Firm-level analysis of the importance of innovation barriers for medium-sized firms

Firm-level analysis of the importance of innovation barriers

for medium-sized firms

Gijs Muller

S2070251

University of Groningen

MSc BA Strategic Innovation Management

Supervisor: dr. P.M.M. de Faria

Co-assessor: prof. dr. D.L.M. Faems

22-6-2015

Word count: 13741

Extant literature has extensively linked firm size to innovativeness of firms, comparing small to large firms. This study aims to address the anticipated unique case of medium firms and the innovation barriers they perceive. Thereby five types of innovation barriers are distinguished: financial, knowledge, market, regulations and resistance barriers. The data that is used comes from the fourth Belgian Community Innovation Survey. A MANOVA regression is conducted to distinguish between the perceived importance of the five innovation barriers to small, medium and large firms. The results show that only the resistance barrier is significantly differently perceived by small and medium firms, and the perception of market barriers differ significantly between small and large firms. Additional analysis of the effects of innovation barriers on innovative performance showed no significant results.

Key words: innovation barriers, medium-sized firms, community innovation survey, firm size, innovation,

1

Introduction

''Innovation is widely considered the lifeblood of corporate survival and growth'' (Zahra and Covin, 1994, p. 183). Throughout time, innovation has indeed been of great importance for the continuity and profitability of firms, areas, and economies (Garud et al., 2013). Besides the benefits that innovation brings individual firms, innovation also contributes to society through the creation of jobs, bringing economic prosperity, and introducing practical products and services (Ahlstrom, 2010). Which firms, in terms of size, are most innovative is a much debated question though and is a matter of considerable policy interest (Dolfsma and Van Der Velde, 2014). One of the first academics to address the link between firm size and industry innovativeness was Schumpeter (1934). Within what was later dubbed the Schumpeter Mark I perspective, he suggested that small entrepreneurial firms were more innovative as opposed to large firms (Schumpeter, 1934). Later on, the so-called Schumpeter Mark II perspective suggested that large incumbent firms were more prone to innovation than smaller firms (Schumpeter, 1943). The fundamental question of the Schumpeterian debate has consequently been who is more innovative, the small or the large firm (Acs and Audretsch, 1988). The discussion regarding the success of small or large firms at innovating in response to vigorous environmental change, to generate jobs and to be competitive in the global marketplace progresses in today’s writings (Damanpour, 1992). Despite the vast amount of research regarding the innovativeness of small and large firms there is still no consent on the degree or direction of the relationship between firm size and innovation (Damanpour, 1992), but over the years scholars have argued for both perspectives conveyed by Schumpeter (Dolfsma and Van Der Velde, 2014).

2 there are not many studies that focus on medium firms, Tourigny and Le (2004) did find that medium firms look more like large firms in the sense that they have a higher propensity of reporting barriers to innovation than small firms. One of the few conclusions with regard to the innovativeness of medium-sized firms comes from Laforet (2008) who finds that in terms of number of patents and innovation awards medium firms are more innovative than small firms. Besides these papers there is little understanding of the innovativeness of medium-sized firms and what influences the innovativeness of these firms. Therefore this paper will address the factors that influence the innovativeness of medium-sized firms. To do so the ‘barriers to innovation’ approach will be used, which focuses on aspects that hinder innovation, like hurdles, barriers or obstructions (Hadjimanolis, 2003). This method will be adopted in this research because it is of high value to managers of innovation to recognize barriers that are regularly experienced by innovating organizations in order to come up with a successful strategy to overcome potential obstacles to innovation (D’Este et al., 2011). It is expected that not only the type of innovation barriers but also the importance of innovation barriers are determined by firm size (Hadjmanolis, 2003).

This paper aims to contribute to and extend the ideas as presented by Schumpeter in the Schumpeter Mark I and Mark II perspectives by specifically looking at the innovativeness of medium-sized firms. To do so, this paper will empirically analyze the innovativeness of medium-medium-sized firms using a firm-level perspective to innovation barriers that hinder firm innovativeness. Main research question thereby is: which innovation barriers do more/less successful medium-sized firms experience? This research question will be answered via the following two sub questions:

Q1: What innovation barriers do medium-sized firms experience?

Q2: Do the innovation barriers for medium-sized firms differ from those for small and large firms?

This paper is structured as follows. First the relevant literature will be discussed followed by the development of the hypotheses. Next the methodology will be discussed, accompanied by some descriptive statistics. Subsequently the results will be presented, followed by a discussion of the results, limitations, indications for future research and finally a conclusion.

Literature review

3 sized enterprises (SMEs) are of particularly great significance as they make up most of today’s economies (Nieto and Santamaría, 2010). In fact, in 2013 99 of every 100 companies in the EU28 were SMEs, 2 in every 3 employees were employed by SMEs and 58 eurocents of each euro of value added was produced by SMEs (European Commission, 2014). The critical significance of innovation by these organizations in nowadays’ competitive environments has been commonly accepted in current literature (Mohnen et al., 2008) and stimulation of innovation in SMEs continues to be one of the core focus points of policy makers to trigger economic advancement at the local, regional, national and European levels (Edwards et al., 2005). Organizations that are unable to constantly remodel their products, services and processes will find that the continuity of their business is at risk (Saatçioğlu and Özmen, 2010). The term innovation is equivocal though and consensus on a distinct definition is hard to find in the literature (Adams et al., 2006). To guide the following writing the definition as proposed by Baregheh et al. (2009) will be adopted: ‘’innovation is the multi-stage process whereby organizations transform ideas into new/improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace’’ (p. 1334). Even though its importance is universally professed by economic experts, consultants, and politicians, the reality is that there is an ‘innovation problem’, suggesting that the bulk of organizations nowadays are not introducing or adopting enough innovations (Storey, 2000). This innovation problem has been long-lived and has been researched from various angles. Examples of research perspectives that have been adopted in current literature are, amongst others, organizational structures and cultures, financing, short-termism, personality traits and team dynamics (Storey, 2000).

5 Small firms are free of these bureaucratic constraints, leading to flexibility in decision making regarding innovation (Acs and Audretsch, 1988). In an endeavor to test the Schumpeterian thesis of size advantages for innovation, Cohen and Klepper (1996) discussed four stylized facts regarding the connection between innovativeness and firm size. First of all, the feasibility of a firm to perform R&D successfully is positively associated with firm size. Secondly, within industries the relationship between innovative activity and firm size is positive for all firm size clusters. Thirdly, for most industries it goes that expenditures on R&D efforts rise proportionately with firm size. Lastly, the amount of patents and innovations per dollar spent on R&D activities decreases with firm size. Smaller firms are responsible for a disproportionate number of patents and innovations compared to their firm size.

As we have seen in the previous section, small and large firms have different advantages with regard to their innovative capacity. An element which is equally relevant as the advantages for innovation are the barriers to innovation. Whereas success factor analysis intends to emphasize positive factors, the innovation barrier approach attempts to (re-)enact the innovation flow by exposing, discerning and weather the barriers to innovation (Hadjimanolis, 1999). In this paper we adopt the definition of barriers to innovation as presented by Mirow et al. (2008): ‘’any factor that leads to prevention, delay or distortion of the outcome of the innovation process of an organization’’ (p. 3). This definition covers both potentially positive and negative effects of barriers to innovation (Mirow et al. 2008), which is beneficial for this research as some innovation barriers could promote and drive innovation while other barriers might impose negative pressures on the innovation process (Saatçioğlu and Özmen, 2010). Factors that positively impact the innovation process are named facilitators (Hadjimanolis, 2003). Over time, facilitators may turn into barriers and barriers may turn into facilitators as an organization moves through its lifecycle stages or as external circumstances shift (Koberg et al., 1996). Innovation barriers are thus considered as dynamic because their occurrence and significance varies for diverse firm activities (Hadjimanolis, 2003). Hadjimanolis (2003) further argues that lots of barriers essentially exist because of a lack of facilitators. Understanding which barriers influence the innovation process and being able to confront them are believed to positively affect the success of the innovation process (Saatçioğlu and Özmen, 2010). The capacity to distinguish innovation barriers indicates ‘’the firm’s awareness of the difficulties involved as a result of engagement in innovation activities’’ (D’Este et al. 2011, p. 482). From a policy perspective, the barrier approach offers a great benefit because it offers a fixated and detailed view of the innovation process (Hölzl and Janger, 2012).

6 difficulties in gaining finance, high costs of innovation and unsuitability of management (Freel, 2000). Large and established firms however seem to be hindered by dominant designs, path dependency, an inability to unlearn, an excessive reliance on proven routines and an inability of management to think outside the box (Assink, 2006). Current literature mostly consists of papers that discuss potential innovation barriers for SME’s in general (Buse et al., 2010; Cordeiro and Vieira, 2012; Madrid-Guijarro et al., 2009), but none of these are specifically focused on medium firms. Tourigny and Le (2004) did find that medium firms look more like large firms in the sense that they have a higher propensity of reporting barriers to innovation than small firms. The fact that barriers to innovation seem to differ for small and large firms raises the idea that medium-sized firms might also experience particular, unique barriers to innovation that haven’t been revealed yet. Thereby the barriers that resulted in failures to bring new products or services to the market are especially interesting, as these should offer key insights for managers (D’Este et al., 2011). Barriers to innovation are widely discussed in extant innovation literature, but the perspectives that have been adopted for analysis of the innovation barriers differ. Larsen and Lewis (2007) made a distinction between financial barriers, market barriers, management and personal characteristics barriers, and other barriers. Hadjimanolis (2003) classified innovation barriers as being either external (market barriers, government barriers, other barriers) or internal (people barriers, structural barriers, strategy barriers). Hueske et al. (2014) used three levels of analysis: the external environment, the individual, and the firm. Innovation barriers can also be segregated into tangible barriers and cognitive barriers, where the last-mentioned are not actual barriers as they are only a perception of the firm. In fact, the presence and importance of all innovation barriers is interconnected with the observation and judgment of employees and managers (Hadjimanolis, 2003).

Hypotheses development

7 financial capital, and efficient conduct (Wernerfelt, 1984). For resources to lead to a competitive advantage they need to be valuable, rare, inimitable and non-substitutable (Bakar and Ahmad, 2010). Innovation, jointly with a mixture of resources, leads to competitive advantage in the form of capabilities. These organizational capabilities represent the firm’s proficiency in deploying assets to successfully execute activities and boost performance (Bakar and Ahmad, 2010). In other words, innovation is formed by new mixtures between extant resources and competencies (Paladino, 2007). This means that resources can both hamper and enhance innovation (Paladino, 2006). Hypothetically, the RBV suggests that firms with a larger number of resources have a higher propensity of surviving (Williams, 2014). Possession of aforesaid resources will consequently amplify a firm’s tendency to innovate (Paladino, 2007). Moreover, superior resources might contribute to new product success because superior resources facilitate the generation of market power and accordingly competitive advantage in the market (Gatignon and Xuereb, 1997). The absence of aforementioned resources and competencies can be expressed as innovation barriers within the firm (Hadjimanolis, 2003). Lack of resources urges firms to find these outside the firm, often with great difficulty and at great cost (Hadjimanolis, 2003). The fact that innovation barriers originate from a lack of resources can also be deducted from existent literature on innovation barriers, as we will see in the following sections. Jamrog (2006) found that scarcity of resources within a firm is actually the most important barrier to innovation. It is thus argued here that where the RBV views sees firms as a collection of resources and capabilities, the absence or scarcity of these resources can lead to considerable innovation barriers. For the purposes of this research five types of innovation barriers will be distinguished: financial barriers, market barriers, knowledge barriers, regulation barriers, and resistance barriers.

Financial barriers

8 acquire the much needed external finance (Lee et al., 2015). Mazzarol et al. (2010) confirm these ideas by stating that SME’s are more prone to search for external financing to leverage external resources to overcome their own lack of resources. Indeed, innovative firms, and especially SMEs as opposed to larger firms, are most likely to experience financial barriers (Tiwari and Buse, 2007). Medium sized firms however possess more financial resources for innovative activities than do small firms (Mazzarol et al., 2010). The resource-based view suggests that larger firms often possess more resources and thus are able to profit from economies of scale (Williams, 2014). Furthermore, with greater size and a larger pool of resources, firms will be more capable to absorb fixed costs and sustain business activities, whereas small firms could be forced to leave the market in case of high costs (Williams, 2014). SMEs are consequently more sensitive to the financial conditions of their innovations (Brancati, 2015). Large firms are better able to collect finance for risky R&D projects due to capital market imperfections (Vossen, 1999). Therefore it is hypothesized that the importance of financial barriers decreases with increasing firm size. This leads to the following hypotheses.

H1a: Financial barriers are more important for medium firms than for large firms H1b: Financial barriers are less important for medium firms than for small firms.

Knowledge barriers

9 smaller firms, there is an increased demand for experts to organize innovation (Thom, 1990). Hölzl and Janger (2012) add ’difficulty in finding cooperation partners for innovation’ as another knowledge barrier (p. 11). The difficulty of finding useful partners with knowledge assets is a fundamental barrier faced by particularly SMEs (Tiwari and Buse, 2007). Larger firms have advantages of scale and scope with regard to knowledge barriers, because they have more resources to create novel knowledge and can leverage this knowledge to create multiple products for differing markets (Cohen and Klepper, 1996; Granstand et al. 1997). In fact, larger firms also have bigger knowledge bases besides having more resources (De Araújo Burcharth et al., 2015). Absorptive capacity is an especially important capability for SMEs as it is a vital source of competitive advantage for these firms (De Araújo Burcharth et al., 2015), however Schmidt (2010) argues that every extra employee boosts the capacity of a firm to adopt external knowledge, suggesting larger firms have a greater chance of profiting from external knowledge than smaller firms. Furthermore, larger firms are more capable than smaller firms when it comes to distinguishing, understanding and learning technologies (Imbriani et al., 2014). Large firms can use their internal resources to complement external knowledge regarding technologies, whereas SMEs might be hindered to take in technological knowledge due to a shortage of scientific and technical employees or experience (Imbriani et al., 2014). It is thus expected that the importance of knowledge barriers decreases with increasing firm size. This leads to the following hypotheses.

H2a: Knowledge barriers are more important for medium firms than for large firms H2b: Knowledge barriers are less important for medium firms than for small firms.

Market barriers

10 innovating, due to their superior financial resources (Vaona and Pianta, 2007). Market uncertainties are probably strongly connected with financial restraints (Mohnen et al., 2008), suggesting smaller firms perceive more market uncertainty due to their lack of financial resources. Furthermore, large firms are in the position to raise entry barriers and have considerable high market power from current products. Indeed, market power greatly correlates with firm size (Bughin and Jacques, 1994). It is therefore expected that the importance of market barriers decreases with increasing firm size. This leads to the following hypotheses.

H3a: Market barriers are more important for medium firms than for large firms H3b: Market barriers are less important for medium firms than for small firms.

Regulation barriers

11

H4a: Regulations barriers are more important for medium firms than for large firms. H4b: Regulations barriers are less important for medium firms than for small firms.

Resistance barriers

Besides the mentioned barriers a certain resistance to change might exist within a firm (Stendahl and Roos, 2008). Resistance to change can be defined as ‘’any conduct that serves to maintain the status quo in the face of pressure to alter the status quo’’ (Zaltman and Duncan, 1977, p. 63). Changes indeed bring about feelings of uncertainty and fear in individuals that strengthen the current state of affairs (Lewis and Grosser, 2012). Besides the individual resistance to change, there are collective and organizational powers that create additional resistance to change. Existing guidelines, processes and organizational culture for instance hamper the flexibility that is needed to change, and organizational memory could even inhibit exertions of change altogether (Lewis and Grosser, 2012). Individuals do not resist innovation itself necessarily, but rather resist the changes related to innovation (Bao, 2009). Small firms have fewer resources to dedicate to change initiatives (Battilana and Casciaro, 2013). Larger firms have more difficulty overcoming resistance due to the increased complexity of the organization and the accompanying need for coordination (Battilana and Casciaro, 2013), although they have more financial and human resources at their disposal (McDade et al., 2002). Resistance to change in a firm could thus be seen as organizational rigidities (Galia and Legros, 2004). Consequently, increasing firm size can build progressively more resistance to change (Wiersema and Bantel, 1992). Indeed, larger firms are slow to react to changes, have loftier communication networks that impede the transmission of information and usually resist change because of the pure complications of innovation within a firm (McDade et al., 2002). Lorenzi and Riley (2003) correspondingly state that small firms experience less resistance to change than their larger counterparts. It is thus expected that resistance to change increases with firm size. This leads to the following hypotheses.

H5a: Resistance barriers are less important for medium firms than for large firms. H5b: Resistance barriers are more important for medium firms than for small firms.

Methodology

12

Data and sample

To test the hypotheses this study uses data from the fourth Community Innovation survey (CIS IV). The data was collected in 2005 in Belgium by the Flemish government under supervision of Eurostat and covers the period 2002-2004. The CIS is a European initiative focused on collecting firm-level microdata on innovation activities, barriers to innovation, several firm characteristics and the impact that innovation has on businesses. It is constructed to present information on the innovativeness of industries based on type of firms, on diverse forms of innovation and on several aspects of the process of innovation. The CIS questionnaire is aimed at positions with decision making authority within firms, like CEOs, R&D managers or innovation managers (Sofka et al., 2014). The survey and the accompanying methodology are based on the Oslo Manual (OECD, 1992), thus providing good reliability and validity of the sampling procedures (Iammarino et al. 2012). Moreover, through comprehensive piloting and testing of the survey across several European countries and between firms from a wide diversity of industries the interpretability, validity and reliability of the CIS survey has been established (Laursen and Salter, 2006). Furthermore, every country that runs the CIS survey separately executes the conventional consistency and logical tests at a firm-level, and also corrects for potential bias related to non-responses (De Faria et al., 2010). The sample from the Belgium CIS IV consists of 887 observations of which 493 were small firms (55.6%), 236 were medium firms (26.6%) and 158 were large firms (17.8%). The group of medium firms can be further divided into 166 smallmedium firms (18.7%) and 67 largemedium firms (7.6%).

Dependent variables

14 other barriers to innovation showed that the barrier ‘problems with regulations’ correlated significantly with ‘resistance to change’ (r=0,296, p < .001). The two separate barriers that were used to measure other barriers were measured on a scale from 0 (factor not experienced) to 3 (high degree of importance). However, the scale was also found to be unreliable at ⍺ = .555. Therefore the other barriers will only be tested separately, and not on an aggregated level.

Independent variables

This study argues that the perceived importance of innovation barriers is different for medium-sized firms as compared to small and large firms. Therefore a distinction is made in the sample between small, medium and large firms. These size classes were based on the definition by EU law as presented in EU recommendation 2003/361. This publication states that medium-sized firms are those firms that employ 50-249 persons, firms with less than 50 employees are considered small firms, and firms with 250 or more employees are marked as large firms (European Commission, 2003). To see if the perceived importance of innovation barriers also differs within the group of medium-sized firms an additional distinction was made between small-medium (50-149) and large-medium (150-249) firms.

Control variables

15

Descriptive statistics

16

Table 1 Descriptive statistics

Variable

Total sample Small firms

(0-49 employees) Medium firms (50-249 employees) Smallmedium firms (50-149 employees) Largemedium firms (150-249 employees) Large firms (≥250 employees)

Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD

Financial Barriers (aggregated)

Lack of funds within firm or firm group Lack of outside funds

Innovation costs too high

Knowledge barriers (aggregated)

Lack of qualified personnel Lack of information on technology Lack of technological opportunities Lack of information on markets

Difficulty in finding co-operation partners

Market barriers (aggregated)

Market dominated by established firms Uncertain demand for innovative goods

Other barriers

17

Results

18 for different firm sizes, using a Bonferroni adjusted alpha level of 0.017. Thus, combined the innovation barriers differ at a statistically significant level between the three groups of firm sizes. Individually, only the market barriers and the resistance barrier vary statistically significant between the three groups of firm sizes.

Table 2 Mean scores dependent variables for the firm size groups

Small firms (0-49 employees) Smallmedium firms (50-149 employees) Largemedium firms (150-249 employees) Medium firms (50-249 employees) Large firms (≥ 250 employees) Total

Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD

Financial Barriers 1.25 0.99 1.15 0.96 1.13 0.97 1.14 0.96 1.20 0.89 1.21 0.97 Knowledge barriers 0.95 0.70 1.02 0.68 0.87 0.68 0.98 0.73 0.92 0.60 0.95 0.97 Market barriers 1.11 0.90 1.21 0.90 1.29 0.97 1.24 0.91 1.37 0.90 1.19 0.91 Regulations barrier 0.92 1.03 0.86 0.95 1.09 1.01 0.92 0.97 1.03 0.96 0.94 1.00 Resistance barrier 0.71 0.83 0.92 0.85 0.81 0.84 0.89 0.85 1.01 0.81 0.81 0.84

20

Table 3 In between group comparisons of innovation barrier scores

Discussion

The main objective of this paper was to assess the importance of innovation barriers to medium firms and how the importance of these innovation barriers is different when compared to small and

Variable Firm size (I) Firm size (J) Mean difference (I-J) Std. error

Financial barriers Small Medium 0.109 0.077

Large 0.056 0.088

Medium Small -0.109 0.077

Large -0.053 0.099

Large Small -0.056 0.088

Medium 0.053 0.099

Knowledge barriers Small Medium -0.034 0.054

Large 0.035 0.062

Medium Small 0.034 0.054

Large 0.068 0.070

Large Small -0.035 0.062

Medium -0.068 0.070

Market barriers Small Medium -0.128 0.071

Large -0.263* 0.081

Medium Small 0.128 0.071

Large -0.136 0.092

Large Small 0.263* 0.081

Medium 0.136 0.092

Regulations barrier Small Medium -0.010 0.080

Large -0.110 0.091

Medium Small 0.010 0.080

Large -0.100 0.103

Large Small 0.110 0.091

Medium 0.100 0.103

Resistance barrier Small Medium -0.170* 0.066

Large -0.290* 0.075

Medium Small 0.170* 0.066

Large -0.120 0.085

Large Small 0.290* 0.075

21 large firms. Merely looking at the mean scores of the six innovation barriers that are analyzed in this paper, there seem to be some differences amongst small, medium and large firms.

Financial barriers are most important for small firms and least important for medium firms. These differences were not statistically significant though, so the importance of financial barriers for hampering innovation activities or projects or influencing a decision not to innovate was not significantly different for small, medium or large firms. This is a rather surprising finding as financial restraints for innovation are said to decrease with firm size (Mohnen et al., 2008). This would also follow from the RBV, as increasing firm size is positively associated with a greater pool of resources (Williams, 2014). Consequently, medium firms would possess more financial resources than small firms, and large firms would possess more financial resources than medium firms (Mazzarol et al., 2010). SMEs are accordingly argued to be more sensitive to the financial setting of their innovations (Brancati, 2015). This does not follow from the results of this study though. One explanation for there not being a significant difference between the importance of financial barriers for small, medium or large firms might be the rise of venture capitalists and other private equity constructions which have become a key source of financing (Mohnen et al. 2008). In fact, in many countries distinct financing structures are in place for smaller, innovative enterprises. Another means of financing comes from angel investors, who subsidize many younger, smaller firms (Mohnen et al. 2008). Venture capital is the main source of financing though, not just contributing financial resources but also reducing information asymmetry and moral hazard, issues with other sources of external financing, through active participation in the company (Mohnen et al., 2008). The low rating of the financial barriers, indicating a low importance as perceived by the firms, is somewhat surprising as well. Freel (2000) however already indicated that financing might be an issue for innovation, but it is unlikely to be critical. Large firms thereby have a greater tendency than small firms to report high costs of innovation as impediments (Tourigny and Le, 2004). Together with the previously mentioned arguments this might explain why the rating of financial barriers is higher for both small and large firms than for medium firms, even though the differences are not statistically significant. Furthermore, there seems to be no difference between importance of financial barriers for smallmedium or largemedium firms.

22 bigger output (Hölzl et al., 2010). The scores of knowledge barriers are particularly low for all firm sizes. This is probably because Belgium is part of a highly entrepreneurial, creative and capable region within Europe that is a particularly solid producer of knowledge (Capello and Lenzi, 2013). Specifically, smallmedium firms rank knowledge barriers as most important. Previous research has shown that smaller firms are more prone to encounter knowledge barriers, because they are at a disadvantage when it comes to exploring information on markets and technologies methodically (Hölzl et al., 2010). This result suggests that not necessarily small firms, as hypothesized, experience knowledge barriers as most important, but rather smallmedium firms experience knowledge barriers as most important.

Market barriers show a pattern of increasing importance from small to medium to large firms. Even though only the difference between the scores of small and large firms is significant, this is exactly opposite to what was hypothesized and is thus a fairly unanticipated result. The aggregated group of market barriers exists of two separate barriers, namely a barrier due to markets being dominated by established enterprises and a barrier due to uncertain demand for innovative products. The results from this analysis are partly in line with previous research from the European Commission (2014) that showed competition and finding customers for innovations are of special concern to medium-sized firms as opposed to small firms. Concentration in a market is supposed to offer large firms an advantage to innovation over smaller firms since innovation can only occur when firms have a certain degree of market power and possess certain resources that are linked to substantial firm size (Acs and Audretsch, 1988). The results of this paper show the opposite, as the scores on market barriers are significantly different in favor of the small firms as opposed to large firms.

The regulations barrier is ranked as most important by largemedium firms and least important by smallmedium firms, but none of the differences in scores for regulation barriers between firm sizes was significant. Overall medium firms rank the regulations barrier equally important as small firms, both lower than large firms. Thomas (1990) found that regulations are deteriorating for small firms, but do not necessarily have an influence on large firms. There has not been much empirical research on the impact of overall regulation on innovation, (Blind, 2012) so there is no clear explanation at this point why there are no significant differences observed between the importance of regulation for small, medium or large firms. It might be that regulations with regard to innovation are already adjusted for different firm sizes within the Belgian innovation policy.

23 complexity and consequently a greater need for formal structures for planning, control and resource distribution (Wiersema and Bantel, 1992). Actually, resistance to change within a firm can be seen as an organizational rigidity (Galia and Legros, 2004). As a consequence, increasing firm size can create increasingly stronger resistance to change (Wiersema and Bantel, 1992). In large firms, resistance to change can even develop into interdepartmental conflicts with regard to innovation costs (Fosfuri and Rønde, 2009). Lorenzi and Riley (2003) also confirm that small firms experience less resistance to change than do large firms. They add an extra note though that small firms often have less resources to deal with problems that might arise due to resistance. Even though the importance of the resistance barrier was significantly different for small, medium and large firms it should be noted that the mean score indicates a low importance of resistance barrier for hampering innovation activities or influencing a decision not to innovate, as is the case with all barriers in fact.

24 analysis in Stata was conducted with the same variables, leading to similar non-significant results. The results from the linear regression are available on request from the author.

From the results it appears that medium firms essentially do not perceive the importance of financial, knowledge, market and regulation barriers significantly different than small or large firms do. Madrid-Guijarro et al. (2009) also looked at the relationship between firm size and innovation barriers and likewise did not find significant interactions. These results are not in line with Hadjimanolis (2003) however, who argued that the importance of innovation barriers would be determined by firm size. Hadjimanolis (2003) furthermore stated that the nature of the barriers to innovation would be different according to firm size. This might explain why there are, except the importance of resistance barriers, no statistically significant differences of importance of innovation barriers for medium-sized firms compared to small and large firms. Perhaps medium firms experience totally different barriers to innovation than those that were measured by the CIS IV. Hadjimanolis (2003) further argues that the deletion of innovation barriers is required, but not exclusively, for innovation to materialize. Indeed, innovation barriers are probably complementary to facilitating elements for innovation (Hadjimanolis, 2003). As was previously posited, using the RBV of a firm, resources and capabilities can be seen as innovation facilitators. The fact that the perceived importance of innovation barriers for medium firms are not significantly different to the perceptions of other firms might therefore mean that medium firms possess unique resources or capabilities that help them overcome the barriers to innovation and regard them as irrelevant, judging by the low mean scores for all innovation barriers. Another explanation for the low scores on importance of innovation barriers and insignificant differences between firm sizes could be that Belgium has an effective innovation policy in place. The perceived importance of innovation barriers was moreover found not to significantly influence the innovative performance of firms. This is in line with Piatier (1984) whose study leads to the same conclusion. This is probably due to the fact that the importance of innovation barriers is just a perception of the manager or owner of a firm, and does not necessarily say anything about the actual influence of the barriers.

Limitations

25 was measured, and not necessarily how they influence the performance of firms (Tourigny and Le, 2004). An attempt was made to measure their influence on innovative performance, but with no significant results, so the results of this paper are purely based on the perceptions of the respondent firms with regard to the innovation barriers described. Another factor that might influence the results of this paper is the distinction between innovating and non-innovating firms. A thoughtful choice was made not to make this distinction for the current research because the CIS requests all firms to answer the question on the innovation barriers. Therefore, the answers to this question represent the whole sample of both innovating and non-innovating firms. Analyzing the whole sample seemed like the best way to give a fair presentation of the perceived importance of innovation barriers. However, most barriers are perceived as more important by innovating than non-innovating firms. This is probably because non-innovating firms can only answer the barrier question with regard to their decision of not innovating at all, whereas innovating firms can answer the barrier question from the perspective of why they did not start some innovation projects, or why there are problems with current innovation projects (Tourigny and Le, 2004). Another limitation follows from the data sample that was used in this research. The CIS IV data that was used here merely covers the Flanders area in Belgium. The results are thus not vastly generalizable due to the limited geographical scale of the sample.

Future research

26 innovation activities a more quantitative approach to the innovation barriers would be needed. Furthermore, to thoroughly investigate the innovativeness of small, medium or large firms one would have to simultaneously consider the effects of facilitators to innovation, barriers to innovation, firm characteristics and the nation-wide innovation policy, an approach that was beyond the scope of this study but could deliver valuable insights in the future.

Conclusion

This study analyzes the importance of innovation barriers for hampering innovation activities or influencing a decision not to innovate as perceived by medium firms in comparison to small and large firms. Following the existent literature on innovation five different types of innovation barriers were identified: financial barriers, knowledge barriers, market barriers, regulation barriers and resistance barriers. Small, medium and large firms were distinguished using number of employees according to the EU definition of firm sizes. To analyze the differences between small, medium and large firms a MANOVA test was performed using Belgian CIS data from 2005. Before continuing with a conclusion with regard to the preceding discussion, it should be noted that all results in this paper are purely based on the perceptions of managers/owners of the respondent firms and might therefore be subject to prejudice.

The analysis shows that there are not that many differences in importance of innovation barriers for the different firm sizes. The importance of financial barriers, knowledge barriers and regulation barriers are not perceived as significantly different by small, medium or large firms. When looking at market barriers, the higher importance as perceived by large firms is significantly different from the lower importance perceived by small firms. Medium firms do not perceive the importance of market barriers significantly different than small or large firms. The importance of the resistance barrier is significantly differently perceived by all firm sizes. Small firms perceive the importance of resistance barriers significantly lower than medium firms and large firms. The difference in perceived importance of the resistance barrier is not significantly different between medium and large firms. Furthermore, the perceived importance of barriers did not influence the performance of product or process innovations.

27 barriers to innovation. Care must thus be taken not to regard the innovation barriers studied in this paper as irrelevant. There are probably other factors influencing the perception and outcomes of innovation barriers. Policy makers should continue to actively seek to identify these factors and implement the results in innovation policies. The most important policy implication is that policy makers should help firms overcome internal resistance to change. Flexibility is, for all size classes, the most important way of overcoming resistance to change (Tourigny and Le, 2004). The importance of the resistance barrier increases with firm size, so policy makers should come up with appropriate strategies to increase flexibility in small, medium and large firms. The results further indicate that market barriers are significantly perceived to be more important for large firms than for small firms. This would thus be another point of interest for policy makers, however further research would be needed to indicate why these differences exist because this result is not in line with current literature.

28

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