Effects of SME collaboration on R&D in the service sector in open innovation.

Author:Suh, Yongyoon
Position::Small and medium enterprise - Research and development
 
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Firms typically envision being successful through innovation at the international level. Some of the major factors influencing the success and innovation of firms include R&D and commercialisation based on internal resources (Chesbrough & Crowther, 2006; Lichtenthaler, 2008). Resources developed through internal R&D can act as a formidable barrier preventing potential competitors from entering the same market (Chesbrough, 2003; Schilling, 2008). However, firms face various problems such as limited amounts of time available for R&D and rapid market changes arising from fluctuating customer needs (Chan, Kensinger, Keown, & Martin, 1997). Internal R&D efforts can be inefficient and wasteful in that such efforts require the use of many resources and substantial amounts of time, making it intractably difficult to capture growth opportunities and manage the firm's innovation activity (Kuemmerle, 1997; Lane & Lubatkin, 1998; von Hippel, 1988). Consequently, the firm's organisation and R&D strategies have to be designed such that they can satisfy diverse global needs. Further, its R&D process must increase the likelihood of R&D outputs becoming both technically and commercially successful.

To survive in increasingly competitive markets, firms have started to incorporate external resources from other firms for the growth and success of their business. In particular, the expansion of boundaries between firms has contributed to this phenomenon. Because of the abundance of external ideas in the global market and increasing collaboration among firms, an increasingly large number of multinational firms have been pursuing innovation activity in partnership with other firms (Dodgson, Gann, & Salter, 2006). Noteworthy is the use of both internal and external ideas through collaboration for coping with rapid market changes and developing new growth engines. Such initiatives have sparked growing interest in new R&D paradigms for exploring how firms manage their collaborative efforts. In the wake of these changes, the concept of open innovation has been highlighted with collaborative activities such as technology acquisition, R&D collaboration, and joint venture activity.

The concept of open innovation embraces the strategic intent behind the use of both internal and external resources and is defined as the dynamic capability to manage technology both within and outside firms. Collaborative activities for the use of external resources reflect the core role of open innovation, that is, the enhancement of the performance, productivity, and sales of firms (Lichtenthaler, 2008). Open innovation can be achieved by integrating strategic activities such as technology acquisition and transfer, R&D collaboration, joint venture activity, and networking. A number of empirical studies have examined the R&D efficiency by analysing strategy of technology acquisition and commercialisation and evaluating technologically innovative activities (Amara & Landry, 2005; Arora, Fosfuri, & Gambardella, 2001; Gassmann & Reepmeyer, 2005; Kline, 2003). In addition, some studies have reported that goals and determinants for successful R&D cooperation vary according to partners (Belderbos, Carree, & Lokshin, 2004; Fritsch & Lukas, 2001; Tether, 2002). To sum up, collaboration has been referred to as one of the most important factors in open innovation.

However, three key issues remain largely unexplored and unexploited: types of collaboration, target industrial sectors, and methods. First, the question of whether R&D performance varies according to the type of collaborative activity has remained in the context of open innovation. Previous studies of collaborative activities have typically examined their effects on R&D performance by focusing on only one particular type of collaborative activity (Belderbos et al., 2004; Criscuolo & Haskel, 2003; Lhuillery & Pfister, 2009; Sampson, 2007). In addition, rather than types of collaboration, they usually focus on types of collaborative partnerships such as university--firm, university--government, or institute--firm partnerships (Belderbos et al., 2004; Eom & Lee, 2010). Thus, there is a need for a better understanding of how differently types of collaborative activities influence R&D performance, which should have important implications for R&D management.

Second, in terms of a target industrial sector, most of the previous studies have focused on the manufacturing sector. In addition to the manufacturing sector, there has been growing interest in innovation in the service sector and R&D in the service sector in the context of the global economy and economic growth. In fact, the value added from the service sector typically accounts for more than 70% of total value added in developed countries (Howells & Barefoot, 2007). With such changes in the economic structure, R&D in the service sector has also played an increasingly important role in innovation in services. Among others, open innovation in small- and medium-sized enterprises (SMEs) in the service sector, which called as service SMEs, has become a topic of special interest (Edwards, Delbridge, & Munday, 2005; Narula, 2004; West, Vanhaverbeke, & Chesbrough, 2006). SMEs have more difficulty than large firms in exchanging external resources because they have fewer technological resources (Narula, 2004). In addition, SMEs have fewer resources to develop and manage the whole innovation process internally (Edwards et al., 2005). SMEs are more likely to lack sufficient capabilities in manufacturing, distribution, marketing, and extended R&D (Lee, Park, Yoon, & Park, 2010). Thus, as for the service SMEs, collaboration is also a particularly important factor to improve their own R&D performance.

Finally, in terms of methods, most of the studies conducted a relatively simple quantitative analysis based only on the number of innovation such as how many develop new products or how much improve processes (Belderbos et al., 2004; Eom & Lee, 2010; Klomp & van Leeuwen, 2001; Lhuillery & Pfister, 2009). Although these studies have also examined innovation outputs in terms of labor productivity or sales in either the manufacturing or service sector, they have typically considered such outputs only individually. For example, van de Vrande, de Jong, Vanhaverbecke, and de Rochemont (2009) examined the differences of SMEs' innovative activities between the manufacturing and service sectors, but the descriptive statistics were only conducted. In this regard, the simultaneous consideration of multiple inputs and outputs can be more relevant for a collective analysis of all the important factors in collaborative activities. For this, data envelopment analysis (DEA) can be used to evaluate relative efficiency based on the simultaneous consideration of multiple inputs and outputs (Cooper, Seiford, & Tone, 2000). Because the weight of inputs and outputs can be extracted through DEA, it can be used to compare their effects on R&D performance based on the type of collaborative activity.

This paper addresses the effect of collaboration on efficiency of R&D in the service sector by employing DEA within the theoretical framework of open innovation. The paper provides an in-depth analysis of the effects of different types of collaborative activities on the R&D performance of service SMEs. In this study, we consider the following four major types of collaboration: 1) in-house R&D (non-collaboration); 2) technology acquisition or licensing as customer--provider relationships; 3) R&D collaboration as a strategic alliance; and 4) networking as an inter-firm alliance. We analyse the effects of each type of collaboration on R&D in the service sector by employing various input variables (including R&D investment and labor intensity) and output variables (including the number of service and process innovation and patents). With these multiple inputs and outputs, DEA is employed to assess the R&D performance of service SMEs. As for the R&D performance, the DEA enables us to evaluate the relative R&D efficiency of each collaborative activity. Also, the strategic behavior that firms engage in today can be found based on the weight of inputs and outputs as a result. To empirically test the effectiveness and strategic focus, we review and use the 2006 Korea Innovation Survey (KIS; STEPI, 2006)--published by the Science and Technology Policy Institute (STEPI) of Korea--for the service sector.

The rest of this paper is organised as follows: Section 'Open innovation in SMEs and three types of collaborative activities' provides a brief review of open innovation in SMEs by focusing on the characteristics and types of collaborative activities. Section 'Research methodology' discusses the research methodology and the DEA approach and provides the data, variables, and descriptive statistics. Section 'Efficiency of collaboration for R&D in the service sector' presents the results and discusses the managerial and policy implications by focusing on the effectiveness and strategic focus of each collaborative activity and Section 'Conclusion' concludes.

OPEN INNOVATION IN SMES AND THREE TYPES OF COLLABORATIVE ACTIVITIES

The massive amounts of money and time that firms spend for radical and sustainable innovation reflect the intense competition in the global market. Only those firms that can quickly develop new products can succeed in the recently globalised market in which market needs are diverse and constantly change. Thus, quickly developing and delivering new technologies, products, or services are critical to firm performance. In this regard, open innovation, which contrasts with the traditional R&D environment (i.e., closed innovation), is an emerging paradigm for solving such problems. Open innovation includes all the innovative activities associated with internal and external technology development. As indicated in previous research, open innovation attempts to increase the efficiency and flexibility of the...

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