Barriers to innovationfor SMEs in developing countries; The influence of the institutional environment on the ability of firms to transform firm-specific resources into innovation
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2017-07-14
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en
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Small and medium enterprises (SMEs) are considered to be key drivers for economic growth and employment in both developed and developing countries. One of the principal means through which these enterprises contribute to this task is by developing and commercializing innovation. Although much progress has been made in identifying the critical conditions that lead to SME innovation, however, research has mainly focused on the determinants of innovation in developed countries. In extending previous research, this study aims to answer the following research question: “Under what conditions do firm-specific resources have a positive influence on the innovation of SMEs in developing countries?” This study hypothesizes that a strong institutional environment (i.e., political stability and absence of violence/terrorism, government effectiveness, regulatory quality, rule of law, control of corruption, and voice and accountability) strengthens the ability of SMEs to transform their firm-specific resources and capabilities (i.e., internal research and development (R&D), skilled labor, level of education, and managerial experience) into innovations. To test the hypotheses, the study uses a multi-level binary logistic model and firm-level data from the World Bank Enterprise Survey for 35 developing countries between 2010 and 2015. In contrast to predictions, the results show that the ability of firms to transform the firm-specific resources of internal R&D and managerial experience into innovation is not affected by the strength of the institutional environment. In addition, contrary to expectations, the results show that a strong institutional environment weakens the ability of firms to transform skilled labor into innovation, whereas a weak institutional environment strengthens this ability. Furthermore, as expected, the findings show that a strong institutional environment strengthens the ability of firms to transform the firm-specific resource of educated employees into innovation, whereas a weak institutional environment weakens this ability. This study contributes to existing literature by combining the resource-based view and the institution based view to demonstrate that innovation of SMEs not only depends on firm-specific resources, but also on the institutional environment in which firms are embedded. Although it is generally found that weak institutional environments inhibit firm performance in developing countries, policy makers should keep in mind that this is not necessarily the case for firm innovation. Future research is needed into how institutions matter to be able to recommend better and more innovation-friendly policies that can aid the growth of SMEs in developing countries.
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Faculteit der Managementwetenschappen