variable Relationship with local authorities has lost its statistical significance when running the OLS Without decomposing the IVC into three separate phases, we would not have known such impacts of this variable on firms’ innovative capacity The decomposition of the IVC helps to shed light on the correlation between cronyism with the Idea generation phase Table 4.2 Estimation Results of the OLS model Variables IVC score Coeff St Err 0.01 0.03 Investment >10 bil in 2018 in QN 0.11*** 0.04 Labor >10 0.06** 0.03 Private -0.05 0.08 Service 0.01 0.03 Highest manager’s higher education 0.04 0.03 Relationship with local authorities -0.04 0.03 -0.14*** 0.03 0.00 0.01 Management capacities 0.04*** 0.01 Age -0.01*** 0.00 0.00 0.00 Increased investment in IT Informal payments Annual revenue in 2018 (Ln) DDCI scores 30 Variables Constant IVC score Coeff St Err 0.44** 0.22 ***, **: One and five percent statistically significant level respectively 31 CHAPTER : DISCUSSIONS AND POLICY IMPLICATION 5.1 Discussion The innovation value chain The IVC framework allows us to decompose the innovation process into three separate phases: Idea generation, Conversion, and Diffusion It is a linear approach to conceptualizing the innovation process, starting from finding good novel ideas to profitable products This simple version of a rather complex and diverse innovation process enables us to understand how various factors influence each phase of innovation differently In this research, for example, we can see that firms with an investment of more than 10 billion in 2018 in the province are only significantly better than firms with a smaller investment in conversing ideas and diffusing the outputs, but not in sourcing new ideas In the same way, other variables related to labor, cronyism, and bribery also demonstrate their partial impacts on the innovation process, and the IVC framework allows us to identify these differences The IVC approach is not only useful for managers, but also policy makers It helps them to anticipate the impacts of policy on firms' innovation capacity This research has shown that different policy instruments can be more effective to this aspect but less to the others of innovation For example, efforts to eliminate bribery are more effective in enhancing firms’ capacities to develop new innovative projects and diffuse the results; while fighting cronyism and ensure an equal playground for firms are more effective in encouraging them to seek for more radical ideas At the stage of policy formulation and planning, the policy makers should envision these impacts on the IVC Management capacities Management capacities are crucial to firms’ innovation Firms that have adopted good management practices have more strong links in their IVC This is the only variable that is statistically significant correlation with all phases of the IVC This finding reconfirms previous research that good management is crucial to firms’ innovation (WB, 2016; 2020) 32 As we have mention earlier in the definition of innovation, it is not a spontaneous activity or event, but an organized and systematic process that requires discipline that can be learned and practiced; and active learning and exploiting the acquired knowledge is prerequisite for successful innovation These conditions require good management, especially management of knowledge Investment and labors Firm’s resources are important to enhance innovative capacities The composite analysis shows that firms with more than 10 billion VND investment are better at conversing new ideas to new products and commercializing the results of the innovative activities At the macro-level, it supports the main tenet of endogenous growth theory that investment is significant to both innovation and economic growth, in which enterprises are the main contributors Our finding confirms the importance of investment in building strong innovative capacity On the other hand, firms employing more than 10 labors appear to have more strong links in their IVC, especially in the Diffusion phase The result suggests that micro-firms are often disadvantaged in commercializing the outputs of innovation when compared to bigger SMEs Business environment The business environment has significant impacts on firms’ innovative capacities In this research, we consider two factors: cronyism and bribery Of the two factors, the effects of cronyism are more noticeable in the Idea generation phase, while bribery appears more influential in the other phases The analysis shows that firms considering kinship with local authorities as one of their advantages in assessing important information are more likely to have weak links, especially in the Idea sourcing phase One possible reason is that kinship with local authorities allows them to have easier access to business opportunities and makes it less necessary for the firms to pursue innovative projects to boost their competitiveness This negative relationship between cronyism and innovation has also been found in some other research Sabry (2019) found that while formal state-business 33 consultation helps to stimulate more innovation, cronyism is, in general, detrimental to innovation of businesses; however, Sabry also found that in countries with institutional deficiencies, cronyism helps stimulate innovation since it can counteract the constitutional inefficiencies that would otherwise hamper innovation In comparison with other provinces in Vietnam, the administration of Quang Ninh is more developed and efficient In four consecutive years, the business environment in Quang Ninh has been evaluated by the business community as the most favorable in Vietnam, which is reflected in its ranks in some indexes like PCI, PAPI, or PAR index In addition, the local government is very active in consultation with the local businesses and investors IPA (Investment Promotion Agency), a powerful agency established in 2012, is directly chaired by the Provincial Chairman The agency has coordinated inter-sectoral efforts to promote investment in the province It has specialized offices providing both consulting and supporting services to investors, and another office focuses on learning and studying innovative solutions to promote investment in the province The agency has been very active in researching and implementing new solutions to improve the business environment Therefore, it is arguable that cronyism can counteract the lack of formal consultation or governmental ineffectiveness in the case of Quang Ninh Our analysis shows that cronyism is harmful to the innovation process of Quang Ninh’s SMEs This is because its possibly positive side that was previous pointed out in other research (Sabry, 2019) has been offset by the constant improvements of the formal consultation channels and business environment at large; while its negative side that discourages innovative activities have prevailed Firms that rely on kinship with local authorities feel less pressure to take risks in innovation As for bribery, its relationship with the IVC is significantly negative, particularly in the Conversion and Diffusion phases This result suggests that, in Quang Ninh, bribery is harmful to a firm’s innovative capacity, especially in translating new ideas into products, distributing the products into the market, and protecting them In the context of governmental ineffectiveness, firms can rely on bribery to circumvent red tape and other types of administrative obstacles that would otherwise hamper innovation (Leff, 1964; Nguyen, 2020) However, in the context of Quang Ninh, where 34 administrative management have been significantly improved in several consecutive years, bribery can hardly bring its advantages to innovators Rather, bribery has become a burden to SMEs, at least in the sense that resources that should have been invested in innovative projects are now used to pay local government officials Firm’s age The firm’s age appears to be negatively correlated with the IVC This is quite the opposite of our initial hypothesis The composite analysis shows that this correlation is mainly in the Diffusion phase but with a small marginal effect and a low level of statistical significance (10%) The OLS model, however, shows that firm’s age is quite significant a variable, despite the small degree of impact Therefore, it can be said that the new generation of firms in Quang Ninh province has become relatively stronger in terms of the overall innovation capacities than the older ones 5.2 Limitation of the research This research studies the relationship between SMEs’ characteristics and innovative capacities To assess firms’ innovative capacity, it does not look at the results aspect: the number of innovative products, processes, etc., but the process itself through the judgment of the managers This approach can only be a proxy to the real variable of a firm’s innovative capacity We acknowledge that some other variables that should be included to improve the model, such as the amount of firm’s investment in R&D, the proportion of skilled workers, whether the firm involves in transnational trades These are variables often found in studies on innovation This problem is due to the lack of data However, the result of our Omitted variable test in the OLS model shows that there is no problem with omitted variables The issues of causal relationships or endogeneity may potentially exist in the regression models of innovation These types of problem have previously been addressed in Nguyen (2020) and Roper & Arvanitis (2012) As pointed out by Nguyen (2020), some literature suggested that firm performance, including firm innovation, may have a reversal causality relationship with bribing behavior As he explained, the binary 35 nature of the observatory variables renders him unable to address the problem in the conventional way that is using an instrumental variable Therefore, he uses a bivariate probit model with a maximum likelihood estimator to obtain less biased estimates of a binary model with an endogenous binary explanatory variable, as suggested by Wooldridge (2010) Roper & Arvanitis (2012), when investigated the relationship between innovation outputs and business performance, could address the endogeneity issue by using the instrumental methods because the variables were continuous However, as our research does not focus on a single relationship, but to study the relationship between some characteristics of SMEs with the IVC, this issue is left for future studies 5.3 Policy Implication The findings in this report support a broad approach of the local government in facilitating local firms’ innovative capacity Not only are firms’ internal factors important, but business environmental factors are highly impactful to their innovative capacity Therefore, the main recommendation of this research is that the local government of Quang Ninh province should have a broad approach to designing supporting policies The solutions should target reducing the costs of innovators while stimulating a transparent competitive environment The local government of Quang Ninh province should continue to push forward the strategy to improve the quality of business environment, which it has been doing well in recent years Next, the local government should target SMEs that are potential Some indicators like firm’s performance and management capacities can reflect such potentiality More importantly, the rationale for supporting policies, therefore, is not to create “a more balanced economy” because SMEs are so disadvantaged in comparison with big enterprises, but to create more successful innovators based on their potentiality to get big in the future (Mazzucato, 2020) As for financial supports, they should not be constricted in narrow senses like preferential taxes They should be broader and more purposeful like contracting projects and public procurement that require substantial innovative capacity or create platforms that connect investors with local innovators 36 Finally, the local government should strengthen its formal support channels for SMEs innovation To be more effective, there should be more innovation in the realm of policy itself Just like firms, the local government should first understand its “weakest links” so that it can find better solutions Good practices in other successful countries can always be learned; however, to adopt and make them effective requires understanding of its own context 37 REFERENCES Ayyagari, M., Demirgỹỗ-Kunt, A., & Maksimovic, V (2014) Bribe Payments and Innovation in Developing Countries: Are Innovating Firms 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Economia Politica, 36(1), 79-110 Schumpeter, J., 1934 The Theory of Economic Development Harvard University Press, Cambridge, MA Wooldridge, J M (2010) Econometric Analysis of Cross Section and Panel Data Cambridge, MA: The MIT Press World Bank (2020), Vietnam: Science, Technology, and Innovation Report World Bank (2016) Vietnam 2035: Toward prosperity, creativity, equity, and democracy 39 LIST OF AUTHOR’S PUBLICATION Nguyen, T L., Hoang, V T, & Dinh, T M (2020) The role of science, technology and innovation in economic growth: a theorerical and empirtical review and its implications for Vietnam (Tổng quan lý thuyết kinh nghiệm thực tiễn vai trò khoa học, công nghệ đổi sáng tạo tăng trưởng kinh tế: Một số gợi suy cho Việt Nam) JSTPM, 9(4), 2020 40 APPENDIX The set of questions assessing firm’s management capacities in the DDCI Quang Ninh 2019 survey (Original Vietnamese - English translation) No Point The firm already had/does’t have/planned to adopt each of these management technigque 1 Khi gặp vấn đề phát sinh q trình kinh doanh, Doanh nghiệp tập trung rà sốt điều chỉnh quy trình làm việc để ngăn ngừa tình trạng tương tự tái diễn When problems arised from the business process, the firm focuses on inspecting and adjusting the working process to prevent the same things happen again Doanh nghiệp ban hành thực thi đánh giá kết công việc nhân viên qua số hiệu công việc (KPI) The firm has adopted and implemented the Key Performance Idicator to assess the performance of personnel Doanh nghiệp đề bạt thăng chức cho cán bộ, nhân viên dựa kết quả, hiệu công việc The firm proposes and promots its personnel based on their performance Doanh nghiệp có sách thực thi việc thu thập, tổ chức phân tích liệu thị trường, đầu vào, đầu (ví dụ sở liệu khách hàng, nhà cung cấp, v.v.) The firm has policies to collect, organize, and analyze market data, input, output (i.e customers data, suppliers, ect.) 41 No Point The firm already had/does’t have/planned to adopt each of these management technigque Doanh nghiệp có sử dụng kết phân tích liệu thị trường, đầu vào, đầu cho định đầu tư, kinh doanh The firm uses the analytic results of the market, input, output for investment and business decisions Doanh nghiệp thực thi sách quản lý rủi ro với doanh nghiệp đối tác chuỗi cung ứng The firm implements risk management policies with suppliers in its supply chain Doanh nghiệp thực thi sách quản lý rủi ro từ thiên tai tượng bất thường (mua bảo hiểm, đầu tư ngăn ngừa rủi ro, đào tạo tập huấn ngăn ngừa rủi ro, v.v.) The firm implements natural disaster and unusual event risk management policies (Purchasing Insurance, Investment against risk, training to prevent risks, ect.) Doanh nghiệp công bố, công khai thông tin liên quan đến tầm nhìn, chiến lược, quy tắc đạo đức kinh doanh, kế hoạch chế độ, nội quy bên công ty The firm publishes information related to its vision, strategy, principle, rules of business ethics, plans and incentives, company policies 42 ... UNIVERISTY HOANG VAN TRUNG THE RELATIONSHIP BETWEEN SMALL AND MEDIUM-SIZED ENTERPRISES’ CHARACTERISTICS AND THEIR INNOVATIVE CAPACITY: EVIDENCES FROM FIRMS IN QUANG NINH PROVINCE MAJOR: PUBLIC POLICY... some characteristics of SMEs located in Quang Ninh province and their innovative capacity based on the IVC framework Specifically, we assess firms? ?? innovative capacity through the process of innovation... data from the DDCI survey in 2019 Therefore, we limit the scope of this research in Quang Ninh province Concerning the data, we combine two data sets: the DDCI Quang Ninh 2019 survey, and the Enterprise