INNOVATION IN SMALL AND MEDIUM ENTERPRISES

INNOVATION IN SMALL AND MEDIUM ENTERPRISES

Abstract

Small and Medium Enterprises (SMEs) make a substantial impact to the economy regarding innovation, growth, and employment. In addition to that, the previous literature revealed that innovativeness holds the most significant role in order to increase the growth. Nowadays, innovation is one of the priorities of small and medium enterprises (SMEs) formulated in the strategy and to strengthen their activities of building a knowledge-based economy in our country.‏ The previous literature also insights that the innovation, knowledge, entrepreneurship, and growth as interrelated

Moreover, Innovations have become a necessity determinant of the successful development of every company. Small and medium enterprises (SMEs) have been forced to be innovative because of the permanent pressure they face from their competitors in the market. However, the capability to compete in advances plays a very essential role as an element of their competitiveness.

On the contrary, small and medium enterprises (SMEs) have a lack systemization and are inefficient, and thus will prevent consequent implementation and integration of innovative ideas in marketable products and services, as the aim of this paper is to give the view on the difficulties of coming up with an innovative activity.‏ This paper reviews and will examines the process of innovation within small and medium enterprises (SMEs), as it’s a communication tool to integrate measuring, research, and development, marketing products and services.”

Keywords:   innovation, SMEs, Firm strategy,

Introduction

There are so many meanings and definitions about what is innovation. A simpler describe of innovation is the process of translating an idea into something that creates value, the main difference between the invention and innovation being value. Indeed, innovation is not a new phenomenon; innovation studies argued that the innovation concept refers to the putting into practice of inventions. In addition to, that the innovation and ideas play an important and central role in economic growth and development.

Furthermore, Literature treats innovation as a measure for other factors of growth and development. However, the primary goal of assessing innovation is to advance the understanding of growth (Rose et al. 2009). Datta and Jessup (2013) pointed out measures of innovation as an outlay on research and development of patents, while Laforet (2011) acknowledged innovation results as improved effectiveness, cost‐benefit, value transparency, and an enhanced working environs (Terziovski, 2010).

Recent researches have clearly explained how innovations arise and diffuse, the factors influencing the process (including the role of policy) and the social and economic consequences of innovations. Moreover, innovation in any Small and medium enterprises and corporation requires different functions and people working together from opportunity identification, ideation to development, production, marketing and sales (implementation)” (Rothwell &Dodgson, 2011).

The innovation system approach allows the identification of a variety of impending policy difficulties or system letdowns affecting collaborative learning (Rothwell &Dodgson, 2011). For instance, lack of knowledge infrastructure and lack of adaptability of small and medium enterprises (SMEs); (individuals, policies to change). While, substantial research argue that the small and medium enterprises (SMEs) and startup business play an important role to participate in interactive learning networks – both contributing to knowledge development and exploiting knowledge development elsewhere (Man & Chan, 2012).

On the other hand, Innovation along with tactic formulation, due to their correlation of conjoint interdependence is extensively seen as important factors for the small and medium enterprises (SMEs) growth and its sustainability. In this paper, we aim to scrutinize the relationship between innovation, strategy and its impact on business effectiveness, to fill a gap regarding the knowledge concerning these interactions, which diffuse.  In the results, rates related to innovation, and strategy is high, along with high costs for companies, as we assumed that they are linked to implementation. As firms contemplate each one of these extents of the business, they will experience increasing costs if there is a poor employment of the strategy, innovation. However, even with their importance, many small and medium enterprises (SMEs) do not have structured processes of strategy, innovation. This may be particularly true in small and medium enterprises (SMEs) and startup businesses, which are the subject of this research (Edwards &Munday, 2015).

The assurance of the causes, determinants, and additionally the apparatuses utilized by organizations to outline their procedures of conceiving and execution of innovation, advancement, are essential in recognizing the variables and determinants that impacts and affects business advance and clarify how these impacts happen or act. The significance of this issue is expanding, to be specific at the global level, in light of the fact that the market in every nation is for the most part too little to permit the entrance on the speculation made in building up another item, so internationalization comes as a characteristic way to take after, once the development procedure is appropriately combined, in view of a sound, visionary and supportable system. Numerous new firms start operating with an unequivocal eye on internationalization and items composed and redid for universal markets ought to be set up to contend at a worldwide scale, upheld by clear and differential procedures (Brunswicker &Vanhaverbeke, 2015).

The results of the study also provide the base for the proposal of an analytical assessment instrument, which purposes at initiating an inquiry into the firm’s prevailing methodologies and routines related to planning, innovation and internationalization, and thus consenting a more demanding and systematic clarification of the connections of those processes. The diagnostic instrument acts as a base for the proposal of suitable instruments that the can be effected to better manage those processes. This valuation instrument may apply to more mature small and medium enterprises (SMEs) as well, helping organizations enlightening their strategy processes to reach their vision and mission (Kaminski, Oliveira &Lopes, 2014).

Why are SMEs important?

The only method of eradicating poverty sustainably has been the promotion of economic growth, which is initiated through employment and wealth creation. Specifically, in developing countries, this can be achieved through encouraging more and more SMEs into a country’s economy. In this way, they act as major sources of income, employment provider as well as breeding grounds for future entrepreneurs. SMEs on average occupy over 95 percent of the economy (Lertwongsatien& Wongpinunwatana, 2013). Their contribution to employment and country’s gross domestic product (GDP) are therefore by no means trivial. A study undertaken in 2006 showed that almost 140 million SMEs from 130 different countries absorbed 65% of the total labor force.

Moreover, SMEs usually act as driving force in a growing economy. The figure below illustrates the reinforcing dynamics. The total number of SMEs in an economy is directly proportional to the rate in which SMEs are created and destroyed (Morck, Shaver &Yeung, 2017). Creation of SMEs has increased by profitable market opportunities while their destruction by barriers of innovation as discussed later in this paper. Increased number of SMEs translates to increased job opportunities and the per capita. Contrary to the case with multinational corporations, SMEs directly benefits the locals because most of them are domestic firms. This reinforcing dynamic translates to economic growth (Yew, 2015).

Also, development of SMEs has helped in the achievement of other developmental goals. They provide both goods and services to the local people. Some of these goods and services like education and health are very critical to economic development. They also act as sources of income for the disadvantaged in the society. A good example for that matter is the development of women entrepreneurs which has helped to create gender equality by providing women with sources of income (Terziovski, 2013).

The Innovation Process

Nowadays, any small and medium enterprises (SMEs) and startup businesses regardless of the specific operation must be prepared to face significant and continuous changes. Thus, innovation becoming a condition of sustainable in a market and would be useful for diversified economies. While the process of innovation is one the central drivers of growth and prosperity in our economies, the new challenge is to master the innovation process, creating new competitive advantages by offering better product/services or offering new solutions. The mastery of the innovation procedures may be done most effective by understanding innovation, as it’s not simply the definition however also the whole technique that causes the achievement of innovation and ultimately the success of the organizations that enforce it (Gronum, Verreynne &Kastelle, 2012).

The purpose of this paper is to provide a clear image concerning the innovation procedure so that every small and medium enterprise (SMEs) and startup businesses can implement innovation of their regular activities. An excellent understanding that innovation is not a simple activity needs to be seen as a process, in this paper by proposing some of the steps for innovation system and via offering the results and the advantages of the innovation process implementation, Fig.1 illustrate the innovation process (Barba, Martínez &Jiménez, 2017).

Innovation process is a sequence of actions carried by the management of any firms to produce/launch product/service, including expanding their market shares, production processes, not least improving administrative and management activities of their businesses ((Rothwell 1992), (Rothwell 1994), (Rogers 1995), (Van de Ven 1999), (Bessant 2005).

By reviewing literature, many researchers have argued that there are different approaches and sequences of events; they propose a set of steps/stages for innovation process as typically consists of seven phases that start with an idea and ends with implementation (Hesmer, 2010).

Figure 1: Innovation Process

Successful innovation influenced and achieved by managers to create models of innovation within the small and medium enterprises (SMEs) and startup businesses which will intend to use strategy, employee participation, innovation resources, organization culture, and customer’s feedback along with supplier’s satisfaction in order to select excellent ideas for developing a new product and services (Bianchi, Frattini &Vercesi, 2010).

Innovation as a driving force to compete

Innovation is one of the crucial factors which should be considered by any enterprise which wishes to succeed in today’s competitive economy. It should, therefore, be among the priority factors of an enterprise. It entails thinking creatively and differently to find solutions to problems affecting an enterprise regarding economic and it’s social value. A problem may be affecting a whole industry and therefore being the first to unleash the solution becomes a competitive advantage to a business (Beck &Demirguc, 2016).

Schumpeter (2013) emphasized that it depends on the entrepreneur’s innovative ability when it comes to setting and keeping the capitalistic engine in motion. He pointed out on the innovations with the capability of transforming the already existing markets to new ones. He was aware that innovation mostly becomes effective when implemented in new products as well as services with commercial relevance.

Innovation can, therefore, be seen to be more of economics than technology and a complex venture which may arise from any sector in the production process. No best way to approach innovation. Firms should, therefore, outline their business models which would lay a foundation for competition with other firms and take the advantage of innovations even in the cases where they seem difficulty to achieve (Acar, Sey &Arditi, 2015).

Most of the firms nowadays have become aware of the benefits of keeping in pace and adapting to innovations as a solution to overcome the intense competition in the current market demands. Every firm has therefore tightened belts to make sure they keep updating their operational routines. This has introduced another new page of innovation which makes it very hard for firms operating on their old way to survive (Terziovski, 2013).

Innovation strategies

Nature has proved that there is nothing which is new under the sun but the only constant variable for that matter remains to be changed, which is however inevitable. Thomas Jefferson once advised people to always take things by their smooth handle. Business owners may prefer to hesitate under the comfort zone of status quo, but according to the recent research, 47% of businesses are at risk following the current automation of many operations. So, it’s clearly that for any business to survive with depending on its anticipation for change and responding to innovations. Here are some important innovation strategies (Terziovski, 2013).

Innovation by assimilation

This strategy simply entails the gradual process of making evaluations on innovations available and absorbing the best. A good example, in this case, is a plumber who adopts either TSheets or some of the computerized tools. The likelihood of prevailing over his or her competitors increases especially if they are using the old tools like a shovel. Through this strategy, a business is required to foster an innovative philosophy and major on the good ideas (Terziovski, 2013).

Innovation through listening

Goods ideas will always be provided by different people, the secret in this strategy lies in paying the necessary attention and filtering those ideas to get the best. Listening especially from the enterprise team has lent to successful business innovations considering that they are the real people who do everything in the whole organization. However, listening should not be limited to the team only, suppliers and vendors are also of equal importance since they also interact with many other related businesses and can reveal secrets of success from other enterprises (Terziovski, 2013).

Barriers to innovation

Any process will face barriers to implement or launch as innovation. Literature and studies conducted that small and medium enterprises (SMEs) are often facing similar barriers of innovation. The most dominant and common barriers are listed as below:

Lack of financial resources/access to finance

According to literature, illustrates that lack of financial resources is a major constraint for small and medium enterprises (SMEs) particularly emerging economies (GFPI, 2011). On the other hand, any improving access to finance will affect small and medium enterprises (SMEs) on their performance and its operations, as the availability of finance is positively associated with productivity, growth, and development.

Lack of qualified labors/access to workforce

The success of any firms are determined through the access of workforce, as an essential and a key driver and will contribute to innovation and bring new ideas, knowledge, skills, define new opportunities,  and adapt to change, therefore can affect the operations of small and medium enterprises (SMEs).

Bureaucracy / Inefficient government regulations

Bureaucratic barriers and regulations may hold the innovation activities of firms in any business in several ways. As they include obstacles that originate in legislation, legal requirements, and standards, as well as lengthy administrative and approval procedures.

Further to previous studies, argue that the other bureaucratic hurdles have related to financial constraints. On the other hand, small and medium enterprises globally illustrate that there is a problems factor is access to government information, and bureaucratic discretion (Terziovski, 2013). The mitigation of government fees might be a strong impact on small and medium enterprises that will lead them to engage in more diversified business operations. As a result, bureaucracy is a large barrier for such enterprises.

High cost of innovation and inadequate Research and Development

Cost of innovation is an important key driver to innovation; findings identified cost as the inability of purchasing of necessary items for their operations. Moreover, small and medium enterprises (SMEs) disable to acquire external competencies and fail to take the risk. On the other hand, research and development inadequacy is considered to be an obstacle to small and medium enterprises innovation (Kang, 2008), While research and development can influence the innovation process.

Lack of organization culture

Findings illustrate that the organizational culture play an important role impact on the implementation of innovation process‏ ; factors like, absence of best practice, lack of motivation among the employees, low synergies of resources, therefore organizational structure considered and identified as a restrain factors for innovation (Aminreza(2011), Lim (2007) & Silva (2007)).

The impact of innovation on development and growth

Innovation is central to modern theories of development and growth (Verspagen, 2005) along with innovation process as it has become the key to competitive and business success. Moreover, innovation is tied up with changes in the structure of the economy, upgrading technology in production, and moving towards higher value-added operations globally.

Schumpeter (1934) argues in theory of economic developments that innovation saw as the core mechanism behind economic dynamics, and he also argues that “without innovation, no capitalism.” Moreover, the only sustainable source of development, profit, growth job generation and creation, and international competitiveness is innovation.

Previous literatures mention that the small and medium enterprises (SMEs) play an important role by facilitating the reallocation of resources from less to more uses that are productive by supporting structural change and by performing ‘cost-discovery’, ‘gap-filling’, and ‘input-completing’‏ functions in the economy in order to contribute economic growth (Terziovski, 2013).

Also, small and medium enterprises (SMEs) and startups owners (Entrepreneurs) are the players that respond to opportunities, constraints, risk, threats, proceeding from the economic environment in which they operate. This put Small and Medium Enterprises (SMEs) and startup business at the heart of any successful and sustainable diversified economies (Terziovski, 2013).

In the results, existing literature conducts and illustrates that the innovation makes a significant contribution to the economic growth, job creation, and poverty reduction, while by investing and spending more in research and development can mitigate the gab among the economies (Terziovski, 2013).

Conclusion

Changes occur to individuals or a system because of the adoption or rejection of an innovation. As a result, innovation has become an important and critical factor for successful development and growth of small and medium enterprises (SMEs) and of every size. Moreover, innovation support policies and procedures that empower work forces with the ability to solve problems at all levels (i.e., individual, community, region, and global). According to previous studies, conclude that small and medium enterprises (SMEs) play an important role to accelerate economies around the world. Due to its role in development, growth, positive impact on poverty reduction and ability to changing market conditions.

While barriers to innovation and its constraints are the main reason to not accelerate the wheel for innovation at small and medium enterprises (SMEs) to influence on economic diversification, there are several constraints that affect small and medium enterprises (SMEs), they include lack of financial resource, legal constraints, lack of skilled worker, and the high cost of innovation, inadequate research and development, and organizational structure.

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