The effect of social capital on innovation of SMEs in vietnam

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICSTHE EFFECT OF SOCIAL CAPITAL ON INNOVATION OF SMALL AND MEDIUM-SIZED ENTERPRISES IN VIETNAM BY HOANG DUY KHOA MASTE

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE EFFECT OF SOCIAL CAPITAL ON INNOVATION OF SMALL AND MEDIUM-SIZED ENTERPRISES IN

VIETNAM

BY

HOANG DUY KHOA

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, NOVEMBER 2016

UNIVERSITY OF ECONOMIC INSTITUTE OF SOCIAL STUDIES

VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE EFFECT OF SOCIAL CAPITAL ON INNOVATION

OF SMALL AND MEDIUM-SIZED ENTERPRISES IN

VIETNAM

A thesis submitted in partial fulfillment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

Table of contents

DECLARATION 1

ACKNOWLEDGEMENT 2

ABSTRACT 3

ABBREVIATIONS 4

LIST OF FIGURES 5

LIST OF TABLES 6

CHAPTER 1: INTRODUCTION 7

1.1 Problem statement 7

1.2 Research objectives 8

1.3 Research questions 8

1.4 Scope of the study 9

1.5 structure of the study 9

CHAPTER 2: LITERATURE REVIEW 11

2.1 Innovation 11

2.1.1 Definition of Innovation 11

2.1.2 Product innovation 11

2.1.3 Importance of innovation in entrepreneurship 13

2.1.4 Determinants of Innovation 15

2.1.5 SMEs and their contribution to economic growth 18

2.2 Social capital 21

2.3 Relationship between social capital and innovation 23

CHAPTER 3: METHODOLOGY AND DATA 27

3.1 Multinominal logit model 27

3.2 Data and variables 29

3.2.1 Data analysis 29

3.2.2 Variables 34

CHAPTER 4: EMPIRICAL RESULTS 37

4.1 Descriptive statistics 37

4.2 Regression Results 39

4.3 Marginal effects 42

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 45

5.1 Main finding 45

5.2 Recommendations 46

REFERENCES 48

APPENDIX 53

DECLARATION

This declaration is to certify that this thesis entitled “The effect of social capital on innovation of small and medium-sized enterprises in Vietnam” which is conducted and submitted by me in partial fulfilment of the requirements for the degree of the Vietnam – The Netherlands Programme

The thesis constitutes only my original works and due supervision and acknowledgement have been made in the text to all materials used.”

Hoang Duy Khoa

ACKNOWLEDGEMENT

It is my pleasure to convey my heartfelt appreciation to those who greatly contributed

to this thesis through supervision, support and encouragement

I would like to express my utmost gratitude to my supervisor, Dr Le Van Chon, for his excellent guidance, advocate, caring, tolerance and patience It is my luck and honor to work under his supervision His wisdom, knowledge, skill and wholehearted devotion to this paper have always touched, inspired and motivated me Without his encouragement and persistent help, I would not have been able to complete this thesis

I am very grateful to all the lectures of Vietnam – The Netherlands Programme (VNP), who not only delivered valuable knowledge to help me carry on this paper but also gave

me inspirations to do research I would like to send my special thanks to Prof Nguyen Trong Hoai, Dr Pham Khanh Nam and Dr Truong Dang Thuy who have always accompanied us during the two – year master programme I am very thankful to Dr Pham Khanh Nam and Dr Truong Dang Thuy who gave me encouragements and comments on

my Concept Note and Thesis Research Design I would also like to thank all VNP staff for their conscientious assistance

I am thankful to my friends from VNP who have shared bittersweet experiences of studying with me and always sent helps and encouragements whenever I need Besides,

my sincere thankfulness also goes to my company’s managers and colleague who kindly and understandingly facilitated my master studying

Finally, I am most grateful to Dad, Mom, Aunt, Sister and Brother for their unconditional love, endless support and limitless tolerance to me throughout my journeys

ABSTRACT

The contribution of SMEs in the economic growth is undeniable but difficult to measure, especially in Vietnam SMEs take a large percentage in the total number enterprises in Vietnam, thereby offering remarkable employment opportunities Moreover, they also play essential role in enhancing the stabilization and dynamic of the economy One of the most important element in improving the activities of the SMEs is innovation, which has long been mentioned as a consequential component for creating and keeping up the competition and development of cooperation in SMEs SMEs’ innovation activities are currently influenced by many components, but the SMEs usually faces the problem of lack

of resources and capital In this context, social capital is used as a significant resources in most of SMEs activities in general and innovation process in particular The relationship between social capital and innovation has been examined by many authors in many countries However, there has been very little research about this issue in Vietnam This paper aims to ascertain the consequentiality effect of social capital on the innovation by utilizing the multinomial logit model while measuring innovation of Vietnamese SMEs According to the theories and empirical researches of many authors in all around the world,

we expect the positive relations between the social networks of enterprises and the innovation activities Besides, we have also expected to figure out more related factors that effected on innovations activities, thus we might be able to recommend the policy makers ways to enhance the economics About the methodology, this paper use the multinomial logit model to test its hypothesis We measuring innovation of Vietnamese SMEs by “new products”, “improvement of existing products” “export” The positive relations between the social networks of enterprises and the innovation activities which is evidenced by previous literature again presented in this study In addition, we also find some factors which affect innovation, since the policy makers will be able to motivate the economy development by implementing the innovation support's policies

Keywords: product innovation, social capital, SMEs, Vietnam, multinomial logit

model

ABBREVIATIONS

GDP Gross domestic product

SME Small and medium-sized enterprises

CIEM Central Institute for Economic Management

MPI Ministry of Planning and Investment of Vietnam

ILSSA Institute of Labor Science and Social Affairs

MoLISA Ministry of Labor, Invalids and Social Affairs of Vietnam BSPS Business Sector Programme Support

R&D Research and development

PPF Production–possibility frontier

OECD Organization for Economic Cooperation and Development OLS Ordinary least squares

MNL Multinomial logit model

SOEs State-owned enterprises

MIT Ministry of Industry and Trade

FDI Foreign Direct Investment

LIST OF FIGURES

Figure 1: The movement of PPF curve to the right when have technological

innovations 15

Figure 2: SMEs’ contribution to GDP and employment 19

Figure 3: Conceptual Framework 26

Figure 4: The 2013 SMEs’ survey sample by location 32

Figure 5: The 2013 SMEs’ survey sample by sector 33

LIST OF TABLES

Table 1: The innovativeness indicators for SMEs in different dimensions 17

Table 2: Cataloged SMEs by financial assets 18

Table 3: SMEs’ Shares of Manufactured Exports in Developing and OECD Economies 19 Table 4: Firm ownership structure 30

Table 5: Firm size 31

Table 6: Different between Large enterprises and SMEs 33

Table 7: Number of observations with improve existing product and new process 37

Table 8: Interaction between improve existing product and new process 37

Table 9: Descriptive statistics 37

Table 10: The dummy variable descriptive statistics 38

Table 11: Multinomial logistic result 39

Table 12: Marginal effect results 43

CHAPTER 1: INTRODUCTION

1.1 PROBLEM STATEMENT

Vietnam had official economic renovation (Doi moi) in 1986, but this process had a slow advance until 2000, especially after the Asian financial crisis Up to now, along with international economic integration, the economic reform began strongly happens emphasis

on private sector Vietnam had accomplished stunning accomplishments such as steadiness economic growth, the rapid development of foreign trade/investment or the reduction of destitution Among that accomplishment, the importance of the small-and-medium-sized enterprises (SMEs) in undeniable According to the General Statistic Office, the number of formal SMEs in 2012 was 286.468 firms which took account of 98.34% total firms It contributed approximately 40% of GDP and provided 51% labor force in Vietnam each year and created sustainable economic development

However, the Vietnamese SMEs also have to struggle many obstacles The total number of newly established firms had decreased sharply from 83.600 to 77.500 between

2010 and 2012 Moreover, the exiting the market of current firms is an upward trend For example, the number of disbanded and discontinued operating firms was increased by 11.9% in 2012 which accounted for 60.700 companies Understanding this urgent situation, many developing countries’ legislature are implementing a lot of policy in order to fortify the development of its SMEs However, the big question is how they could motivate the development of SMEs by enhancing its performance Many researchers found out that the increasing productivity could be conducted by innovation Innovation will create the competitive advantages and be the essential source of the increasing in productivity There are a lot of theoretical and empirical studies such as Brüderl (1998), Maskell, P (2000), Molina‐Morales (2010), Stam et al (2014) emphasized the consequentiality of the technical for economic and determinants of innovation while the social capital has only been noticed over the past few years The most famous case study is the Putnam Nanni

Lanzetti (1993) As per this paper, the social capital is characterize as the essential resource for firm and which cooperate among individuals Because of this possibility, the individual social capital could influence firm’s innovation by using different indicators to measure the social capital Moreover, through social capital, some capabilities allow firms to integrate their resources, engendering and sharing knowledge to make their improvement There is a network connection which connect people and solve the matter together

In this studies, the social capital of owner/manager of enterprises will be mentioned as well However, there are a few of the scientific research approve that the social capital have the influence on innovation, especially SMEs in Vietnam This research also illustrate delineate a few key components having sway on SMEs innovation The data collected from the surveys of Vietnam SMEs conducted in 2013 will be acclimated to accentuate the impacts of social capital on the innovation The qualitative results will be used to introduce the different aspects of potential factors influencing the innovation and some suggestions about the development of SMEs in Vietnam will also be mentioned The enterprises will refer to this research when promoting innovation for their product

1.2 RESEARCH OBJECTIVES

This paper aims to claim the need of social capital for the product innovation activities and determine which elements exhibit the significant impact on product innovation activities of Vietnamese SMEs Throughout the understanding of which elements impact the product innovation, the enterprise’s owner/manager can adjust the firm’s strategy to gain the competitive advantages not only in residential market but also in worldwide market Besides, the policy makers might be able to control the influential elements of each industry in order to make suitable decision to assist the innovation of specific sector

- How does social capital affect innovation?

- What should policy makers do to promote the probabilities of innovation?

1.4 SCOPE OF THE STUDY

The SMEs Survey in Vietnam, which is financed by the Royal Embassy of Denmark

in Vietnam (hereafter Danida) under the Business Sector Programme Support (BSPS) has been conducted six times, the latest is the period 2007-2013 There are three department that organized this survey together such as the Central Institute for Economic Management (CIEM) of the Ministry of Planning and Investment of Vietnam (MPI); the Institute of Labor Science and Social Affairs (ILSSA) of the Ministry of Labor, Invalids and Social Affairs of Vietnam (MoLISA); and the Development Economics Research Group (DERG)

of the University of Copenhagen

1.5 STRUCTURE OF THE STUDY

In more detail, Chapter 2 is used for the literature review It is used to review theories and to display some result of empirical studies The meanings of innovation, social capital and some designators effect on innovation will be introduced as well In this chapter, we will able to consider the need of innovating in SMEs

Chapter 3 will be focused on explaining our methodology and data This part will content the Econometric model that we conducted and more details about the data that we used in this paper

Chapter 4 will illustrate the results that we found through in our research The variables description and descriptive statistic will be stated at the opening of this chapter which help

us to understand clearly about all variables and statistics The rest of the chapter is used to describe the regression result and marginal effects

Chapter 5 is for the conclusion and policy implication All of this research will be reviewed, analyzed the advantages and disadvantages of our methodology and

recommendation for the future researches This chapter will also suggest the policies for

policy makers and for enterprises when they want to increase the rate of innovating product

CHAPTER 2: LITERATURE REVIEW

2.1 INNOVATION

2.1.1 Definition of Innovation

The concept of innovation has evolved radically over the last forty years and one is known as the knowledge-based innovation There are a lot of concepts about this types such as knowledge-based innovation derived from science; knowledge-based innovation derived from market needs; knowledge-based innovation derived from linkages between actors in markets; knowledge-based innovation derived from technological networks or knowledge-based innovation derived from social networks According to Hyvarinen (1990), innovation includes both internal and external activities of firms which are creating new products, enhancing existing products, process, governance or marketing… The first type of innovation is very familiar with any business operation, the research and development (R&D) process In addition, these innovation activities will be considered as

a crucial components decided the “life of SMEs” while technology is applied at a broader sense rather than relating to products only He also classified innovation into five types: product, process, marketing, organizational and social innovations As a research scale, we just focus on product innovation

2.1.2 Product innovation

Product innovation is defined as the development of new products, changes in design

of established products or use new technology in the manufacture of established products

It takes many advantages for firm such as: inventing a new product, improving a product's quality, enhancing product's technical features or adding new parts, input and expecting functions to an established product hence firm can growth, expansion and gaining a competitive advantage Especially in small enterprises the influence of individuals is considered, the individuals or a group of them who get the ideas, make decisions of buying the new products Drucker (1985) is mentioned the influence of time, the entrepreneur’s relationship to individual’s environment

While substantial studies have been investigating and providing proofs of relationship between countries’ export and their innovation activities at macro level (Greenhalgh, 1190), less effort and papers on this correlation at micro level have been presented On the one view, a considerable studies have showed evidence for a significant positive influence

of innovation which are represented by R&D expenditure or number of innovations on the performance of export

Innovation is defined as “implemented technologically new products and processes and significant technological improvements in products and processes” (Becheikh et al., 2006) According to their perceptions, (technical) innovation refers to either a technologically new product/process or an existing product/process which are experienced

a substantially technological advancement

A rough distinction can be made between product innovation (including both new product innovation and modification of an existing product) and process innovation Process innovations are a way to improve productivity and reduce production costs, while product innovation gives the innovating firms a competitive advantage Following Utterback and Abernathy (1975) and Cassiman and Martínez-Ros (2004) we could hypothesize that product innovations and process innovations have a different effect on export performance But often, product innovation and process innovation are linked as newly developed products or modified products often requires new production technology Innovation is treated as an underlying determinant of a quality, such as firm performance or productivity The adaptable with changing market condition needs firms accumulate new knowledge and constantly modify their products and processes Innovation is also considered as a tool of entrepreneurs to exploit change as an opportunity for a new or a different business and service (OECD, 2005)

Innovation is evaluated in various ways On the one hand, the input-oriented measurement of innovation uses data on R&D (research and development) But R&D expenditure tends to overestimate innovation, because it includes aborted efforts that do

not necessarily lead to new products/processes or improved products/processes On the other hand, the output-oriented measurement applies patent data, innovation count and firm-based surveys However, a patent would better represent an invention rather than innovation The method of innovation count is deemed an object approach which relies on innovation data from various sources, such new product/process announcements, database, journals, etc (Becheikh et al., 2006)

Reguia (2014) has showed some advantages of product innovation:

- Growth, expansion and gaining a competitive advantage Enterprises can make the difference between their product and market will be able to earn profits The research and find out way to making product more attractive by contrasting its unique value and difference with other competing products Therefore, small firms can develop their businesses by exploit product innovation effectively, gaining a competitive advantage, attract customer as unique or superior

- Brand switching: the successfully product innovation will attract customers from rival brands The introduction of the iPhone make mobile phone users to switch from Nokia, Motorola, Sony, etc is the example

Besides, product innovation not only take advantages but also many drawbacks:

- First, innovation will contain high costs and high risk of failure: When a firm engages to innovate its product, it will spend a lot of capital, resources into innovation process and it could take times for a business which an uncertain return

- Second, lost connect with others partners: the firms change the way operate, and the relationships between the business including customers, suppliers and counterpart will break down too

2.1.3 Importance of innovation in entrepreneurship

According Yeniyurt (2014), to determine the needs of communities which are changing from time to time, the industry leaders always needs to make the adaptation to maintain the economy Both small and large business play the important role to help the

economy survive the changing times In other words, it is necessary for a business to be productive, innovative and ingenious

Creating new products, enhancing the existing one or improving the manufacturer process are the samples revealed the importance of innovation in entrepreneurship For examples, a business will have to consider to expand their current products and service to satisfy the changing prerequisite of their clients They always seek the opportunity to find

a way to make their product better through the innovation

In term of small enterprise, innovation is far more important than other factors in the success of their company Why? Firstly, as a small enterprise, they will be able to compete with large companies by implementing lower price strategy which mean cost-effective and qualitative In addition, they incentive their employees create something useful for the company Both of it might be achieved by innovation

Nowadays, the global economy has been transformed to the knowledge economy At the beginning, the economy commences from an agricultural economy to the post-industrial/mass production economy and it is continuously developing as the knowledge economy Technology in general and knowledge technology in particular are the highly important elements It will help to create the educational and innovative products and services which will gains more returns to business, especially in exportation It marked by technological innovations movement and the global competitive for innovation with new products and processes

The Production–possibility frontier (PPF) curve is the clearly illustration for the importance of innovation A production–possibility frontier (PPF) is a graphical exhibit of conceivable combination of two components which is the constant resources and the technology (Samuelson, 1967) In bellowed picture, the A, B, C, D are the points to produce It means that the increasing the amount of product X will make the decreasing the amount of product Y However, by adding technological progress, the PPF curve will move

to the right and the possible point will now be the E which means we can produce more

The economic will be able to produce more products and services than before Thus, the innovation in entrepreneurship will also make the increase the productivity, then Gross Domestic Product will increase too

Figure 1: The movement of PPF curve to the right when have technological

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

or the processes of manufacturing The bases of new process and improved products are the research and development (R&D) The innovation process normally starts from the

R&D activities such as demand analysis, market survey, developing the new idea, testing

it with assessment, learning and applying new technology, designing the new product

R&D is considered as the key factor encouraging technological change (Grunertet al.,

1997) Most of the research claim that changing in technological is a necessary for

innovation of firms (Huiban & Bouhsina, 1998) But some researchers have showed that

innovation in small firms is not primarily R&D based (Le Bars et al., 1998) This statement

seems to be true for this paper In particular, according to Vietnam 2013 SMEs’ survey,

there are a large amount of missing data because R&D cost cannot separate clearly from

other costs

Secondly, the characteristics of the entrepreneur such as background and skills and are

believed to have a significant impact on innovation These characteristics are considered

to be more important in small firms than large firms which are complex and difficult to

making decisions These factors related to enterprise's characters such as: firm size, firm

age, training cost, amount of labor, firm asset, firm profit, export activity…Empirical

findings show that young owner/manager are more likely to innovate than the older

owner/manager (Mascitelli, 2000; Avermaete, Viaene, & Morgan, 2002) Moreover, many

studies have emphasized the importance of owner/manager’s educational background for

innovation They suggested that owner/manager with post-school qualification are more

likely to innovate than other owner/manager of firms (Cohen & Levinthal, 1989)

The innovating firms have tendency to expand their markets to earn higher profits

from their investment (Teece, 1986) Thus, the positive relationship between export and

innovation is expected

In many theories, networks and communities is the source of knowledge, and social

capital is the indispensable factor of the innovation According to Molina‐Morales et al

(2010), they considered the role of social capital effect on firms’ innovation through

process and product innovation

Commented [KH1]: 1.R&D

2.Phần này có nên bổ sung từ 4.1 lên hay không?

According Hyvarinen (1990), the table below describes three indicators of innovation when they are studied based on four dimensions including technology, individual,

enterprise, market/ environment

Table 1: The innovativeness indicators for SMEs in different dimensions

Technology * Personnel participating

* Other innovations

* New ideas

* Renewals

* Development possibilities

* Diffusion of innovation

* Development of individual

* Better living standard

* Better image

* Rewards

* Development of enterprise Internationalization

* New enterprises Employment

* Regional development Facts

* Know-how

* Economic growths

* Diffusion of innovation Source: Hyvarinen (1990)

2.1.5 SMEs and their contribution to economic growth

There are widely recognized descriptions about the small and medium enterprises (SMEs) It might be founded in the producing agriculture in village, a small coffee shop at the corner to a production base in small town or automotive parts manufacturer selling to domestic and overseas markets The owner might come from many different social back-ground, markets (urban, rural, local, national, regional), different levels of skills, capital and many others

According to OECD (2005), Small and medium-sized enterprises are non-subsidiary

In statistics, it is usually based on amount of employees and value of assets to classify the size of enterprises The given number of employees are different in across countries In the European Union, the upper limit employees of SMEs is 250, while there are around 500 in the United States Small firms are mostly with fewer than 50 employees Even, there is also defined as “micro” enterprises, with fewer than 10 employees

The other key features determining an enterprise is a SMEs is financial assets

Table 2: Cataloged SMEs by financial assets

Company category Staff headcount Turnover Balance sheet total

is over 60% of GDP and over 70% of total employment (figure 2)

Figure 2: SMEs’ contribution to GDP and employment

Source: Ayyagari, Beck and Demirgüc-Kunt (2003),p 27-28

Table 3 show that SMEs are an important source of export in some East Asia, African developing economies and OECD countries The share of export in more industrialized East Asian economies (Taipei – 56%, China – 40%, India – 31.5%) less than industrialized African economies (Tanzania and Malawi - <1%) One important thing is that small enterprises with employees more than 50 have lower export potential than medium-sized enterprises

Table 3: SMEs’ Shares of Manufactured Exports in Developing and OECD Economies

Economy Year Definition of an SME (a) % SME manufacture

exports Developing Economies

Chinese

India 1991/1992 <Rs 30 M investment in plant & machinery 31.5

Note: (a) Definition adopted by each study, which may be different to the official

national definition of an SME

Studies: Korea (Kim and Nugent, 1999), India (Badrinath and Others, 1997),

Mauritius (Wignaraja and O’Neil, 1999), Tanzania and Malawi (estimates based on

Wignaraja’s fieldwork), the remaining countries (OECD, 1997)

Source: Wignaraja, Ganesh (2003)

The SMEs have some advantages to adapt socioeconomic situation – they constitute

an important dynamic element in economy Because of the small production, they are

Commented [KH2]: 30tr Rupees (tiền ấn độ)

flexible and easy to make adjustment to the economic shock They are also more active

and responsive to changes in the market, changes in their activities and products to meet

market demand – it is also the innovation of SMEs

SMEs played an important part in the enhancing poverty alleviation, especially in rural

areas Another point is narrowing the development gaps among provinces, urban, and rural

areas It create more job opportunities with low cost The saving solution and allocation in

many areas from SMRs can make a lot of occupations for many candidates in the whole

country Especially in rural area, they also take part in reducing the job migration to the

big city Besides, firms can take advantages of this local resources to operations and

contributed in the economics growth

Moreover, in order to gain the comparative advantages with large firms and

corporations, goods and services of SMEs must be diversified not only in quantity but also

in quality They entry the niche market which the large firms skipped

The SMEs is also contribution in industrialization and modernization process in

Vietnam, speeding the urbanization process, supporting and encouraging the development

of large enterprises through their networks with these enterprises Confronting with trade

barriers, transport costs fall and globalization, SMEs are required to create the products

which more added value to stay ahead and compete with rivals with lower cost This is the

main reason of firms to apply innovation

2.2 SOCIAL CAPITAL

The principal theory about the social capital is that networks of relationships This is

the intangible assets of firms which can be applied for the individual or the group For the

individual level, social capital is one’s relationships with others As Portes (1998) define

the social capital consists of two elements: first the network of the relationships which

allows individuals to access resources possessed by their associates, and secondly the

quantity and quality of resources possessed by member of a network Adler & Kwon, 2000

focus on the social capital of actors at micro level, with a focus on networks and social

Commented [KH3]: Tính năng động của SMEs

Commented [KH4]: Bổ sung các cty đều bắt đầu từ SMEs

relationships Definitions also vary depending on whether they focus on relationships, the structure of the relationships or the type of relationships between people (e.g information relationships, personal relations, or economic relationships)

In conclusion, Social capital can be measure by:

Network size: In the literature it is often assumed that the more social relations an entrepreneur has, the better the entrepreneur is connected, the more and better access the entrepreneurs has to information and other resources, and consequently the better the entrepreneur will perform Each individual contact of an entrepreneur can be regarded as a channel of communication between that entrepreneur and many other indirect contacts (Ahuja, 2000)

Network based: Membership of organizations, engagement in volunteer activities, conversations with other parents

Networks and Norms Separately: political efficacy, generalized trust, trust in government, and optimism

The benefits of this relationship is accumulates from one’s network of formal and informal ties with others (Burt 1992) Next, social capital has been definite as the value which organization is exploiting from each member when they joining of organization, (Nahapiet and Ghoshal 1998).

According to previous studies, social capital is proxy by business networking can lead

to long-term performance Dyer & Singh (1998) finds out that firm networking can generate a sustainable competitive advantage, relation- specific assets, conduct knowledge, and provide supplementary resources and effective governance Therefore, business networking can boost the super-normal profit Watson (2007) finds an interesting relationship between the networks and SMEs possibility of survival and growth SMEs’ survival and growth rate can be boost until they gain enough the optimum number of relationships and reduce when the networks are congested

According to Stam et al (2014) examined the role of entrepreneurs’ personal networks and small firm performance by using Meta-analytic methods to synthesize empirical finding from 59 studies They analyzed 4 aspects of social capital include network size, strong ties (the relationship with family, friends and other close contact to archive resources) and weak ties (firms' connections with distant business and acquaintances), structure holes (the extent to which entrepreneurs' network contacts are connected to each other) and network diversity The final result showed the positive relationship between social capital and firm’s performance

Based on a study of 1,700 new business ventures Germany, Bruderl and Preisendorfer (1998) gives an empirical test of the network success hypothesis that conclude social capital enhances the successful start-up firms They consider the effect of network by divided into the strong-ties and weak-ties Although there are no effects of human capital

on the amount of social capital, the relationship between human capital and the success of new businesses are significant In addition, human capital stock plays an important role in order to improve the productivity and increase the salaries as well It is also a source not only to motivate and boost up employees’ responsibility but also to create expenditure in R&D Consequently, firm will be able to achieve their objectives easier Thus, Richardson (1972) has also indicated that the innovation requires the use of both different skills and knowledge that would be attained in the process by the application of social capital

2.3 RELATIONSHIP BETWEEN SOCIAL CAPITAL AND

INNOVATION

Nowadays, many firms decide to invest on the social capital because of the impact of

it on their innovation Based on the definition of cooperation possibilities, through collaborative learning, the social capital is valuable in order to spread the information flow and knowledge as well as to reduce the uncertainty and transaction costs, which facilitates the collaboration among firms Moreover, one of most important impact of social capital

in innovation is that the high level of social capital might reduce transaction costs (Maskell, 2001; Landry et al., 2002) Many various forms of social capital affect the innovation

process is proved by many previous evidences Furthermore, the increasing in social capital, especially in the forms of participation and relational assets, will lead to the increase of the likelihood of innovation

Most recent research emphasize the positive relationship between of social capital and the innovation process On the other side, there are some negative impact as well (Dasgupta, 2000) Firstly, the social networks and the geographic factor of firms has impacted innovation of firms (Molina‐Morales 2010) The role of social capital is examined various aspects such as trust, social interactions, shared vision and involvement

of local institutions in the product and process innovation of firms The result also confirmed the view that social capital indices, to some extent, can reveal the innovation

It is underlined that in social network theories of innovation, the relational tools is more important than technical tools in terms of creating competitive advantages (Lengrand and Chatrie, 1999) In specific, while the relational tools might be able to apply in both internal and extenal term of firms, the technical tools can only be used in external side such

as adding value by acquiring communication technologies and new information In case of small firms, they have rarely not enough capabilities to invest on their own innovation so that they will have to rely on the outside sources Most of them always tend to find and connect with other partners/supplier in order to collect the information and create a close relationship It is obvious that firms always need to strengthen their relationships in both internal and external environment

Another fact is that firm with a large stock of social capital will increase reliable information, help to reduce misbehavior, allow member of firm can share implicit information, and more convenience negotiations Meanwhile, the function of social capital

is that the value and knowledge of business will be created by the integration between the relationship and the trust to each other in both relation and credit between firms

Hence, social capital enhance the firm’s innovation When the specialization happens and the process of globalization develops, it makes this advantage gets bigger, hence boots the essential between different firms (Maskell, 1999)

In fact, it might not necessary for firm to apply any innovation type at any time during its circle life It might refer one more than another or even choose to both innovation types

As stated above, the innovation is very important and they will always need make research carefully before deciding which type of innovation will be suitable for the firm

Social relationships together with confidence among workers positively affect product innovation (Tsai and Huang, 2008) Higher level of belief in others appears to boost innovation This is also evidenced by the study of Subramaniam and Youndt, 2005 as they find that exchanging ideas and understandings among staffs stimulate product innovation

as the higher level the interractions in a company are, the faster the new technological information and understanding occur Besides, Le Bas et al (1998) also shows that these activities are also assumed to promote trustworthy and efficient channels for communication across demarcation lines of organizations In particular, Nahapiet and Ghoshal (1998) indicates that common language assists in enhancing access to individuals and obtaining their knowledge Furthermore, beliefs along with reciprocal respect and shared perceptions among staffs also foster learning and innovation in organizations (Wu

et al., 2008) Hence, the interaction between employees accelerate product innovations Despite putting a lot of effort, this study have not solve the endogeneity among variables, which are mentioned in literature that competition on the international markets would force exporting firms to innovate to remain competitiveness; moreover, the exporting firms may ‘learn by exporting’ as they are exposed to a richer source of knowledge, expertise and technology that is often not available in the home market

Based on literature review, this paper shows this conceptual framework:

Figure 3: Conceptual Framework

 Improving existing products

 Applying new process