2017
Innovation Behavior of Sole Proprietors:
a Comparison with SMEs
Author: R.C. van der Wal
Student number: S2382369
Small Business Management and Entrepreneurship. Faculty Economics
and Business. Rijksuniversiteit Groningen.
Supervisor: dr. W.W.M.E. Schoenmakers
Co-supervisor: dr. E.P.M. Croonen
1 Abstract
2 Table of Contents Abstract ... 1 Introduction ... 3 Theory ... 6 Innovation ... 6 Types of Innovations ... 7 Innovation radicalness ... 9
Routine vs. Sporadic innovation ... 11
Open Innovation ... 13 Methodology ... 15 Survey method ... 15 Sample ... 16 Response Bias ... 17 Variables ... 17 Results ... 17 Types of innovation... 18 Innovation radicalness ... 19
Routine vs. sporadic innovation ... 21
Open innovations ... 21
Discussion ... 23
Innovation types ... 23
Innovation radicalness ... 24
Routine vs. sporadic innovation ... 25
3 Introduction
Innovation is highly important in the society we live in today and although scholars from different fields are somewhat spread on the definition, they do agree on one aspect: it is the creation and/or adoption of something new (Schilller, 2001; Vossen, 1998; Knight, 1967; Kline & Rosenberg, 1986; Gopalakrishnan & Damanpour, 1997). Rapid technological changes and advances contribute to the necessity for companies to keep up, or to put it differently; companies use innovation to obtain competitive advantages over their competitors (Ireland & Webb, 2007). Innovation offers companies an opportunity to keep up with current changes or even push the technological change (Knight, 1967; Flaig & Stadler, 1994).
As you might imagine, innovations are not a uniform activity. Knight developed a theory in which innovation occurs in four different categories; product/service innovation, production-process innovation, people innovation, and organizational innovation (Knight, 1967). Innovations do not just spontaneously appear in a company, firms have to dedicate their resources to produce and develop innovations. Billions and billions of euros are spend each year on research and development. In the Netherlands for example, companies spend roughly an equivalent of 2% of the GDP on research and development of innovations (I.e. about 15.4 billion US $) (Organizations for Economic Cooperation and Development, 2017). According to Schumpeter Mark I, entrepreneurs are the main facilitator of innovation, they cause the destruction of old ways by transforming these old ways radically and disruptively. However, two decades later he altered his views in Schumpeter Mark II, in which he states that large businesses are the most important players and the driving force of innovation. This change of thought was driven by the fact that large companies have the resources to set up R&D departments and started doing so, resulting in large scale innovation (Schumpeter, 1934; Schumpeter, 1950; Storey & Greene, 2010).
Not all companies, however, innovate (in the same intensity or matter); there seems to be a large discrepancy in innovation production correlating to the sizes of the companies, like Schumpeter pointed out in his work, large companies tend to produce more innovations than smaller and medium sized companies (SMEs). This difference stems from the available resources; larger companies have relatively more resources to spend on innovation than smaller companies (Vossen, 1998; Knight, 1967). Interestingly, large companies do not spend a larger portion of their total resources on innovation (Fritsch & Meschede, 2001). Although larger companies spend more total resources on innovation, SMEs spend relatively more capital which, according to Fritsch and Meschede, makes them more dedicated to their inventions. Another advantage concerning innovation efforts that larger companies have over small companies is their ability to exploit their innovation efforts better than smaller companies due to their “established name and
reputation” (Vossen, 1998, p. 91) and their larger production volume (Fritsch & Meschede, 2001). This might
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management, middle management, etc.) resulting in a longer chain of command. This longer chain of command obstructs flexibility and creates managerial inefficiencies (Vossen, 1998). SMEs are able to behave more flexibly meaning that there is: rapid decision making, fast reaction to chancing markets, and capacity for customization (Vossen, 1998). This leads small businesses to focus more on small niche markets where scale advantages are not possible and thus large companies tend to stay out. Small companies further excel in innovation efficiency, according to Acs & Audretsch (1991) small businesses produce 2.4 times more innovations per employee than larger companies. This seems to contradict the theory of Schumpeter and further stipulates the debate between the superiority of business sizes.
We know the differences between large (more than 250 employees) and small businesses (between 50 and 250 employees), but what happens with the smallest of businesses; the sole proprietors? This is where we find the gap in existing theory. There is a large amount of work on large companies and theory on SMEs has increased in the last decades but, so far, sole proprietors remain largely neglected. A sole proprietorship is a company where the owner and business is one entity. The sole proprietor is distinct from small businesses in matters of size, the sole proprietor has no employees and therefore the revenues are generally lower. And although the revenues are generally lower, together they still make up a considerable part of the economy. In the Netherlands there were roughly 1.5 million businesses in 2015, of those 1.5 million businesses 1.17 million (77%) are run by sole proprietors. In that same year roughly 873.000 sole proprietors used their business as their main source of income. The average income of the sole proprietors that use their business as their main source of income is €34.900. Together they accounted for €30 billion of income in the Netherlands in 2015, which is roughly 8% of the total income in the Netherlands (CBS, 2017). What we know about their innovating behavior is little to none despite their consequential role in the economy. We expect that this group has been neglected due to the vast diversity in the sole proprietors themselves and to the difficulty of acquiring secondary information because sole proprietors, unlike small businesses, are not required by law to publish their financial records. The central bureau for statistics of the Netherlands discovered that there is a distinct difference between the lower educated and the higher educated, the latter accounting for roughly 40% of the total number of sole proprietors, or to put it differently, there are roughly 468.000 highly educated sole proprietors. Lower educated sole proprietors are predominant in the construction and trade industry, higher educated sole proprietors are dominant in the business services such as; IT services, accountancy, R&D, and consultancy (Centraal Bureau voor de Stastiek , 2017). In this study we want to explore if sole proprietors are involved in innovation therefore we need to answer the following research questions:
How do sole-proprietors innovate?
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SMEs is advantageous because that the theory is already well developed and therefore it provides us with a benchmark.
As mentioned before, innovation comes in many forms such as; product/service innovation, production-process innovation, organizational innovation, and people innovation (Knight, 1967). In order to understand more about the innovating behavior of the sole proprietor we need to investigate what kind of innovations sole proprietors produce, hence our first sub-question:
What kind of innovations do sole proprietors produce?
Next we need to investigate how disruptive their innovations are for their own company. Therefore, we need to know if sole proprietors produce innovations that are building on or expanding existing technologies, called incremental innovations which are not disruptive. SMEs are predominantly involved in incremental innovation to improve their profits (Oke, Burke, & Myers, 2007; Storey & Easingwood, 1998), we want to know if sole proprietors operate similarly as SMEs. Further, we want to know if sole proprietors produce innovations that make their existing products and processes obsolete, called radical innovations which are quite disruptive. Although less used by SMEs due to the cost of radical innovation, it is still moderately used (Oke, Burke, & Myers, 2007). The reason that SMEs produce radical innovation even though it is expensive is that when everything goes right, the payoff could be high (Cooper, 1998; Simon, Elango, & Houghton, 2002). We want to know if sole proprietors are even more deterred by the high cost than SMEs therefore we need to answer:
How disruptive are the sole proprietor’s innovations?
Knight differentiates between two innovation processes; routine innovation and non-routine (sporadic) innovation. Routine innovation is planned and the company has everything in order to produce innovations such as well-defined routines, procedures to evaluate their innovations, and ways of implementation. On the other hand, we have non-routine innovation or sporadic innovation. These innovations are spurred by the way the company performs (i.e. bad or good performance). When a company performs well, they could expand their horizon by innovating and thus reaching new markets and expanding on their success, this is called slack innovation (Knight, 1967). When a company performs badly, that company could use innovation to improve the performance of their company. By innovating they could move to other markets where they could be more successful (Knight, 1967). What we want to know is, do sole-proprietors use routines to innovate, or do they innovate when they are performing well or when performance is down. We want to know what triggers the sole proprietors to innovate. Therefore, we need to answer the following sub-question:
How do sole proprietors behave in regards to innovation processes?
In addition, we want to explore if companies use open innovation, “a company commercializes both its own
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deploying pathways outside its current businesses” (Chesbrough H. W., 2006, p. 37). Open innovation gained
popularity over the last decades as a manner of innovating and knowledge usage. It basically entails that companies do not perform the complete innovation process internally but instead it uses external sources and internal sources in combination to produce innovations (Chesbrough H. W., 2006). This could lead to huge advantages for smaller companies because they’re able to use technology developed in large R&D labs by large companies (Van de Vrande, De Jong, Vanhaverbeke, & De Rochemont, 2009). This topic has become more popular in the last year for SMEs, however, has this theory evolved in sole proprietorships or is open innovation a practice only SMEs and large companies use? To answer this we propose the following sub-question:
How do sole proprietors use open innovation?
In the next chapter we will go further into detail with first the definition of innovation, followed by a more detailed elaboration on our research questions and hypotheses. This will be followed by our methodology, results, discussion, conclusion, limitations, and further research.
Theory Innovation
Before we further go into detail regarding innovation; the different types, impacts, the different processes of innovation, and open innovation, we first need to elaborate more on the definition of innovation. Innovation is inherently different from inventions in one important aspect: an innovation is the first commercialization of a new idea whereas an invention is the new idea itself (Fagerberg, 2004). However, this definition could exclude commercialization of some new ideas due to the required standard of first implementation. This becomes more apparent in the definition provided by Knight:
“An innovation is the adoption of a change which is new to an organization and to the relevant environment.” (Knight, 1967, p. 478).
Knight elaborates that an idea or an innovative thought does not inherently classify as an innovation, actions need to be taken to implement an innovation before it is an innovation in actuality. Therefore, Knight explicitly mentions the adaptation of a change, meaning that the company is already in the stage of implementing the change. In this paper we define this “adoption of change” as “activities to commercialize an idea” based upon the definition of Fagerberg (2004). Further, Knight mentions the ‘relevant environment’ in his definition and by adding that he defines innovation more broadly than Fagerberg. That is, innovation is not limited to being the first of the world such as in the definition of Fagerberg (2004). Knight elaborates on relevant environment by explaining how the implantation of a known technique from one environment into another, different environment, could be an innovation. For example; “Introducing
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However, for the sole proprietor, determining or knowing if their innovation is new to the world could be hard (if not impossible) to do and not an important task since the sole proprietor is microscopically small in the world perspective (Krizah, Brodnik, & Bukovec, 2014). There is no database where all the innovations are recorded (Krizah, Brodnik, & Bukovec, 2014), which makes it time consuming for a sole proprietor to determine if their innovation is new to the world or not. This is time consuming due to the amount of businesses worldwide, there are 1.7 million in the Netherlands alone (Centraal Bureau voor de Stastiek , 2017). Since sole proprietors only have a small customer base, the knowledge that another sole proprietor, who on the other side of the world, is implementing a similar innovation would be irrelevant. Knight disregards the strenuous requirement of an innovation being new to the world by adding that an innovation needs to be new to the company and to the relevant environment. However, this standard set by Knight is still hard to measure for sole proprietors because of what that environment encompasses. The environment, according to Knight is the direct reference group of the subject, which in our case is the sole proprietor. The direct reference group of the sole proprietor are; direct competitors, indirect competitors, suppliers, and customers (Wagemans, 2001). The problem arises when we ask the sole proprietor to include their indirect competition in their relevant environment. According to Peteraf and Bergen (2003), it’s difficult for firms to identify their indirect competition since it requires a “search for similarities far more
fundamental than product type” (Peteraf & Bergen, 2003, p. 1030). Indirect competitors consists of
substitutes, potential competitors, latent substitutes, and vertically differentiated rivals (Peteraf & Bergen, 2003). It is hard to expect that sole proprietors are fully aware of their indirect competitors when larger businesses, which have more resources at their disposal, already have difficulties identifying the indirect competition correctly (Costa, Fontes, & Heitor, 2004). Therefore, we expect that sole proprietors are not able to give us information regarding both the newness of their innovation for the indirect competition, and if their innovation is new to the world. This leads us to use the minimum requirement of innovation stated by the OSLO manual. The OSLO manual provides guidelines and information on innovation. They state that an innovation at minimum is:
“(Innovation is) A change in a firm’s products or functions (…) that is new (or significantly improved) to the firm” (OECD/Eurostat, 2005, p. 17).
Any measurement of novelty in their environment is disregarded and the focus lies on the firm itself. Therefore, sole proprietors are able to provide us with more reliable data concerning innovations in their firm.
Types of Innovations
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operations are part of the production-process. Third; organizational-structure innovation, this category proceeds on the last category production-process innovation due to its resemblance that this category also entails actions that form the production-process. However, this category is focused on the structure inside of the organization such as communications systems, formal reward systems, etc. Fourth; people innovation, according to Knight this category is made up of two parts. First, it is concerned with the hiring and dismissing of employees and second, the altering of beliefs and thoughts of the firm’s employees through education and/or psychoanalysis (Knight, 1967).
So what does this mean for the sole-proprietor? Strait away we disregard organizational-structure innovation and people innovation due to the nature of the sole-proprietors business. Organizational-structure innovation regards “formal interactions and authority relations among the participants in the
organizations” (Knight, 1967, p. 482). Sole-proprietorship is one of the simplest business structures there is
with one employee which is also the owner of the sole proprietorship (Marcum & Blair, 2011), therefore, relationships and interactions between multiple members in an organization is not applicable. Further, people innovation is the alteration the company’s personnel and modification of the beliefs and behaviors of the people in the organization (Knight, 1967). Once again, this is not applicable to the sole proprietorship. Altering the sole proprietor’s personnel would inherently result in a change of ownership and therefore not qualify as changing personnel as described by Knight, he specifies change of personnel as the hiring and dismissing of people. Further, Knight notes that altering beliefs and behaviors could be done through psychoanalysis, a complex instrument that is highly unlikely to be used by sole proprietors on themselves. Product/service innovations in sole proprietors are likely to be present due to the dominance of product/service innovations in SMEs and large firms (Oke, Burke, & Myers, 2007; Lentz & Mortensen, 2008). The cause for this dominance is that product innovations are responsible for improving the firm’s performance and strengthening the competitive advantage (Hall, 1993; Artz, Norman, Hatfield, & Cardinal, 2010). Moreover, service innovation has shown to improve sales, profits, and it provides the firm with new opportunities (Storey & Easingwood, 1998). Sole proprietors are unlikely to produce as many product/service innovations as SMEs; SMEs are much larger with more resources available, however, we expect that sole proprietors are implementing product/service innovations to improve their performance in a relatively similar way as SMEs. Therefore, we believe that our null hypothesis will be retrained and our alternative hypothesis will be rejected:
H₀ 1.1: Sole proprietors produce relatively as much product/service innovations as SMEs. H₁ 1.1: Sole proprietors produce relatively more or less product/service innovations than SMEs.
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competitive pricing or profit margin by delivering a service or product quicker or cheaper (Madrid-Guijarro, Garcia, Domingo, & Van Auken, 2009 ; Davenport, 1993). Therefore, we expect sole proprietors to undertake production-process innovations in a similar fashion. Hence, we believe that our null hypothesis will be retrained and our alternative hypothesis will be rejected:
H₀ 1.2: Sole proprietors produce similar amount of production-process innovations as SMEs H₁ 1.2: Sole proprietors produce more or less production-process innovations than SMEs.
In Oke’s (2007) research, SMEs predominantly produced product/service innovations (81%) over production-process innovations (19%), which matched pervious research on product/service innovation in large firms (Oke, Burke, & Myers, 2007; Griffin, 1997). We want to know if sole proprietors are focused on product/service innovations just like SMEs and large firms, we believe that our null hypothesis will be rejected and our alternative hypothesis will be retained:
H₀ 1.3: Sole proprietors produce similar amount of product/service innovations and production-process innovations.
H₁ 1.3: Sole proprietors produce more product/service innovations than production-process innovations.
Innovation radicalness
Just as there is a difference between categories of innovation there is also a different intensity or effect of innovations. These are placed on a continuum ranging between incremental innovations and radical innovations (Hage, 1980); incremental innovations are small or minor adaptions to existing product/services/processes. These incremental innovations “Enhance and extend the underlying
technology and thus reinforce the established technical order” (Tushman & Anderson, 1986, p. 441). For
example: the increasing efficiency of the combustion engine. On the other end of the continuum, radical innovations are revolutionary changes in technology that make existing technologies obsolete. Radical innovations “entail clear, risky departures from existing practices” (Cooper, 1998, p. 497). For example the invention of the internal combustion engine which led to the demise of the steam engine (Dewar & Dutton, 1986).
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all, radical innovation is risky (Cooper, 1998). Sole proprietors are legally the owner of the company so in case of bankruptcy, creditors are legally able to claim the personal belongings of the sole proprietor. If a sole proprietor focuses on radical innovation then he/she would increase the risk for said sole proprietor to lose a lot more than just the business (Ang, Lin, & Tyler, 1995). However, radical innovations do tend to generate high returns and sole proprietors are the most flexible due to the fact that the sole proprietorship is the smallest business form (Simon, Elango, & Houghton, 2002). Therefore, we believe that just as SMEs, sole proprietors do not produce many radical innovations due to the risk. However, flexibility is an advantage of the sole proprietor when he tries to implement a radical innovation. Therefore we believe that, relatively, sole proprietors produce the same amount of radical innovations as SMEs (Oke, Burke, & Myers, 2007). Hence, we believe that our null hypothesis will be retrained and our alternative hypothesis will be rejected:
H₀ 2.1: Sole proprietors produce relatively a similar amount of radical innovations as SMEs. H₁ 2.1: Sole proprietors produce relatively a different amount of radical innovations than SMEs
Incremental innovation is less dependent on knowledge resources than radical innovation, incremental innovation is spurred by contact with existing product/services and production-processes in context of the external environment (Dewar & Dutton, 1986). This type of innovation is often used to fine tune existing techniques in a company which could provide the company with substantial growth (Oke, Burke, & Myers, 2007; Storey & Easingwood, 1998). The underlying thought of incremental innovation is that it is based upon a profound understanding of the customer (Oke, Burke, & Myers, 2007), this is why incremental innovation is used more than radical innovation, it seems to be more accessible than radical innovations (Oke, Burke, & Myers, 2007). Sole proprietors are able to produce incremental innovations since sole proprietors are in close proximity with their customers, we believe that they are able to apply changes to their product/service and production-process to their customer’s liking. This leads us to believe that, relatively, sole proprietors would produce a similar amount of incremental innovations as SMEs. Therefore, we believe that our null hypothesis will be retrained and our alternative hypothesis will be rejected:
H₀ 2.2: Sole proprietors produce relatively a similar amount of incremental innovations as SMEs. H₁ 2.2: Sole proprietors produce relatively a different amount of incremental innovations as SMEs.
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innovations although incremental innovations are, just as in SMEs, dominant. Therefore, we believe that our null hypothesis will be rejected and our alternative hypothesis will be retained:
H₀ 2.3: Sole proprietors produce similar amount of incremental innovations and radical innovations. H₁ 2.3: Sole proprietors produce more incremental innovations than radical innovations.
Routine vs. Sporadic innovation
Innovations can be further understood by differentiating them into different innovation processes. Knight (1967) describes two processes; routinized innovation and sporadic innovation with the latter consisting of slack innovation and distress innovation. An overview of these processes are displayed in Figure 1.
Routinized innovations are innovations planned by the company to happen every period or X amount of time. These routine innovations are often small/incremental changes to the product of a company (Knight, 1967). Take for example the smartphone industry, the big manufactures launch a new model almost every year. These new models often only differ slightly from their predecessor. Non-routinized innovations or sporadic innovations are innovation that are influenced by outstanding performance, both positive and negative. When a company decides to pursue innovation when it is performing outstandingly well than it is called slack innovation. In this situation the company perceives itself to be successful leading to the search for a new challenge (Knight, 1967). This challenge could be found in expanding the business to new products, processes, or markets (Knight, 1967). Slack innovation could often be radical in nature due to the extra resources a company possesses when it is performing well (Oke, Burke, & Myers, 2007). On the other hand, when a company performs subpar then the company could try and save itself by innovating. This is called distress innovation, which is often time incremental of nature due to the constraint on resources (the company is under performing after all) (Knight, 1967).
What about the sole proprietor; when would the sole-proprietor innovate? It is possible for a company to have both routine innovations and sporadic innovations since there are multiple ways a firm is able to
Innovation processes
Routinized innovation Sporadic innovation
Slack innovation Distress innovation
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innovate. There is almost no research on this specific topic so we have to speculate as to why sole proprietors perform routinized and/or sporadic innovation, therefore the next hypothesis will be primarily based on assumptions.
We assume that sole proprietors are pre-occupied with their main tasks due to being the only employee in the company. This is reflected in the work of Nordenmark et al. where empirical evidence was found that sole proprietors on average have longer working hours and more irregular working hours then their employed counterparts (Nordenmark, Vinberg, & Strandh, 2012). A cause of this difference is that sole proprietors are responsible for all the activities in their firm. Therefore, we think it is unlikely that sole proprietors plan their innovations in a routinized way since this requires an extra continuous workload to the already high workload of a sole proprietor. Thus, we believe that our null hypothesis will be rejected and our alternative hypothesis will be retained:
H₀ 3.1: Sole proprietors produce similar amount of sporadic innovation and routine innovation. H₁ 3.1: Sole proprietors are more involved in sporadic innovation than routine innovation.
Let’s propose a situation where the sole proprietor is performing exceptionally well, the prerequisite for slack innovation. In this situation we would assume that there is ample work for the sole proprietorship which in turn means that sole proprietors are (exceptionally) busy due to the sole proprietor being the only employee in their business. When this happens, it seems unlikely that the sole proprietor would be able to spend time on innovation, even if the financial resources may be there. Also, we suspect that the owner has multiple alternative options to spend their “extra” income since their business revenue is also their personal income. The sole proprietors could spend it on innovation, however, they could alternatively use it for personal use, save it for a rainy day, or reinvest it into their company to replace worn materials. We assume that when the workload is high on the sole proprietor, that he will find ways to reduce it. This could be done by expanding the business which is beneficial for the sole proprietor. Business failure rates are significantly higher in smaller businesses than larger businesses (Honjo, 2000). Sole proprietors are the smallest of businesses leading them to be the business group with the smallest buffers and therefore highest risk of failure (Bates & Nucci, 1989). With this given, we suspect that when sole-proprietors are successful they try to expand their business and thus minimize risk. Therefore, when a sole proprietors is in a slack moment it will instead of innovate, expand to increase chances of survival. Therefore, we believe that our null hypothesis will be rejected and our alternative hypothesis will be retained.
H₀ 3.2: Sole proprietors have similar feelings toward expanding the firm when their firm performs exceptionally well and innovating when the firm performs exceptionally well.
H₁ 3.2: Sole proprietors do not feel similar on expanding their business when their firm performs exceptionally well and on innovating when their business performs exceptionally well.
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workload, this could be due to low quality products/services, high competition, etc. However, due to the assumed lack of workload we assume that the sole proprietor then has enough time to invest in innovation even if financial resources may be constraining the innovativeness. Further, negative moods, changing (negative) circumstances, and job dissatisfaction have been proven to increase innovativeness on the individual level and the organizational level. (Zaltman, Duncan, & Holbek, 1973; Zhou & George, 2001; Anderson, De Dreu, & Nijstad, 2004). This could lead to the sole proprietor’s endeavor to overcome their lack of workload by innovating and consequently increase their chances to improve their competitive advantage, quality of products/services, etc. which could lead to improved performance. So we believe, when a sole proprietor is performing below par, that he will innovate in order to improve business performance. Therefore we think that sole proprietors are more inclined to innovate when their business is performing under par and so sole proprietors will be innovating sporadically since “performing” under par happen sporadically. Hence, we believe that our null hypotheses will be rejected and our alternative hypotheses will be retained:
H₀ 3.3: Sole proprietors produce similar amount of distress innovation and slack innovation. H₁ 3.3: Sole proprietors are more involved in distress innovation than slack innovation.
Open Innovation
For the majority of the 20th century, innovation was performed in a closed innovation model meaning that innovation took place inside the company, from the original plans all the way to the implementation and the diffusion of the innovation (Chesbrough H. W., 2006). Only in the last decades of the 20th century did this model begin to perform inefficiently, in with other words, companies were less able to fully diffuse their innovations (Chesbrough H. W., 2006). Workers with knowledge of the firm’s innovations were mobilizing, which lead to information being dispersed, plus the rise of private venture capital facilitation for these knowledge worker’s ability to start up their own company (Chesbrough H. W., 2006). In the new “open” innovation model, knowledge comes from both external and internal sources meaning that: “the
boundary between a firm and its surrounding environment is more porous, enabling innovation to move easily between the two” (Chesbrough H. W., 2006, p. 37). The main benefit is that inventions that are
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grouped in technology exploitation and technology exploration. The former “implies innovation activities
to leverage existing technological capabilities outside the boundaries of the organization” (Van de Vrande,
De Jong, Vanhaverbeke, & De Rochemont, 2009, p. 424) and the latter consists of “innovation activities to
capture and benefit from external sources of knowledge to enhance current technological developments”
(Van de Vrande, De Jong, Vanhaverbeke, & De Rochemont, 2009, p. 424). Van de Vrande used five practices of technology exploration; customer involvement, external networking, external participation, outsourcing R&D, and inward licensing of intellectual property (IP). With technology exploitation, there are three activities: venturing, outward licensing of intellectual property (IP), and the involvement of non-R&D workers in innovation initiatives.
In this research we will be limiting ourselves to the two most popular means of open innovation (customer involvement & external markets) and the most unpopular (outward IP licensing). We involve only these three due to their strong presence (customer involvement, external networking) or strong absence (IP licensing) in SMEs. We fear that if were to incorporate all aspects of open innovation, our questionnaire will become too extensive for sole proprietors to answer, since we suspect that they already are busy. In other words, our questionnaire is too extensive already to incorporate all aspects of open innovation. We selected customer involvement and external networking due to their recognized importance (Van de Vrande, De Jong, Vanhaverbeke, & De Rochemont, 2009; Gassmann, 2006; Chesbrough, Van Haverbeke, & West, 2006). IP licensing was selected because in Van de Vrande (2009) research, SMEs are not that interested in IP licensing. In order to explore if this could be size related we choose to incorporate IP licensing in our study. The results of Van de Vrande’s (2009) research was that almost all SMEs (97%) try to involve their customers in the innovation process. SMEs try to involve their customers to generate a market pull so the SME knows what the market wants and thus minimize the risk of innovating (Van de Vrande, De Jong, Vanhaverbeke, & De Rochemont, 2009). Customer involvement is only possible if the relationship between the customer and the firm is close. In order to have a close relationship, firms have to have a few essential customers (Lagrosen, 2005). Small businesses traditionally focus on a small group of customers and tend to be in close proximity to the customers, this is caused by the lack of layers meaning that the customer is in direct contact with the managers (Levy, Powell, & Yetton, 2002; Ahire & Golhar, 1996). Sole proprietors do not have many customers since their market share is small and sole proprietors are by default in direct contact with their customers since there is nobody else in the business to be in contact with. Therefore, we believe that SMEs and sole proprietors have in common that their customers are often in small numbers and essential for the company, much more so than large companies who often have a large customer base. Therefore, we suspect that sole proprietors use customer involvement similarly as SME’s and so, we believe that our null hypothesis will be retained and our alternative hypothesis will be rejected:
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More than 90% of Van de Vrade’s et al (2009) sample used external networking; “drawing on or
collaborating with external network partners to support innovation processes” (Van de Vrande, De Jong,
Vanhaverbeke, & De Rochemont, 2009, p. 428). Through external networking, companies are able to excel by gaining information from the marketplace and/or experts in a specific field, such as marketing or technology. This is done because SMEs in particular often lack certain specialized employees (Rothwell, 1991). Sole proprietors lack specialized employees even more so. Because it is nearly impossible for the owner to be specialized in all fields, we suspect that sole proprietors often engage partners in external networking just as the SMEs. Therefore we suspect that sole proprietors use external networking in a similar intensity as SMEs, so we believe that our null hypothesis will be retained and our alternative hypothesis will be rejected.
H₀ 4.2: Sole proprietors make similar use of external networking as SMEs. H₁ 4.2: Sole proprietors make more or less use of external networking as SMEs.
With IP licensing, however, we don’t think it will be very likely that sole proprietors attempt outward licensing. Sole-proprietors are less likely to be able to protect their innovations through patents due to the cost of applying for a patent, which could run up to serval of thousands (European Patent Office, 2017; Kitching & Blackburn, 1998), an amount of money which, relatively, is larger for a sole-proprietor than a SME or a large company. Unlike SMEs and large companies, sole proprietors are likely to dependent on bootstrap capital which provides them with enough capital for their operations but not enough to enable them to afford patents as well (Van Auken & Neeley, 1996). 15% of the SMEs in Van de Vrande’s (2009) study are involved in IP licensing, which is less than large firms (De Rassenfosse, 2012). However, we believe due to the smaller resources, sole proprietors are even less involved in IP licensing. Therefore, we believe that our null hypothesis will be rejected and our alternative hypothesis will be retained
H₀ 4.3: Sole proprietors make similar use of intellectual property licensing as SMEs H₁ 4.3: Sole proprietors make less use of intellectual property licensing than SMEs
Methodology
A quantitative empirical research was performed in order to answer the question of what type of innovations are produce, how disruptive are the innovations, when do sole proprietors innovate, and which open innovation practices are used; this all to therefore answer our main research question: how do sole proprietors innovate? This quantitative method was the most suitable since there is data available on the innovative behavior of SMEs with which we can compare the innovative behavior of the sole proprietor. Survey method
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conventional methods, and since it was free to use. Financial expenses account for our choice of not sending paper questionnaires, since this would result in printing and mailing cost.
Sample
To analyze the innovative behavior of the sole proprietor, we use a survey compiled by us (see appendix). This survey was directed towards sole proprietors and was administered through e-mail. We gathered our sample through the Dutch chamber of commerce. On their website, the chamber of commerce in the Netherlands provides names, addresses, and telephone numbers of sole proprietorships which are economically active. We selected two branches on their website; “Engineers, architects and other specialized services” and “plumbers, painters, glassier, roofers and other specialized trades”. We picked these two branches because they are involved in the same field of work, i.e. construction, where we expect economic trends to impact both branches somewhat similarly. However, this will limit our generalizability towards all sole proprietors since this industry could have certain effects on sole proprietors. Moreover, we suspect that these two branches differ greatly in education level. We suspect that the branch of engineers, architects and other specialized services contain many highly educated individuals, whereas the branch involving plumbers, painters, glassier, roofers and other specialized trades differ in our expectation of finding many low educated sole proprietors. The chamber of commerce doesn’t provide e-mail addresses, so we tried to find their respective e-mail addresses by Googling their company names. This provided us with an e-mail list of 1500 sole proprietors throughout the Netherlands divided evenly between the two branches. From these 1500 sole proprietors invited, 67 individuals completed our questionnaire giving us a response rate of 4.5%. The first question in our survey was to determine if the respondent was indeed a sole proprietor. This needed to be done because in the process of finding email addresses we mistakenly could’ve gathered addresses from other companies with a similar name. Next, we dismissed all the sole proprietors that are not involved in innovation since they are not able to provide us with information about the before mentioned subjects. The two groups’ distribution is shown in table 1.
Table 1 Sample overview, the distribution of our sample between the two branches.
Branch Respondents
Branch 1: Engineers, architects and other specialized services 27
Branch 2: Plumbers, painters, glassier, roofer, and other specialized trades 12
17 Response Bias
A non-response bias check has been performed in this study by testing if both branches occur with the same probabilities since we sent out an equal amount of invitations to both groups. After performing a Chi-squared test on our sample, it was rejected that they occur with the same probabilities, it seems that branch one is over-represented. Therefore, we have to account for a possible response bias. Further response bias checks were not performed due to the very limited amount of secondary information on sole proprietors. Sole proprietors are not mandated by law to publish any financial data since they do not possess shareholders. Moreover, firm size, which could be used as a response bias variable is uniform for sole proprietors and therefore unusable.
Variables
In this research we investigate four different aspects of innovation, these aspects have different variables which are explained to the respondents to shortly elaborate what our variables mean. We made a table to display our variables and respective definition; Table 2. The respondents were asked if they were involved in each innovation aspect and they were then asked how frequent they were partaking in these innovation aspects through the use of a Likert scale.
Innovation aspect Variable Definition
Innovation type Product/service
innovation
New products or services that are sold, produced, or given away by the firm
Production-process innovation
Alterations in the firm’s manner of production
Innovation radicalness Radical innovation Innovations that entail clear, risky departures from existing practices
Incremental innovation
Innovations that enhance and extend the underlying technology and thus reinforce the
established technical order
Routine vs. sporadic innovation. Routine innovation Innovations planned by the company to happen every period or X amount of time
Sporadic innovation Innovation that are influenced by the outstanding
performance, both positive and negative
Slack innovation Innovations spurred by the extraordinarily good
performance of the company
Distress innovation Innovations spurred by the extraordinarily bad
performance of the company
Open innovation Customer
involvement
Directly involving customers in the innovation processes.
External networking Drawing on or collaborating with external
network partners to support innovation processes
IP licensing The act of selling or buying intellectual property
to profit from either personal IP or the IP of other companies
18 Results Types of innovation
To test our first hypothesis that sole proprietors, relatively, do produce as much product/service innovations as SMEs, we need to compare the average percentage of product/service innovations produced by SMEs and that of the sole proprietors. In our research, we collected data from sole proprietors, and the data on SMEs is available through previous research. In this research we collected data from one group (sole proprietors) and we want to test if the sole proprietor’s score is similar to a predetermined value (SME’s score). Further, we found no evidence that our data is normally distributed. Moreover, we collected our data on a Likert scale making our data continuous. To test if the mean of two groups is similar just as we want to do, scholars commonly use a one-sample t-test. However, the t-test is not performed in our study because there is no significant evidence that our variables are normally distributed. Therefore, in order to compare sole proprietors to SMEs we need to use the one-sample Wilcoxon signed rank test, which is the non-parametric one-sample t-test. The one sample Wilcoxon signed rank test has the following assumptions: dependent variable should be either ordinal or continuous, standard value has to be known and data is not normally distributed, we meet all these requirements. The one-sample Wilcoxon singed rank test is used to test the median of one group to a pre-determined median. With the one-sample Wilcoxon singed-rank test a p-value larger than 0.05 means that the sample’s median is equal to the pre-determined median. This hypothetical median in our research would be the relative amount of the SME’s production/service innovation. In the study of Oke et al (2007), 81% of the innovations from SMEs are product/service innovations, therefore, if SMEs took our questionnaire, they would obtain a score of 5 (almost always (>75%)). This means that our hypothetical median must be 5. Table 3 shows that sole proprietors have an observed median of 4 whereas SMEs have a median of 5. The table also shows us that the p-value is lower than 0.001 with a z-score of -4.533. Since the p-value is lower than 0.05 (p<0.001), the two group’s scores are significantly different. SMEs score significantly higher (5) than sole proprietors (4). Therefore our null hypothesis is rejected and our alternative hypothesis is retained: Sole proprietors relatively produce significantly less product/service innovations than SMEs.
We’ve discussed product/service innovations, now for our second hypothesis we want to determine if sole proprietors produce a relatively similar amount of production-process innovations as SMEs. Similar condition apply for hypothesis 1.2 as for hypothesis 1.1; the variables are not normally
Hypothesis 1.1
Hypothesis 1.2
One-sample Wilcoxon signed rank test N Observed median Hypothetical median Significance Z Product/service innovation 32 4 5 <0.001 -4.533 Production-process innovation 33 3 2 <0.001 3.691
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distributed, we want to examine if the two groups have similar scores, we collected data from sole proprietors and we have data available from previous research of SMEs, a Likert scale was used which means that the data is considered to be continuous. Therefore, we will be using the one-sample Wilcoxon singed rank test. Oke (2007) found that on average 19% of the innovations implemented by SMEs are production-process innovations. SMEs in our questionnaire would therefore have a score of 2 (Rarely (1%-25%)), hence our hypothetical median is 2. Table 3 shows us that the observed median of the sole proprietors is 3 whilst the SMEs hypothetical median is 2, further, it shows us that the p-value is smaller than 0.05 (p<0.001) and the z-score is 3.691.Therefore, sole proprietors do not have similar scores as SMEs, SMEs score (2) significantly lower than sole proprietors (3). Therefore, our null hypothesis is rejected and our alternative hypothesis is accepted thus; sole proprietors relatively produce more production-process innovations than SMEs.
For our third hypothesis we want to examine if sole proprietors are, relatively, producing more products/service innovations than production-process innovations, just as SMEs. We have two variables (product/service innovations and productions-process innovations) on the same Likert scale so therefore we are able to compare the two. The two variables are not independent due to the fact that the data is collected at the same time from the same respondents. To compare these two variables within our one group (sole proprietors) we could use the paired t-test, however, our data is not normally distributed. Therefore, we need to use a non-parametric test and since a Likert scale is a continuous variable we are convinced that a Wilcoxon matched-pair signed-rank test is the best way to examine if these variables are present in a similar amount, since all the assumptions are met for this test (i.e. continuous data, data is from the same respondents, and symmetrical shaped data between the two groups). Table 4 shows us that the number of respondents that filled in our product/service innovation question and our production-process question is 31 and that they have a p-value of 0.036 with a z-score of 2.099. The p-value is smaller than 0.05 (p=0.036) and therefore the Wilcoxon signed-rank test provides evidence that sole proprietors produce more product/service innovations than production-process innovations. So that means that our null hypothesis is rejected and our alternative hypothesis is retained.
Hypothesis 1.3
Related-samples Wilcoxon signed rank test N Significance Z
Product/service innovation vs. production-process innovation 31 0.036 2.099
Radical innovation vs. incremental innovation 31 0.183 -1.332
Sporadic innovation vs. Routine innovation 29 0.909 -0.114
Distress innovation vs. Slack innovation 32 0.451 -0.754
Expansion vs. Slack innovation 31 0.030 2.170
20 Innovation radicalness
For our fourth hypothesis we want to determine if sole proprietors relatively produce a similar amount of radical innovations as SMEs. Similar condition apply for hypothesis 2.1 as hypotheses 1.1 and 1.2; the variables are not normally distributed, we want to examine if two groups have similar scores, we collected data from sole proprietors, and we have data available from previous research of SMEs, and a Likert scale is used so the data is continuous. Therefore, we will be using the one-sample Wilcoxon singed rank test. Oke (2007) found that on average 23% of the innovations implemented by SMEs are radical innovations. SMEs in our questionnaire would therefore, have a score of 2 (Rarely (1%-25%)), hence our hypothetical median being 2. Table 5 shows us that the observed median of the sole proprietors is 2 whilst the SMEs hypothetical median is 2, further, it shows us that the p-value is larger than 0.05 (p=0.092) and the z-score is 1.683. Therefore, no significant change was found between the two groups. Sole proprietors do have similar scores as SMEs and so our null hypothesis is retained, thus, sole proprietors relatively produce as much radical innovations as SMEs.
For our fifth hypothesis we want to determine if sole proprietors relatively produce a similar amount of incremental innovations as SMEs. Similar condition apply for hypothesis 2.2 as for hypotheses 1.1, 1.2 and 2.1; the variables are not normally distributed, we want to examine if two groups have similar scores, we collected data from sole proprietors and we have data available from previous research of SMEs, and a Likert scale is used so the data is continuous. Therefore, we will be using the one-sample Wilcoxon singed rank test. Oke (2007) found that on average 76% of the innovations implemented by SMEs are incremental innovations. SMEs in our questionnaire would therefore, have a score of 5 (almost always (>75%)), hence our hypothetical median is 5. Table 5 shows us that the observed median of the sole proprietors is 3 whilst the SMEs hypothetical median is 5, further, it shows us that the p-value is smaller than 0.05 (p<0.001) and the z-score is -4.578. Therefore, sole proprietors do not have similar scores as SMEs, sole proprietors (3) score significantly lower than SMEs (4). And so, our null hypothesis is rejected. Sole proprietors implement significantly less incremental innovation than SMEs therefore, our alternative hypothesis is retained.
For our sixth hypothesis we want to determine if sole proprietors are implementing, relatively, as many radical innovations as incremental innovations. Similar condition apply as hypothesis 1.3, therefore, we use a Wilcoxon matched-pair signed-rank test. Table 4 shows us that the number of respondent that filled in our radical innovation question and our incremental innovation question is 31 and that they have a p-value of 0.183 with a z-score of -1.332. The p-value is larger than 0.05 and therefore,
Hypothesis 2.1
Hypothesis 2.2
Hypothesis 2.3
One-sample Wilcoxon signed rank test N Observed median Hypothetical median Significance Z Radical innovation 32 2 2 0.092 1.683 Incremental innovation 31 3 5 <0.001 -4.578
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there is no significant difference between radical innovation and incremental innovation for sole proprietors. So, this test provides proof that sole proprietors produce relatively as many radical innovations as incremental innovations. Therefore, our null hypothesis is retained.
Routine vs. sporadic innovation
For our seventh hypothesis we want to determine if sole proprietors produce a similar amount of sporadic innovations as routine innovations. Similar conditions apply as hypotheses 1.3 and 2.3, therefore, we use a Wilcoxon matched-pair signed-rank test. Table 4 shows us that the number of respondents that filled in our radical innovation question and our incremental innovation question is 29 and that they have a p-value of 0.909 with a z-score of -0.114. The p-value is larger than 0.05 and therefore sole proprietors do not have significant differences between routine and sporadic innovation. So, this test provides proof that sole proprietors produce relatively as many routine innovations as sporadic innovations. Therefore, our null hypothesis is retained.
For our eighth hypothesis we stated that sole proprietors prefer to expand their business rather than innovate. In order to determine if this is the case in our sample, we need to determine if sole proprietors have similar feelings about innovating when their firm is performing exceptionally well, and expanding their business when their firm is performing exceptionally well. To test this, we use the Wilcoxon matched-pair signed-rank test due to the similar conditions as hypotheses 1.3, 2.3, and 3.2. Table 4 shows us that the number of respondents that filled in our slack innovation question and our expansion question is 31 and that they have a p-value of 0.030 with a z-score of 2.170. The p-value is smaller than 0.05 and therefore sole proprietors have significantly different scores for expansion (4 – slightly disagree) than for innovation (3 – neutral). So, this test provides proof that sole proprietors are more inclined to innovate when their business performs above par than to expand the business when the business performs above par. Therefore, our null hypothesis is rejected and our alternative hypothesis is retained.
For our ninth hypothesis we want to determine of sole proprietors produce a similar amount of slack innovations as distress innovations. Similar conditions apply as hypothesis 1.3, 2.3 and 3.1, therefore, we use a Wilcoxon matched-pair signed-rank test. Table 4 shows us that the number of respondents that filled in our slack innovation question and our distress innovation question is 32 and that they have a p-value of 0.451 with a z-score of -0.754. The p-value is larger than 0.05 and therefore sole proprietors have significantly similar scores for slack innovation as for distress innovation. So, this test provides proof that sole proprietors produce relatively as much distress innovations as slack innovations. Therefore, our null hypothesis is retained.
Open innovations
In Van de Vrande’s et al (2009) research, they collected data on how many of the Dutch SMEs are involved in certain open innovation practices. They didn’t specify how many innovations were implemented with the use of certain open innovation aspects. Therefore, we need to convert our Likert scale which is continuous,
Hypothesis 3.1
Hypothesis 3.2
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to a dichotomous variable which is ordinal. We relabeled the values of the variables of the Likert scale for open innovation (customer involvement, external networking, and IP licensing) from 1 (never) to 1 (no), and 2 (rarely), 3 (sometimes), 4 (regularly), and 5 (almost always) to 2 (yes).
For our tenth hypothesis we want to determine if sole proprietors are using customer involvement as much as SMEs. Therefore, we need to compare the amount of sole proprietors that are involved in customer involvement with the amount of SMEs that are involved in customer involvement. Van de Vrande’s et al (2009) research provides us with data on how many SMEs are involved in customer involvement and our questionnaire provides us with the data on sole proprietors. Since our variables are ordinal, they are by definition not normally distributed and therefore we need to use non-parametric tests. Moreover, sample items are independent and unrelated to each other. Therefore, the best test for these hypotheses is the binomial test. With that we can test if the observed percentage is similar to the percentage of the SMEs. Van de Vrande’s et al (2009) research found that 97% of the SMEs are involved in customer involvement. Therefore, the probability that a SME is involved in customer involvement is 0.97. Table 6 shows us that for customer involvement 31 respondents completed this question, of those 31 respondents 83.9% are involved in customer involvement. Therefore, our pre-determined probability is 97% and our observed probability (sole proprietors) is 83.9%. The p-value of the binomial test for customer involvement is 0.002. This p-value is smaller than 0.05 and therefore sole proprietors are significantly less involved in customer involvement than SMEs. So, our null hypothesis is rejected and the alternative hypothesis is retained, sole proprietors are less involved in customer involvement than SMEs.
For our eleventh hypothesis we want to determine if sole proprietors are using external networking as much as SMEs. To do this we used a similar test as we did for hypothesis 4.1 i.e. the binomial test. We have two groups, of which sole proprietor’s data was collected by us and the SME’s data is secondary data from previous research. Therefore, we use a binomial test where the pre-determined probability is derived from Van de Vrande’s et al (2009) research in which 94% of the SMEs are involved in external networking. Table 6 shows us that for external networking 30 respondents completed this question, of those 30 respondents 83.3% are involved in external networking. For our eleventh hypothesis, our pre-determined probability is 94% and our observed probability (sole proprietors) is 83.3%. Moreover,
Hypothesis 4.1
Hypothesis 4.2
Table 6. Open innovation; sole proprietors vs. SMEs
Binominal Test N Observed
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the p-value of the binomial test for external networking is 0.032. This p-value is smaller than 0.05 and therefore the sole proprietors percentage is significantly different than that of the SMEs. This result is evidence that sole proprietors are significantly less involved in external networking. Therefore, our null hypothesis is rejected. The alternative hypothesis is retained, which states that sole proprietors are less involved in external networking than SMEs.
For our twelfth hypothesis we want to determine if sole proprietors are using IP licensing as much as SMEs. To do this we used a similar test as we did for hypothesis 4.1 and 4.2 i.e. the binomial test. We have two groups; of which sole proprietor’s data was collected by us and the SMEs data is secondary data from previous research. Therefore, we use a binomial test where the pre-determined probability is derived from Van de Vrande’s et al (2009) research in which 15% of the SMEs are involved in external networking. Table 6 shows us that for IP licensing 39 respondents completed this answer, of those 39 respondents 2.6% are involved in IP licensing. For our twelfth hypothesis, our pre-determined probability is 15% and our observed probability (sole proprietors) is 2.6%. Moreover, the p-value of the binomial test for external networking is 0.014. This p-value is smaller than 0.05 and therefore the sole proprietors percentage is significantly different than that of the SMEs. This result is evidence that sole proprietors are significantly less involved in IP licensing than SMES. Therefore, the null hypothesis is rejected. The alternative hypothesis is retained, which is that sole proprietors are less involved in IP licensing than SMEs.
Discussion Innovation types
Our data suggest that sole proprietors are less involved in product/service innovations than SMEs and that sole proprietors are more involved in production-process innovations than SMEs. However, sole proprietors do, just like SMEs, produce more production/services innovations than production-process innovations. Our null-hypotheses 1.1 and 1.2 are rejected against our expectations. Further, the null hypothesis 1.3 is retained, that means that sole proprietors, just like SMEs, are focused more on product/service innovations than production-process innovation. That sole proprietors are more involved in production-process innovation could suggest that sole proprietors need more production-process innovations to support their product/service innovations. Since production-process innovations could be necessary to support product/service innovations (Madrid-Guijarro, Garcia, Domingo, & Van Auken, 2009 ). However, this seems counter intuitive, since according to Vossen (1998) and Oke (2007) the smaller firms are more flexible and more easily adapt to their new product/service innovations. Nevertheless, we believe that sole proprietors do need some production-process innovations, on the other hand we doubt that they need more production-process innovations than SMEs to implement product/service innovations. A decline in product/service innovations and a rise of production-process innovations could stem from the difficulty of fully profiting from and the cost of implementing new product development (Lieberman & Montgomery, 1998; Owens J. D., 2007). The difficulties of new product development could deter sole proprietors. An
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alternative for sole proprietors could be to adopt product/service innovations that are implemented in larger companies. By adopting innovations, sole proprietors do not have to spend resources to develop a new product and they do need the knowledge to develop a new product/service which are the main problems for sole proprietors (Rogers, 2010). Further, sole proprietors could benefit from adopting innovations because the adoption could enhance their existing product/service which could lead to better performance and higher pay-offs (Hall, 1993; Artz, Norman, Hatfield, & Cardinal, 2010). In this research we adopted the minimal definition for innovation by the OSLO manual. This means that even if a sole proprietor adopts an innovation, it is still regarded as an innovation because it is “a change in a firm’s products or
functions (…) that is new (or significantly improved) to the firm” (OECD/Eurostat, 2005, p. 17).
Production-process innovation is seen as, besides being a necessary support for product/service innovations (Jayanthia & Sinhab, 1994), a means to maximize cost effectiveness (Madrid-Guijarro, Garcia, Domingo, & Van Auken, 2009 ). We propose that sole proprietors are busy and this is backed by their workweek being longer, on average, than employed people (Nordenmark, Vinberg, & Strandh, 2012). Product innovations lead to higher sales which in turn means more work and to the growth or expansion of the business (Storey & Easingwood, 1998). We believe that product/service innovations could become undesirable for sole proprietors when they are already busy and are not willing to expand. SMEs account for the creation of jobs, especially the gazelles which are focused on high growth (Smallbone, Leig, & North, 1995; Birch, 1981; Davidsson & Delmar, 1997). Sole proprietors on the other hand, demonstrated their adversity to growth or expanding in our open innovation questions. According to Walker and Brown (2004), small business owners could be focused more on lifestyle goals than financial goals and production/service innovation may cause a need for growth. When sole proprietors are reluctant to expand, production-process innovations could be more desirable since they reduce cost and increase efficiency (Madrid-Guijarro, Garcia, Domingo, & Van Auken, 2009 ). We can deduce that this is why sole proprietors are more focused on production-process innovations and less on product/service innovations, in comparison to SMEs.
Innovation radicalness
25
innovations in the “gray” zone (innovations that are between radical and incremental) since it was not mentioned in the article. Our results show that sole proprietors in general “barely” (1%-25%) produce radical innovations and “sometimes” (25%-50%) produce incremental innovations. So combined, these innovations account for 26%-75% of all the innovations produced by sole proprietors. This in turn, means that 25%-74% of innovations fall in this “gray” zone. Therefore, we suspect that if we measured innovation radicalness just like Oke (2007), disregarding the “gray” zone, that radical and incremental would obtain a higher percentage. Considering sole proprietors do not significantly differ between the amount of radical and incremental innovations produced, we could say that radical and incremental innovation is 50%/50%. With this in mind, we suspect that sole proprietors relatively produce more radical innovations (50%) then SMEs (19%). However, due to our inclusion of the “grey” zone we are not able to provide evidence that sole proprietors produce relatively more radical innovations than SME. Therefore, sole proprietors, relatively, produce at least many radical innovations as SMEs. The popularity of radical innovation seems logical since sole proprietors are flexible due to their size advantages (Oke, Burke, & Myers, 2007; Vossen, 1998). This flexibility stems from the relatively low barriers sole proprietors have, to adopt a change. Unlike SMEs, sole proprietors do not have employees besides the owner. Therefore they do not need to “convince” their employees to adopt the change which makes the implementation of an innovation much easier (Klein & Sorra, 1996). Further, in this research we explore innovation in the most basic form, formulated by the Oslo manual. This means that the innovations regarded as radical, is radical in the sole proprietor’s perspective however, we do not have information if this is regarded to be radical by firms outside of the sole proprietorship. This is due to the before mentioned difficulty of measuring if innovations are new to the world. Furthermore, customer involvement is significantly lower for sole proprietors. Being in close proximity is fundamental for incremental innovation (Oke, Burke, & Myers, 2007). This seems to result into a lower percentage of incremental innovations for sole proprietors. We go more into detail in our open innovation discussion into what causes customer involvement to be lower. Conclusively, our results suggest that sole proprietors produce relatively as many (if not more) radical innovations, due to their flexibility. Moreover, a lower percentage incremental innovation could be resonating from the smaller involvement in customer involvement
Routine vs. sporadic innovation
26
proprietor. We have to alter our before mentioned theory that they are too busy to innovate; it seems that innovation contributes to the generally high workload of the sole proprietor. Further, sole proprietors feel less inclined to expand when the business performs exceptionally well than to innovate when the business performs exceptionally well. This could be explained by the motives of the sole proprietor. Walker and Brown explain that business behavior is heavily dependent on the small business owner (Walker & Brown, 2004). Small business owners (sole proprietors) could be just like SMEs and larger companies, focused on growth and financial targets. When a sole proprietor is performing well then it could decide to expand in order to further improve their financial scores. However, our data suggest that this is a less popular goal for sole proprietors. Walker and Brown (2004) show that small business owners possible have ulterior motives for being a small business owner. They explain that small business owners could have decided to have a business to provide them with a better lifestyle, such as flexible hours, more autonomy, etc (Walker & Brown, 2004). These non-financial goals often seem to impede financial goals, such as business growth. (Walker & Brown, 2004). This assumption is based on the idea that innovations are able to increase the lifestyle of the small business owner. Therefore, sole proprietors are less interested in expanding and more interested in innovations because expansion could impede their lifestyle goals.
Open innovation
Our data suggests that the open innovation practices researched in this study are less popular with sole proprietors than SMEs. This suggest that though sole proprietors are, just like large, medium and small businesses, involved in open innovation practices (Van de Vrande, De Jong, Vanhaverbeke, & De Rochemont, 2009; Lichtenthaler, 2008), sole proprietors are doing less so than the before mentioned bigger businesses. That sole proprietors are less involved in customer involvement than SMEs, is counter intuitive to what we originally thought to be correct. It seems that the sole proprietor’s customers might be less inclined to work together with the sole proprietor. Lagrosen (2005) describes that for customer involvement an active customer is required. We can’t disregard that some of the sole proprietorship’s contractors could be larger firms. These larger firms might not be interested in investing their resources (time for meetings etc.) into the sole proprietor, even if he is able to improve their product/service or production-process innovations. This is because the sole proprietor’s innovation could have a limited effect on the larger firm because of the size of sole proprietor and so chances on the sole proprietor’s side could be seen as trivial for a company, many times bigger. Besides that, in our sample we have sole proprietors which product is relatively simple (branch 2), for example; the product that most painters deliver could be seen as homogenous. Therefore, contractors are easily able to switch between sole proprietors (Porter, 1980). So instead of investing effort in one sole proprietor to innovate a more suitable product/service for the contractor, the contractor could instead find a sole proprietor that already is suited for their company, which results in reduced activity of the sole proprietor’s customers.
