Drivers and Effects of Internationalising Innovation by SMEs

Globalisation is radically reshaping the business environment for small and mediumsized enterprises (SMEs). In order to cope with increased competition and business opportunities in globalised markets, SMEs may opt to strengthen their innovative capabilities and to internationalise their business activities. In this paper we investigate the determinants that drive SMEs from Germany to engage in innovation activities abroad and whether such activities pay off in terms of growth at their domestic locations. The analysis is closely related an innovation policy question, i.e. whether internationalisation of innovation in SMEs is a sign of weakness - innovative resources are shifted abroad and undermine domestic activities - or is a sign of strength (as SMEs may gain access to new knowledge sources and sales potentials which may positively impact their domestic activities). A particular feature of this paper is the separation of five types of innovation activities abroad that are associated with different levels of risk and investment, and are likely to assert different impacts on firm performance: R&D, design, production of new products, implementation of new processes, and sales of new products. We employ a large, representative data set of German SMEs from manufacturing and services derived from three consecutive waves of the Mannheim Innovation Panel (MIP). First, we model an SME’s decision to expand innovation activities abroad in 2006 and 2007, e.g. either setting up innovation activities abroad for the first time or enlarge existing ones. Export experience and experience in effectively protecting intellectual property turn out to be important drivers for internationalising innovation. SMEs that conduct in-house R&D on a continuous base are more likely to establish R&D activities abroad and to sell new products to foreign customers. German SMEs do not seem to be pushed to internationalisation by increased competition (such as threat of market position through new entrants or a fierce price competition), but rather go abroad with innovative activities when they have a niche market position, i.e. a low number of competitors and a patent-based technology advantage. This is particularly true when it comes to sell innovative products in other countries. High innovation costs at the domestic location are an important factor for establishing or expanding non-R&D innovation activities at foreign locations. A shortage in qualified personnel has a strong impact on increasing production activities for new products abroad. By and large, internationalising innovation activities is beneficial to an SME’s economic performance in its home country. SMEs with R&D activities abroad in 2005 as well as those selling innovative products to foreign customers were able to significantly increase employment at domestic locations in 2004 to 2006. R&D at domestic locations only as well as exports of non-innovative products also spur growth, though at a significantly lower rate. There are no negative effects from internationalising innovation on home market performance. This is even true for producing innovative products at foreign locations or by increasing the efficiency of foreign production through process innovations.

Rammer, Christian and Anja Schmiele (2008), Drivers and Effects of Internationalising Innovation by SMEs, ZEW Discussion Paper No. 08-035, Mannheim, published in: Applied Economics Quarterly Supplement.