Agglomeration and innovation effort: A longitudinal study on small and medium manufacturing enterprises in Vietnam

• Published date: 01 August 2022
• Author: Luong Vinh Quoc Duy,Damien Cassells
• Date: 01 August 2022
• DOI: http://doi.org/10.1111/rode.12874

1252 

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     wileyonlinelibrary.com/journal/rode  Rev Dev Econ. 2022;26:1252–1268.

© 2022 John Wiley & Sons Ltd

Received: 19 December 2020 

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  Revised: 1 February 2022 

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  Accepted: 7 February 2022

DOI: 10.1111/rode.12874  

REGULAR ARTICLE

Agglomeration and innovation effort:

Alongitudinal study on small and medium

manufacturing enterprises in Vietnam

Luong Vinh QuocDuy1

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DamienCassells2

1School of Economics, University of 

Economics Ho Chi Minh City, Ho Chi 

Minh, Vietnam

2School of Accounting and Finance, 

Technological University Dublin, Dublin, 

Ireland

Correspondence

Luong Vinh Quoc Duy, School of 

Economics, University of Economics 

Ho Chi Minh City, Ho Chi Minh City, 

Vietnam.

Email: quocduy@ueh.edu.vn

Abstract

This  paper  analyzes  agglomeration  effects  on  innova-

tion behavior by small  and medium manufacturing en-

terprises in  Vietnam.  We  use a  novel  data  set of  1,520 

small and  medium  enterprises  from  2011  to  2015.  We 

focus on the spatial concentration of economic activities 

that  influence  firms’  innovation  outcomes.  Moreover, 

we outline  firms' and  owners' characteristics  as  we ex-

amine  the  role  of  entrepreneurs  and  other  covariates 

such  as  firm  size,  age,  and  the  number  of  establish-

ments  in  fostering  their  firm's  innovation.  Empirical 

results  show  the  following:  agglomeration  contributes 

to the firms' innovation.  Firms were less likely  to inno-

vate  when  they  become  larger  in  size,  but  microfirms 

were  less  innovative  than  others.  Firms  were  found 

to  be  more  innovative  if  they  produce  more  than  one 

product and  operate in  different  cities or  provinces. In 

contrast to  the  strong effects  of  agglomeration on  firm 

innovation, firm- level characteristics, especially  that of 

owners, exhibit a weaker or insignificant role.

KEYWORDS

agglomeration, firm innovation, localization economies, 

urbanization economies, Vietnam

JEL CLASSIFICATION

O12; O30; O53; D22

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1253

DUY and CASSELLS

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BACKGROUND

Innovation is an essential factor in promoting long- run economic growth as it applies new tech-

nology  to  production. According  to  Schumpeter  (1923)  and  Romer  (1990),  innovation  fosters 

productivity and  shifts  the  production  possibility  frontier  of   an  economy. Empirical  evidence 

clearly shows that developed countries' economic growth  largely depends on  innovation (Raffo 

et al., 2008).  Moreover,  innovation helps  alleviate  poverty  in  the  developing  world  (Voeten 

etal.,2015). It  also allows developing  countries to perform well  in economic catch- up by using 

international technological knowledge (Szirmai etal.,2011).

While innovation output in developed economies is mainly due to research and development 

(R&D) activities,  innovation itself  is still  the primary  concern of  firms  in developing  countries 

(Chen etal.,2020).  Firms play a crucial role  in the economy as  they create employment in pro-

ducing goods and services. Firms are also the most important innovators in an economy because 

they, among various organizations  (i.e., universities, research  institutes’ innovation), engage  in 

innovation. An innovation is defined as “a new or improved product or process (or combination 

thereof) that differs significantly from the unit's previous products or processes and that has been 

made available to  potential users  (product) or brought  into use  by the  unit (process)”  (OECD/

Eurostat, 2018,  p. 20).  The worldwide innovation  landscape sees  the  domination of  developed 

economies among the  world's most innovators, while  low- income economies stay at the lowest 

ranks (World  Intellectual  Property Organization  [WIPO],  2021).  Reports  show  the  most com-

petitive countries, which are  mainly from East Asia,  Europe, and North America,  also have the 

highest innovation capability (Schwab,2019).  Traditionally, the key motivator for  firm  innova-

tion is profit (Schumpeter,1923). In globalization, innovation benef its firms by enhancing their 

competitiveness against  rivals (Porter  &  Stern,2001).  Thus, to foster  economic  prosperity in  a 

country or region, it is essential to foster innovation at the firm level.

In this  paper, we examine the  Vietnamese small  and medium  enterprises (SMEs).  As SMEs 

dominate the total number of firms in developing economies, their importance is crucial in these 

types of  economies  (Vandenberg et al.,2016).  Amsden  (2009), however,  notes that  there is  no 

consensus in the literature on the types of firms (e.g., large or small multinational corporations or 

domestic enterprises) that are the most innovative. Cohen and Klepper (1992) provide empirical 

evidence that either large or small firms can contribute to technological progress, assuming that 

each firm  follows  its relative  advantages.  It should  be  noted that  Szirmai  etal. (2011)  observe 

that SMEs  create a  considerable number  of jobs  in  advanced economies and developing  coun-

tries. SMEs'  role  in  developing  countries  is even  more  influential  as  they  are the  main  actors 

in promoting organizational and institutional  change (Fagerberg,2005; Stam  & van Stel,2009). 

SMEs, therefore, should be  the focus of  any studies  on innovation in  developing and transition 

economies.

Previous literature  shows  that  both  internal  and  external  factors  can  drive  SMEs'  innovation, 

but most  studies  on  firm  innovation  focus  on  internal  R&D  (Nguyen  et  al., 2011).  However,  the 

external environment's role is increasingly recognized as no less  important than internal factor, be-

cause firms’  innovative  activities operate by  having substantial  interactions  with  external sources 

rather than operating in isolation (Cohen & Levinthal,1990; Fagerberg,2005; Porter & Stern,2001). 

Although globalization provides f irms opportunities to expand relations domestically and  globally, 

location  is  an  essential  factor  in  promoting  a  firm's innovation  (Porter  &  Stern, 2001;  Yström & 

Aspenberg,2017). Innovative firms typically prefer locations close to the skilled labor pool, research 

institutes, and favorable business climates  (Black,2005). Thus, agglomeration, which  is external to 

firms, may encourage innovation activities by influencing firms located nearby.