Open innovation for SMEs in developing countries--an intermediated communication network model for collaboration beyond obstacles.

Author:Vrgovic, Petar
Position::Small and medium enterprise

Developing countries around the world are diligently examining the means of growing their local and national economies. Innovation is broadly considered to be one of available means to achieve this desired growth (Jaffe & Lerner 2006), though it stands to be the least explored one, which is partially due to the newness of this field (Gupta 2009). National innovation initiatives hold many opportunities to advance and grow a nation's economic base. The importance and applicable approaches of National Innovation Systems in transition economies and developing countries should be systematically assessed (Kitanovic 2007). These efforts towards advancing innovation at a national scale have proven to be very fruitful, being performed with a combination of macro-economic policy, venture capitalism, innovation management, and regional entrepreneurship initiatives, such as through the use of national innovation hubs (Trajtenberg 2001; Wonglimpiyarat 2005; Chen & Karwan 2008; Marceau 2008). These national innovation hubs have successfully used inventor networks and product consultant support networks.

Most current economic growth is largely a result of small and medium sized enterprises (Siu 2005; Nieto & Santamaria 2010). And, since it is known that growing small businesses have a positive impact on the country's economic wellbeing through the creation of wealth and jobs, such growth also spurs further innovation (Carter & Jones-Evans 2006). Therefore, this paper posits it is a fruitful idea to strive toward improving the innovation processes and frameworks that governments and SMEs employ in developing countries. Studies from developing countries show that innovation cooperation and interaction are becoming more and more important for SMEs to promote their innovation abilities (Biggs & Shah 2006; Liefner et al. 2006). However, while applying the concept of innovation hubs to small to medium size businesses in developing countries may result in the largest impact on local and national growth, this paper argues that developing countries may face significant obstacles when trying to implement innovation hubs and strategies the way developed countries did.

This paper focuses on creating a model that can help small to medium size businesses in developing countries to invent and produce new products more efficiently, by connecting them with experienced inventors and marketing research teams through intermediary help of government bodies and innovation hubs. In the literature review section, the open innovation initiatives of SMEs in developing countries will be analysed, as well as their networking preferences and factors affecting them. Also, government agencies' and other intermediary bodies' roles will be reviewed to delineate their function as mediators in developing countries. The next chapter of this paper will present the proposed model, after which, relevant data will be summarized to support the given model.


SMEs, open innovation and networking in developing countries

In the increasingly competitive global market, small and medium enterprises have frequently been the engine of countries' economic growth and technological process (Bruque & Moyano 2007). In order to stay efficient in the global market, SMEs must constantly work to innovate and improve their processes (O'Regan et al. 2006). Small- and medium-size firms can be profitable if they adopt innovative strategies that continually improve operating efficiency, and innovative practices that create competitive advantages and better business performance (Bhaskaran 2006). SMEs are very different from large business in that most of them lack a formal process for developing new products and services (Nieto & Santamaria 2010). This is partially due to having limited resources (i.e., capital and people) to dedicate to such a process, which creates a vicious circle that prohibits most small businesses from growing substantially; even if SMEs have R&D departments, they typically do not spend as much as big companies do in total, or even as a percentage of overall revenue (Narula 2004). Therefore, literature suggests that SMEs should innovate differently from large companies, and focus on building networks with other companies, research facilities, customers and suppliers (Kleinknecht & Reijnen 1992; Bullinger et al. 2004). This open innovation mostly focuses on early stages of innovation, addressing external sourcing of technology and intellectual property, thus networking SMEs with technology providers (Chesbrough & Crowther 2006; Vanhaverbeke & Cloodt 2006).

Regarding incremental process and product innovations, small firms in developing countries often do not have in-house technical support or maintenance support, and will typically seek assistance from subject matter experts only when they're attempting to address an immediate issue, whereas large firms intentionally enhance their long-term innovative capacity via joint research initiatives with external universities (Laursen & Salter 2004; Fukugawa 2005).

We believe there are many challenges facing small to medium size businesses when it comes to inventing or generating new product and service ideas and some of them are: (1) limited resources, (2) fewer inventive employees, and sometimes (3) lack of understanding about the idea generation process (Vossen 1998; Olander et al. 2009).

Firstly, because of SMEs' limited cash and resources, in most cases they cannot afford to create product development departments, or fully dedicate people to the creation of new products and services (Woy & Qing 2007; Woy & Wang 2007). Furthermore, because of their limited resources, SMEs have limited ability to conduct the customer research that can be a good method to generate purposeful ideas targeted at specific market segments or opportunities (Woy & Qing 2007; Woy & Wang 2007), although they have a strong motive to involve their customers in innovation processes and market research (Van de Vrande et al. 2009). Hence, SMEs need a lower-cost method to generate, research and ultimately realize ideas, where we suggest networking with independent inventors pools and marketing agencies rather than with other SMEs, because some researchers reported that SMEs have the greatest positive impact on their innovativeness when collaborating with different types of partners (Brioschi et al. 2002; Becker & Dietz 2004; Bullinger et al. 2004; Nieto & Santamaria 2010).

Networking is found to be a good form of collaboration for SMEs, mostly as a possible method to innovate as much as large firms do (Narula 2004), where there is evidence that the success of SMEs in comparison to large companies is based on SMEs' ability to utilise external networks more efficiently (Rothwell & Dodgson 1994). Van de Vrande et al. (2009, p.434) summarize their research stating 'External networking to acquire new or missing knowledge is an important open innovation activity among SMEs'. SMEs can clearly benefit from collaboration networks that are well constructed and managed (Inkpen & Tsang 2005), helping them to strengthen their competitive advantage (Bougrain & Haudeville 2002), to facilitate their innovation capabilities (Lee et al. 2010), and to be significantly more productive in developing countries (Biggs & Shah 2006). These collaboration networks help SMEs co-develop products and services (Gulati 1998), and also helps all the network members to share experience, yielding learning effects for future innovation (Lundvall 1993; Argote & Ingram 2000). Since SMEs generally face more uncertainties and barriers to innovation, networks are found to be a complementary response to insecurity arising from development and use of new technologies, while reducing uncertainties in innovation (Diez 2000). A significant growth in the use of external networks by firms of all sizes is evident in last 50 years (Hagedoorn 2002). These networks of collaboration and communication networks are shown to be relevant when researching policy development and evaluation in innovation (Van der Valk & Gijsbers 2010).

Who do SMEs collaborate with? Innovative SMEs are shown to be more likely to communicate in external networks with other SMEs and various social networks, than with institutions such as universities and private research establishments, or larger firms (Rothwell 1991; Massa & Testa 2008; Todtling et al. 2009). For example, there is evidence from European SMEs that there is a limit to how much of R&D activities can be externally acquired by partnering with a large company, mostly due to various technological and strategic considerations (Narula 2004). Additionally, most SMEs have relatively little to offer for collaboration, and even if they do they can face a strategic threat of being overtaken, or face the loss of intellectual property. In big developing countries (such as China, Brazil and India) that often accommodate big transnational companies, SMEs are indeed often contacted to innovate for their larger partners, and hence have no need to network with local companies. Assistance received through this subcontracting is beneficial enough and it promotes technological innovations of these SMEs (Kumar & Subrahmanya 2010). However, small developing countries may lack the presence of many transnational companies and therefore cannot have their innovative efforts jumpstarted this way; these countries must find other partners and methods to initiate innovation, preferably through collaborative networks. Collaboration with other SMEs is therefore considered to be crucial for SMEs' innovation efforts (Radas & Bozic 2009), but in order for that collaboration to succeed, other SMEs must have relevant knowledge and experience to help (Zeng et al. 2010). If none of collaborative SMEs have that knowledge, how can they innovate?

In addition there are other external factors that governments and innovation hubs must consider, such as the education and technical skillsets of...

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