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SME Networks for Open Innovation![]()
Chapter 14
GOVERNANCE OF INNOVATION AND GROWTH IN SME NETWORKS
Tove Brink
University of Southern Denmark
This paper was first published in International Journal of Innovation Management, Vol. 20, No. 3 (April 2016), 1650052 (23 pages). © World Scientific Publishing Europe Ltd. DOI: 10.1142/ S1363919616500523
The aim of this article is to reveal what organising of innovation and growth can be enabled in small and medium-sized enterprise (SME) networks. This is especially interesting for the governance of loosely coupled networks. The research is conducted in the Danish food industry with three food-producing firm networks. The posed hypotheses are tested in a structural equation modelling (SEM) approach with the available data of 60 SMEs.
The findings show that the governance of preferred behaviours of SMEs has a considerable significant positive impact on product and systematic innovation, which have a significant impact on growth. Governance of network connections is also found to have a significant positive impact on growth. The findings contribute to an understanding of how both governance of preferred SME behaviour and network connections enable innovation. This study provides SMEs, SME network organisations and policy bodies with an enhanced understanding of governance approaches.
Keywords: Innovation; SMEs; network; preferred behaviour; governance.
Introduction
The move towards innovation-based sustainable growth is at the heart of the EU’s response to the economic challenges caused by the financial crisis in Europe, as noted at the EU Innovation Convention (2014). According to this aim, small and medium-sized enterprises (SMEs) in Europe represent approximately 99% of the enterprises, employ 67% of workers and contribute 58% of value added1 (European Commision, 2012). SMEs are therefore of essential interest for innovation and growth in the European area. Moreover, literature streams perceive SMEs’ innovative activities as the missing link to enhancing existing growth theories, as highlighted by Braunerhjelm et al. (2010). The anticipation of the importance of SMEs as growth agents is stated within both entrepreneurship theory (Davidsson, 2004; Sarasvathy, 2008; Trettin and Welter, 2011) and network theory (Freel, 2003; Powell and Grodal, 2005; Huggins and Johnston, 2010). In these theories, SMEs are acknowledged for their innovative activities, which can lead to growth. However, in other literature streams, SMEs are noted for having limited resources and, thus, hindering innovation and growth in SMEs, as highlighted by (Edwards et al., 2005; Murphy, 1996). SMEs can overcome their resource limitations through participation in networks, where they can have access to enhanced resources and knowledge (Powell and Grodal, 2005). There is a call for research on the understanding of SME networks and their aim for innovation to contribute to the understanding of SME growth. Therefore, the following research question is addressed in this paper: What organizing of innovation and growth can be enabled in SME networks? Organizing represents a process approach (Weick, 1995), which typically has an underlying antecedent of governance to support the organising process. The governance literature highlights the complementary nature of three perspectives towards governance (Müller, 2012), namely, economic through transaction cost economics (TCE) (Coase, 1937; Williamson, 1996), human through agency theory (Eisenhardt, 1989b; Sundaramurthy and Lewis, 2003) and organisational through trust and control (Puranam and Vanneste, 2009). The governance perspectives are complementary, which means that they can be present in coordination but not necessarily all of them need to be in coordination. However, governance takes its point of departure in at least one of them. In this paper, the focus will be on the economic perspective of governance in relation to growth in turnover in SMEs. A contribution is hereby made to the understanding of governance to support the organising of innovation in SME networks for growth.
In Schumpeter’s seminal papers on innovation, he stressed the importance of both the behaviour of the entrepreneur and the SMEs connections to society in general. Schumpeter’s (1934) mark I highlighted the importance of preferred behaviour through the intuition and skills of SME managers to enable innovation. Later, Schumpeter’s (1942) mark II emphasised the significance of innovation as embedded in the institutional framework through connections and governance structures related to SMEs. These marks showed the early acknowledgement of the importance of antecedents of SME behavioural preferences and network connections for innovation and growth. As highlighted earlier, such thinking has developed within literature streams on entrepreneurship theory, network theory and growth theory. However, the combined impact of these issues has remained underdeveloped.
The SME firm network context provides an opportunity for SMEs to pursue innovation. The SME participants in this research aim for innovation. The Danish SME networks are organised as loosely coupled systems providing a context for drawing on project governance frameworks with multi-project structures and multifirm settings (Söderlund, 2004) and focusing on the economic perspective on growth. This context provides interesting opportunities for an enhanced contribution to innovation theory through a further understanding of governance to support the organising of innovation aims in SME networks to enable innovation and growth.
This paper starts with a review of the literature streams of growth, innovation, preferred behaviour and connections in SMEs to enable innovation. The hypotheses are developed concurrently. Then, the method and data collection are described. The statistical model and findings are analysed and discussed. The conclusion based on the main findings finalises the article.
Literature Review and Hypotheses
Literature on growth is the first issue to review in increasing the understanding of the relationship between innovation and growth. Furthermore, a literature review on innovation is conducted to reveal different innovation content. Thus, a literature review on aims of innovation is conducted. Then, a literature review on the antecedents of innovation on preferred organisational behaviours are conducted. Hereby, the internal organisational sources for innovation are revealed. Then, a literature review on external network connections that enable innovation is conducted. Both internal and external sources are important and often highlighted for innovation and growth (Tidd and Bessant, 2013; Dodgson et al., 2014; Brink, 2014). Finally, a review on governance finalises the review and a summary provides an overview of the posed hypotheses.
Growth
Authors within different literature streams have addressed growth. Penrose (1959) notes, in her early notion of growth within the entrepreneurial field, the importance of a continuous focus on new productive opportunities, which drive the growth of the firm. Davidsson et al. (2009) indicate the importance and necessity of having a resource-based advantage and behaviour that allows firms to be profitable and form a sound basis for their growth. Ramezani et al. (2002) argue that SMEs should secure a sound level of profitability before they utilise their growth opportunities for further growth. The literature thus highlights an interrelation between innovation and growth.
In this research, growth is measured as the increase in firm turnover. This is the most frequently employed indicator of growth (Delmar, 1997). When research examines very different operating firms, there is a growing consensus that the increase in turnover should be the preferred choice (Weinzimmer et al., 1998; Wiklund, 1998) because it is the most general of the alternatives to measuring growth. All commercial firms need to have turnover to survive. The networking SMEs in the present research operate very differently, even though they are all situated in the food industry. Therefore, in the absence of a better measure of growth, the increase in turnover in the SME is used as the measure of growth in this paper.
The literature review reveals that innovation has a positive impact on growth in turnover. The content of innovation is now examined more closely.
Innovation and different innovation aims
In this paper, innovation is used in accordance with the definition by Amabile et al. (1996), which highlights both the development of the new creative idea and the ability to successfully implement the new idea. This definition refers to first getting the new idea, integrating the new idea in an organisational learning approach, and finally executing the new idea in a collective, successful implementation. Innovation, viewed as an isolated new creative idea, is therefore not sufficient. It also requires organisational coordination, learning and implementation. This refers to an organisational approach to innovation with a multidimensional framework, as elaborated by Lam (2005) and by Crossan and Apaydin (2010) in their literature review on organisational innovation.
In the seminal paper by Cohen and Levinthal (1990), the authors highlight that absorption capacity is important for innovation to prosper through recognition of the value of new information to turn into innovation capabilities in the organisation. The notion of absorptive capacity overlaps with notions in other fields and has since been cited by researchers in various fields. As highlighted in Volberda et al.’s (2010) literature review on absorptive capacity, the notion has been used in the fields of learning, innovation, managerial cognition, knowledge-based view of the firm, dynamic capabilities and co-evolution. Among others, Volberda et al. (2010) reveal the important research gap between how inter-organisational knowledge interacts with intra-organisational knowledge according to Cohen and Levinthal’s (1990) distinction between diverse and overlapping knowledge. This highlights the notion of innovation as reaching from the individual to the organisational level and overlapping across the levels within the organisation.
Schumpeter (1934) provided an early consideration of different innovation aims. Schumpeter (1934) understands innovation aims as doing “new and difficult things” and obtaining economic development and growth through this effort. This definition is in line with the definition highlighted by Amabile et al. (1996) but focuses on different aims for innovation.
Schumpeter (1934, p. 66) notes five typical innovation aims:
• New products
• New processes of production
• New markets
• New sources of supply
• New organisational approaches.
The listed innovation aims are very different in content, ranging from the development of the product itself to how the product is made, how the market for the product is identified/employed and how the supply of sources for production is identified to how the whole organisation surrounding the product is constructed for innovation. The five innovation aims can overlap or stand alone for any innovation, as interpreted by Schumpeter (1934). It must be noted that Schumpeter’s original categories of innovation aims are widely found and employed today, e.g., the European Innovation Union Scoreboard Index (2014).
The hypothesis constructed based on the literature review on innovation and growth therefore emphasises the positive impact of innovation on growth and the presence of different innovation aims that enable innovation:
H1: Innovation aims have a positive impact on growth.
Now, focus is set on the effect of SME behaviour on innovation and growth.
Behaviour of SMEs
Individual preferences shape behaviour within SMEs and have an impact on creativity and innovation (Penrose, 1959; Davidsson, 2004; Sarasvathy, 2009; Trettin and Welter, 2011; Brink, 2014). This notion is supported by research conducted by the psychologist Csiks...
