Factors influencing innovativeness of SMEs: the case of emerging transition economy Sonja Radas Ljiljana Božić The Institute of Economics, Zagreb

Motivation for research SMEs as the engine of economic growth and employment. Innovativeness is among the most important means through which SMEs contribute to economic growth - innovation may be even more important for SMEs than for large firms(Fritz, 1989, Sweeney, 1983) Importance of research on factors influencing innovativeness of SMEs (Keizer et al, 2002) The actual process by which SMEs undertake innovative activity remains unclear (Hoffman et al., 1998)

What does the SME innovation depend on? The determinants of innovation for SMEs depend on specificities of region (Kaufman and Todling, 2002) Most studies on SME innovation come from developed economies (Hadjimanolis,1999) What propels SMEs in transition economies to innovate?

Generalization of extant research Innovativeness of SMEs in developing economies - to which extent the findings from developed countries can be generalized to developing economies?

Goals of the research To explore factors that determine innovations in SMEs in a transition economy –Variables from literature important for innovativeness in SEMs (Keizer, 2002) + new variables –Comparison with the extant research To investigate factors that prevent SMEs from innovating in transition economy

Conceptual model Determinants of innovation  External factors  Internal factors  Firm characteristics  S trategy, management and marketing changes Obstacles to innovation Innovation Whether innovated or not Type of innovation

Definition of innovation New or significantly improved product (good or service) introduced to the market Incremental innovationsIncremental innovations - product line extensions or modifications of existing platforms and products Radical innovationsRadical innovations - products that are new to the market as well as for the company. New or significantly improved process introduced within the enterprise.

External factors

Internal factors: firm characteristics

Internal factors: strategy, management and marketing changes

Methodology CIS data covering innovation activities over the period Sample: 448 SMEs (micro firms excluded) in Croatia from manufacturing and service sectors. Analysis method: logit analysis, ANOVA, Pearson Chi2 test.

Factors excluded from analysis …after examining bivariate relationships between independent and dependant variables: Innovation subsidies Firm age Proportion of full time equivalent employees engaged in intramural R&D.

Results - Relationship between factors and innovation

Variables related to obstacles to innovation

Results – obstacles to innovation 40% of firms report having faced obstacles in innovation activities but that does not prevent firms from innovating. Process innovation: no difference between firms that report obstacles and those that do not (N=172, Chi2 =1.9, p=0.17) Product innovation: firms that reported obstacles are more innovative compared to those that did not (N=172, Chi2 =3.2, p=0.07 )

Results – hampering factors Financing and expense internal factors both are significantly important BUT financing and expense is the factor that presents the most problems!

Conclusion Most factors that are found to be important in studies on innovativeness in SMEs in developed economies are also confirmed to be important in this study (external links and links with academic and research institutions, highly educated staff) If Croatian case is indicative of other developing countries, findings from developed economies may travel across geographic and economic boundaries better than could be expected.

Conclusion Similar findings from Cyprus (Hajimanolis, 1999) and Greece (Salavou and Liouas, 2003). SMEs from the same geographic region may share many similarities in innovation development. Yet we need to be careful when making general conclusions.

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