Credit access and innovation activity in vietnamese SME

In the wake of Vietnam banking crisis 2008-2010, there hasbeen more focus on access to finance for small and mediumsized firms.. Even though some studies has already suggestedthat limit

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT

ECONOMICS

CREDIT ACCESS AND INNOVATION ACTIVITY IN VIETNAMESE SME

BY

TRƯƠNG BẢO DUY

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, JANUARY 2015

0

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT

In the wake of Vietnam banking crisis 2008-2010, there hasbeen more focus on access to finance for small and mediumsized firms Even though some studies has already suggestedthat limit access to credit might stagnate innovative process,scarce studies has put their focus on small firms in developingcountries For this reason, our study is tended to reduce thatgap by analyzing how credit could have affected innovationactivities of Vietnamese’s small and medium sized enterprises(SMEs) using data between 2007 to 2011

Our hypothesis is having access to credit allowsVietnamese SMEs aid their innovation process Since, it wouldallow them to import new machineries, upgrade outdatedproduction line, to cut cost, produce new products and/orimprove their old products In this paper we uses logit modelsand Fixed-effect models to test the hypothesis Among others,logit models allow us analyzing effect of credit on firms eachyear, and fixed-effect models help us take advantage of ourVietnamese SMEs panel data sets

This study results suggest that easing credit accessincreased the likelihood of introducing new technology orapplying new production line of Vietnamese SMEs However,the effect of credit access on other types of innovation, likeintroducing new products and improving old products isinconsistent over the year, thus it needs to be studied further

Key words: Vietnamese SMEs, credit access, innovation

LIST OF TABLES

Table 3.1: expected sign of independent variables 27

Table 4.1: the share of Vietnamese SME by ownership category for the period 2000-2008

31 Table 4.2: the share of SMEs on total number of firms in Vietnam33

Table 4.3: the share of SME by kind of economic activity 34

Table 4.5: Debt average of Vietnamese SMEs 37Table 4.6: Average SME innovation activity 38Table 4.7: Logit model, marginal effects - year 2007 41Table 4.8: Logit model, marginal effects - year 2009 42Table 4.9: Logit model, marginal effects - year 2011 43Table 4.10: Checking for Multicollinearity 46

CHAPTER I INTRODUCTION

For better audience experience, introduction chapter isused to state out the causes and the range of this study.Problem statement section is used to briefly describe theoriesand empirical studies behind firm innovation as well as revealany possible connections between credit access and innovation

It also indicates the need to conduct this research in Vietnam aswell as the research objects and the scope of the study They,therefor, determine the goals and the scope of this thesis

1 Problem statement

Although firm innovation got its very first attention inthe early twentieth century via the book of Schumpeter’s book(1934), yet public and research interest is disproportionate.Unsurprisingly, large and multinational enterprises got the mostattention from both governments and scholarships around theworld It is properly because when it comes to innovation, wetend to think about breakthrough technologies, which might becreating a whole new industry or dramatic changes of an oldindustry For example: internet industry or big jumps ofagriculture Innovation is also seen as the result of heavy R&Dinvestment which can only be done by large enterprises Yet,innovation is not necessarily breakthrough technologies(Hadjimanolis, 2000) In fact, more studies and better definition(Archibugi & Iammarino, 2002) pointed out that innovation is notlarge enterprises’ exclusive right, instead it happens anywheredespite size and region through self-learning or adapting Thatopened the gateway for more recent studies toward innovationactivities in small and medium enterprises (SMEs) Nevertheless,most research around this topic (Beck

& Demirguc-Kunt, 2006; Hoffman, Parejo, Bessant, & Perren,1998; March-Chorda, Gunasekaran, & Lloria-Aramburo, 2002)were still conducted primarily in developed countries, forinstance in Western Europe and North American countries.Their

contribution as a result were limited within the developed

countries’ boundary Thus, there are many areas around this topicneed to be explored

Investigating the effect of credit access on SMEs’innovation in developing countries is an interesting yetchallenging task It is interesting because a clear connectionbetween them seems to exist While credit is a main externalfinancial resource of SMEs; Innovation is an indicator of firm’sadaptation ability and sometime growth ability, but it may requireheavy investment Yet in developing countries, credit applicationprocess may not be transparent thus may require personalconnection Beside a firm can use credit for multiple reasonsnot just innovation, for instance, enlarging its labor forceinstead of investing on automatic machine This topic ischallenging because while many studies has been done so far,they are still limited partly because they only used data ofdeveloped countries The reason could be due to the nature ofdeveloping countries, data of SMEs is not collected easily As aresult, it is difficult to measure credit access and firm’sinnovation

For this reason, our study tries to narrow that gap byinvestigating the link between credit and enterprise innovationusing Vietnamese SME dataset conducted by the CentralInstitute for Economic Management (CIEM) of the Ministry ofPlanning and Investment of Vietnam (MPI); the Institute ofLabour Science and Social Affairs (ILSSA) of the Ministry ofLabour, Invalids and Social Affairs of Vietnam (MoLISA); and theDevelopment Economics Research Group (DERG) of theUniversity of Copenhagen This dataset provides rich informationabout Vietnamese SME from 2005 to 2011, thus allowing us to

build our panel models We hope that our result can be used asreference for government intervention then.

There is one more reason that urged us to do this study.There was a banking crisis in Vietnam from 2008 to 2010 whichmight limit access to credit from small firm After the crisis, areport of Rand et al (2012) used 2011 Vietnamese SME survey

data implied a reduction in number of SME innovation activities.Although this might have been an coincident and did notnecessarily reflect the real connection between those factors,since credit is just one of many barriers of firm’s innovation.Many studies (Hall, 2005; Hoffman et al., 1998; Madrid‐Guijarro,Garcia, & Van Auken, 2009) shared the same result where itindicated that financial resource are one of the main causes.However, it should be noticed that most of the studies wereconducted outside developing countries’ boundary therefore we

do not expect our study would share the same result

Though there are only a small number of study investingthe role of innovation in Vietnam, this study considers it to be

an important factor of firm growth for two reasons It isclaimed to give firm a temperate absolute advantage in themarket (Schumpeter, 1934) and also increasing firm survivalchance (Christiansen, 1997) Consequently, our study finds itsduty to further investigate the existence of credit access andinnovation relationship in Vietnam environment

2 Research objects

The first step of our study was finding the bestmeasurement for firm credit access This was considered as acrucial step due to the fact that credit access was difficult tomeasure and there was still no broaden accept on the way tomeasure it After that we investigate to see if the firm hadbetter credit position would have innovated more than the firmwho did not We were also take into account difference betweenhigh technology and low technology firms which consequentlyinfluence decisions of the head of the enterprises on innovation.Thus, in the end we separated the firms in our data into twogroups to see how credit access had affected innovation withineach group

In more detail, this study tries to unveil the link betweencredit access and SME innovation activities and to investigate ifthe magnitude of that link was different

among technology and non-technology oriented firms For this reason, there are two objects our study is aimed for.

- Firstly, it examines the impact of credit access, official andunofficial, on SMEs’ innovation activities Unofficial credit still

be a source of firm credit, therefore it should be considered

- Secondly, it investigates whether the effect of theexternal financial access differed across firms by industrytype Ultimately, basing on the final results, we expect topropose better policies for Vietnam government

To solve the study’s research objectives, the main questionraised by this paper is: “Is there a relationship between access tocredit and SMEs innovation in the case of Vietnam?” Two subquestions are also raised to clarify our objectives: “Is there anydifference between official and unofficial credit access to SMEinnovation activities?”; and “Whether the effect differ acrossfirms by type of technology level (high technology and lowtechnology)?”

4 Research Outline

CHAPTER II is used for literature review Most of it would

go through behind theories and share the result of previousempirical studies, in which we also try to explain the

fundamental difference of innovation between technologyand non-

technology oriented SME We consider it as vital step due to thefact that the need of innovating is unevenly across differenttypes of firm; Furthermore, different types of firm might alsorequire different kinds of financial resource At the end of thischapter, we would explain how innovation is defined, which wouldleading to our discussion on how it should be measured.

CHAPTER III would be used to explain our methodology.This part would therefore content our Analytical Framework,the Econometric model that we conduct and the data that weuse in this study Via this step, we want to discuss theadvantages and disadvantages of the Vietnamese SME paneldata

In CHAPTER IV, we would discuss the results that we found inour study The beginning of this chapter would be used toreview Vietnamese economic situation, focusing on SMEs’innovation and their credit access conditions It is intended tosupply reader a full picture of Vietnamese economy, Innovation, Credit status and events that might be linked to this study Therest of it is used to describe the data and our regression result.With this step, we expect to bring up all vital indicators, theirtrend and their association that we has discovered

CHAPTER V is for our conclusion and policy implication All

of our study is summarized here It is also used to indicate theadvantages and disadvantages of our methodology, our data aswell as our suggestion for future researches Policy implication iswhere we suggest intervention policies that influenced by thisstudy’s findings

CHAPTER II LITERATURE REVIEW

This chapter is where we recall behind theories as well asresults of empirical studies In theories section, we would reviewthe most well-known theories and would also reveal ourhypothesis The rest of this chapter was used for empiricalstudies reviewing In this section, we would summarize findings

of previous researches and sort out factors that could haveaffected firm innovation activities beside credit access We alsosummarize ways to measure innovation activities of firms andwhat measurement we use for this study

1 Theories

Having access to Finance is a key driver in the creation(Cassar, 2004; Popov and Roosenboom, 2013; Kim et al 2016),survival (Tsoukas, 2011) and growth (Rahaman, 2011) process

of firms, and especially for smalls (Beck and Demirguc- Kunt,2006) and innovative firms (Lee et al., 2015) According tostudies, SMEs and innovative firms have more constraints anddifficulties to access to finance, because their projects tend to

be riskier (Lee et al., 2015) Like access to finance is importantfor firms activities, it can consequently foster economic growth(Kim et al., 2016) and influence positively innovation (Wang,2014; Brown et al., 2009) Furthermore, it was demonstratedthat innovation has a positive impact on economic growth(see e.g Hasan and Tucci, 2010; Galindo and Méndez, 2014).The importance and linkage of this two variables (Figure 1), hasplaced innovation in the heart of the Europe 2020 Strategy

There are vary types of sources of funding, and sourceselection is depended on risk level (the firm itself or itsprojects), firm’s maturity and the amount of funds needed

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Manigart and Witmeur (2009) It also based on size, age andavailability of information of firm as well as it goals, itsownership and sector that firm is in,

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according to study of Berger and Udell (1998) For instance, Beckand Demirguc-Kunt (2006) suggest larger firms have betteraccess to formal sources of external finance than smaller firms.While according to Manigart and Witmeur (2009), small firmsusually rely on private sources, like saving of owners, or hisfamily and friends, especially when the risk is high Commercialbanks usually fund firms with low risk level instead andtherefore Venture Capitalists or Business Angels can beanother option of funding for small firms at their early stagethrough equity financing.

It is undeniable that there are many financial options forlarge enterprises even in the context of developing countries,however smaller enterprises on the contrary do not have suchprivilege If a small firm needs funding and it cannot get itthrough private source, commercial banks seem to be their onlychoice because equity financing is not a popular option indeveloping countries Yet, fund from banking system does notcome with ease, and it is more severe in the case ofundeveloped economies If a firm does not have lands,warehouses, machines or any kinds of physical asset that can

be used as collateral securities, bankers have to base on credithistory and firm information to make a lending decision However,firm information is hard to obtain accurately and credit history inmany cases does not well recorded or even non-exist For thisreason, risk may be too high for bank to bear Even if acommercial bank accepts to pay high cost to acquire firminformation and accept high risk due the non existence of credit

history for long term purpose The debtor can later use thisinformation and its good credit history to borrow from differentbank, which will be willing to accept a much lower interestbecause the risk is already diminished.

This is the dilemma in banking system and also raise a

question for this study: “Whether small firms use bank lending

to fund for their innovative project?”

When we study the relationship between credit accessand innovation, we realize that it is a subject of two main stream

of theories

When we observe innovation as a risky project, financetheory suggests that high risk goes with high return Studieshave already indicated that high technology firms, which requireconstantly innovating, appeared to expect and have higherreturn than normal firms (Hall, 2005) For this reason, we canassume that innovative firms are aware the risks when theypursue a creative-oriented project Yet expecting high returnmakes them accept high interest to get access to externalfinancial resource Studies also has found that high innovativefirm has owners that were more favorably inclined toward riskacceptance (Beck & Demirguc-Kunt, 2006; Hall,2005; Hoffman etal., 1998)

According to the European Commission, financial marketsand financial institutions are traditionally reluctant to invest inR&D projects, because they bear a higher uncertainty/risk,compared to more traditional business projects Thisuncertainty and risk is due to the lack of information, in whichbanks and financial institutes fail to appraise the risk of aninnovative project To compensate to the rist lender may want

to increase interest rate or deny lending to firm Stiglitz andWeiss (1981) argues that even though creditors can increaseinterest rate to reduce their risk, it is a non-linear trade off.When the interest rate goes more than a peak point, it attractsmore gamblers and because of costly and unavailableinformation, banks are not easy to distinguish their good

creditors from gamber The peak point is especially low incountries where the credit regulations are poorly defined andenforcement methods are weak and unreliable This is reflected infigure 4.1 bellow.

Theories also suggested that small innovative firms havemore difficulty accessing external financial sources due to theirrisky activity and more severe asymmetric information problems.

At the same time, innovative firms have to reply on intangibleasset and therefore have less tangible assets to use as collateral(Hall, 2010)

We could see that two theories suggest different finalconsequence Therefore, understanding what influencesinnovation decisions and how many kinds of innovation wereessential While going over different articles we wereacknowledged that there were primarily two kinds of strategy,and what strategy a firm refers would depend on how that firmchoose their position in the market We like to call one of thoseare active (or offensive) strategy, which was chosen when firmtry to gain initiative in its

Expected Return to the Bank

(or open) a niche market Inactive (or defense) strategy waswhere a firm only innovates under market pressure Firms with

Market provision Innovation decisions New (or improving existing) products

no market power choose this strategy because they do not haveenough resources to lead or conquer an old market which was fully explored

While the offensive strategy might give firm a greatchance to control an unexplored market and get higher profitvia technical advantage, it was also a costly option The strategywas visualized by figure 2.2, in which firm innovation decision ismainly decided basing on market provision from the R&Dactivities or manager’s scope As a result, this strategy requires

a firm to invest their resources on innovation projects whichtheir outcomes, in many cases, were highly unpredictable.Differing from normal project, the assets in an innovationproject are usually intangible assets which are knowledge andhumans These kinds of asset probably be vanished immediatelywhen a key employee leaves the project This leads toincreasing the vulnerability of an innovation project Moreover,

on financial perspective, intangible assets cannot be used ascollaterals to get access to bank credit This may lead firm toconsider bank’s debt as a poor choice to finance their innovation

Production

Figure 2.2 : Enterprise Innovation – Offensive strategy

Defensive strategy may not give firm technical advantage,yet it is a cheap strategy Firms do not have to constantlychange their products, but instead study market needs andsatisfy it This may not give those firms first hand in the market,

but still can give them enough profit, especially where theproduct cycle is long When

Market needs Innovation decisions New (or improving existing) products

New (or improving existing) process

firms found their need to innovate, they can choose to do one oftwo things First, they can slightly change their products appear

so they can satisfy customer aesthetic requirements orintroduce new products yet share the same characteristic of theold ones This choice does not require much financial resourcesince they can rely on old technology and existing productionline Thus, finding external resource is not necessary; anotherchoice of firm is investing in the production process where theycan optimize their production and increase their marginal profit.This usually requires a firm to buy new machines or invest inphysical assets, like land, store or workshop, which can be used

as collateral securities if it seeks for credit access

Production

Figure 2.3 : Enterprise Innovation – Offensive strategy

Eventually a firm does not have to choose to glue toone strategy or one innovation type during its life In fact, it canprefer one more than other or even choose to follow bothstrategies if its situation allows them to do so Unfortunately,even though it is very important, we cannot clarify whichstrategy firm is following and consequently what kind ofinnovation they persuade unless doing a survey We can onlyassume that high technology enterprises highly refer activestrategy due to their need to secure their future by trying toseize market power through technology advantage Previousresearch backed this assumption by showing that high

technology enterprises in European spend heavy cost tointroduce a new product or adjust old product through R&Dactivities (Hoffman et al., 1998), while low technology

enterprises may refer passive strategy since they have no marketpower at all and their product have longer life cycle This leads us

In term of direct link between bank loan and firminnovation process, studies (Hewitt-Dundas, 2006) argued a linkbetween budget constraint and firm innovative strength, they

also suggested that firms mainly use their internal resource tofund their innovation This could mean bank loan is a lessattracted choice when firms are looking to fund their riskyinnovation projects Yet, those studies used data fromdeveloping

countries and and it is notable that mature financial marketshave other options than bank loan to get external financialresource For instance, small firms can fund their projects usingequity or debt instruments Furthermore, risk ventures play ahuge role in funding risky projects Ventures also supplyknowledge and experience through training and monitorprocess so the entrepreneur can have better performance, andreduce risk Some government may boost firms’ innovationthrough intervention, like tax cutting or loan guaranteeing, tolighten firms’ financial pressure.

When focusing our interest on a smaller picture, where weonly observe the association between credit access andinnovation, we find various results from empirical studies Forinstance, Girma, Gong, and Görg (2008) found positivecorrelation between credit access and innovation when usingthe data of Chinese enterprises Yet at the same time theirresult suggested government intervention played a crucial role.They pointed out that enterprises that had close connectionswith government get better credit access This means firms,received government supports, were only required to pay asmaller cost to get access to external financial resource to fundtheir projects This, in a way, satisfied finance theory with highrisk high return

On the other hand, a contrary picture was shown in the result

of Madrid‐ Guijarro et al (2009) study It indicated that firms withbetter financial position innovate better In this study, financialposition was built using bank’s debt, firm liquidity and loans’ cost.Meaning, firms, that had more debt than average, were having apoor position and thus innovated less The result fits transactioncost theory and agency theory where they claimed large debtactually discourage innovation Thus, this result can only be used

as reference for our study Since financial position cannot be used

as a proxy for credit access Because Spanish firms may choosenot to use bank loan to finance their research activities, does notmean they cannot get access to it

1.2) Other factors

Though we believe that credit access is among crucialfactors, we have to take into account other factors that caninfluence firm innovation Those can be gathered into 3 maingroups The first group is manager’s (or owner’s) characteristics.The second group is the characteristics of firm, or internalfactors The final group includes factors that belong to firm’senvironment, or external factors

The characteristics of firm owner or manager has beenwidely believed to play a huge role in firm innovation amongstudies Changing or introducing a product is always a riskyactivity due to its uncertain outcome and high costrequirement, that may go along Therefore, a high risk takerperson might find this kind of activity more attractive thanothers This characteristic seems to be magnified in small andmedium enterprise environment, where owners’ decision receivesless pressure from inside the enterprise Yet, critical ideas, insome cases, may increase the rate of success through monitormethods

Another crucial characteristic is education High educatedowners have their own advantage since most innovation projectsrequire a certain level of knowledge As a result, better educationwould give firms’ owner a better chance to understand ofinnovative process and foresee its outcome This could lead to intime judgement and intervention This positive association hasbeen already confirmed by the empirical study of Hadjimanolis(2000) Higher education may also help a firm owner to maintain

a better relationship with education institutions or technologyassociations which provide firm quality human resource andnecessary technologies

Nevertheless, owner's characteristics may not always beinnovative promoters For example, young owner may not haveenough experience and knowledge to keep firm stay in a wellperformance state Lacking of management skills or marketexperience are claimed to make owner makes poor decisionsthus leading to bad

outcomes This is why owner’s age is considered as a barrier offirm innovation However, it seems that the empirical result(Hadjimanolis, 2000) proved it differently when it reported aweak and negative correlation instead This result may suggestthat older owners are risk averse or slower adapters than youngerones.

Internal factors

Firm’s characteristics are believed to play their own roles.The first characteristic which has been suggested by variousstudies were firm’s size Large enterprises are claimed toinnovate more frequently than smaller ones It could bebecause larger enterprises are more stable and easier inmobilizing resources which exist inside or outside firm Theeffect of size has also been confirmed in studies’ results(Hadjimanolis, 2000), yet it seems that size does not always play

a major role

Human resource could be another key role in firminnovative progress Better human resource may carry withthem better knowledge and research experience that wasneeded in any research process Scientific knowledge is alsoimportant when a firm want to apply their discovery, or inbroader terms the technology that they bought, into practice.Human resource quality could be measured by the number ofhighly educated employees, or the amount of humaninvestment Hadjimanolis (2000) revealed in his study that thelarger the number of highly educated employees, scientists orengineers, a firm has the more innovative it would be Study ofGirma et al (2008), giving nearly the same result when itindicates labor training have positively associated with innovationspillovers

Internal financial resources are doubtlessly associate withinnovation’s cost When facing activities that require high costand result uncertain outcome, firms are suggested to rely oninternal financial resources to fund those risky activities since itwas a cheap solution For measurement methods, some studiesused revenue as a proxy for firm financial health However,previous researches have believed that profit or

cash flow were a better measurement Liquidity can also be used to estimate firm finance position according to Madrid‐

Guijarro et al (2009)

Other factors like firm age or level of firminternationalization are also worth mention Age markes firmmaturation A firm that has survived for many years is less likely

to face financial difficulties and more likely to perform better than

a less mature one Thus, it may face less trouble whileinnovating (Girma et al., 2008) Enterprises that compete ininternational market has been suspected to get easier access toforeign investment or new technologies On the other hand,they also face more competitors and must satisfy technicalrequirements of importing countries These could urge them intoimproving their products to compete more effectively andachieve goods standard of importing countries Girma et al.(2008) confirmed this in his study when he proved that firmreceived more FDI innovated more than other using data ofChinese enterprises Nevertheless, when using export sales as

a proxy for firm internationalization, only a weak correlation hasbeen showed (Hadjimanolis, 2000)

External factors

External factors has been suggested to play a role infirm innovativeness Competition seems to be the first factorthat worth mention When a firm is under heavy competitivepressure, there is many chance that it have to improve theircurrent products to compete its rivals It may also try tointroduce a new product to test the new market where thenumber of competitor is still low; Or it can also choose toupgrade or introduce new production process to reduceproduction cost The result of Kim et al., (1993) confirm asignificant association, yet Hadjimanolis (2000) study do not

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share the same result It could be because there are variousoptions that firm can choose like cost cutting or applying newmarketing rather than invest in a risky project.

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Connection with University and technological institutionshas been believed to have a strong impact on firm innovation.Gemünden and Heydebreck (1997) calls it ‘technologicalinterweavement’ in their study Education institutions can play

as suppliers of high quality human force as well as technologyhubs of the region To measure the education network’s impact

on enterprises’ innovation activities Madrid‐ Guijarro et al (2009)use the distance between firm and institution as proxy

Other factors like social networks or government supportcan also be considered Joining an industrial association aresupposed to allow firms to get contact with new technology.While government supports are various from approaching foreigninvestment, loan guarantee, human training to introducing tofirms new technology They all may have positive effects on firminnovation

3 Innovation measurement

There is no unique way to measure innovation activities infirms Some studies relied on firms’ R&D expenditure Yet this isthe limitation of those studies since innovation cannot bemeasured correctly using one of its inputs as proxy Furthermore,R&D expenditure is only relatively accurate in the context oflarge enterprises only where that activity seems to be the root

of enterprises new products or product improvements In SMEs’environment, however, R&D costs are usually not recordedseparated from other costs Thus, some studies use the sale ratiobetween new products and old products as indicator This gavethem an advantage in using firm’s output as measurement ofinnovation However, some believed this method is not a fairjudgement of firm innovation rate, because it only takes intoaccount successful innovation projects As a result, it also did

not suit our purpose, since we wanted to observe innovationeffort without evaluating its result.

In an act to find better measurement, we first lean on the definition of Schumpeter (1934), an economist who is often

considered as the first one drawing

attention on the importance of innovation within firms In his

book he defined 5 types of innovation as following:

1.Introducing a new product or adjusting old product

2.Introducing a new industrial process

3.Opening a new market

4.Developing a new supply of raw material or other kind of input

5.Create changing in industrial organization

The definition is clear yet it might be too complex for anyempirical study Thus, to simplify this matter, this study chose thedefinition of Oslo Manual (Manual, 1997) which focus exclusively

on the first two types of innovation of Joseph Schumpter’sdefinition Even though it only captures a fraction of the originaldefinition, it makes innovation concept easier to be measured Inthis definition, introducing new products or improving old producthas to be ‘significantly’ different compared to old product throughapplying new technology, knowledge or material It states that anew process has to be new or its improving has to be significant,this also includes introducing new delivery method The weakness

of Oslo Manual definition is, even though this definition distinguishcarefully what is “new”, as well as well define what is “significantlyimproved” and what is “minor” improving, yet this increase thecomplexity of the definition In practice, a complicated definitionmakes it hard to gather data Moreover, Oslo Manual definitionalso does not consider improvements which involve purely creative

or aesthetic as innovation This could be considered as a stepback of this definition In model economy, we can see a lot ofproducts from different producers with nearly the same features butdifferent appearance Fashion industry, personal computer industry,smartphone industry are good examples In these types of market,while the cycle of a product is shorter than the cycle of atechnical breakthrough, producers do not have any choice but

invest their resources on aesthetic features instead of technicalfeatures to improve their old products or create a new one.