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INNOVATION IN SMEs IN TRANSITION ECONOMIES: A CHALLENGE FOR POLICY

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Title: INNOVATION IN SMEs IN TRANSITION ECONOMIES: A CHALLENGE FOR POLICY


1
INNOVATION IN SMEs IN TRANSITION ECONOMIES A
CHALLENGE FOR POLICY
  • David Smallbone
  • Professor of Small Business Entrepreneurship
  • Small Business Research Centre
  • Kingston University

2
STRUCTURE OF TALK
  • Introduction
  • Entrepreneurship in transition environments
  • Some empirical evidence of innovation in SMEs
    from Ukraine
  • Promoting innovation in SMEs in EU new member
    states
  • Creating innovative new ventures in China
  • Conclusions and policy challenges

3
INTRODUCTION
  • Innovation and entrepreneurship
  • Transition?
  • Term potentially misleading if taken to mean a
    process of transformation towards target of
    market economy
  • Variations in pace of change
  • New member states of the EU (emerging market
    economies)
  • Former Soviet republics (except Baltic States)
  • China

4
Entrepreneurship, Innovation and Economic
Performance
5
Table 1 Progress in Transition in Selected CEECs
and NIS based on EBRD Indicators 2005
6
2. ENTREPRENEURSHIP IN TRANSITION ENVIRONMENTS
7
ENTREPRENEURSHIP THE PROCESSES OF MARKET REFORM
  • Shift in the dominant form of ownership from
    public to private
  • Privatisation of SOEs and de novo start-ups
  • Privatisation processes used affected initial
    stages of entrepreneurship development
  • Liberalisation of markets removal of price
    controls
  • Created market opportunities, as well as
    increased competition
  • Applies to factor markets (e.g. for capital) as
    well as product markets
  • Creation of market institutions
  • Includes banks and financial institutions
    training business support organisations
    regulatory bodies

8
SOME CHARACTERISTICS OF ENTREPRENEURSHIP UNDER
TRANSITION CONDITIONS
  • An initial explosion of entrepreneurial activity
    in most countries, as opportunities were created
    by legal and administrative reforms
  • A predominance of very small enterprises, with
    few medium sized even fewer large enterprises
  • Some forms of unproductive entrepreneurship,
    inherited from the Soviet period e.g.
    nomenclatura entrepreneurship

9
SOME CHARACTERISTICS OF ENTREPRENEURSHIP UNDER
TRANSITION CONDITIONS (cont)
  • Necessity and opportunity driven
    entrepreneurship entrepreneurship or
    proprietorship?
  • Significant core-periphery contrasts in new firm
    formation in performance of established SMEs,
    reflecting variations in supply and demand
    conditions the pace of restructuring
  • Strong external environmental influences on
    individual behaviour

10
INSTITUTIONALIST FRAMEWORK
  • Empirical evidence shows that in post-socialist
    economies the external environment (including
    institutions) is one of the dominant features
    influencing the nature and pace of
    entrepreneurship development
  • Institutionalist theory provides an appropriate
    interpretative frame of reference, since it
    emphasises the role of external, political,
    economic and societal influences on human
    behaviour (North, 1990).
  • Formal and informal institutions can affect
    opportunity fields (e.g. establishment of private
    property rights) but institutional deficiencies
    can adversely affect entrepreneurial behaviour

11
INSTITUTIONALIST FRAMEWORK (cont)
  • Formal institutions are enforced by legal
    regulatory mechanisms, whilst informal
    institutions by normative and mimetic mechanisms
    and trust
  • Where formal rules fail, or are absent,
    individuals use social networks, based on mutual
    trust in order to pursue business endeavours
  • In fragile settings with institutional conflicts
    the rule of law is largely absent, the number
    of business created and survive is small and
    behaviour patterns of entrepreneurs distinctive

12
3. INNOVATION IN SMEs IN UKRAINE
13
THE SME SECTOR IN UKRAINE
  • Rapid development of SME sector until 1996,
    followed by stagnation but some improvement after
    2001
  • 5.7 registered enterprises per 1000 inhabitants
    c/f around 30 in EU
  • Private enterprises contribute circa 65 of GDP
    but lt40 of employment
  • gt50 of SMEs are collectively owned by employees,
    reflecting their privatisation origins
  • Official statistics on innovative enterprises
    only include technological innovation

14
SOME EMPIRICAL EVIDENCE CHARACTERISTICS OF
ENTREPRENEURS IN INNOVATIVE ENTERPRISES
  • Survey of 300 innovative small enterprises in
    2002 in 3 broad sector groups
  • Sectoral differences in education level of
    entrepreneurs previous work experience
  • Entrepreneurs in medium/high tech 99 university
    educated previously worked in manufacturing or
    research 21 had private sector experience 4
    habitual entrepreneurs
  • Entrepreneurs in low tech manufacturing 71
    university educated previously worked in
    manufacturing or construction 27 had private
    sector experience 19 habitual entrepreneurs
  • Entrepreneurs in business services 92
    university educated previously worked in diverse
    sectors 40 had private sector experience 27
    habitual entrepreneurs

15
CHARACTERISTICS OF INNOVATIVE ENTERPRISES
  • Sectoral differences in firm size age and
    origins
  • Enterprises in medium/high tech spinouts from
    scientific institutions by scientists looking to
    commercialise reserach results 21 mixed
    public-private ownership typically offer
    services as well as manufacturing
  • Enterprises in low tech manufacturing many
    originated in privatisation in early 1990s 23
    mixed public-private ownership typically offer
    services as well as manufacturing
  • Entrepreneurs in business services many
    originated in western donor programmes of
    technical assistance 95 private

16
INNOVATION PROCESSES
  • Sectoral differences in sources of innovation and
    use of external inputs
  • Enterprises in medium/high tech entrepreneur
    employees the most common sources of innovation
    51 report some external input into innovation
    process 28 reported co-operation with
    university
  • Enterprises in low tech manufacturing
    entrepreneur employees the most common sources
    of innovation 33 reported some external input
    into innovation process 7 reported co-operation
    with university
  • Entrepreneurs in business services customers
    employees the most common sources of innovation
    7 reported some external input into innovation
    process
  • Recurrent characteristics across sectors included
    a product/service package and/or high degree of
    niche focusing

17
THE CHALLENGE OF BUILDING A MARKET-ORIENTED
INNOVATION SYSTEM
  • Need to reconstruct innovation systems, since
    formerly research was mainly carried in research
    institutions of branch Ministries
  • Some research institutes have closed, others have
    downsized
  • Need to change to a philosophy of demand-oriented
    innovation rather than supply-side driven
    environment
  • Enterprises need to become more active in RD and
    innovation, which government appears slow to
    actively promote

18
4. PROMOTING INNOVATION IN SMEs IN EU NEW MEMBER
STATES
19
THE POLICY CONTEXT FOR INNOVATION IN SMEs IN
ROMANIA
  • The National Development Plan (2007-13)
    recognises the importance of innovation to the
    future competitiveness of the Romanian economy
  • BUT
  • Links between RD and production are weak
  • Policies are overly focused on technological
    innovation
  • There is a lack of joined up policies
  • Decline of some research institutes because of
    resource constraints

20
THE POLICY CONTEXT FOR INNOVATION IN SME IN
ROMANIA (cont)
  • Low transfer rate of research results from
    Research Development Institutions to businesses
  • Business incubators are underdeveloped
  • Few HE institutions appear to prioritise
    developing links with businesses
  • Limited availability of business support services
    to small firms
  • Low level of engagement between business support
    agencies and SMEs
  • Lack of a strong regional dimension to either the
    innovation or business support systems

21
BARRIERS TO INNOVATION IN ROMANIAN SMEs
  • Lack of appreciation of the importance of
    innovation in the majority of businesses,
    reflecting a lack of any recent tradition of
    market driven research
  • Undercapitalisation of SMEs, affecting their
    ability to absorb technology transfer
  • Low levels of compliance of SMEs with EU
    standards
  • Limited development of supply chain linkages

22
FOCUS OF GOVERNMENT POLICIES IN RD INNOVATION
FIELD IN ROMANIA
  • National Plan for Research, Development
    Innovation (2007-13) includes 2 programmes
    innovation and partnership, which
  • Recognise the need to ground the innovation
    system in international co-operation
  • Encourage entrepreneurial activity in
    universities and RDI institutes
  • Encourage partnerships between RD organisations
    and enterprises
  • Seek to develop a specialised infrastructure for
    technology-transfer and innovation.
  • Seek to provide direct support for RDI activities
    in enterprises
  • Promote investment in public, and private
    research infrastructures

23
DEVELOPING A REGIONAL INNOVATION SYSTEM, LODZ,
POLAND
  • Since 2002, Lodz vovoidship has used a series of
    4 EU funded projects to start to develop a
    market-oriented regional innovation system
  • Projects have enabled
  • The development of a regional innovation strategy
  • Introduction of some pilot projects
  • Assessment of potential for cluster development
  • Incorporation of elements of regional foresight
  • Piloting of a regional benchmarking exercise
  • Identification and promotion of good practice
    support mechanisms from other EU regions,
    including study visits
  • Promotion of science-industry collaboration
  • Establishment of operational programme and tools
    to facilitate restructuring of textiles industry

24
DEVELOPING A REGIONAL INNOVATION SYSTEM, LODZ,
POLAND
  • Good practice features include
  • Focus on a bottom-up approach to regional
    development
  • A willingness to provide pump-priming funds from
    regional and national sources to provide a basis
    for EU funding bids.
  • A commitment to involving entrepreneurs and their
    representatives similarly between research
    organizations and government.
  • Demonstration of the potential leadership role of
    higher education institutions in regional
    economic development.

25
DEVELOPING UNIVERSITY BUSINESS-LINKAGES, SPINNO
PROGRAMME, ESTONIA
  • Started in 2001, SPINNO aims to create an
    entrepreneurial environment in RD and applied HE
    institutions in the fields of engineering and
    technology, to develop the potential for
    co-operation with enterprises
  • SPINNO is part of a measure to promote RD
    activities and innovation in the Estonian NDP for
    the implementation of EU Structural Funds, SPD
    (2004-6).
  • Key activities include
  • the facilitation of knowledge transfer
  • developing entrepreneurial and business skills
    within HE institutions
  • the provision of technology transfer services
  • encouraging co-operation with local and foreign
    partners for acquisition and exchange of
    information and technology.
  • The Programme is managed by Enterprise Estonia

26
SPINNO PROGRAMME LEARNING POINTS
  • A positive attempt to stimulate and facilitate
    change in the culture of higher education
    institutions and research institutes
  • Although specifically focused on science and
    engineering faculties, the principles of SPINNO
    are potentially transferable into other subject
    areas
  • The incorporation of an interim review of the
    SPINNO program, which fed into some modifications
    to the programme, as part of a process of
    learning and continuous improvement is a positive
    feature

27
5. CREATING INNOVATIVE NEW VENTURES IN CHINA
28
THE ENVIRONMENT FOR ENTREPRENEURSHIP IN CHINA
  • All levels of government in China are currently
    expected to support new and growing businesses,
    providing them with access to advice, improved
    access to finance and more transparent regulation
    (State Council, 2005).
  • Policies include incubator provision and
    incentives to encourage high-tech development
    (e.g. tax breaks, Talent Fund, Innovation Fund),
    although less emphasis on post-start up support
  • At the local level, Pudong has been transformed
    from a backward rural area into one of China's
    most developed economic zones

29
CHARACTERISTICS OF CHINESE SAMPLE OF ENTREPRENEURS
  • Mainly male under 40 years old graduates with a
    technical background with a strong determination
    to succeed
  • Motives for start up independence desire for
    achievement improving living conditions,
    although such responses must be interpreted in
    their social context.
  • Strong desire to do something different, combined
    with a determination to respond to a challenge,
    despite being faced with significant obstacles
  • Although many have overseas study experience,
    they typically lack experience in marketing and
    management.

30
CHARACTERISTICS OF SAMPLE OF ENTREPRENEURS IN UK
  • Mainly male but older than Chinese sample
    mainly postgraduate educated, with a technical
    background previous business experience more
    common.
  • Motives for start up spotted opportunity
    contribution to society previous employer
    reluctant to exploit opportunity changes in
    employment circumstances
  • Previous industry experience made a widespread
    contribution to new business creation 8-10 years
    of industry experience was typical
  • Most had worked or travelled abroad on business
  • Many were involved in other business activities
    in some way

31
IDENTIFYING BUSINESS OPPORTUNITIES
32
EXPLOITING BUSINESS OPPORTUNITIES
33
6. SOME CONCLUSIONS AND POLICY CHALLENGES
34
CONCLUSIONS
  • The results of empirical studies emphasise the
    importance of interpreting entrepreneurship in
    its social context
  • There is a lack of tradition of market driven
    innovation, which affects how innovation is
    perceived by entrepreneurs and by policy makers
  • For Central East European countries, EU
    membership offers access to financial and
    technical resources to facilitate improvements in
    policy process
  • For other former Soviet republics, the lack of
    attention to building market oriented innovation
    systems is part of a wider lack of attention to
    business support

35
KEY POLICY CHALLENGES
  • The process of market reform requires a
    fundamental change in the role, type and
    behaviour of public institutions, as well as the
    establishment of new forms of governance.
  • This reflects a need for government to replace
    its roles as planner of resource allocation and
    price setter, and owner and financier of
    enterprise activity through subsidies and
    transfers with a role as regulator and
    facilitator of private enterprise activity
  • To achieve this requires a commitment to
    institutional capacity building, at the national
    and sub-national levels, which includes the
    development of an effective business and
    innovation support infrastructure
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