Innovation Success of Non-R&D-Performers - Substituting Technology by Management in SMEs

This paper investigates the role of research and development (R&D) and innovation management for innovation success in small and medium-sized enterprises (SMEs). While there is little doubt about the significance of in-house R&D activities for generating successful innovations and obtaining a novelty-based competitive advantage, entering into continuous in-house R&D activities may be a particular challenge for small firms. They will have to bear high fix costs such as setting up a separate R&D laboratory, meet minimum scale requirements of effective R&D activities and have to deal with high sunk costs in case of stopping R&D. Since the nature of R&D implies high uncertainty of its outcome, devoting large resources to R&D may jeopardise the whole enterprise in case R&D investment fails. Given these restraints, SMEs may opt to substitute R&D by innovation managing practices which demand less investment and bear less uncertainty. Innovation management science has developed a number of tools which should support firms in identifying innovation potentials, transferring them into new products and processes and implementing them successfully in the market or within a firm’s operations. These include human resource management, team working, co-operating with external partners and sourcing relevant knowledge from the firm’s environment, particularly from clients, suppliers and competitors. The paper analyses whether SMEs can in fact substitute R&D activities by innovation management in order to achieve the same innovation success as R&D performing SMEs. The research question is closely linked to the innovation policy as it explores whether R&D is a necessary prerequisite for innovation success, or whether other in-house activities can play a similar role. The analysis rests on data obtained from the 2003 wave of the German CIS. Innovation success is measured through a categorial variable that captures the extend to which an SMEs has successfully introduced “challenging” product and/or process innovations, i.e. innovations that significantly change the firm’s market position. We run ordered probit models that control for a potential selection bias between innovating and non-innovating firms. Our findings show that continuous R&D activities are a main driver of innovation success in SMEs, especially when linked to external knowledge sourcing. Firms without in-house R&D activities can still yield a similar innovation success as R&D performers. On the one hand, they may contract out R&D which will reduce their own risk and allows them to better control costs of R&D. On the other hand, human resource management and team work are innovation management tools that can help non-R&D performing SMEs to gain similar innovation success as R&D performers, especially when combined with each other or combined with external knowledge sourcing or formal co-operations with external partners. In contrast, focusing on searching external sources of innovation without in-house R&D is a less successful strategy, as is occasional R&D (i.e. starting R&D only in case a technological problem needs to be solved). Our results have some relevance for innovation policy. First, the strong focus on promoting in-house R&D often to be found in innovation policy is not fully supported by our study when it comes to SMEs. First, in-house R&D seems to be particularly effective only if combined with external knowledge sourcing. Policy initiatives should thus attempt to combine financial R&D support to SMEs with strengthening the capacities of SMEs to co-operate with other partners, including links to customers and suppliers. Secondly, innovation policy should also acknowledge the key role of external R&D in SMEs and also offer financial support to this type of R&D activity. Finally, policy may try to identify likely barriers in SMEs that prevent them from effectively using innovation management practices, particularly human resource management and team working.

Rammer, Christian, Dirk Czarnitzki and Alfred Spielkamp (2008), Innovation Success of Non-R&D-Performers - Substituting Technology by Management in SMEs, ZEW Discussion Paper No. 08-092, Mannheim, published in: Small Business Economics.