The determinants of innovation in SMEs in emerging economies: a
moderated mediation framework.
Master thesis
N. I. Mazur, 10285032
MSc Business Administration - International Management Faculty of Economics and Business, University of Amsterdam First supervisor: dr. Mashiho Mihalache
Second supervisor: dr. Michelle Westermann-Behaylo Date: 23 June 2017, first draft
Statement of Originality
This document is written by student Nazar Mazur who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its
references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
The strong role of R&D departments in stimulating innovation within companies has been demonstrated in various studies from around the world. However, the studies have been ignoring the determinants of innovation in the context of SMEs in emerging economies. Innovation found to be more important for SMEs to remain competitive in this dynamic environment than for global firms. Companies depend on innovation and have noted that the emplacement of innovation in the global economy has started to shift because of emerging economies. This study aims to investigate the effect of determinants of innovation in SMEs in emerging economies. Moreover, the study investigate the mediating effect of R&D on the relationship between external determinants (networking, competition, institutions) and innovation. Further, the moderating effect of personal characteristics (employees and managers) on the direct relationship between R&D and innovation was tested.
This study partially supported empirical findings and found a positive relationship between competition and innovation. Also employees had a positive moderating effect on the relationship between R&D and innovation. However, no link was found for the moderating effect of managers. Furthermore, other independent variables such as networking and institutions had no influence on innovation. Also the mediating variable R&D had no effect on the relationship between innovation and external determinants: networking, competition and institutions. Additionally, no relationship was found between R&D and innovation. The associated managerial practices of this study provide insights for entrepreneurs, managers and employees interested in innovation in emerging economies and SMEs. Firms can use this information for strategic decisions in order to gain a competitive advantage or if the firm is planning to expand their innovative operations within emerging economies
Keywords: SME, Innovation, R&D, Networking, Institutions, Competition, Employees characteristics, Managers characteristics, Emerging economies
Table of contents
1. Introduction ... 1
2. Literature review ... 6
2.1 R&D and innovation ... 6
2.2 Networking ... 8
2.3 External environment: Competition ... 12
2.4 External environment: Institutions ... 14
2.5 Moderation effect: characteristics of employees and managers ... 16
3. Theoretical framework ... 19
3.1 External variable: Networking ... 19
3.2 External environment: Competition ... 21
3.3 External environment: Institutions ... 23
3.4 Direct relationship: R&D and innovation ... 25
3.5 Moderation effect: Personal characteristics ... 27
4. Methodology ... 31
4.1 Sample and data collection ... 31
4.2 Method ... 32 4.3 Measures ... 32 4.4 Analysis... 36 5. Results ... 37 6. Discussion ... 42 6.1 Findings... 42
6.2 Scientific relevance and managerial implications... 47
6.3 Limitations and suggestions for future research ... 49
7. Conclusion ... 50
8. References ... 53
List of Figures FIGURE 1.CONCEPTUAL MODEL ... 19
List of Tables TABLE 1.DESCRIPTIVE STATISTICS AND CORRELATIONS ... 40
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1. Introduction
At the beginning of the 20th century researchers, considered innovation as a major driving force of global economic expansion, positive economic performance and knowledge progress, which also affects the long-run growth rate of companies (El Elj & Abassi, 2014; De Medeiros, Ribeiro & Cortimiglia, 2014; Casmef, 2013; Parbotheeah, Nam & Back, 2014). Innovation involves change or novelty and can take the form of new products, production processes, markets or sources of supply (De Medeiros et al., 2014). Companies depend on innovation and have noted that the emplacement of innovation in the global economy has started to shift because of emerging economies (Govindarajan & Ramamurti, 2013). Poor countries are no longer only acquiring innovation from developed countries; they have also begun contributing innovation to the rest of the world.
Today, global firms wrestle with dynamic environments (Dijk, 2014), which can be characterized as a rapidly changing marketplaces, products, technology and higher degree of uncertainty. The constantly changing environment makes it difficult for firms to regulate geographically diffused assets and leverage innovations beyond national borders (Dijk, 2014; Hana, 2013; De Medeiros, Ribeiro & Cortimiglia, 2014). Apart from large (global) companies, there are also firms with less employees, financial and knowledge level, which are called small and medium enterprises (SMEs). In current literature, SMEs are considered to be the new engine of the economic growth and employment (Radas & Bozich, 2009; Hana, 2013). Researchers emphasize that innovation is more important for SMEs than global firms in order to remain competitive in this dynamic environment (Radas & Bozic, 2009). Due to the recognized economic power of the SME sector, developed and developing countries are trying to determine the main factors promoting SMEs potential to produce innovations independently. A long time, Tushman & Nadler already stressed that “ Organizations can
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gain competitive advantage only by managing effectively for today while simultaneously creating innovation for tomorrow” (Hana, 2013, p. 82).
Various studies have stated that the present and future are based on the power of knowledge, information and an innovative economic environment (Hana, 2013; Ayyagari, Demirg-Kunt & Maksimovic, 2011). They also mention that firm success depends on the knowledge, experience, creative activity and constant learning process of employees and managers (Hana, 2013; Radas & Bozic, 2009; Romero & Martinez-Roman, 2012; Ayyagari et al., 2011). Greater rates of innovation are associated with employees and managers who have completed university education or higher (Ayyagari et al., 2011). Additionally, various researchers have identified education as an important factor in a company’s success and innovative activities (Romero et al., 2012; El Elj et al., 2014; Al-Mubaraki et al., 2013). In order to generate new ideas and stimulate innovation, firms and managers must encourage internal learning and individual training to unlock employees’ hidden and underutilized abilities (Kestin, Parm & Ulhoi, 2010). In making this effort, “the potential of employees can be made more visible, recognized and exploited to the benefit of both the firm and its employees” (Kestin, Parm & Ulhoi, 2010, p.163).
It has been stated that R&D and innovation are linked to each other Vega-Jurado et al., 2008. R&D can be considered as an activity, which change money into knowledge. While innovation is more a practice of creating business out of the R&D knowledge (Kamp & Bevis, 2012). Presently, research and development (R&D) activities not only generate new knowledge and innovation, but also gather knowledge outside the company (Vega-Jurado et al., 2008). Relationships with other companies are a beneficial tool of innovation, with knowledge links affording firms easier access to new ideas (Parbotheeah et al., 2014). Companies prefer to operate in an area with high innovation to be able to make better use of available knowledge from other firms; this process is known as knowledge spill-over. Small
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and medium enterprises have less developed R&D departments compared to global firms and are more dependent on the external knowledge of large firms (Parbotheeah et al., 2014). Another important factor is the total cost of innovation and in-house R&D (Casmef, 2013), but finance literature is silent on how innovation in developing countries is affected by access to finance and institutions (Ayyagari, Kunt & Maksimovic, 2011). However, it can be assumed that emerging economies are unable to take full advantage of R&D due to financial constraints; this issue leads to economic stagnation (Ayyagari et al., 2011). According to Parbotheeah et. al., (2014) companies in developing countries depend more on professional service firms as a replacement for weak or missing institution.
In recent years, the focus of knowledge and in-house R&D has shifted to the identification of determinants of innovation and become a popular topic. Possible determinants of innovation have been analysed in theoretical and empirical studies. The determinants of innovation can be internal or external in nature (Vega-Jurado et al., 2008; Radas & Bozic, 2009; El Elj & Abassi, 2014; Casmef, 2013). A strand of endogenous growth literature validates the importance of size as a determinant of innovation and highlights the importance of institutional control and innovation policies (Vega-Jurado et al., 2008; El Elj & Abassi, 2014; Parbotheeah et al., 2014). Because poorly functioning institutions in emerging markets increase transactional costs and uncertainty, having a unique strategy is a useful step in overcoming institutional deficiencies (Parbotheeah et al., 2014). Well defined and adapted strategy helps to avoid institutional deficiencies and stimulates the increase of innovation. Studies have identified more determinants of innovation, such as the market competitiveness, foreign presence and financial situation of a country (Casmef, 2013; Parbotheeah et al., 2014) as well as marketing activities and protocols, strategic factors, firm strategy, firm process and marketplace characteristics (Evanschitzky, Eisend, Calantone & Jiang, 2012). Most of these determinants have been recognized as successful in developed countries, but their effects in
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emerging economies need to be researched more extensively. Developed countries can be considered as a sovereign state, with higher progressed economy and technological capabilities, compared to emerging (developing) countries. Developing countries are more associated with lower human development index, weaker institutions and low industrialization (Heyneman, 1980).
Emerging economies continue to grow more rapidly than developed economies. Additionally, developing countries encompass more than the half of the global population. They have a major impact on the global economy and provide more business opportunities than the rest of the world (Parbotheeah et al., 2014). Studies about SME innovation in developing countries are missing, largely due to lack of data (Ayyagari et al., 2011). Most literature uses US data or focuses on global firms. The current study differs from earlier articles in that firm-level data for a large number of emerging economies was used. Furthermore, few studies have examined the effect of external determinants and workers’ personal characteristics on firm innovation outputs. While this thesis will fill the gap in the literature of innovation for SMEs in emerging economies by exploring the nature of different relationships. First, this study measures the influence of a firm’s external environment on innovation performance. Following, the study will control how those relationships are mediated by R&D. Additionally, the effect of employee and manager characteristics on the relationship between R&D and innovation will be explored. To fill the above-mentioned gap in the literature, the research question this study aims to answer is as follows:
The influence of external factors and personal characteristics on innovation in SMEs in emerging economies: a moderated mediation framework.
Findings in existing research are difficult to generalize because they focus on developed countries, multinational companies or limited determinants of innovation. The current thesis focuses on the characteristics of employees and managers and external
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determinants of innovation. As a result, the study provides a clearer understanding of SME innovation in emerging economies around the globe.
This study will use the data collected from the the European Bank for Reconstruction and Development (EBRD) and the World Bank Group (the World Bank). The data is collected by observing many different firms at the same point of time, also known as a cross-sectional dataset. Therefore, this dataset is perceived as one of the best ways to pinpoint how and which of the changes in the business environment affect firm-level innovation across countries (Hsiao, 2014). Furthermore, this study adopts a quantitative data approach for investigating the topic. For the quantitative data research approach, the leading model that will be used is the moderation mediation model.
The structure of this paper is as follows. First, the theoretical foundations of this study are discussed; relevant literature about emerging economies, external determinants of innovation, employee and manager characteristics and SMEs are reviewed. The following section provides a theoretical framework with the development of hypotheses and propositions. The data set and sample are described, and the variables are explained, including their sources, collection method and how they were measured. The chapters following the methodology section present and discuss the findings of the empirical analysis. Finally, the outcomes of the study, possible shortcomings and avenues for future research are elaborated.
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2. Literature review
This part will analyse the current theoretical debate about different external determinants of innovation for SMEs in emerging economies. Following variables will be briefly explained: R&D, innovation, networking, competition, institution, employees and managers characteristics.
2.1 R&D and innovation
For long time, innovation has been considered as the most important tool for SMEs (Solow, 1956; Acs and Audretsch, 1990; Uden, Knoben & Vermeulen, 2014) to survive tight competition and global economic crisis as well as be able to compete against global companies (Al-Mubaraki et al., 2013). Innovation refers to change; it can take the form of new markets, extraordinary idea, better quality products, new production processes (Ates, 2016). Innovation can be viewed as the utilization of improved solutions that meets customer or market requirements and needs (De Medeiros et al., 2014). The goal of new production processes is to reduce costs and boost productivity. New products focus on improving the relationship with the customers, and new markets increase market shares (Raymond & St-Pierre, 2010). Different forms of innovation have been found to be interdependent (Al-Mubaraki et al., 2013). Innovation often differ by size; therefore, firms manage different innovative activities that vary in scale, scope and productivity. Small and medium enterprises are skilled at radical product innovations, while global firms are more specialized in improving process innovations or making incremental changes to existing products or technologies (Santarelli and Sterlacchini, 1990). The value added activities of all types of businesses focus on improved firm performance and remaining competitive in existing and new business areas.
According to empirical studies, SMEs are considered to possess great capacity for innovation (Hoffmann, Parejo, Bessant & Perren, 1998) that enables them able to compete against local firms and global and knowledge-based economies (Raymond & St-Pierre,
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2010). The ability to produce new knowledge through R&D is regarded as a main pillar for successful innovation (Rammer, Czarnitzki & Spielkamp, 2009; Amara, Landry, Becheikh & Ouimet, 2008). Research and development activities mostly focus on “exploring new ways of solving technical problems, employing new technologies to meet user demand, and developing new technologies to produce and deliver goods and services will help firms to generate innovations that outperform competitors and help innovators to gain market shares and increase profitability” (Rammer et l., 2009, p. 36).
Following various studies, R&D activities are proposed for discovering solutions to problems and creating new knowledge, which can lead to ownership of intellectual property, also known as patents (Jaffe, 1986; Coe & Helpman 1995). R&D practices are risky and costly activities, especially for SMEs, which do not possess the extensive finances and resources of larger competitors (Ortega-Argiles, Vivarelli & Voigt, 2009; Rammer et al., 2009). Additionally, R&D projects place high pressure on profits and companies’ chances of survival in case of failure. However, a large segment of SMEs still manages to engage in innovative practices to overcome other liabilities related to smallness (Bruderl & Preisendorfer, 1998). Small firms also differ from large firms in that they innovate on a less intensive basis (Cefis, 2003). Studies have examined the share of companies with internal R&D activities on an intensive basis by firm size. The findings of the study revealed that over the last years the intensity of small companies is increased by 9.3% and large companies by 53.4% (Rammer et al., 2009). While, differences in R&D activities of small and large firms are significant this contrast has some advantages for large firms in terms of R&D practices and innovation, this effect seems to end beyond a critical point (Love & Roper, 1999). Studies confirm that smaller companies tend to be more innovation intensive than large companies beyond that critical point (Love & Roper, 1990; Demirel & Mazzucato, 2012).
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2.2 Networking
Looking at a business environment, innovation was considered to be a single-firm activity, but this assumption seems to be misleading. Today, the changing business environment with consumers’ constantly changing demands, rapid and extreme technological improvements and a high degree of competition have made innovation more complex, costlier and riskier (Kaminski, Carlos de Oliveira & Lopes, 2008). According to Vanhaverbeke and Cloodt (2005), new complicated materials, information and communication technology (ICT) products and advanced technologies are the main drivers competitive advantage. Innovations are fundamental for companies (Lee, Park, Yoon & Park, 2010), but the complexity of new improvements is beyond the abilities of single companies and especially SMEs (Kaminski et al., 2008), most of the time due to the lack of resources or knowledge (Lee et al., 2010).
To overcome the complexities and uncertainties and reduce the gap between knowledge and technology, companies’ R&D departments are forced to cooperate with each other (Vanhaverbeke & Cloodt, 2005, Zeng, Xie & Tam, 2010; Bougrain & Haudeville, 2002). The evolution of innovation has inspired firms to apply new way of working, known as open innovation. According to Bougrain & Haudeville (2002), innovation is strongly related to experiments, risk and compromises between different parties. Firms with open innovation strategies extend beyond organizational boundaries (Lee et al., 2010) and increase networking ties, which represent a direct connection to external knowledge inflows (Tomlinson & Fai, 2013; Zeng et al., 2010). By using other companies’ knowledge, firms can improve their know-how and accelerate their own innovation. However, the knowledge outflows will be used by the concurrents in their own interests as well (Tomlinson & Fai, 2013).
According to Zeng et al., (2010), SMEs are considered to be engines of growth in emerging markets, and open innovation is key improving SMEs’ innovation abilities. The
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development of the Chinese economy is a major example of of innovative SMEs, which have contributed to the growth of the Chinese emerging market. Small and medium enterprises account for 99% of all firms in China (Zeng et al., 2010). Companies used network ties to improve their industrial competitiveness, growing the economy and increasing business activity and employment in the process (Zeng et al., 2010). Following this example, emerging economies are realizing the importance of knowledge in economic activities and trying to reduce the gap with developed countries (Liefner, Hennemann & Xin, 2006). Attracting R&D departments is one of the most influential factors for emerging economies attempting to catch up with technology leaders (Li & Kozhikode, 2008). Collaborative networks actively contribute to raising regional competitiveness in terms of new technology network development projects and enabling access to new resources, skills and cost synergies (Farinha, Ferreira & Gouveia, 2016, p. 321). The collaborative networks can provoke the creation of urban regions with highly concentrated knowledge. This lead to increased collaboration between SMEs and other firms and expands local production and employment (Li & Kozhikode, 2009; Liefner et al., 2006).
Networking increase interactions between various business parties. Strong network connections can be achieved by high emotional intensity and long-time collaboration; while parties with weak network connections only have social interaction with each other (Ceci & Iubatti, 2012). Networking is important, as R&D and innovation output seems to be strongly related to the number and strengths of collaboration networks (Becker, Dietz, Wolfgang & Jurgen, 2002). The main goal of network relations between companies is knowledge flows in both directions and increased profit from complementary competencies (Lee et al., 2010; Ceci & Iubatti, 2012). Consistent with the literature, competitors face similar challenges and possess different resources and capabilities useful for resolving challenges related to innovation and other situations (Chen, 1996). For example, large firms constantly screen and
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monitor their environments in pursuit of new customers, rivals and network relationships (Lee et al., 2010); this information gathering is a costly and complex activity. While most SMEs lack resources and capabilities and struggle to find useful partners. Because of these difficulties, SMEs are likely to build strong and lasting relationships once they organise a network (Lee et al., 2010). Furthermore, SMEs seek trustworthy and opportunistic partners to reduce the risk of R&D information outflow (leaks) to the external environment (Gnyawali & Park, 2009; Tomlinson & Fai, 2013). By finding quality firms with which to collaborate, SMEs attempt to overcome their internal resource constraints to (Tomlinson & Frai, 2013; Gnyawali & Park, 2009) improve their competitive advantage in relation to larger organizations.
The study of Kaminski et. al., (2008) explains that SMEs are flexible and innovative, but that a lack of resources can obstruct their development process. Global companies are less flexible but have more resources, knowledge and capabilities, which can be converted into new products or processes (Lee et al., 2010; Kaminski et al., 2008). Therefore, large companies superiority can be recognized in mass production, earnings in scale, better relationships with customers and suppliers. While SMEs flexibility provide better mobilize opportunities, by meeting market demands in a more efficient and faster way. By collaborating with global firms, SMEs can gain intrinsic assets to overcome resource shortages (Tomlinson & Fai, 2013). Tsai (2009) and Becker et al. (2002) suggest that SMEs should also focus on collaboration with centres of scientific knowledge, such as universities and research institutions. Salavou et al. (2004) and Zeng et al. (2010) confirm Tsai’s (2009) statement and emphasize the importance of network ties with suppliers and customers.
In the literature, suppliers and customers are considered as an inter-firm type of network. The importance of customers in product and process innovation has been highlighted since 1970 (Von Hippel, 1976; Tomlinson & Fai, 2013); today researchers still
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recognize the importance of a strong positive relationship with customers (Tsai, 2009). Moreover, Tomlinson & Fai’s (2013) study found a positive relationship with product innovation when companies’ R&D departments, suppliers and customers collaborated in developed economies. In addition, SMEs from six different developed countries in Europe found that R&D and supplier collaboration had a positive influence on innovation (Tomlinson & Fai, 2013). Kaminski et al.’s (2008) study of Brazil’s emerging economy declared that for SMEs, collaboration with suppliers enhances the knowledge of R&D department and can positively influence innovation. By collaborating with customers, SMEs can acquire tacit knowledge and a precise set of user requirements as well as collect feedback on existing and new products (Amara & Landry, 2005). Suppliers are also considered to be a direct entrance to valuable information for R&D activities. They obtain important information by interacting directly with customers and other suppliers, which can be relevant for SMEs as well (Amara & Landry, 2005). Long-term solid relationships between clients and suppliers can create innovative project solutions and improve the productivity chain where the SME is infused. Nonetheless, various studies contradict previous statement and show no effect of customers and suppliers on the relationship between networking and R&D performance (Sanchez & Perez, 2003; Tsai, 2009). In Sweden, Loof & Heshmati (2002) found no correlation between SMEs networking connections with customers and product innovation. Additionally, well-structured SMEs with R&D divisions in their possession, confirmed to be more able of linking their development activities with other partners: universities and research, testing or consultancy firms (Kaminski et al., 2008). Building a relationship between universities and business industries has become an important pillar of innovation research, especially in the context of research on networking relationships (Spithoven et al. 2013; Becker et al., 2002). have determined that universities in emerging
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economies with highly skilled students can influence firms’ R&D outcomes (Zeng et al., 2010).
The existence of SMEs depends on characteristics of the local environment, such as the availability, price and quality of local resources as well as the presence of quality suppliers in the area. These aspects are crucial for SMEs innovation process. Firms in emerging economies have little interaction with large firms, universities or quality suppliers compared to those in developed countries. The main external partners of firms in emerging economies are customers (Kaminski et al., 2010). Furthermore, SMEs are specialized in a specific business field, but networking with other firms can broaden their scope. Small and medium enterprises will have the opportunity to enter other markets where they can gather new information and capabilities to improve their competitive advantages. Essentially, properly formulated and guided networking relationships can benefit SMEs R&D outcomes and competitive advantages by giving them the ability to acquire different types of information, knowledge and capabilities (Lee et al., 2010). As illustrated in the literature, networking has many benefits. At the same time, the presence of conflicting and missing results regarding the relationship between networking and R&D performance requires more research focused on SMEs and emerging economies. First, this study aims to explore a basic understanding of networking and implications. Further, this study will describe networking in the context of SMEs in emerging economies. From a managerial viewpoint, the study also demonstrates that networking relationships between SMEs and other partners in emerging economies are a valid approach to improving innovation performance.
2.3 External environment: Competition
According to the literature, competitiveness is “a set of institutions, policies and factors combining to determine the level of productivity of an economy and its corresponding
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capacity to generate wealth and returns on investments and determining the potential for economic growth” (Schwab, 2010, p. 25). Therefore, competition can occur in different forms, various sectors and among diverse group of players, with the main goal of acquiring additional resources (Audretsch, 2004).
Globalization and increased global mobility have strengthened global competition. This evolution caused the fall of trade barriers and increased market openness, leading to the boost of import, export and replacement of R&D departments across different countries (Farinha et al., 2006). Less competitive regions such as emerging economies began to catch up with developed countries by increasing their knowledge and available skilled labour, in order to attract more companies (Leydesdorff & Meyeer, 2006). Focusing on competition at the firm level, different articles mention incumbents in a particular market are constantly being threatened by existing competitors and new entrants (Schumpter, 1943; Carlin, Schaffer & Seabright, 2004). Further, examining costly and risky innovative processes, the literature concludes that successful competitors will push out incumbents that fail to innovate (Carlin et al., 2004). Previously isolated SMEs are now facing international competition and need to improve their market shares. Scarce resources and knowledge are the main constraints in developing the ability to compete and innovate in emerging economies and abroad (Al-Mubaraki et al., 2013). Additionally, competition is closely related to industry concentration and entry barriers, which are recognized as being highly correlated with innovation (Salavou, Baltas & Lioukas, 2004). Early studies considered entry barriers as discouraging to innovation and positive for higher profits (Schumpter, 1942). Thus, companies spend less on competition and have more funds for R&D activities and increased innovation. Today, competition has increased, and entry barriers have fallen; companies have become less flexible in choosing the best R&D projects for generating the greatest possible turnover (Ayyagari et al., 2011). Additionally, companies’ ability to establish strong
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relationships with customers and suppliers has decreased, leading to lower firm reputations (Ayyagari et al., 2011).
Aghion and Howitt’s (1998) article describes three different effects of competition on innovation. To begin, the Darwinian effect is used to explain how market competition pushes managers to quicken implementation of new innovations to avoid loss of control and bankruptcy (Porter, 1990). Therefore, managers are forced to act faster than expected in order to compete. The neck-and-neck model describes that incumbents have fewer reasons to undertake new innovative activities than newcomers. The total game can be changed if newcomers surpass incumbents; at this point, neck-and-neck competition starts, leading to more rivalry and increased innovative practices (Ahn, 2002). Finally, the mobility effect illustrates how learning-by-doing is important for innovation. In highly competitive markets, workers are forced to switch frequently from one project to another. It is necessary for companies that workers are able to rapidly acclimatize to new jobs (Aghion and Howitt, 1996). Bearing this essential information in mind, next section explains more broadly the effects of competition on innovation and how it affect SMEs, especially in emerging economies.
2.4 External environment: Institutions
Since the 1990s, more scientists have realized the importance of institutions, especially in developing economies. Businesses and markets in developed countries operate smoothly and the influence of institutions is almost unnoticeable (Peng, Wang & Jiang, 2008). According to McMillan (2007), the situation is different in poorly operating markets in developing countries, where institutions are weak. Institutions are known as the “rules of the game”, which shape strategy, innovation, R&D and company performance (Lu, Tsang & Peng, 2008; Peng et al., 2008; Hoskisson, Eden, Lau & Wright, 2000; Rolfstam, 2009). Institutions can be described as "regulative, normative, and cognitive structures and activities
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that provide stability and meaning to social behaviour" (Peng et al., 2008; Rolfstam, 2009). More broadly, Peng, Sun, Pinkham & Chen (2009, p.4) describe the institutional framework as “the set of fundamental political, social, and legal ground rules that establishes the basis for production, exchange, and distribution”. Institution quality can be determined by government selection, monitoring and replacement, efficiently formulated and implemented policies, economic and social interaction between firms, inhabitants and the state (Barasa, Knoben, Vermeulen, Kimuyu & Kinyanjui, 2017).
Institutions collaborate with companies by establishing rules and communicating to the companies about which choices are acceptable, preferable and supportable (Peng et al., 2009). As a result, effective institutions reduce uncertainty among companies. Institutions oversee societal transactions in areas of politics, law and society (Pent et al., 2008; Pent et al., 2009). Institutional frameworks can be divided in two types of constraints: formal and informal. Literature describes formal constraints as a set of political rules, judicial decisions, regulations and contracts regulations (Pent et al., 2008; Lu et al., 2008; Peng et al., 2009). Informal constraints focus more on the norms of behaviour, conventions, and self-imposed codes of conduct, which are more rooted in culture and ideology (Pent et al., 2008; Lu et al., 2008; Peng et al., 2009; Chang, Chung & Mahmood, 2006). Furthermore, researchers underline two important findings. First, each country has its own unique combination of companies and institutional infrastructure for innovation that differs in terms of formal and informal constraints (Rolfstam, 2009; Peng et al., 2009; Chang et al., 2006). Additionally, institutions are much more than a background setting; they help firms to formulate and implement strategies to achieve better competitive advantage (Rolfstam, 2009; Peng et al., 2008; Lu et al., 2008; Peng et al., 2009).
Quality, developed institutions enhance firm productivity, while poor institutions mostly lead to unstable government, low bureaucratic growth, increased cost of doing
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business, bribery, tax evasion, corruption and unproductive behaviour of organizations (Barasa et al., 2017). Different studies relate emerging economies to weak institutions (Yildrim & Gokalp, 2016; Ahlstrom & Bruton, 2006; Zhu, Wittmann & Peng, 2012). Additionally, absence and weak enforcement of intellectual property rights (IPR), patent laws and contracts decrease R&D activities and innovation outcomes in emerging economies (Barasa et al., 2017). Innovation is a high-risk activity, which is provided by R&D departments and requires resource intensive activity. Therefore, a broad range of social norms related to knowledge creation, imitation and relocation (Lu et al., 2008) are imperative as well as strong institutions and enforcement of rights (Peng, Ahlstrom, Carraher & Shi, 2017).
2.5 Moderation effect: characteristics of employees and managers
The relevance of personnel knowledge in the innovation process has been broadly recognized (Bilbao-Osorio & Rodríguez-Pose, 2004; Farinha et al., 2016; Al-Mubaraki et al., 2013; Lu t al., 2008). Employees with more knowledge have been found to perform better and have higher innovative input (Uden et al., 2014). Knowledge can be distinguished into two types: explicit and tacit knowledge. Explicit knowledge can be readily articulated, codified, accessed and verbalized and easily transmitted to others (Nonaka & Konno, 1998). The information contained in encyclopaedias and textbooks are primary examples of explicit knowledge. Tacit knowledge can be defined as “unwritten, unspoken, and hidden vast storehouse of knowledge held by practically every normal human being, based on his or her emotions, experiences, insights, intuition, observations and internalized information” (Shuaib & Olalere, 2013, p.52). Tacit knowledge can mostly be acquired by interacting with other people and can be found in a person’s consciousness, which makes it difficult to transfer. In order to transfer tacit knowledge firms need to stimulate joint or shared activities, therefore the knowledge can transfered from the consciousness of one person to another. Rosenberg (1990) and Pavitt (1998) highlight that the scientific and technological know-how necessary
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for innovation is most often tacit. Additionally, Bilbao-Osorio & Rodríguez-Pose (2004) conclude that SMEs’ R&D activities are unprofitable when employees are low quality.
Innovation is generally accepted as a critical parameter of human intelligence and quality (Farinha et al., 2016). It can be measured by focusing on the main characteristics of a person’s innovative behaviour, such as creating new and favourable products, ideas or procedures (Jong & Hartog, 2007). In order to be innovative, individuals must possess extraordinary skills, abilities and knowledge (Uden et al., 2014). These personal qualities can be used within a work role, team or company process in order to achieve the best possible results. The knowledge obtained from R&D activities or workers’ skills and abilities is the one of the most important components of effective innovation.
Examining knowledge in the context of emerging economies, it is apparent that a positive stream of stimulating education and improving human capital levels are the main pillars of many development initiatives and policies (UNCTAD, 2016). Skilled human capital is considered as the main element boosting innovation at the firm level in developed countries (Leiponen, 2005; Vinding, 2006; Uden et al., 2014). It can be assumed that current government practices in emerging economies are on the right track to generate more innovation. Although the institutions provide useful educational and advisory coaching for managers, the gap in the SME sector remains the same (Kayanula & Quartey, 2000). The explanation of this dilemma is that coaching is expensive and managers do not see the necessity of improving their managerial experience due to obstinacy and stubbornness (Al-Mubaraki et al., 2013).
A growing body of research considers innovation and managers as an organizational combination that leads to the survival of businesses and affects core competencies and innovative performance, especially within a competitive environment (Farinha et al., 2016). Managers are considered as the process of influencing others towards achieving desired
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outcome (Jong & Hartog, 2007). Firms differ in possession of knowledge and the ability to manage knowledge. Managers are an important link in effectively managing acquired, created, shared and diffused knowledge within a firm (Lu et al., 2008). Talented managers are scarce in emerging economies; therefore, SMEs must cope with managers who lack experience and knowledge (Al-Mubaraki et al., 2013). Over time, managers develop necessary skills and experience, which allow them to make wise decisions related to innovation (Li, Wang & Liu, 2013). Different studies reveal that experienced managers are more capable of managing complex problems in a company's environment, allowing for the accomplishment of better innovative and firm performance (Barasa et al.,, 2017). For example, Bantel and Jackson’s (1989) study illustrated that banks with more focus on innovation perform better with experienced managers. While Nichter & Goldmark (2009) focused on emerging economies, demonstrating that work experience of employees in SMEs have positive effect on the company's firm performance and growth.
In summary, knowledge within a firm involves three basic issues. To start, humans focus on making a company more innovative by exploring new knowledge rather than exploiting existing knowledge. Secondly, it is necessary to create a well-designed infrastructure for external and internal learning and promoting innovation activities within a company. Finally, managers deal with the creation and management of a context that is appropriate for innovation.
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3. Theoretical framework
Building on the external determinants and personal characteristics, this study presents nine working hypothesis based on the innovation performance of SMEs in emerging economies. The conceptual model of this study is illustrated in Figure 1.
To start, this study will discuss the importance of external variables on innovation for SMEs in emerging economies, and also how R&D mediate those relationships. Followed by the paragraph explaining the relationship between R&D and innovation. The next part argues how employees and managers characteristics moderate the relationship between R&D and innovation for SMEs in emerging economies.
3.1 External variable: Networking
The main force behind the development of innovation is cooperation between parties such as science, technology and financing instruments (Zhou, 2013). Establishing R&D cooperation is necessary to acquire expertise that cannot be achieved internally. Intensive relationships between firms and R&D departments can also increase market strength, economies of scale and exploitation of new opportunities (Ceci & Iubatti, 2012; Rosenfeld, 1996). Hagedoorn (2002) describes the importance of R&D partnerships in order to access new information and increase innovation. Additionally, Gnyawali & Park (2009) emphasize
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that SMEs must form alliances in the interest of achieving economies of scale and broader scope in R&D. For example, the results of their study found that SMEs in the computing industry with fewer than 1,000 employees could compete with major players, such as International Business Machines (IBM) or Hewlett-Packard (HP), as long as their R&D departments collaborated on achieving this goal (Gnyawali & Park, 2009). However, R&D collaborations must address unpredictable risk, delayed or failed projects and poor assets, among other challenges. Additionally, each R&D input is not directly detectable; companions tend to focus more on their own activities and profit. Because of this situation, moral hazards can occur (Becker et al., 2002).
Tacit knowledge seems to play an important role in R&D departments and can lead directly to innovation. This type of knowledge cannot be transferred through files or written in documents; it is embedded in workers’ minds (Bougrain & Haudeville, 2002; Ranga, Debackere & Tunzelmann, 2003). Networking is a good way to acquire this important and specific type of knowledge. Collaboration between the firms will provide “the know-why, know-how, know-when, and know-what” (Bougrain & Haudeville, 2002, p. 58), necessary for R&D departments to increase their innovation performance. R&D and supplier partnerships give firms an opportunity to absorb know-how from suppliers’ perspective. The acquired suppliers knowledge helps companies to identify potential problems, speed up and improve new product or process development and respond quickly to market demands (Tsai, 2009). Following, SMEs can collaborate with suppliers, who provide additional insights into the development process of R&D activities, such as identifying market performance, improving poor design development and achieving important personal insights for further innovation (Zeng et al., 2010; Tsai, 2009; Hagedoorn, 2002). In addition, SMEs cooperate with their competitors in order to create economies of scale, reduce risk and combine resources (Lee et al., 2010; Tsai, 2009; Farinha et al., 2016; Biggs & Shah, 2006). Small and
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medium enterprises in emerging economies lack resources and capabilities, R&D funding, and distribution and marketing competencies necessary and beneficial to stimulate innovation. Furthermore, SMEs apply different types of networking in the interest of gaining outside expertise to acquire new markets and technologies they cannot achieve on their own (Zeng et al., 2010; Gnyawali & Park, 2009).
Research institutions are considered to have a strong positive influence on innovation outcomes, especially for SMEs (Diez, 2000). Research institutions provide SMEs with not only competencies and knowledge but also training for innovative and skilled workers or university graduates. Cooperation with institutions also decreases transaction costs, corrects market failures, reduces the risk of leaking important information to competitors and serves as an important source of innovative ideas (Zeng et al., 2010; Liefner et. al., 2006).
Overall, the literature emphasizes the importance of effective firm strategies regarding SMEs and collaboration with different parties. Small and medium enterprises in emerging economies must be aware of the fact that they are simultaneously competing and collaborating with other companies to improve R&D activities and innovation and outperform other competitors:
Hypothesis 1a: Increased SME networking ties will positively influence innovation performance in emerging economies.
Hypothesis 1b: Increased SME networking ties will positively influence innovation performance in emerging economies, and R&D mediates this effect.
3.2 External environment: Competition
As Hadjimanolis (1999, p.2) explains, “while firms in less-developed countries, in the recent past, were operating within a relatively protected environment, they must now face the global forces of competition. The globalization of the markets requires the adaptation of firms in order to survive.” A large body of researchers has produced empirical evidence of
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competition influencing innovation. Kamien & Schwartz (1982) emphasize that strong competition may reduce motivation to innovate, likewise Abernathy & Utterback (1978) confirm these results by highlighting that intense competition is more likely to decrease innovation instead of encouraging it. Other literature has found evidence of the opposite: that innovation will increase in response to fiercer competition (Nickel, 1996; Ahn, 2002; Ayyagari, 2011). It can also be argued that lack of competition makes innovation less necessary (Dasgupta & Stiglitz, 1980). For example, Kraft (1989) stresses that barriers of entry may reduce the motivation to be first in introducing new products. In other words, competition may drive organizations’ innovation efforts.
Different studies have stated that competition lowers prices and increases production efficiency (Ahn, 2002, Ayyagari et al., 2011). Aghion, Dewatripont & Rey (1997) confirm the idea that new entrants influence incumbents’ profits from innovation. It is important to closely examine the diversity of the competition. According to Aitken & Harrison (1999), if the competition consists largely of foreign entrants, it will have a different effect as previously mentioned: incumbents’ market share and productivity will decrease. Furthermore, evidence has proven that innovation spreads faster among highly technological incumbents and slows down less efficient technological incumbents (Ayyagari et al., 2011).
Additionally, firms with monopoly power in a certain markets actually have more skilled R&D labour and better resources. More importantly, they can afford to execute riskier and costlier innovative projects (Cohen & Levin, 1989; Damanpour, 2010). However, monopolistic companies face less competition and, therefore, less pressure to continue investing in costly innovative projects (Dean, Brown & Bamford, 1998). The situation is different for SMEs. Empirical evidence about SMEs suggests that small firms are more willing to achieve innovation because it is a part of their strategy and the main pillar of gaining competitive advantage over other firms, especially large competitors (Salavou et al.,
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2004). Due to the lack of resources, diversification and knowledge, SMEs focus on the types of innovation that large firms are unable to accomplish.
Blundell, Friffith & Van Reenen’s (1999) econometric analysis found that companies in competitive markets with larger market shares tend to gain more from innovating than those in less competitive markets. For example, the results of Konings (1998) focused on one particular industry in Bulgaria (an emerging economy) and found that intense competition led to more innovation, which is in line with the findings of Blundell et. al., (1999). However, the findings of Konings (1998) for Estonia contradict previous assumption by showing no link between competition and innovation. Furthermore, most emerging markets are more
concentrated than developed markets (Divecha, Drach & Stefek, 1992). Firms that operate in concentrated markets have more motivation to innovate, as their investments can be easily converted into positive returns (Martinez-Ros, 2000). Nonetheless, Zahra (1993) indicates that companies in concentrated markets are more likely to avoid innovation, as it may agitate the balance of the market. Despite different and contradictory findings, this study has composed following hypothesis:
Hypothesis 2a: A high degree of competition will positively influence innovation performance in emerging economies.
Hypothesis 2b: A high degree of competition will positively influence innovation performance in emerging economies, and R&D mediates this effect.
3.3 External environment: Institutions
It is already known that investing in R&D activities stimulates technical and scientific know-how, which allow companies to innovate products, processes and services (Barasa, et al., 2017). However, the progress of R&D activities and innovation strongly depend on a country’s institutional system (Barasa et al., 2017). Institutions from emerging economies often have weak legal systems and poor intellectual property rights, which are linked to
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increased uncertainty, high risk of imitation and high costs of conducting business in (Ahlstrom & Bruton, 2006; Biggs & Shah, 2006; Pent et al., 2017).
Weak institutional environments ruin the appropriable and effective value of innovation. For this reason, firms have been advised to withhold their valuable knowledge activities from poor intellectual property rights (IPR) economies (Zhao, 2006; Biggs & Shah, 2006). For example, companies in Venezuela must interact with the weakest legislation authorities in the world (Yildririm & Gokalp, 2016). This country has a poor institutional environment and weak enforcement. Therefore, firms act without institutional control, and Venezuela’s political environment is untrustworthy (Yildririm & Gokalp, 2016). According Zhao’s (2006) findings, 84% firms from emerging economies experience poor IPR protection; this issue makes it challenging for R&D departments to remain innovative.
China, another emerging country, is known for its unpredictable, volatile and weak institutional environment (Ahlstrom & Bruton, 2006). China’s government attempts to provide innovation support for firms and especially SMEs: “to promote innovative activities of SMEs, many intermediary institutions or organizations are established in China, such as ‘Productivity Centers’, ‘Technology Transfer Organizations’, and ‘Technology Business Incubator’, etc.” (Zeng et al., 2010, p.5). Despite its weak institutional environment, China has become the world champion in number of domestic patent applications (Peng et al., 2017). Improvements to China’s IPR protection system have also been recognized, but these changes are still insufficient. The current maximum fine for violation of IPR laws is RMB 1 million ($160,000). In most cases, this fine represents only a small part of all innovation expenses experienced by firm (Peng et al., 2017). Because local SMEs and the Chinese government benefit much more from imitation, the country is unwilling to change its policies and increase IPR penalties (Liang & Xue, 2010; Un, Cuervo-Cazurra & Asakawa 2010).
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Weak IPR protections also have consequences for the local SMEs. First, firms from developed countries are less willing to cooperate with local firms and share their knowledge, fearing that their intellectual property, and future profits, will be expropriated (Chang, Chung & Mahmood, 2006). Mansfield, Schwartz and Wagner (1981) concluded that 90% of all innovations of pharmaceutical SMEs would not be possible without IPR protections. Additionally, local SMEs must often cope with extortion from government and local institutions (Barasa et al., 2017). This issue causes long delays, high costs and difficulties in obtaining licenses and permits, which are required to starting new R&D projects. As a result, SMEs in emerging economies struggle to invest in R&D and develop new products (Barasa et al., 2017). Thus, the current study argues that the innovation outputs of SMEs’ R&D departments depends on emerging countries’ institutional environments:
Hypothesis 3a: Poor institutions in emerging economies will have a negative influence on SMEs’ innovation performance.
Hypothesis 3b: Poor institutions in emerging economies will have a negative influence on SMEs’ innovation performance, and this effect is mediated by R&D. 3.4 Direct relationship: R&D and innovation
Emerging literature emphasizes that R&D expenditures are the most important aspect of a company's ability to innovate (Freeman & Soete, 1997; Shefer & Frenkel, 2005). Today, rapidly changing consumer preferences, shorter product life cycles and growing quality expectations force SMEs to continue improving their technological R&D assets. Unfortunately, boosting R&D activities among SMEs is difficult due to the restricted financial and intangible resources (Pradhan, 2011). The R&D output of large firms is much greater compared to SMEs, which allow large companies cost reduction and more effective development of new products (Ortega-Argiles et al., 2009). As a result, competing is even more difficult for SMEs, and this problem leads to imitation of other companies’ ideas
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instead of innovation (Ortega-Argiles et al., 2009; Rammer et al., 2009). Although SMEs have fewer possibilities for R&D activities than larger companies, the adaptability of their R&D and their capability and productivity seem to be greater than that of larger companies. In other words, SMEs produce more products and innovation than large companies when measuring in terms of unit of input invested in R&D (Ortega-Argiles et al., 2009). Additionally, compared to large companies, SMEs tend to demonstrate greater flexibility because they can mobilize to meet market demands more quickly (Lee et al., 2010; Kaminski et al., 2008). Furthermore, it is important to fully exploit the innovative potential of each project by applying the correct management techniques and using external knowledge (Rammer t al., 2009)
The World Investment Report (2015) concludes that the share of the world’s total R&D activities taking place in developing countries is continuing to grow. As stated in the literature, emerging countries are known as emulators and imitators of practices (Bougrain & Haudeville, 2002). Li & Kozhikode (2008) explain that in the short-run, SMEs can acquire key resources through imitation, but this effort is not sufficient to remain competitive in the future. Small and medium enterprises that apply imitation routines are unable to renew their resources over time and lose their competitive advantage to R&D intensive companies (Liefner et al., 2006). Additionally, Cohen & Levinthal (1989) emphasize that SMEs’ innovation performance depends on two activities: acquiring knowledge from external sources and internal R&D (Qian and Li, 2003; Wolff and Pett, 2006; Raymond & St-Pierre, 2010). In the context of SMEs in emerging economies, the first function is considered to be more important, as it provides the basis for the internal R&D activities (Liefner et al., 2006). These practices compensate for SMEs’ financial shortcomings and provide them with the possibility of creating an internal stock of scientific knowledge. Scientific knowledge may further increase the ability of R&D to understand
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requirements and needs of consumers and employees; apply them to commercial ends (Wang, Mario & Kafouros, 2009). Such knowledge may also enhance firms’ understanding, bridge distant technological contexts and help firms recognize gaps in the technological landscape.
Previous studies have demonstrated the positive effects of R&D on innovation in developed economies (Amara et al., 2008; Raymond & St-Pierre, 2010; Wang, YU, & Liu, 2013) and developing countries (Shefer & Frenkel, 2005; Uden et al., 2014; Inekwe, 2013). Though the total amount of SMEs show less intense R&D capacity and patenting activities, SMEs are still more innovative than global firms (Raymond & St-Pierre, 2010). Additionally, the impact of R&D spending on growth is positive for upper-middle-income economies and insignificant in lower-income economies. Furthermore, Scherer (1965) found that innovation practices increase to a certain level when company size increases; the relationship becomes proportional. On the other hand Martin (2015) found that at a certain level of R&D expenditure no correlation exists between R&D spending and innovation. According to Martin (2015) innovation is a hit or miss situation. He also argues that the key to innovation is not how much to spend on R&D but how to spend the available funds. Other studies relate innovative success to technological activities instead of the inputs used in innovation. In this case, researchers examine technological outputs such as patent, product and process innovations (Huergo & Moreno, 2011; Conte & Vivarelli, 2014). Considering all the thoughts of above-mentioned literature, this study proposes following:
Hypothesis 4: The research and development activities of SMEs in emerging economies have a positive influence on innovation performance.
3.5 Moderation effect: Personal characteristics
While some developing countries must cope with human resource scarcity, others have witnessed substantial growth their pool of R&D personnel (OECD, 2007, p. 23). The number of PhD students in science and technology in China has increased to over 50,000, and
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the number of researchers in South Korea has grown to over 200,000 (Unctad, 2005). An important factor in this development is that scientists are available for less than a fourth of the cost in developed countries (Li & Kozhikode, 2008). Therefore R&D activities in emerging economies can be managed by highly skilled personnel at lower costs. This reality leads to more R&D practices and greater chances of innovation. The next section distinguishes human resources in two parts: employee and manager quality.
3.5.1 Employees
Companies in emerging economies operate below technological limits and with less skilled workers (Uden et al., 2014). For these reasons, SMEs are forced to match competition by imitating products rather than and innovating new ones. In this case, less educated staff rely more on their own knowledge and competences (Bougrain & Haudeville, 2002). According to Nelson & Phelps (1966), to stimulate innovation, SMEs need to focus more on employee knowledge, which will lead to better understanding, creating and processing of information. Moreover, a certain level of schooling seems to have a greater impact on the absorptive and exploiting capacity of knowledge of a worker (Uden, Knoben & Vermeulen, 2014). The agriculture case in emerging economies demonstrates a significant positive relationship between knowledge and innovation (Knight et al., 2004). In order to remain innovative, employees and R&D activities must continue acquiring new knowledge and skills. Learning by doing is a strong example of this process.
SMEs can improve knowledge and skills by encouraging additional trainings (Freel, 2005). Especially in emerging economies, technology industry training seems to contribute additional employee knowledge and play a crucial role in innovation (Uden et al., 2014). While Goedhuys (2007) found no significant relationship between training and innovation in Tanzania, the results of Santamaria, Nieto & Barge-Gil (2009) contradicts previous findings by showing a significant positive effect between training and innovation. Following the
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contradictory findings of Goedhuys (2007) and Santamaria et. al., (2009), another empirical research have demonstrated that innovation-averse areas are less dependent on skilled labour and well-endowed with unskilled employees Leichenko and Silva (2004). Thus, this study can assume that knowledge and skills contribute to employee quality, which affects R&D performance and innovation. Therefore, the current study proposes the following hypothesis:
Hypothesis 5a: The effect of R&D on innovation will be positively moderated by employees’ characteristics.
3.5.2 Managers
In small and medium enterprises, managers are responsible for making wise decisions about all aspects of R&D activities leading to innovation (Bougrain & Haudeville, 2002). For example, managers can choose between two different strategies. First, they can ensure stability and consider innovation to be a major financial risk. This method leads to a centralized management style with limited external contacts. The second strategy involves accepting risk, which increases activities within a firm and can encourage faster growth (Bougrain & Haudeville, 2002).
In the context of above-mentioned strategies, managers’ education levels influence the quality of addressing complex strategies, sometimes with the help of research and advisory agencies instead of informal contacts (Bougrain & Haudeville, 2002). The US study of 800 Forbes companies in developed countries, illustrates that master business administration managers employ more aggressive strategies and are more successful compared to managers without degrees (Bertrand & Schoar, 2003). Although R&D employees contribute their knowledge to achieve innovative results, the success of innovation relies more on management activities than employee knowledge (Wang et al., 2013). However, managers are aware of the fact that firm success is also built on employees’ quality and dedicated work.
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When firms have to deal with problems or complex situations occur, level of education and tenure of managers influence the ability to recognize whether the firm can rely on SMEs own competencies (Bougrain & Haudeville, 2002). However, a lot of managers in SMEs are less skilled and often have little idea of how to manage innovation processes based on their knowledge in different contexts (Ortt & van der Duin, 2008) Understanding how to manage innovation successfully is crucial at a time when innovation is almost obligatory for survival and simultaneously extremely risky because it may lead to firm failure (Ortt & Duin, 2008). Furthermore, the relation among leaders and followers has found to be relevant for innovativeness (Graen & Scandura, 1987; Jong & Hartog, 2007). Taken from the manager's point of view, employees individual innovation can be guided and supported by managers support activities, such as providing right advice in risky situations, contribute with necessary resources and recognition. Following this line, Tierney, Farmer & Graen (1999) findings show positive effect of R&D managers supportive role on the performance of employees of a chemical firm. Later study of Janssen & Van Yperen (2004) confirm previous study results, by finding out that intensive relationship between managers and employees had a positive influence on innovative behaviour. Taking this information into consideration, this study suggests the following hypothesis:
Hypothesis 5b: The effect of R&D on innovation will be positively moderated by managers’ characteristics.
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4. Methodology
Leading literature represents a mass of various sources of innovation in developed countries, especially for multinational companies (Phene & Almeida, 2008; Lee, Sang & Taewon, 2012; Fors & Zejan 2012). However, studies about SME innovation in developing countries are missing, largely due to lack of data. The core research question of the current study is as follows: “what are the determinants of innovation for SMEs in emerging economies?”. This thesis focuses on the manager and employee characteristics, networking, competition, institutions and R&D. It provides a better understanding of SME innovation in emerging economies around the globe.
4.1 Sample and data collection
This study used the data from the Management, Organization and Innovation survey, also known as MOI. The data was gathered by the European Bank for Reconstruction and Development (EBRD) and the World Bank Group (WBG). The MOI survey was spread in 2008-2009 among 1,800 firms in 12 emerging countries: Belarus, Bulgaria, Kazakhstan, Lithuania, Poland, Romania, Russia, Serbia, Ukraine and Uzbekistan. The survey was administered face-to-face, with generally the same person, a factory, production or operation manager, responding to all sections. This dataset covers a broad range of industries and firms, but the sample population included only small and medium enterprises with less than 250 but more than 50 employees and turnover between €10 and €50 million (European Commission, 2016); these limitations reduced the sample to 908 firms. By applying these reduction restrictions, this study ensured that the firms were comparable in terms of size and generated cash flow. This survey broadly covers innovation that companies undertake. Furthermore, the final sample involved companies with a mean firm age of 35.09 (SD = 26.23) years and a mean size of 118 (SD = 57.20) employees. The firms operated in different industries such as food (13%), manufacturing (56%) and other industries (31%).
