The effect of social capital on innovation of SMEs in vietnam

THEEFFECTOFSOCIALCAPITAL ONINNOVATIONOFSMALLANDMEDIUM- SIZEDENTERPRISESINVIETNAM... structureof thestudy...9 CHAPTER2:LITERATURE REVIEW...11 2.1.. SMEsand theircontributiontoeconomic gro

THEEFFECTOFSOCIALCAPITAL ONINNOVATIONOFSMALLANDMEDIUM- SIZEDENTERPRISESINVIETNAM

DECLARATION 1

ACKNOWLEDGEMENT 2

ABSTRACT 3

ABBREVIATIONS 4

LIST OF FIGURES 5

LIST OFTABLES 6

CHAPTER 1:INTRODUCTION 7

1.1 Problemstatement 7

1.2 Researchobjectives 8

1.3 Researchquestions 8

1.4 Scopeof thestudy 9

1.5 structureof thestudy 9

CHAPTER2:LITERATURE REVIEW 11

2.1 Innovation 11

2.1.1 Definitionof Innovation 11

2.1.2 Productinnovation 11

2.1.3 Importanceofinnovationinentrepreneurship 13

2.1.4 Determinants of Innovation 15

2.1.5 SMEsand theircontributiontoeconomic growth 18

2.2 Socialcapital 21

2.3 Relationship between social capitalandinnovation 23

CHAPTER3:METHODOLOGY ANDDATA 27

3.1 Multinominal logitmodel 27

3.2 Dataandvariables 29

3.2.1 Dataanalysis 29

3.2.2 Variables 34

CHAPTER4:EMPIRICALRESULTS 37

4.1 Descriptivestatistics 37

4.2 RegressionResults 39

4.3 Marginaleffects 42

CHAPTER5:CONCLUSIONANDRECOMMENDATIONS 45

5.1 Main finding 45

5.2 Recommendations 46

REFERENCES 48

APPENDIX 53

Thisdeclarationistocertifythatthisthesisentitled“Theeffectofsocialcapitaloninnovationofsmallandmedium-

sizedenterprisesinVietnam”whichisconductedands u b m i t t e d bymeinpartialfulfilmentoftherequirementsforthedegreeoftheVietnam–T h e NetherlandsProgramme

Thethesisconstitutesonlymyoriginalworksandduesupervisionanda c k n o w l e d

g e m e n t havebeenmadeinthetexttoallmaterialsused.”

HoangDuyKhoa

1

Itismypleasuretoconveymyheartfeltappreciationtothosewhogreatlycontributedt o thisthesisthroughsupervision,supportandencouragement

Iwouldliketoexpressmyutmostgratitudetomysupervisor,Dr.LeVanChon,forh i s excellentguidance,advocate,caring,toleranceandpatience.Itismyluckandhonortoworkunderhissupervision.Hiswisdom,knowledge,skillandwholehearteddevotiontot h i s paperhavealwaystouched,inspiredandmotivatedme.Withouthisencouragementandpersistenthelp,Iwouldnothavebeenabletocompletethisthesis

IamverygratefultoallthelecturesofVietnam–

TheNetherlandsProgramme(VNP),whonotonlydeliveredvaluableknowledgetohelpmecarryonthispaperbutalsogavem e inspirationstodoresearch.IwouldliketosendmyspecialthankstoProf.NguyenT r o n g Hoai,Dr.P h a m KhanhN a m andD r T r u o n g DangT h u

y whoh a v e alwaysaccompaniedusduringthetwo–

yearmasterprogramme.IamverythankfultoDr.PhamKhanhNamandDr.TruongDangThuywhogavemeencouragementsandcommentsonm y ConceptNoteandThesisResearchDesign.IwouldalsoliketothankallVNPstafffortheirconscientiousassistance

Thec o n t r i b u t i o n o f S M E s i n t h e economicgrowthi s u n d e n i a b l e b u t difficul

tt o measure,especiallyi n Vietnam.S M E s takea largep e r c e n t a g e i n t h e totalnumber

e n t e r p r i s e s inVietnam,therebyofferingremarkableemploymentopportunities.Moreover,t h

e y alsoplayessentialroleinenhancingthestabilizationanddynamicoftheeconomy.O n e ofthemostimportantelementinimprovingtheactivitiesoftheSMEsisinnovation,whichhaslongbeenmentionedasaconsequentialcomponentforcreatingandkeepingupt h e competitionanddevelopmentofcooperationinSMEs.SMEs’innovationactivitiesarec u r r e n t l y influencedbymanycomponents,buttheSMEsusuallyfacestheproblemoflacko f resourcesandcapital.I n thiscontext,socialcapitalisusedasasignificantresourcesinmostof

SMEsactivitiesingeneralandinnovationprocessinparticular.Therelationshipbetweensocialcapitalandinnovationhasbeenexaminedb y manyauthorsi n m a n y countries.However,therehasbeenverylittleresearchaboutthisissueinVietnam.Thispaperaimstoascertaintheconsequentialityeffectofsocialcapitalontheinnovationbyu t i l i z i n g themultinomiallogitmodelwhilemeasuringinnovationofVietnameseSMEs.A c c o r d i n g tothetheoriesandempiricalresearchesofmanyauthorsinallaroundtheworld,weexpectt h e p o s i t i v e relationsbetweent h

e socialnetworkso f e n t e r p r i s e s andt h e innovationactivities.Besides,wehavealsoexpectedtofigureoutmorerelatedfactorsthateffectedoninnovationsactivities,thuswemightbeabletorecommendthepolicymakerswaystoenhancetheeconomics.Aboutthe

methodology,thispaperusethe

multinomiall o g i t modeltotestitshypothesis.WemeasuringinnovationofVietnameseSMEsby“newproducts”,“improvementofexistingproducts”“export”.Thepositiverelationsbetweent h

e socialnetworkso fe n t e r p r i s es andt h e innovationac ti v i ti e s whichi s evidencedb y p r

e v i o u s literatureagainpresentedinthisstudy.Inaddition,wealsofindsomefactorswhichaffectinnovation,sincethepolicymakerswillbeabletomotivatetheeconomyd e

v e l o p m e n t byimplementingtheinnovationsupport'spolicies

Keywords:producti n n o v a t i o n , socialcapital,S M E s , Vietnam,multinomiall o g i t

m o d e l

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GDP Grossdomesticproduct

SME Smallandmedium-sizedenterprises

CIEM CentralInstituteforEconomicManagementM P IMinistryofPlanningandInvestmentofVietnamI LS S A

InstituteofLaborScienceandSocialAffairsMoLISA

Figure1:ThemovementofPPFcurvetotherightwhenhavetechnologicali n n o v a t i o n s

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Figure2:SMEs’contributiontoGDPandemployment 19

Figure3:ConceptualFramework 26

Figure4:The2013SMEs’surveysamplebylocation 32

Figure5:The2013SMEs’surveysamplebysector 33

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Table1:TheinnovativenessindicatorsforSMEsindifferentdimensions 17

Table2:CatalogedSMEsbyfinancialassets 18

Table3:SMEs’SharesofManufacturedExportsinDevelopingandOECDEconomies19T a b l e 4:Firmownershipstructure 30

Table5:Firmsize 31

Table6:DifferentbetweenLargeenterprisesandSMEs 33

Table7:Numberofobservationswithimproveexistingproductandnewprocess 37

Table8:Interactionbetweenimproveexistingproductandnewprocess 37

Table9:Descriptivestatistics 37

Table10:Thedummyvariabledescriptivestatistics 38

Table11:Multinomiallogisticresult 39

Table12:Marginaleffectresults 43

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1.1.PROBLEMSTATEMENT

Vietnamhadofficialeconomicrenovation(Doimoi)in1986,butthisprocesshadas l o wadvanceuntil2000,especiallyaftertheAsianfinancialcrisis.Uptonow,alongwithi n t e r n a t i o

n a l economicintegration,theeconomicreformbeganstronglyhappensemphasiso n privatesector.Vietnamhadaccomplishedstunningaccomplishmentssuchassteadinesse c o n o m i c growth,therapiddevelopmentofforeigntrade/investmentorthereductionofdestitution.Amongthat

thesmall-and-medium-sizede n t e r p r i s e s (SMEs)inundeniable.AccordingtotheGeneralStatisticOffice,thenumberofformalSMEsin2012was286.468firmswhichtookaccountof98.34%totalfirms.It

c o n t r i b u t e d approximately40%ofGDPandprovided51%laborforceinVietnameachyearandcreatedsustainableeconomicdevelopment

However,t h e V i e t n a m e s e S M E s alsoh a v e t o strugglem a n y obstacles.T h e totalnumberofnewlyestablishedfirmshaddecreasedsharplyfrom83.600to77.500between2 0 1 0and2012.Moreover,theexitingthemarketofcurrentfirmsisanupwardtrend

Forexample,th e numberofdisbandedanddiscontinuedo p e r a t in g firmswasincreasedby 1

1 9 % in2012whichaccountedfor60.700companies.Understandingthisurgentsituation,m a n y developingcountries’legislatureareimplementingalotofpolicyinordertofortifyt h e developmentofitsSMEs.However,thebigquestionishow

theycouldmotivatethed e v e l o p m e n t ofSMEsbyenhancingitsperformance.Manyresearchersfoundoutthatthei n c r e a s i n g p r o d u c t i v i t y couldb e conductedb y innovation.Innovationwillc r e a t e t h e c o m p e t i t i v e advantagesandbetheessentialsourceoftheincreasinginproductivity

TherearealotoftheoreticalandempiricalstudiessuchasBrüderl(1998),Maskell,P

(2000),Molina‐

Morales(2010),Stametal(2014)emphasizedtheconsequentialityofthetechnicalforeconomicandd

eterminantsofinnovationwhilethesocialcapitalhasonlybeennoticedoverthepastfewyears.ThemostfamouscasestudyisthePutnamNanni7

Lanzetti(1993).Asperthispaper,thesocialcapitalischaracterizeastheessentialresourcef o r firmandwhichcooperateamongindividuals.Becauseofthispossibility,theindividuals o c i a l capitalcouldinfluencefirm’sinnovationbyusingdifferentindicatorstomeasuret h e socialcapital.Moreover,throughsocialcapital,s o m e c a p a b i l i t i e s a l l o w f i r m s t o i n t e g r a t e theirresources,engenderingandsharingknowledgetomaketheirimprovement.T h e r e isanetworkconnectionwhichconnectpeopleandsolvethemattertogether.

Inthisstudies,thesocialcapitalofowner/

managerofenterpriseswillbementionedaswell.However,thereareafewofthescientificresearchapprovethatthesocialcapitalhavet h e influenceoninn ovation, especiallySMEsi nVietnam.T

h i s researchalsoillustrate delineateafewkeycomponentshavingswayonSMEsinnovation.Thedatacollectedfromt h e surveysofViet nam SMEsconductedin20 13willbeacclimatedtoaccentu ate thei m p a c t s ofsocialcapitalontheinnovation.Thequalitativeresultswillbeusedtointroducet h e differentaspectsofpotentialfactorsinfluencingtheinnovationandsomesuggestionsa

b o u t t h e d e v e l o p m e n t ofSMEsinVietnamwillalsobe mentioned.Theenterpriseswillrefertothisresearchwhenpromotinginnovationfortheirproduct

- Howdoessocialcapitalaffectinnovation?

- Whatshouldpolicymakersdotopromotetheprobabilitiesofinnovation?

1.4.SCOPEOFTHESTUDY

TheSMEsSurveyinVietnam,whichisfinancedbytheRoyalEmbassyofDenmarki n Vietnam(hereafterDanida)undertheBusinessSectorProgrammeSupport(BSPS)hasb e e n conductedsixtimes,thelatestistheperiod2007-

2013.TherearethreedepartmentthatorganizedthissurveytogethersuchastheCentralInstituteforEconomicManagement( C I E M ) oftheMinistryofPlanningandInvestmentofVietnam(MPI);theInstituteofLaborScienceandSocialAffairs(ILSSA)oftheMinistryofLabor,InvalidsandSocialA f f a i r s ofVietnam(MoLISA);andtheDevelopmentEconomicsResearchGroup(DERG)o f theUniversityofCopenhagen

1.5.STRUCTUREOFTHESTUDY

Inmoredetail,Chapter2isusedfortheliteraturereview.Itisusedtoreviewtheoriesandtodisplaysomeresultofempiricalstudies.Themeaningsofinnovation,socialcapitalandsomedesignatorseffectoninnovationwillbeintroducedaswell.Inthischapter,wewillabletoconsidertheneedofinnovatinginSMEs

Chapter3willbefocusedonexplainingourmethodologyanddata.ThispartwillcontenttheEconometricmodelthatweconductedandmoredetailsaboutthedatathatweu s e d inthispaper

Chapter4willillustratetheresultsthatwefoundthroughinourresearch.Thevariablesdescriptionanddescriptivestatisticwillbestatedattheopeningofthischapterwhichhelpu s tounderstandclearlyaboutallvariablesandstatistics.Therestofthechapterisusedtod e s c r i b e theregressionresultandmarginaleffects

Chapter5isfortheconclusionandpolicyimplication.Allofthisresearchwillbereviewed,analyzedt h e advantagesa n d d i s a d v a n t a g e s o f o u r m e t h o d o l o g y and

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recommendationforthe futureresearches.Thischapterwillalsosuggestthe

policiesforp o l i c y makersandforenterpriseswhentheywanttoincreasetherateofinnovatingproduct

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CHAPTER 2:LITERATURE REVIEW2.1.INNOVATION

2.1.1 DefinitionofInnovation

Theconceptofinnovationhasevolvedradicallyoverthelastfortyyearsandoneisknownastheknowledge-

Thefirsttypeofinnovationisveryfamiliarwithanybusinessoperation,theresearchandd e v e

l o p m e n t (R&D)process.Inaddition,theseinnovationactivitieswillbeconsideredasa crucialcomponentsdecidedthe“lifeofSMEs”whiletechnologyisappliedatabroaders e n s e ratherthanrelatingtoproductsonly.Healsoclassifiedinnovationintofivetypes:p r o d u c t , process,marketing,organizationalandsocialinnovations.Asaresearchscale,wej u s t focusonproductinnovation

2.1.2 Productinnovation.

Productinnovationisdefinedasthedevelopmentofnewproducts,changesindesigno f establishedproductsorusenewtechnologyinthemanufactureofestablishedproducts.I t takesmanyadvantagesforfirmsuchas:inventinganewproduct,improvingaproduct'squality,enhancingproduct'stechnicalfeaturesoraddingnewparts,inputandexpectingfunctionst o anestablishedp r o d

u c t h e n c e f i r m cangrowth,e x p a n s i o n a n d g a i n i n g a c o m p e t i t i v e a d v a n t

a g e Especiallyi n smalle n t e r p r i s e s t h e i n f l u e n c e o f i n d i v i d u a l s i s considered,theindividualsoragroupofthemwhogettheideas,makedecisionsofbuyingt h e newproducts.Drucker(1985)ismentionedtheinfluenceoftime,theentrepreneur’srelationshiptoindividual’senvironment

Whilesubstantialstudieshavebeeninvestigatingandprovidingproofsofrelationshipbetweencountries’exportandt h e i r i n n o v a t i o n activitiesatmacrolevel( G r e e n h a l g h , 1 1 9 0 ) ,lesseffortandpapersonthiscorrelationatmicrolevelhavebeenpresented.Ontheo n e view,aconsiderablestudieshaveshowedevidenceforasignificantpositiveinfluenceo f innovationwhicharerepresentedbyR&Dexpenditureornumberofinnovationsontheperformanceofexport.

Innovationisdefinedas“implementedtechnologicallynewproductsandprocessesandsignificanttechnologicalimprovementsinproductsandprocesses”(Becheikhetal.,2 0 0 6 )

A c c o r d i n g t o theirperceptions,

(technical)i n n o v a t i o n referst o eithera t e c h n o l o g i c a l l y newproduct/

processoranexistingproduct/

processwhichareexperienceda substantiallytechnologicaladvancement

Aroughdistinctioncan bemadebetweenproductinnovation(including bothnewp

r o d u c t i n n o v a t i o n andmodificationo f ane x i s t i n g p r o d u c t ) a n d processinnovation.Processinnovationsareawaytoimproveproductivityandreduceproductioncosts,whilep r o d u

c t innovationgivestheinnovatingfirmsacompetitiveadvantage.FollowingU t t e r b a c k

andA b e r n a t h y ( 1 9 7 5 ) a n d C a s s i m a n andM a r t í n e z Ros( 2 0 0 4 ) wec o u l d h y p o t h e s i z e thatproductinnovationsandprocessinnovationshaveadifferenteffectone x p o r t performance.Butoften,productinnovationandprocessinnovationarelinkedasnewlydevelopedproductsormodifiedproductsoftenrequiresnewproductionte

-chnology.Innovationistreatedasanunderlyingdeterminantofaquality,suchasfirmperformanceorproductivity.Theadaptablewithchangingmarketconditionneedsfirmsaccumulaten e w k n o

w l edg e andc o n s t a n t l y m od i f y t h e i r productsandprocesses.I n n o v a t i o n isalsoconsideredasatoolofentrepreneurstoexploitchangeasanopportunityf o r aneworadifferentbusinessandservice(OECD,2005)

Innovationisevaluatedinvariousways.Ontheonehand,theinput-orientedm e a s u r e m e n t o f i nn o v ati o n usesdataon R& D (researchanddevelopment)

B u t R&De x p e n d i t u r e tendstooverestimateinnovation,becauseitincludesabortedeffortsthatdo

- Growth,expansionandgainingacompetitiveadvantage.Enterprisescanmakethedifferencebetweentheirproductandmarketwillbeabletoearnprofits.Theresearchandf i n d o u t wayt

o makingp r o d u c t moreattractiveb y c o n t r a s t i n g i t s u n i q u e v a l u e anddifferencewithothercompetingp r o d u c t s Therefore,smallfirmsc a n d e v e l o p theirbusinessesbyexplo itprodu ct in nov ati on effectively,g aini ng acompetitiveadvantage,attractcustomerasuniqueorsuperior

- Second,lostconnectwithotherspartners:thefirmschangethewayoperate,andtherelationshipsbet ween the businessincludin gcu stom ers, suppliers andcou nterpart willb r

e a k downtoo

2.1.3 Importanceofinnovationinentrepreneurship

According

Yeniyurt(2014),todeterminetheneedsofcommunitieswhicharec h a n g i n g fromtimetotime,theindustryleadersalwaysneedstomaketheadaptationtomaintaintheeconomy.Bothsmallandlargebusinessplaytheimportantroletohelpthe

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Creatingnewproducts,enhancingtheexistingoneorimprovingthemanufacturerprocessarethesamplesrevealedtheimportanceofinnovationinentrepreneurship.Forexamples,abusinesswillhavetoconsidertoexpandtheircurrentproductsandservicetos a t i s f

y thechangingprerequisiteoftheirclients.Theyalwaysseektheopportunitytofinda waytomaketheirproductbetterthroughtheinnovation

Intermofsmallenterprise,innovationisfarmoreimportantthanotherfactorsinthes u c c e

s s oftheircompany.Why?

Firstly,asasmallenterprise,theywillbeabletocompetewithlargecompaniesbyimplementinglowerpricestrategywhichmeancost-

effectiveandqualitative.Inaddition, theyincentivetheiremployeescreatesomethingusefulforthecompany.Bothofitmightbeachievedbyinnovation

Nowadays,theglobaleconomyhasbeentransformedtotheknowledgeeconomy.Att h e b e

g i n n i n g , t h e economyc o m m e n c e s f r o m anagriculturale c o n o m y t o t h e p o

s t - i n d u s t r i a l / m a s s productioneconomyanditis

continuouslydevelopingastheknowledgeeconomy.Technologyingeneralandknowledgetechnologyinparticulararethehighlyimportantelements.I t willhelpt o createt h eeducationa

la n d i n n o v a t i v e p rodu ct s andserviceswhichwillgainsmorereturnstobusiness,especiallyinexportation.Itmarkedbytechnologicalinnovationsmovement andtheglobalcompetitiveforinnovationwithnewp r o d u c t s andprocesses

First of all, knowledge-based innovation open up the ability to improve the products

Theeconomicwillbe

abletoproducemoreproductsandservicesthanbefore.Thus,theinnovationinentrepreneurshipwillalsomaketheincreasetheproductivity,thenGrossD o m e s t i c Productwillincreasetoo

ortheprocessesofmanufacturing.Thebasesofnew processandimprovedproductsare

theresearchanddevelopment(R&D).Theinnovationprocessnormallystartsfromthe

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AccordingHyvarinen(1990),thetablebelowdescribesthreeindicatorsofinnovationwhentheyarestudiedbasedonfourdimensionsincludingtechnology,individual,e n t e r p r i s e , market/environment.

*Improvedtechnologies

*Diffusionofinnovation

2.1.5 SMEsandtheircontributiontoeconomicgrowth

Therearewidelyrecog nized descriptionsaboutt h e sm all andm ed i u m enterprises(

S M E s ) Itmightbefoundedintheproducingagricultureinvillage,asmallcoffeeshopatt h e cornertoaproductionbaseinsmalltownorautomotivepartsmanufacturersellingtod o m e s t i c andoverseasmarkets.Theownermight comefrommanydifferentsocialback-

g r o u n d , markets(urban,rural,local,national,regional),differentlevelsofskills,capitalandmanyothers

AccordingtoOECD(2005),Smallandmedium-sizedenterprisesarenon-subsidiary.I n statistics,itisusuallybasedonamountofemployeesandvalueofassetstoclassifythes i z e ofenterprises.Thegivennumberofemployeesaredifferentinacrosscountries.IntheE

u r o p e a n Union,theupperlimitemployeesofSMEsis250,whiletherearearound500int h e UnitedStates.Smallfirmsaremostlywithfewerthan50employees.Even,thereisalsodefinedas“micro”enterprises,withfewerthan10employees

incomecountries,theyc o n t r i b u t e about70%ofGDPandover95%oftotalemployment.Inlow-incomecountriesi s over60%ofGDPandover70%oftotalemployment(figure2).

Figure2:SMEs’contributiontoGDPandemployment

Source:Ayyagari,BeckandDemirgüc-Kunt(2003),p.27-28

Table3showthatSMEsareanimportantsourceofexportinsomeEastAsia,Africand e v e l o p i

n g economiesandOECDcountries.TheshareofexportinmoreindustrializedEastAsianeconomies(Taipei–56%,China–40%,India–

31.5%)lessthanindustrializedA f r i c a n e c o n o m i e s ( T a n z a n i a andM a l a w i

-< 1 % ) O n e importantt h i n g i s thatsmalle n t e r p r i s e s withemployeesmorethan50havelowerexportpotentialthanmedium-sizede n t e r p r i s e s

Table3:SMEs’SharesofManufacturedExportsinDevelopingandOECDEconomies EconomyYear

DefinitionofanSME(a)

D e v e l o p i n g Econom ies

%SME manufacture exports

Chinese

akepartinreducingthejobmigrationtotheb i g city.Besides,firmscant a k e advantageso f t

h i s localr e s o u r c e s t o operationsa n d c o n t r i b u t e d intheeconomicsgrowth

definet h e socialcapitalconsistso f twoelements:f i r s t t h e networko f t h e relationshipswhi

challowsi n d i v i d u al st o a cc es s resourcesp o s se s se d b y the ir associates,ands e co n d l

y th e q u a n t i t y andqualityofresourcespossessedbymemberofanetwork.Adler&Kwon,200

0f o c u s onthesocialcapitalofactorsatmicrolevel,withafocusonnetworksandsocial

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relationships.Definitionsalsovarydependingonwhethertheyfocusonrelationships,thes t r u c t u

r e oftherelationshipsorthetypeofrelationshipsbetweenpeople(e.ginformationrelationships,personalrelations,oreconomicrelationships)

Inconclusion,Socialcapitalcanbemeasureby:

Networksize:Intheliteratureitisoftenassumedthatt h e moresocialrelationsanentrepreneurhas,t h e bettert h e entrepreneuri s connected,t h e moreandbetteraccesst h e entrepreneursh a s t o informationandotherresources,andc o n s e q u e n t l y t h e bettert h e entrepreneurwillperform.Eachindividualcontacto f anentrepreneurcanb e r e g a r d e d asa channelo fcommunicationb e t w e e n thatentrepreneurandmanyotherindirectcontacts(Ahuja,2000).Networkbased:Membershipo f organizations,engagementi n v o l u n t e e r activities,c o

n v e r s a t i o n s withotherparents

NetworksandNormsSeparately:politicalefficacy,generalizedtrust,trust ingovernment,andoptimism

Thebenefitsofthi s relationshipis accumulatesfromone’snetworkofformalandinformaltieswithothers(Burt1992).Next,socialcapitalhasbeendefiniteasthevaluewhichorganizationisexploitingfromeachmemberwhentheyjoiningoforganization,

( N a h a p i e t andGhoshal1998)

Accordingtopreviousstudies,socialcapitalisproxybybusinessnetworkingcanleadt o termp e r f o r m a n c e Dyer& Singh( 1 9 9 8 ) f i n d s o u t thatfirmn e t w o r k i n g cangenerateasustainablecompetitiveadvantage,relation-

long-specificassets,conductknowledge,andp r o v i d e s u p p l e m e n t a r y resourcesande f f e c

t i v e governance.Therefore,b u s i n e s s n e t w o r k i n g

canboostthesuper-normalprofit.Watson(2007)findsaninterestingrelationshipbetweenthenetworksandSMEspossibilityofsurvivalandgrowth.SMEs’survivalandgrowthratecan b e bo ost u n t il t h e

y gainenought h e optimumnumbero frelationshipsandreducewhenthenetworksarecongested

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f i r m p e r f o r m a n c e b y u s i n g

Meta-analyticm e t h o d s t o s y n t h e s i z e e m p i r i c a l f i n d i n g from59studies.Theyanalyzed4aspectsofsocialcapitalincludenetworksize,s t r o n g ties( t h e r e l a t i o n s h i p withfamily,friendsa n d o t h e r c l o s e contactt o archiveresources)and weakties(f irm s'connectionswithdis ta ntb us ine ss andacquaintances),s t r u c t u r e holes(theextenttowhichentrepreneurs'networkcontactsareconnectedtoeacho t h e r ) andnetworkdiversity.Thefinalresultshowedthepositiverelationshipbetweens o c i a l capitalandfirm’sperformance.Basedonastudyof1,700newbusinessventuresGermany,BruderlandPreisendorfer( 1 9 9 8 )givesanempiricaltesto f t h e n e t w o r k s u c c e s s hypothesisthatc o n c l u d e socialcapitalenhancest h e su ccessf u l start-

upf i r m s T h ey co n sid er t h e effecto f networkb y d i v i d e d

intothestrong-tiesandweak-ties

Althoughtherearenoeffectsofhumancapitalo n theamountofsocialcapital,therelationshipbetweenhumancapitalandthesuccessofn e w businessesaresignificant.Inaddition,humancapitalstockplaysanimportantroleinordertoimprovetheproductivityandincreasethesalariesaswell.Itisalsoasourcenoto n l y tomotivateandboostupemployees’responsibilitybutalsotocreateexpenditureinR&D.Consequently,firmwillbeabletoachievetheirobjectiveseasier.Thus,Richardson(

1 9 7 2 ) hasalsoindicatedthattheinnovationrequirestheuseofbothdifferentskillsandknowledgethatwouldbeattainedintheprocessbytheapplicationofsocialcapital

2.3.RELATIONSHIPBETWEENSOCIALCAPITALANDI

NNOVATION

Nowadays,manyfirmsdecidetoinvestonthesocialcapitalbecauseoftheimpactofi t o n theiri n n o v a t i o n Basedo n t h e d e f i n i t i o n o f cooperationp o s s i b i l i t i e s , throughc o l l a b o r a t i v e learning,thesocialcapitalisvaluableinordertospreadtheinformationflowandknowledgeaswellastoreducetheuncertaintyandtransactioncosts,whichfacilitatest h e collaborationamongfirms.Moreover,one ofmostimportantimpactofsocialcapitali n innovationisthatthehighlevelofsocialcapitalmightreducetransactioncosts(Maskell,2 0 0 1 ; Landry etal.,2002).Manyvariousforms ofsocialc ap i ta laffecttheinnovation

processi s p r o v e d b y m a n y p r e v i o u s evidences.Furthermore,t h e i n c r e a s i n g i n socialcapital,especiallyi n theformso f participationandrelationalassets,willleadt o t h e i n c r

e a s e ofthelikelihoodofinnovation

Mostrecentresearchemphasizethepositiverelationshipbetweenofsocialcapitalandt h e i n

n o v a t i o n p r o c e s s O n t h e otherside,thereares o m e n e g a t i v e i m p a c t a s well(Dasgupta,2 0 0 0 ) Firstly,t h e socialnetworksandt h e geographicfactoro f f i r m s has

impactedinnovation offirms(Molina‐Morales 2010).Ther o l e ofsocialcapitalis

examinedvariousaspectssuchastrust,socialinteractions,sharedvisionandinvolvementoflocali n s t i t u t i o n s i n t h e p r o d u c t andp r o c e s s i n n o v a t i o n o f f i r m s T h

e resulta l s o c o n f i r m e d theviewthatsocialcapitalindices,tosomeextent,canrevealtheinnovation

Itisunderlinedthatinsocialnetworktheoriesofinnovation,therelationaltoolsism o

r e importantthantechnicaltoolsintermsofcreatingcompetitiveadvantages(LengrandandChatrie,1999).Inspecific,whiletherelationaltoolsmightbeabletoapplyinbothi n t e r n a l andextenaltermoffirms,thetechnicaltoolscanonlybeusedinexternalsidesuchasaddingvaluebyacquiringcommunicationtechnologiesandnewinformation.Incaseofs m a l l firms,theyhaverarelynotenoughcapabilitiestoinvestontheirowninnovationsothattheywillhavetorelyontheoutsidesources.Mostofthemalwaystendtofindandconnectwith otherpartners/supplierinordertocollecttheinformationandcreateacloserelationship.Itisobviousthatfirmsalwaysneedtostrengthentheirrelationshipsinbothi n t e r n a l andexternalenvironment

Anotherfacti s thatf i r m witha l arg esto ck o fsocialcapitalwilli n c r e a s e r eli ab le i n

f o r m a t i o n , helpt o reducemisbehavior,allowmembero f f i r m cansharei m p l i c i t i

n f o r m a t i o n , andmoreconveniencenegotiations.Meanwhile,thefunctionofsocialcapitali s thatthevalueandknowledgeofbusinesswillbecreatedbytheintegrationbetweentherelationshipandthetrusttoeachotherinbothrelationandcreditbetweenfirms

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Hence,socialcapitalenhancethefirm’sinnovation.Whenthespecializationhappensandtheprocessofglobalizationdevelops,itmakesthisadvantagegetsbigger,hencebootst h e essentialbetweendifferentfirms(Maskell,1999).

Infact,itmightnotnecessaryforfirmtoapplyanyinnovationtypeatanytimeduringi t s circlelife.Itmightreferonemorethananotherorevenchoosetobothinnovationtypes.A s statedabove,theinnovationisveryimportantandtheywillalwaysneedmakeresearchc a r e f u l l y beforedecidingwhichtypeofinnovationwillbesuitableforthefirm

Socialrelationshipstogetherwithconfidenceamongworkerspositivelyaffectproductinnovation( T

s a i andHuang,2 0 0 8 ) Higherlevelo f beliefi n o t h e r s appearst o b o o s t innovation.ThisisalsoevidencedbythestudyofSubramaniamandYoundt,2005astheyf i n d thatexchangingideasandunderstandingsamongstaffsstimulateproductinnovationasthehigherleveltheinterractionsinacompanyare,thefasterthenewtechnologicali n f o r m a t i o n andunderstandingoc

(1998)alsoshowsthattheseactivitiesarealsoassumedt o p r o m o t e trustworthyandefficientchannelsf o r c o m m u n i c a t i o n a c r o s s demarcationl i n e s o f o r g a n i z a t i o

n s I n particular,Nahapieta n d Ghoshal(1998)indicatesthatcommonlanguageassistsinenhancingaccesstoindividualsandob t ai ni n g theirknowledge.Furthermore,beliefsalo n g withreciprocalrespectandsharedperceptionsamongstaffsalsofosterlearningandinnovationinorganizations(Wuetal.,2008).Hence,theinteractionbetweenemployeesaccelerateproductinnovations.Despitep u t t i n g a l o t o f effort,t h i s s t u d y h a v e n o t s o l v e t h e e n d o g e n e i t y a

m o n g v a r i a b l e s , whicharementionedinliteraturethatcompetitionontheinternationalmarketswouldforceexportingfirmstoinnovatetoremaincompetitiveness;moreover,thee x p o r

t i n g f i r m s m a y ‘learnb y e x p o r t i n g ’ a s t h e y areexposedt o a richers o u r c e o fknowledge,expertiseandtechnologythatisoftennotavailableinthehomemarket

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