University of Groningen Faculty of Economics and Business Msc. in Business Administration, Strategic Innovation Management June, 2014

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University of Groningen

Faculty of Economics and Business

Msc. in Business Administration, Strategic Innovation Management

June, 2014

Master thesis:

“Barriers to innovation for SMEs and possible solutions: a review of the

literature”

Student: Konstantinos Galatsanos

S.N: S2558793

Supervisor: dr. Wilfred Schoenmakers

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Abstract

The main purpose of this research is to report on a literature review the most important barriers to innovation that small and medium sized firms are confronted with, and to provide some possible solutions. Five types of barriers to innovation arise from the literature: finance and cost related barriers, external linkages related barriers, regulatory and policy barriers, management and marketing barriers as well as skill labor related barriers. By providing key solutions to each problem type, the study has the ambition to inform management practices and policy implications, in order for the barriers to be reduced or solved. The conclusions suggest that the size of the company influences the intensity of financial and marketing constraints while the location influences the intensity of regulatory and policy constraints. Finally, directions for future research are proposed.

1. Introduction

The increase of global competition, the changes in the consumer demands, the technological capabilities of firms and the reduction of product cycles increased the significance of innovation (Guijjaro et al., 2009, Freel, 2000, Radas & Bozic, 2009). Although innovation is a very important factor that affects a firm‟s sustainability and competitive advantage, not all companies are able to conduct innovative activities with the same ease. One factor that influences this situation is the size of the company. As it is stated by Verhees and Meulenberg (2004), the literature so far indicates that “innovation in large firms is different from innovation in small firms”. Large firms possess many significant advantages over small firms such as critical resources and capabilities that small firms struggle to find (Hewitt & Dundas, 2006), skills related to human capital and innovation-related knowledge (Rogers, 2004), as well as advantages related to scale and scope the large firms possess because of their size (Cohen & Klepper, 1992). Therefore, it seems that small and medium sized firms face some difficulties when trying to perform innovation activities. But what is the importance of innovation and why is it so important to analyze innovation in relation to small and medium sized firms?

1.1. The importance of innovation

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In the existing literature there are many definitions about the concept of innovation. According to Goswami and Mathew (2005), the existing definitions of innovation include the notions of the invention of something new, creation of new ideas, improvement of something that already exists, spread of new ideas, adoption of something new, doing something in a new way, insertion of changes and seeing something from a different perspective. Additionally, scholars suggest that there are many types of innovation that influence and complement each other (Damanpour et al., 1989). According to Schumpeter (1934) five types of innovation exist: product innovation (the introduction of a new product or the introduction of a better quality of an existing product), process innovation (the introduction of new methods of production), market innovation (the creation of a new marker), input innovation (the subjection of new supply sources) and organizational innovation (new ways of doing business).The importance of innovation derives also from the fact that in the existing innovation literature it is admitted that innovation is a critical aspect in order for organizations to secure their survival and enhance their prosperity when they try to improve their competitive base (Ciabuschi et al., 2011, Baumol, 2002).

1.2. Innovation and SMEs

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The aim of this thesis is to conduct a comprehensive literature research regarding the obstacles that Small and Medium Enterprises (SMEs) face when they try to engage in or perform innovation and to provide possible solutions to these problems. This research attempts to report the problems that have been identified by researchers until now, irrespective of the geographic area and to inform managerial practices and policy implications by providing possible solutions to these obstacles. Accordingly, the research question of the study is:

Which are the barriers to innovation that Small and Medium Enterprises (SMEs) face and which are the possible solutions to these barriers?

This study is organized as follows. In section 2, there will be a short discussion of the methodology. In section 3, the classification of the obstacles that SMEs face regarding innovation will be presented. In the same section, each category of obstacles will be analyzed separately, by providing the most important issues as they have been identified in the existing literature. In section 4, possible solutions which introduce ways to overcome the obstacles will be provided while in section 5 important conclusions of the study will be analyzed. Finally in section 6, the limitations of the study and recommendations for future research will be analyzed.

2. Methodology

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other relevant literature that I could potentially use in my study. After the data was collected, I analyzed it by identifying the main issues that were related to each category of obstacles separately. The same research approach was used in order to identify possible solutions for the barriers. I analyzed the main findings at the end of each part (type of barriers or solutions). In this way a coherent framework was created.

3. Barriers to innovation for SMEs

In order to analyze issues that have a negative impact on SME innovation, a categorization of those barriers is necessary. The aim of this paragraph is to classify the barriers to innovation for SMEs in relation to what has already been written in the literature of SME innovation.

Different researchers have made different categorizations about the obstacles that SMEs face regarding innovation. According to the view of Hadjimanolis (1999), external barriers represent supply (related to the difficulty of acquiring financial resources, information about technologies and raw materials), demand (related to customers and markets) and environmental related obstacles (related to regulations and laws that are applied in the wider entrepreneurial environment and influence the firm), while internal barriers represent obstacles related to resources (e.g lack of funds) and obstacles related to human nature (e.g attitude towards risk). In a similar fashion, Guijarro et al., (2009) further subdivided external barriers into four categories named financial resources, human resources, weak financial position of the firm and increased costs and risks of innovation. In the same context, they subdivided internal barriers and they ended up with four subcategories named turbulence, lack of external linkages, lack of information and lack of government support. Another classification made in the literature is that of Freel (2000) who divided the barriers to innovation into four broad resource categories. This division suggests that SMEs face obstacles to innovation that are related to four categories of resources: finance, management and marketing, skilled labor and external linkages and information.

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reduce the ability of firms to obtain finance for their innovations, while agency theory suggests that the risk related to innovation and information asymmetries that exists may lead to limited financial support in the form of debt (Jensen & Meckling, 1976). It thus, follows that one type of barriers is that, which includes issues related to financial constraints, to the risk of innovation activities as well as to the cost of innovation process.

The ability of SMEs to develop relationships with external partners as well as their ability to benefit from such relationships are considered by researchers as another type of innovation related constraints. As Rothwell (1991) states, efficient external linkages related to technological and market information are positively related to successful innovation. But, although new information facilitates the change in a firm, this information is often costly to be acquired through information search activities in SMEs (Freel, 2000). Dickson et al. (2006), suggest that the resource constraints that SMEs face induce them to form relationships such as strategic alliances with external partners in order to access complementary assets or resources that are important for their innovative activity. On the one hand, SMEs can benefit by forming relationships in networks in three ways (Bourgain & Haudeville, 2002). Firstly, they can improve their competitiveness by drawing information from other firms in the network. In this way, SMEs can improve their technology bases and gain knowledge about the market. Secondly, through networks firms can gain access to tacit knowledge that is possessed by other firms in the network. This tacit knowledge is highly important in order for firms to improve their innovativeness (Senker, 1995). Thirdly, by accessing networks SMEs can gain new knowledge and reduce the irreversibility costs that derive from the high uncertainty that characterizes innovation and from the large gaps between research and commercialization. On the other hand, the lack of partnerships can negatively affect the possibility of innovation activities or the degree of successful innovation (Robertson et al, 1996).

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Furthermore, it is widely accepted in literature that the abilities of SME managers as well as the marketing skills that SMEs possess are at least inefficient and cause a negative effect on innovation. Hausman (2005) argues that managers in small firms are often deprived of the educational level and skills that are required for successful innovation orientation, while Shanteau and Rohrbaugh (2000) suggest that obstacles related to management support constitute an important barrier to innovation because innovation may cause changes in existing routines and schedules. It is also found that rich managerial skills can cause the success of a project while poor managerial skills can destroy even the best business (Foley & Green, 1995). According to Dyer and Handler (1994), in small firms the power of the decision making process is concentrated on the manager in a way that the innovativeness of the firm is dependent on the management‟s perceptions about innovation. But, most of the times, those managers are not willing to adopt suggestions of others or to allocate the decision making power and this leads to lower innovativeness (Dyer & Handler, 1994). Added to the managerial skills, marketing skills are important for the successful commercialization of new products (Wren et al, 2000), especially in high technology companies where the products involve complex technologies that are not easily understood by the customers (Foley & Green, 1995).

Finally, added to the skills that managers lack, researchers of SME innovation claim that there are issues which prohibit the acquisition and development of skills at the employee level. The importance of the skilled labor to innovation is pointed out by Wood (1997) who found that the level of innovative output is positively related to the number of technical skilled employees. But, although there are studies which suggest that employees in small companies can positively influence the probability of innovation (Vossen, 1998), other studies suggest that the lack of skilled labor is one of the barriers to innovation that SMEs face (Bosworth, 1989, Muscio, 2007).

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3.1. Finance, cost and risk

The first category of obstacles to innovation for SMEs is that of barriers related to financial issues regarding innovation. According to Freel (2000) besides the high costs that a company has to address in order to pursue innovation activities, the higher cost of monitoring the innovation process makes the case more difficult. In his study Freel (2000) investigated the sources of finance that small firms in UK used for their innovative efforts as well as the possibility of accessing funds through these sources. His findings suggest that small firms rely on short term finance from bank overdrafts and short-term loans because of the uncertainty about the returns of investments related to innovative activities. At the same time the investigated firms were not informed about all the possible sources of external finance. The most important factors that found to affect the ability of small companies to access external finance consist of the difficulty of those small firms to provide sufficient collateral assets as well as the difficulty to evaluate the risk and the technology involved (Freel, 2000).

Another study that investigated the barriers to innovation for SMEs is that of Hadjimanolis (1999) who investigated the obstacles that small Cypriot firms faced considering product innovation. He found that the lack of sufficient funds, especially by banks and the lack of government financial support constituted two of the top five barriers to innovation for small firms. The inability of accessing finance from banks was due to the requirements of collateral assets demanded by banks in order to provide small companies

Barriers to innovation for SMEs

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with loans (Hadjimanolis, 1999). Also, it is worthy to be mentioned that when the research was conducted there were no Venture Capital funds in Cyprus, even if this absence was not perceived as important obstacle to finance by the investigated SMEs, (Handjimanolis, 1999). The findings of Hadjimanolis (1999) are in total agreement with the findings of Zhu et al. (2013) which demonstrate that the problems that Chinese SMEs face regarding their access to sources of finance are the same as identified by Hadjimanolis (1999) for Cypriot small companies.

In a similar manner Moore and Garsey (1993) suggested that the ability of small firms and especially of small high-tech firms to draw external financial support is limited because of the uncertainties those firms face during their early years. According to their view, these uncertainties are enhanced by the difficulty of assessing the returns of research and development and are greater for private investors than for the development team. They also argue that bank loans are difficult for young high-tech companies to be obtained due to the high requirements in assets that banks demand. The inability of small firms to obtain the adequate financial support from external resources is further enhanced by information asymmetries that exist between these companies and private investors and by the gap of interest that exist between these companies and private investors. These information asymmetries are created due to the lack of information on the side of private investors. In this way, private investors are unable to evaluate the possibility of successful development of a project as well as its technological strengths. Accordingly, the gap of interests arises because private investors often demand a stake of the firm in order to invest in it while firm owners are not willing to lose their authority over the company. These two types of gaps reduce significantly the ability of small firms to access external finance from private investors and banks. These arguments of Moore and Garsey (1993) are supported by the findings of a research made by Mina et al. (2013) in SMEs in US and UK who found that the risk averse behavior of lenders is negatively related to the possibility of obtaining external finance for SMEs and the existence of information asymmetries is responsible for limiting the ability of small and medium sized firms to obtain external finance. Interestingly, the results of the study of Mina et al. (2013) show that the size of the company as well as the pay off period are factors negatively associated with the ability of SMEs to obtain finance and this situation results from the existence of information asymmetries.

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that those SMEs face at obtaining access to financial resources is also in the list but in a lower order. It is noteworthy to be mentioned here that the high innovation costs, the economic turbulence and the difficulty to obtain access to financial resources appear to be more intensive for smaller companies. Finally, it is of importance that changes in financial position (related to dept and liquidity) negatively affected process and management innovation while barriers generated by the external environment including the economic turbulence and the financial support from the government positively affected process and management innovation.

It thus, follows that the existing literature includes many causes that lead to financial obstacles to innovation for SMEs. The cost of innovation is a very important factor that affects the ability of SMEs to conduct innovation. It is widely found that innovation is an expensive process that involves high degree of uncertainty which is very costly to be controlled. This uncertainty that characterizes innovation activities renders banks and external sources of finance reluctant and leads them to avoid lending funds to SMEs or to demand high levels of guarantees. This situation is compounded by the existence of information asymmetries and the gap of interests that exist between the lenders and the SMEs that apply for finance. In addition, this inability to obtain adequate financial resources is found to be more intensive for smaller companies and for companies that are newly created and operate in high tech sectors. Finally, from the previous analysis becomes apparent that the lack of governmental financial support to small and medium sized companies for innovation purposes renders their ability to engage in or conduct successful innovation activities more uncertain.

3.2. External information and linkages

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external research processes of SMEs must be met in order for SMEs to meet their scientific and technological knowledge needs through external linkages. He also points out that SMEs in peripheral regions are in an even more disadvantageous position because they operate in an environment that is less rich than that of small firms‟ in more developed regions.

However, in order to gain knowledge from external channels, firms need to develop absorptive capacity (Tsai, 2001). Absorptive capacity refers to the ability of a firm to recognize new, valuable information from outside, assimilate it and apply it to commercial ends (Cohen & Levinthal, 1990). Cohen and Levinthal (1990) argue that absorptive capacity is path dependent and firms need to invest in their technology bases in order to be capable of recognizing and exploiting new technological opportunities. Thus, low levels of absorptive capacity may hinder SMEs from taking advantage of collaborations with external partners (Muscio, 2007). In this context, Muscio (2007) found that absorptive capacity has a great impact on a SME‟s ability to form network relationships with other firms. His survey that conducted among Italian SMEs revealed that the third most important obstacle for SMEs regarding innovation was the difficulty of collaborating with external research centers and institutions. The lack of external support and problems in communication were significant barriers and can be demonstrated by the low levels of absorptive capacity of some firms involved in the survey, which in turn limited their ability to find external partners for collaboration (Muscio, 2007). Noteworthy to be mentioned, is that Muscio (2007) found that the size and the age of firms do not influence a firm‟s ability to achieve collaborating relationships. This result may suggest that small firms and medium sized firms have the same potential to achieve collaborating relationships with external partners.

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Another powerful tool for SMEs to gain access to valuable resources and knowledge of other firms are the R&D alliances between firms. But, in their article Dickson et al. (2006) suggest that the opportunistic behavior is a superior reason that causes the failure of R&D alliances between SMEs in a great manner. This opportunistic behavior is also facilitated by the difficulty of generating complex contracts that control the behavior of partners in alliances and deprive SMEs from the opportunity to gain benefits from the partner‟s resources (Teece, 1986). Also, the limited experience that SMEs have over alliances, the small number of potential partners and the low credibility of SMEs in the marketplace, are reasons that reduce the ability of SMEs to control partnerships (Dickson et al., 2006). The control over the relationship becomes more difficult because of the high levels of uncertainty that R&D alliances include and the investments in transaction-specific assets that are demanded (Dickson et al., 2006). In addition, another fact that makes SMEs skeptical about their alliances is the uncertainty about the potential intellectual property that can be generated during the partnership (Oxley, 1999). In this case, the resources of the alliance cannot be determined adequately (Oxley, 1999) and contracts cannot be specified upfront and demand future renegotiations (Pisano, 1990). Worthy to be mentioned is that Dickson et al. (2006) found that the relationship between the perceived levels of opportunistic behavior and institutional factors of SMEs‟ environment (such as the level of R&D intensity and the level of institutional collectivism) is moderated by the size of the firm and some institutional factors, which means that the influence of the environmental attributes of SMEs on the opportunistic behavior, as it is perceived by the owners of the company, is different between small enterprises and medium enterprises.

A significant study that demonstrates the barriers that small and medium sized firms face when they try to achieve external linkages for innovation, is that of Nietto and Santamaria (2010), who found that SMEs do not use collaboration in order to gain scientific or technological experience through external links as usually as large firms do. According to their findings, this result is stronger for smaller firms, which is an indication that small firms are less likely to collaborate than medium firms. One of the problems that those SMEs faced when they achieved collaborations with larger firms was the problem of unequal power balance. Their findings also suggest that SMEs do not prefer alliances due to the high costs and risks that arise from managing those alliances. This finding is also stronger for smaller firms, indicating that the size of the firm may influence the ability of the firm to collaborate. Finally, as their findings suggest, another barrier to collaboration for small firms is related to the uncertainty about what the small firm can contribute to the alliance, which suggests that small firms are concerned with how to be attractive to other parties when they want to establish cooperative relationships.

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constraints such as the low quality of scientific and engineering employees constitute a major factor that negatively impacts the ability of these firms to successfully achieve external linkages. Added to this, absorptive capacity is another factor that affects the ability of these firms to achieve successful linkages for innovation purposes. As it is found in the literature, SMEs that characterized by low levels of absorptive capacity have limited ability to identify potential partners as well as to form external relationships in order to support their innovation activities. In addition, it can be concluded that small firms are often not able to identify potential partners for collaboration and when they do so, issues related to trust and intellectual property render them reluctant to engage in such relationships. Furthermore, small firms are more reluctant to engage in collaborative relationships because of the uncertainty about the costs of managing the relationship as well as their contribution in them. But, even if firms achieve collaborative relationships with external partners in the form of strategic alliances, opportunistic behavior that may exist in an alliance and the lack of control over the relationship can hamper the success of the cooperation. This opportunistic behavior is generated by the difficulty of controlling the relationship as well as by the uncertainty involved in innovation activities. Finally, from the previous analysis it can also be inferred that the degree of innovativeness may be a factor that affects the collaborative ability of SMEs, but the argument that size affects the ability of firms to engage in cooperative relationships is not supported, due to contradictory results of the different studies.

3.3. Regulatory and policy

Barriers to innovation for SMEs are also caused by regulatory constraints and inappropriate policies applied by governments. Piatier (1984) tried to identify and classify the barriers to innovation that European SMEs were confronted with. He suggested that some of the reasons that cause barriers to innovation in SMEs are related to bureaucracy and legislations as well as to the prevailing norms and standards. Among the most important barriers in the study of Piatier (1984) were obstacles, related firstly to policy issues such as the effects of the public policy on the wages and the unemployment, which affected negatively the inputs of the company. Secondly, obstacles were related to the foreign trade policies adopted by the European Union, which affected the sales and thirdly to the policy on the public contracts which affected negatively the sales of new products to the authorities. As he pointed out government actions often are not in favor of SMEs while in many cases are even negative for them. This situation derives from the fact that the implementation of programs made by governments is firm-size specific as well as by the fact that the actions of government are usually in favor of large companies and directed to the enhancement of their competitiveness.

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strict and complex rules and the high bureaucracy costs as important barriers that negatively affect innovation in SMEs. These rules put a lot of pressure on SMEs and result in time loss and lower level of innovation activity. Interestingly, Massa and Testa (2008) found that the view of entrepreneurs is shared by policy makers who believe that the existing rules to manage entrepreneurial innovation are very complex. More specifically, policy makers found three types of restrictions in the regulatory framework. First of all, they mentioned that it is difficult to promote innovation if the fiscal conditions are not suitable for it. The second problem, as it is perceived by policy makers, is related to the protection of intellectual property. According to the policy makers‟ view, the intellectual rules about patents in Europe are inadequate, difficult to understand and are characterized by low coverage and high application costs for patenting. Finally, the third restriction derives from the fact that bankruptcy rules are very strict in a way that does not support the risk taking behavior towards innovation in SMEs.

In a similar context, the study of Zhu et al. (2012) about Chinese SMEs suggested that innovation policies that are implemented in developed countries may not be applicable in developing countries. This is because the general patterns of governance; the economic environment and the culture vary considerably between developed and developing countries. According to their findings, five institution based obstacle to innovation for Chinese firms were identified. The most important one is the existence of an unfair competition environment which favors large firms over small firms, while the second was the inability of SMEs to obtain the necessary financial support from financial institutions. Although this issue is related to the financial constraints that SMEs are confronted with, it is considered by the authors as institutional barrier to innovation. Another important barrier identified in this research, is related to the regulatory framework. The complex laws about innovation in SMEs are perceived as confusing by SMEs while the entry and exit processes are expensive and time consuming. An interesting finding of Zhu et al. (2012) is that managers believe that in China the regulatory framework covers mostly technological innovations and the regulations for non-technological innovations (such as organizational innovations) are scarce. Finally, the excessive taxation and the insufficient policies for supporting the innovation related needs of SMEs, are considered as other institution based barriers for SMEs innovation in China.

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Of great importance in the context of regulatory and policy issues is the governmental intervention with the form of financial support. Although this barrier is related to financial issues that SMEs face regarding innovation, it derives from the inability of the government to provide this type of companies with the necessary funds. This phenomenon is demonstrated in a great number of studies about barriers to innovation for SMEs which have identified that the insufficient financial support from the government constitutes an important constraint for those SMEs that conduct innovation activities (Zhu et al., 2012, Piatier, 1984, Guijarro et al., 2009, Freel, 2000).

To sum up, it is widely accepted in the existing literature that small and medium sized enterprises are confronted with barriers related to regulatory and policy issues regarding their innovation activities. These barriers are country or region specific and depend on the governmental policies and regulatory frameworks that are implemented in each country or region. Unfair competition environment favor innovative large firms over SMEs. In this context, entry and exit barriers affect the ability of SMEs to engage in innovation activities, while extensive bureaucracy that leads to complex and time consuming administrative procedures, as well as governmental policies that affect the sales of products are considered by SMEs as important obstacles to innovation. In addition, the inability of existing rules to provide sufficient support to innovators in the form of intellectual property rights (especially patents) and the lack of governmental policies to support the adoption of new technologies, are perceived as important regulatory issues that should be addressed. Added to this, restrictive laws on wages, market laws and the excessive taxation affect negatively the innovation activity of SMEs. Finally, in the majority of the existing studies about barriers to innovation, it is clear that public supportive policies in the form of financial support to SMEs are considered at least as ineffective.

3.4. Management and marketing skills

Innovation in SMEs is also constrained by issues related to managerial skills and attitudes as well as to the lack of sufficient marketing competencies. Freel (1999) suggested that there are several constraints that arise from management decisions and affect negatively the innovation paradigm in small firms. These constraints are associated with the poor planning and financial evaluation by managers, the inadequate delegation as well as with the discontinuity of the management staff. He also argues that small firms are not capable of finding and training high qualified managers due to the scarcity of internal labor markets, the high compensations that are demanded as well as due to the fact that the training process is time consuming and costly.

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top management towards innovation, namely active and passive entrepreneurs. According to their view, the group of active entrepreneurs consisted of SMEs where the top management teams characterized by risk propensity and experimentation in order to seek for opportunities in a preemptive and aggressive manner. On the other hand, the top management of the group of passive entrepreneurs was found risk averse, reactive with a tendency to choose the safe way and to avoid experimentation and exploitation of new opportunities. The findings of their study also suggest that active entrepreneurs found to have a better new product performance than passive entrepreneurs. This is because the propensity towards risk and the proactive orientation of active entrepreneurs provide them with the ability to create new product innovations with unique characteristics for the market. It thus, seems that although there are entrepreneurial orientations that positively affect the innovativeness of a SME, at the same time other types of entrepreneurial orientation exist and cause negative impact on the innovativeness of the firm. In a similar manner, the study of Kenny and Reedy (2006) reveals that one of the barriers to innovation in SMEs is related to the risk aversion behavior of the management team. Their findings suggested that SMEs should have long term strategic horizons considering innovation and not short term approaches. Interestingly, they also found that although a satisfying proportion of the investigated SMEs had a mission statement, only in one third of the sample the employees were familiar with it, which means that the management team may not provided the sufficient effort to constitute the mission statement clear to the staff.

A special category of SMEs is consisted by those that are family owned. But, although this type of firm is recognized as an important source of innovation and economic progress, the nature of management does not influence innovation in a positive manner (Zahra, 2005). According to Zahra (2005), once again the risk aversion behavior of managers is responsible for the negative attitudes towards innovation. More specifically, in this study the long tenures of CEO founders, found to be negatively related to risk taking behavior considering innovation. In this context, long tenures of CEOs facilitate the establishment of inertia that reduces the ability of the organization to adapt quickly to environmental changes. But, a noteworthy result of the study is also that family ownership and involvement (the number of generations that are active in the company) have a positive relationship to the entrepreneurial activity including the behavior of the owners towards innovation. In addition, the research of Zahra (2005) revealed that the size of the company in terms of full time employees does not have a significant impact on the findings, which means that small firms with limited resources and few people may exhibit the same or a closer trend attitude towards innovation as medium enterprises with more people.

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management structure that is applied in small firms are often characterized by the aversion of owner-managers towards the forms of management delegation. The importance of marketing constraints is clear in Adam‟s study (1982) with all the small company types (both innovative and non-innovative) to confront marketing barriers such as constraints related to advertising and to promotion skills and resources. These constraints also arose due to the lack of skill personnel for marketing purposes. Also, as it is mentioned by Adams (1982) there were part time or no employees to conduct marketing activities. And in the case when marketing was performed on a part time basis, the work was carried out by the owner-manager who did not have specialized marketing knowledge and experience. In a similar manner, Nooteboom (1994) argues that small companies exhibit weaknesses in marketing, but these weaknesses are not very strong because of the limited scope of the marketing that exists. On the contrary, he suggests that larger firms are better in marketing than smaller firms. This suggestion is an indication that the size of the firms affects its ability to apply marketing skills and it may constitute a sign that medium companies face fewer constraints than smaller firms regarding marketing issues.

It can thus be concluded that the management and marketing skills are critical factors that affect innovation in SMEs. The perceptions and the type of the management as well as the nature of the decision making process which is adopted, often have a negative influence on the innovation activities of the company due to the lack of appropriate skills and the risk averse behavior towards innovation. Risk averse behavior of managers is considered as a very important barrier to innovation in SMEs because innovation is related to uncertainty by definition. The situation is further compounded by the fact that SMEs do not have the financial means to attract skillful managers or to adopt training facilities. SMEs are often restricted in finding high quality managers because of the high levels of wages demanded by them. In addition, long tenures of managers reduce their ability to respond effectively to environmental changes. Interestingly, the size of the company was found to be insignificant regarding the attitude of management towards innovation. Furthermore, literature suggests that the marketing skills of SMEs are also restrictive regarding innovation, with smaller firms to be in a more disadvantageous position. More specifically, it is found that due to their small size and limited resources and more importantly due to the lack of staff with marketing experience, SMEs often lack the ability to develop sufficient marketing skills in order to promote their innovations.

3.5. Skilled labor

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that their future career potential is limited in such a type of company. They also suggest that while large enterprises confront problems in finding qualified employees because they need a great number of them, medium enterprises are in the best position. This is because on the one hand they are big enough to attract skilled employees while on the other hand they don‟t have very high demands in employees.

Similarly, Tourigny and Le (2004) found that one of the major problems that Canadian SMEs face regarding innovation is that they are not able to devote their staff on an on-going basis as well as the lack of qualified employees to develop product and process innovation. They found that the existence and intensity of the obstacles to innovation as perceived by Canadian SMEs depend on several factors. One of those factors is the location. As their findings suggest, the location provides attributes that can foster innovation. In the context of skilled labor, they found that small and medium sized companies in a specific area of Canada faced less intensive problems in finding skilled workers than companies in other areas of Canada. In addition, they found that SMEs which used governmental support programs were more likely to report problems related to inability to devote employees on an on-going basis and to find skilled workers for innovation. It is also noteworthy to be mentioned that, although they expected small firms to face more intensive problems regarding the lack of skilled personnel than medium sized firms, their results showed that medium sized firms encounter more intensive problems. They explain that this happens because the obstacles to innovation are more intensive as a firm innovates. In this context, as medium sized firms innovate more than small firms, they tend to perceive the obstacles to innovation as stronger.

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have the theoretical knowledge over their field, they lack the specific practical skills that are advantageous for the company‟s innovation activities.

From the previous analysis arises that SMEs encounter intensive problems in identifying and acquiring qualified workers. This is because employees are not willing to work in smaller companies due to the limited career prospects. Although someone could expect that small firms are in a more disadvantageous position regarding this issue, such a conclusion cannot be drawn because different researches show contradictory results. Additionally, the location seems to play an important role to the ability of firms to find skilled labor. Added to the difficulty of acquiring qualified staff, the inability of SME managers to devote their staff on an ongoing basis constitutes an important constraint to innovation for those firms. Another aspect of the problem is the lack of training that is observed in SMEs due to the limited resources they have. As it is found SMEs often lack training facilities or use limited sources for training their staff (such as seminars). Finally, while a solution to the problem could be the employment of graduates, sometimes these graduates lack the sufficient practical skills that are needed for successful innovation.

4. Possible solutions

The aim of this part is to provide some possible solutions for the five types of issues identified in the literature. In order to do so, I will provide suggestions made by authors that will help SMEs to overcome the barriers, as well as examples of successful patterns of innovation in SMEs that show a way in which SMEs can overcome the relevant barriers.

4.1. Finance, cost and risk

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meant that the firm could not invest in parallel processes. In this way marketing and sales could not be conducted at the same time with innovation activities. In the lack of sufficient finance, the company should focus on producing the innovative product in principal, and when the product was ready, to undertake marketing and sales for launching it. Finally, a firm decided to adopt a strategy named “stop and go”. According to this strategy, the project would be put on hold in the lack of sufficient capital and get funding priority if and when sufficient capital existed.

In a similar manner, Radas and Bozic (2012) suggest that one way for SMEs to innovate, despite the intense financial constraints they face, is to reduce the level of novelty and complexity of the undertaken innovative project. In this way, companies can reduce the cost of innovation by introducing a less ambitious version of the project.

Added to these ways, Cattani (international forum, 2002) showed that there are some alternatives in order for SMEs to overcome the financial constraints regarding innovation. One way comes from India which introduced the Small Industries Development Bank in order to facilitate small companies by providing funds and information technology facilities. Another solution according to Cattani (international forum, 2002), is the development of tutoring and mentor programs. In this way, the assistance of experts is provided to SMEs in a low cost manner and most importantly, these mentor programs can operate as guarantors to banks. Finally, he suggests that credit insurance and the stoppage of demanding collateral assets can be a useful way to improve the competitiveness of SMEs.

Last but not least, Harrison and Mason (2000) suggested that the key to unlock the debt and equity for small firms is to remove the information asymmetries that exist. The creation of Business Angel Networks (BANs) that facilitate funding of SMEs could play a substantial role here. They argue that the existence of Business Angel Networks facilitates the communication between private investors and small firms which search for risk investment capital. In this way, BANs invest in projects, where other private investors do not want to invest in, but are necessary for the welfare of the social community. These organizations can be non-for-profit (publicly funded) or commercially oriented (privately funded), but most of the time these organizations are non-for-profit organizations and their costs are undertaken by the governments.

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SME managers should reduce the operational costs of the company by locating the company in their homes or by keeping only the employees that are necessary for the survival of the company. In addition, in the face of limited capital, SMEs should make a careful use of their financial resources by focusing (all the financial resources) firstly on creating the product and when the product is finished enable supportive operations such as marketing and sales. SMEs can also use the “stop and go” strategy and continue the innovation project only when sufficient finance is available. In this way, they don‟t have to abandon innovative projects, but only put them on hold temporarily when financial resources are limited. Furthermore, small companies can reduce the cost of innovation by reducing the level of novelty of the project. It is important to be mentioned that venture capital funds (when they are available) constitute an important option in order for small firms to obtain external finance for innovation. Thus, when venture capitals are available, companies should try to obtain finance through them. Finally, governments can play an important role in facilitating SME access to finance. The creation of Business angel networks can provide SMEs with sufficient finance for innovation while the creation of mentoring programs could help SMEs to obtain bank loans easier by operating as a guarantor to banks.

4.2. External information and linkages

Except from the problems that arise when SMEs try to engage in or use collaboration for innovation, studies in the literature of SMEs have revealed successful patterns of cooperation for innovation. Governments with their policy constitute an important source that can promote cooperation between SMEs and other partners for innovation purposes (Zeng et al., 2010). Zeng et al. (2010) suggest that in order to do so, governments have to establish institutional arrangements and policies in order to facilitate cooperation in a local manner and to establish patterns of cooperation in order for SMEs to enhance mutual learning between themselves and other partners. In this context, financial awards for SMEs that collaborate with other partners for innovation purposes could be effective. In addition, Zeng et al. (2010) suggest that SMEs should be more willing to search for external innovation partners such us universities and intermediary institutions to create networks of collaboration that will enhance the possibility of technology transfer and cooperation in R&D.

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for the science park to be an effective tool for fostering innovation through collaboration, there must be more interaction between SMEs, universities and research institutions. University scientists have to make the research opportunities and processes more explicit to the firms placed in the science park, while members of the firms should visit university boards.

Furthermore, another aspect of the solutions could focus on how a SME could handle the relationship with other firms by the time a collaborating relationship has been created. The study of Graidet and Fraiba (2012) provides five coordination modes that a SME can use to enhance the possibility of success in an innovation network. Trust, communication, benefits division, guarantees and conflict resolution methods can be used to increase the possibility of a successful cooperation. According to this view, SMEs should try to examine the type of information that is transferred in order to reduce the opportunistic behavior and to increase the level of trust between the partners. They should also avoid creating restrictive contracts, but establish guarantees at time. Such guarantees found to be beneficial and lead to a successful collaboration. In addition, informal relations as well as the division of benefits at the time of a new partner arrival found to be beneficial for the project. Finally, conflict resolutions in the form of penalties to partners that do not follow the rules, joint resolution or persuasion constitute important ways to keep the collaboration stable and secure the success of the project.

Finally, sometimes SMEs need to try to collaborate with competitors (co-opetition) because such a type of collaboration can help them to accomplish superior technological innovation achievements (Gnyawali & Park, 2009). But, as Gnywali and Park (2009) suggest, considering the fact that this type of collaboration possesses significant potential costs such as increased level of opportunistic behavior, possibility of losing the control over the relationship e.t.c, SME executives need to adopt a co-opetition mindset in order to achieve effective collaborative relationships with competitors. This means that managers need to understand that cooperation with competitors is an important means of achieving superior technological innovation outcomes and to continuously monitor the environment in order to identify potential collaboration opportunities. By doing so, executives of SMEs will be able to help the other managers to develop a co-opetition mindset and to understand the benefits of collaboration. If managers manage to develop co-opetition mindset, the ability of the firm to engage in collaborative relationships for innovation will be significantly improved.

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for SMEs that achieve cooperative relationships. Additionally, the creation of Science Parks could be used as a superior measure that can foster innovation by stimulating collaborative relationships between SMEs and research institution or universities. It is important that managers of SMEs must seek to collaborate with external partners such as universities or research institutions in order to achieve technology transfer from the one part to the other (these relationships can provide SMEs with the scientific work conducted in universities). It is very important here that SMEs need to interact intensively with their external partners in order to achieve the benefits of the collaboration. One way to do so is by urging employees to visit the associated universities and research institutions. In addition, in order for SMEs to accomplish efficient cooperative relationships, it is very important to establish coordination modes that facilitate the success of those relationships. The increase of trust and the reduction of the opportunistic behavior are significant for achieving successful collaborations. Added to this, the establishment of guarantees at time and the avoidance of restrictive contracts may facilitate the proper function of the relationship. Furthermore, SMEs need to make clear division of benefits among the partners in order to avoid conflicts and to adopt penalties that will make partners reluctant to break the rules of the collaboration. Last but not least, it is necessary for managers of small and medium sized companies to understand the benefits of collaborating with competitors. They need to understand that such type of collaboration can result in superior innovation outcomes and they have to constantly seek for partners even if they are competitors.

4.3. Regulatory and policy

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Storey (2003), in his study, pointed out some successful public created programs that affected positively innovation in SMEs by providing successful policy interventions. During one of those programs, the inability of SMEs to access external finance due to the lack of collateral assets, reduced when the state acted as a guarantor for those small businesses. Another successful program was targeted to provide SMEs with access to markets with the organization of trade fairs to encourage cross border trade among SMEs. Other programs were used to reduce the administrative barriers to innovation SMEs faced, while policy instruments (such as business incubators) which used to assist small firms were considered as valuable solutions. Those programs applied in Europe and USA, aimed to increase the ability of SMEs to innovate through different directions (e.g access to finance, enhance collaboration e.t.c).

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4.4. Management and marketing skills

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Another solution comes from Cooper (2001) and is related to actions that could be taken at the level of support programs. According to this view, such programs should be focused on bring business people and new entrepreneurs together, as well as on creating supporting services for advising SMEs. Added to these, the creation of a management and innovation centre for SMEs could be a good way to facilitate innovation in SMEs by providing a lot of opportunities, and the management training would be one of them.

As far as marketing issues are concerned, because the nature of these issues is related to resource constraints, possible solutions could focus on minimizing the related costs. For example, if a small company cannot recruit marketing staff due to cost issues, a website for promotion purposes could be a good way to overcome this barrier, while another way is promotion by creating direct links with customers through the words of mouth (Larsen & Lewis, 2007).

It becomes apparent that SMEs can reduce the constraints related to management issues. But in order to do so, they have to adopt new managerial styles that promote attitudes towards risk taking. Risk is closely associated with innovation, and for this reason, managers do not have to be risk averse. Conversely, they should be more willing to undertake risk and to focus on how to increase the differentiation and uniqueness level of their products. Managers should also influence the processes and the employees‟ behavior inside the company in order to facilitate positive behaviors towards innovation. In order to do so, managers must provide employees with motives to promote the importance of innovation inside the company and allow them to participate in critical stages of the innovation process such as the idea creation part. In addition, managers should not be strict, but they should let employees feel that they participate in the decision making process in the project level. In addition, managers should retain close connections with their employees in order to advice them as well as in order for the latter to feel that they are important for the company. The abilities of managers regarding innovation can also be increased by public intervention. In this way, the creation of supporting instruments for training and advising entrepreneurs can have a positive impact on innovation in SMEs. Finally, concerning marketing constraints, the ways SMEs can overcome those barriers presuppose costless activities such as direct links with customers as well as the use of low cost promotional services.

4.5. Skilled Labor

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mechanisms. These funding mechanisms will provide small firms with the adequate financial resources needed for accessing workers of higher value. Panagiotakopoulos (2011) also suggests that there are instruments that could be created in order to facilitate the acquisition of higher-level skills from the side of SMEs. The educational system is very important here because it has to focus on how to provide people with the required quality of education in order to support innovation in SMEs. He also argues that another instrument could be the creation of strong trade unions that could boost training and development of employees in small firms. Finally, a higher minimum wage could push small firm managers to recruit more valuable employees because the cost would be high anyway, while training seminars could be conducted in order to increase the capabilities of the workforce.

The recruitment of graduates constitutes another way for improving the position of SMEs regarding skilled labor constraints (Freel, 1999). According to the findings of Freel (1999) the recruitment of graduate employees can enhance the competencies of small firms. This kind of employees is more likely to have a positive attitude towards innovation and will provide the firm with new skills. Freel (1999) also found that the proportion of graduate workers employed in the firm is positively related to the innovation performance, with firms that conduct more innovation activities to be more likely to have graduates in their workforce. But, as Rolfo and Galabrese (2003) suggest, in some cases even the employment of graduates may be problematic due to the lack of sufficient practical skills that they gained during their education. This is the reason why they suggest another type of training. According to this view, SMEs could create links with schools by offering to students in-company training for a short period of time. In this way, companies will have the opportunity to assess not only the theoretical knowledge of their potential employees, but also their attitude towards work and to evaluate if these candidates have the required qualification.

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to cope with it. The great number of applications made by people that wanted to work for the company was an assurance that the firm would be able to replace the employees that were about to leave.

According to the literature, the constraints that arise from factors related to human capital and have a negative influence on innovation in SMEs are not untreatable. Once again, government can lead the treatment by providing SMEs with financial support to facilitate the recruitment of more qualified employees as well as by establishing programs to facilitate training of SME workforce. Such programs could consist of training seminars or trade unions, focused on the improvement of employee skills level. In addition, the educational system has to focus on providing students with the necessary abilities in order to gain all the necessary skills that are demanded for their future work. From the company‟s side, it seems that SMEs can also take some actions in order to mitigate the labor related problems. The recruitment of graduates is one way for SMEs to obtain high level of skills. Such graduates are more suitable for innovation activities and can provide the firm with new and high quality skills. Even in the case that graduates do not have all the necessary abilities demanded by the firm, SMEs can facilitate the solution of the problem by establishing links with educational institutions. In this way, SMEs can assure that their future employees will have all the abilities demanded for innovation. Added to these actions, the ability of firms to fill the skill gaps that arise inside the company, can be fostered by the recruitment of different employees with complementary skills as well as by subcontracting work with other companies. Both of these final actions can provide the firm with skills that are difficult to be obtained because of the labor related problems that this type of companies faces. Finally, the literature suggests that in case of problems related to the withdrawal of skilled workers from the company, due to search of better career opportunities, their negative impact on innovation may be avoided by the direct recruitment of applicants (if they exist) that wait to work for the company.

5. Conclusions

This study attempted to report the most important barriers that small and medium sized enterprises are confronted with, regarding innovation and to provide some possible solutions. The most important obstacles are represented by financial and cost, collaborative, regulatory, policy, management, marketing and skill labor related constraints.

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problems is to establish coordination modes. Managers of SMEs have to secure that satisfying levels of trust will be accomplished and that the possibility of opportunistic behavior will be reduced. Penalties in case of rule violation and clear division of benefits can be used by managers as coordination modes for increasing the trust and reducing the possibility of opportunistic behavior. In addition, modes such as guarantees at time and patterns of conflict resolutions are also important means of managing the collaborative relationships with external partners successfully. Manager of SMEs should also consider the possibility of forming external relationships with competitors because collaboration with competitors can be proved as a superior for successful innovation. Another issue related to the inability of SMEs to achieve cooperative relationships for innovation purposes derives from the fact that small and medium sized firms have low quality scientists. Solutions for this issue should focus on how SMEs can attract high qualified scientists and will be discussed subsequently (in the context of skilled labor related solutions). Despite of the managerial implications, the area of barriers that SMEs face regarding their external information and linkages for innovation also provides some policy implications. In this context, policy makers should focus on developing patterns of cooperation among SMEs and their possible partners. Science parks or financial incentives are considered as superior means that policy makers can develop in order to foster cooperation for innovation for SMEs.

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have been successfully adopted elsewhere. It is also important to be mentioned that if governments manage to implement successful innovation instruments, these instruments may be able to reduce the most or even all the types of barriers to innovation that are faced by SMEs. This is because different policy instruments are able to mitigate the effects of different problems. In this context, public policy can provide SMEs with the financial resources needed for innovation. This issue is of high importance because as has been identified in the literature most SME managers and owners believe that financial support from the governments for innovation purposes is at least inadequate. Finally, inefficient innovation policies cause problems related to the defense of the innovations. SME managers believe that patent protection is characterized by low levels of strength and coverage. Thus, policy makers have to change the intellectual property regulations in order to facilitate the access of SMEs in patent protection. This last issue can also be assisted by management actions. This means that in cases that patent protection does not provide the desirable protection attitudes for an innovator; managers can simplify the project in order to avoid its copy or can use other types of intellectual property rights. An example here is the use of industrial know how which is consider by managers as a very strong protection mechanism.

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implementation by managers of lower cost marketing operations such as the use of internet as a primary promotional service and the direct relationships with customers.

Finally, as far as the constraints that are related to skilled labor are concerned, the analysis shows that SMEs face significant difficulties in recruiting qualified employees. A common phenomenon here is the unwillingness of SME employees to remain in a small or medium sized company. This unwillingness comes from the belief that SMEs do not offer significant future career opportunities. Although the literature does not provide clear directions to solve this issue, one way to avoid the problem is by having a lot of applicants that have applied for a job position inside the company. Thus, managers should consider all the possible applications that they receive as a future “back up” plan in case of employee relinquishment. In this way, the company will be able to respond quickly and the possibility of delays will be reduced. But, sometimes SMEs face difficulties in finding qualified employees that are needed for a specific position (such as scientists). The treatment here suggests that the company can respond quickly by recruiting employees with complementary backgrounds or by subcontracting the work to other companies. By working as a team the complementary skills of the workers will provide the firm with the needed skill package. Another issue that is very important in the context of skilled labor constraints is associated with the inability of SMEs to train their staff effectively. Unfortunately, many SMEs lack the means that are necessary in order to train their workers. One way to avoid the negative effects of this problem on innovation is the recruitment graduates. This type of employees is found to be more suitable for successful innovation. But, even the employment of graduates sometimes is not enough. This is because although graduates may have theoretical knowledge, sometimes they lack practical skills that are necessary for successful innovation. They key here is cooperation between SMEs and educational institutions. If SMEs manage to achieve such relationships with educational providers (that constitute a form of training) it will be easier for them to find workers with all the skills that are needed for successful innovation. It is also important to be mentioned that governments should foster training in SMEs by developing policy instruments. In this context, the creation of measures such as financial support for training in SMEs and training support programs (such as seminars or trade unions) can be useful, while the improvement of the educational system towards the needs for successful innovation can increase the value of the skill base of small and medium sized firms.

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skilled labor related constraints; such a conclusion cannot be drawn due to the contradictory results of the analyzed studies. Furthermore, in the context of regulatory and policy barriers the area seems to play an important effect on the intensity of the problem. This is because regulatory and policy constraints arise from inefficiencies in the institutional and regulatory framework that each country or region has adopted as well as from inefficiencies in the governmental policies for SME innovation purposes that are applied in each country.

As far as the possible solutions to the problems are concerned, it becomes apparent that alternative ways exist in order for SMEs to avoid the negative effects that arise from the barriers to innovation. In some cases managers of SMEs can provide the solution in order to overcome the barriers but as can be concluded from the analysis governments have a great responsibility in facilitating the solutions of the reported problems. In almost all the cases the literature provides examples of innovation policies that can be adopted in order for innovation in SMEs to foster. Thus, well focused government policies can be proved as superior means that will help SMEs to overcome the barriers to innovation.

6. Limitations and future research

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7. Acknowledgements

First of all I would like to thank my supervisor Mr. Wilfred Schoenmakers for his support and the constructive feedback with which he provided me during the writing of this report. Without his suggestions it would be very hard to finish this thesis. His comments helped me to identify the steps that I should follow in order to successfully conduct my research and elaborate on this report. In addition, I would like to thank my friends for their patience and their encouragement. They spent a lot of time to help me improve my grammar mistakes and give me suggestions for the improvement of my thesis. Last but not least, I would like to thank my family for the support and the encouragement that provided me during this period of my life.

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Beck, T., Demirgüç-Kunt, A., Laeven, L., & Maksimovic, V. (2006). The determinants of financing obstacles. Journal of International Money and Finance, 25(6), 932-952.

University of Groningen Faculty of Economics and Business Msc. in Business Administration, Strategic Innovation Management June, 2014