Innovation and exports of vietnamese SMEs evidence from firm level data

THE INFLUENCE OF SUBCONTRACTING ACTIVITIES ON THE INNOVATION IN VIETNAMESE SMALL AND MEDIUM-SIZED ENTERPRISES A thesis submitted in partial fulfillment of the requirements for the degre

THE INFLUENCE OF SUBCONTRACTING

ACTIVITIES ON THE INNOVATION IN VIETNAMESE

SMALL AND MEDIUM-SIZED ENTERPRISES

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

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

ABSTRACT

This study investigates the impact of subcontracting activities on the innovativeness of Vietnamese subcontractors in Small and Medium-Sized Enterprise (SME) sector The study approached two main theories of transaction cost (TCE) and knowledge-based theory The data was drawn from the rich data set of Vietnamese SMEs in 2015 The empirical test used the probit model to examine 271 subcontractors to give the evidence that subcontracting activities with the foreign-invested contractor are likely to innovate rather than with domestic contractors In addition, the results have suggested that the absorptive capacity is very important for innovation of a small firm In this thesis, based on the paper of Cohen and Levinthal (1990), the formation of the absorptive capacity is generated by skilled staffs and training activities in the firm The findings showed that the innovative probability of subcontractors is positively affected by subcontracting activities in foreign-invested sectors and the absorptive capacity

Key words: knowledge, innovation, subcontracting activity, Vietnamese SME

ABBREVIATION

FDI Foreign direct investment

MNCs Multinational Corporations

OECD Organization for Economic Co-operation and Development

R&D Research and Development

SOEs State-owned enterprises

SME Small and Medium-sized Enterprise

TCE Transaction cost economics

TFP Total factor productivity

CHAPTER 1 INTRODUCTION 4

1.1 Research context 4

1.2 Problem statement 5

1.3 Research objective 8

1.4 Research question 9

1.5 Scope of the study 9

1.6 Structure of thesis 9

CHAPTER 2 LITERATURE REVIEW 10

2.1 Theoretical framework 10

2.2 Innovation in subcontracting 12

2.3 The role of the subcontractor in the supply chain and its innovative capability 15

2.4 Transaction cost theory (TCE) 20

2.5 Knowledge-based theory 23

2.6 Empirical review 32

CHAPTER 3 DATA AND RESEARCH METHODOLOGY 34

3.1 Data and sample 34

3.1.1 Small Medium – sized Enterprises (SMEs) 34

3.1.2 Data of Vietnamese Small and medium-sized enterprises 35

3.1.3 Sampling 36

3.2 Definition and classification 37

3.2.1 Definition of Innovation 37

3.2.2 Definition of Subcontracting 39

3.3 Research methodology 41

3.3.1 Transaction cost approach 42

3.3.2 Knowledge-based approach 43

3.4 Analytical frmework 48

3.5 Variables and measurement 48

3.5.1 Data description 48

3.5.2 Dependent variable 50

3.5.3 Independent variables 51

3.5.4 Description of variables and expected sign 55

3.6 Analytical method 58

3.6.1 Empirical model, estimation method 58

3.6.2 The identification strategy 60

CHAPTER 4 EMPIRICAL RESULT 61

4.1 Descriptive statistics 61

4.2 Regression Results 62

4.3 Results interpretation 63

CHAPTER 5 CONCLUSION AND POLICY IMPLICATION 72

5.1 Conclusion 72

5.2 Implications 74

5.2.1 Policy implication 74

5.2.2 Managing implication 75

5.3 Limitations 75

5.4 Future research 76

REFERENCES 77

APPENDIX 87

List of Figure

Figure 1 Theoretical framework 12

Figure 2 The mutual benefit relationships between contractors and subcontractors 16

Figure 3 Structure of subcontracting system 17

Figure 4 Knowledge-creation process - SECI model 29

Figure 5 The level of subcontractor in chain structure 41

Figure 6 Analytical frmework 48

List of Table Table 1 Summary of advantages of star- and tier-shaped structure 18

Table 2 Classification of Small-, and Medium-sized enterprises 35

Table 3 Sample of Vietnamese subcontractors 37

Table 4 The rate of innovation of subcontractors 49

Table 5 The rate of innovation of subcontractors of foreign-invest enterprises of the sample 49

Table 6 Statistic of number of innovators of the sample by type of enterprise 50

Table 7 Statistic of enterprises of the sample classification by total labor force 50

Table 8 Independent variables 55

Table 9 Summarizing the variables 61

Table 10 Regression Results 62

Since launching the renovation programme in the early 1990s, small and medium-sized enterprises (SMEs) emerge as a dynamic force, they account for a large proportion of Vietnamese enterprises In line with renovation policy, they are on top of structured transformation In the meaning of development, the reform of economic environment has positively affected entire Vietnam economy in general and on the development of small and medium-sized enterprises in particular Vietnamese small and medium-sized enterprises and the private sector are continuously the main engines of contribution to growth in Vietnam economy

With the dominant force in the economy, small and medium-sized enterprises are playing a critical role, which has overwhelmed Vietnam economy’s development At end of 2015, the number of small and medium-sized enterprises accounts for 98%2 of entire enterprises in nationwide; the velocity of the number of small and medium-sized enterprises in the period

2000 - 2015 is averagely 18.1% They are a prime source of job creation,

1 Statistic from Work bank data (2016)

2 45th Small and Medium Enterprises Working Group Meeting organized 13 September 2017 in Ho Chi Minh City (link: https://apecceosummit2017.com.vn/45th-small-and-medium-enterprises- working-group-meeting-104.html )

wealth distribution, poverty alleviation, and innovation as well Therefore, they become an important part of the national development and have been viewed as the backbone of the economy

In the early stage of transition, Vietnamese small and medium-sized enterprises were facing many inherent constraints on an underdeveloped country, such as lack of production land, capital for business activities, market information, skilled labor force, modern technology, and investment, etc Thanks to the open-door policy, traditional barriers were gradually detached Vietnamese enterprises have approached opportunities for integrating with the rest of the world In the globalization and technological information era, the challenge also increases the threat from their counterparts

in international play-fields These are public issues debating in many literatures and it is also concerns of many researchers and policymakers Theorists and scholars have shown that the innovation is an appropriate solution for firms to create and maintain the competitive advantage So, studying in innovation is necessary for Vietnamese Small and medium-sized enterprises in the context of globalization

1.2 Problem statement

In Vietnam, Small and medium-sized enterprises account for a large portion of total enterprises The major roles of Small and medium-sized enterprises in the economic development of a country are job creation, nurturing the growth of the labor market, and reducing the development gap among localities, and countries In their evolution progress, small and medium-sized enterprises have faced almost constraints and significant challenges such as high production costs, poor quality of products and services, low degree of innovation, many difficulties in access finance, weak management skills and expertise, lack of market information, and so forth Competitive abilities of Small and medium-sized enterprises in local and global markets are also weak due to obstacles of information, domestic and

international regulations, absorbing and accessing technological advantage, and so on

The globalization process has dramatically changed This process increases abilities of countries to access new information and markets in both domestic and international Vietnamese economy has integrated into the international economy that has opened a great opportunity for Vietnamese small and medium-sized enterprises to take part in the production chains However, they did not develop full awareness and did not pay adequate attention to the participation in and appreciate the benefits of participation in production chains nor take into account it as a tool, a means of survival, of adding value and of improving the efficiency of their production process Moreover, the globalization process gives rise to the capital flows move in the developing countries, and thus it also increases the opportunities for foreign countries to take part in the exploitation of the domestic market size,

as a result, the competitive degree becomes larger in the host countries However, the globalization and competition commonly do not always create the threat for enterprises in the host countries In a certain aspect, the challenges from the globalization produce motivation for firms to development by enhancing operational effectiveness and productivity For this reason, the ideal ways for the firm to survive are the innovation and participation in regional and/or global production chains (Harvie, Narjoko, & Oum, 2010)

The innovation is extremely important for development and sustaining the productivity, growth, and development of a country in general as well as a firm in particular In the macro level, the innovation is the shortest way to fill the development gap between countries For firm level, the recognition of innovation is a vital factor A large number of studies have documented that innovation is a key driver to lead an increase in competitive advantages

In the last decades, most studies of creativeness and/or innovativeness in enterprises concentrate on exploiting the relationships between innovation

and trade, innovation and productivity, or finding the determinants effect on innovation In fact, studies of the relationship between the innovation and subcontractor are a little, especially in the developing world Subcontracting activities are becoming a key factor of industrialization in most countries in the world In the Organization for Economic Co-Operation and Development (OECD) countries, subcontractors are crucial elements for establishing production value chains The integration companies require their subcontractors having the innovativeness to contribute to value chains Contractors and subcontractors together set up an ecosystem, which is formed industrial clusters for development and enhancing competencies In which, innovative activities are a primary concern

In Vietnam, subcontractors are firms that almost take part in the processing, assembling, or manufacturing peripheral products for large companies (e.g multinational corporations), or foreign direct investment (FDI) enterprises Excluding several industries that involved the foreign-invested sector, most domestic manufacturing enterprises have operated in the low added-value industries In addition, most subcontractors lack the cohesion or it is very weak Accordingly, their competitive and innovative capabilities are low (even in cognition) Due to low innovative ability, Vietnamese small and medium-sized enterprises concentrate on low labor-cost or labor-intensive production activities that they have the competitive advantage compared to regional counterparts

Many papers focus on analyzing the role of the subcontractor in developed countries (e.g OECD countries) where the development and the technological degree are very high, and they involve into global value chains from the initial stages (e.g design stage) to ultimate stages (e.g end-used product stage) Studies of the manufacturing subcontractors in Vietnamese small and medium-sized enterprises sector are virtually rare Most research of Vietnamese small and medium-sized enterprises accrue to the subcontracting activities in supporting industries (automobile, electronics, and electricity) In

these industries, enterprises are relatively mature and larger than small and medium-sized enterprises Besides, some existing theories cannot be applied

to examine the innovativeness of the Vietnamese small enterprises due to the knowledge and technology gap Therefore, this study will contribute significant findings and open the new direction to attract policy-makers, scholars for deeply study in this field in order to enhance competencies of Vietnamese small and medium-sized enterprises in general and the subcontractor in particular

1.3 Research objective

Since the innovation plays the important role in the survival and maintains the competitive advantage for the subcontractor, so the main objective is to explain the innovativeness of them through subcontracting activities For that reason, the thesis will discuss the issue involved the subcontracting activities of Vietnamese subcontractor in the SME sector through subcontracting agreements and investigate their knowledge-creation abilities through the absorptive capacity that enhance the innovation likelihood of the firm

Firstly, the thesis will examine the innovativeness in subcontracting activities of the subcontractor through subcontracting agreements In which, the subcontracting relationships, with contractors in the domestic and foreign-invest sectors, are separated into two groups Based on that, the thesis specifically assesses the subcontracting activities at which sector are more likely to innovate Secondly, the thesis will investigate the innovation of subcontractors across building the knowledge base that will form the absorptive capacity of the firm More specifically, the thesis examines the elements of quality management, education, and training activities will contribute to the absorptive capacity

Based on the literature, the thesis will conduct other determinant factors that affected the innovation of the firm Next, a regression model will be built

to test the influence of subcontracting activities on the innovativeness of subcontractor in the SME sector In addition, the thesis will suggest implications that may support to improve the development of subcontractors

in particular and entire Vietnamese SMEs in general

1.4 Research question

For the reasons that mentioned above, this thesis aims to evaluate the innovativeness of the subcontractor and draw implications for helping them to recognize and build an appropriate strategy for the innovation process Accordingly, the research question of this thesis is:

How do subcontracting activities influence on the innovativeness

of Vietnam Small and Medium-sized enterprises’ manufacturing subcontractors?

1.5 Scope of the study

To achieve objective, this thesis mainly concentrates on exploring the effect of subcontracting activities on innovation decision of the subcontractor

in manufacturing sector of Vietnamese small and medium-sized enterprises The data used for this thesis extracted from the rich dataset of Vietnamese small and medium sized enterprises survey in 2015

1.6 Structure of thesis

After introduction chapter, the rest of thesis structured as follows Chapter 2 provides the literature review in general and empirical review of innovation and subcontracting activities Chapter 3 presents the methodology and modeling strategies Chapter 4 presents the empirical results and chapter

5 is the conclusion

CHAPTER 2 LITERATURE REVIEW

2.1 Theoretical framework

In recent years, the globalization process has dramatically changed This process increases the ability to access information and new markets in both domestic and international As a result, the degree of global competition is higher, and new formations of organization are shaped to organize the global value chains (Eurostat, 2005, Lehtinen, 1999; EIM, 2009) On the other hand, traditional value chains are gradually breaking up to be smaller parts that so-called ‘fragmentation’ Those reasons are giving smaller firms the opportunities to gain benefit from specialized activities Ample authors are convinced that the internal structure of firm is reorganizing to adapt this tendency It is believed that information technology is driving the organizational structure of the large firms to become leaner by reducing rigid hierarchy as well as narrowing down the size of the firm The world becomes flat and firms thus have trends to outsource easily their non-core activities to their subcontractors (Lahtinen, 2001) or their labor-intensive production phases to low-cost countries, such as China or India (EIM, 2009) Moreover, according to OECD (2005), the change in organization is to adapt the technological change and facilitate the innovation processes, as a result, foster the firm’s performance Furthermore, both processes of technological change and internationalization are the platforms for supporting smaller firms involve innovative activities, as a result, those firms become more flexible and dynamic (Acemoglu, Aghion, Griffith, & Zilibotti, 2004)

The re-organizing production chain is taken place either inside or outside of the firms (Chen, 2017) This leads to assign labor reasonably and thus increases outsourcing incentives The outsourcing activity becomes more and more popular in most enterprises To take the advantage of production cost, firms decide to outsource their certain functions, non-core production activities, or even entire production stages to external providers These activities have made the current economic environment, in which

organizational structure of enterprises and global value chains completely changes, are reorganized more efficiently than ever

On the view of the contractor, plenty of research has indicated the reason behind the outsourcing decision of the firm According to Abraham and Taylor (1993), employers take into account to rely on outside suppliers to perform their in-house production processes for at least three reasons First, a firm with high labor cost is able to contract out to the low labor-cost organization in order to take benefit Second, when the output temporarily highly exceeds firm’s current capacity due to seasonal or cyclical factors the firm will contract out at the highest period of tasks In contrast, firm in the normal status quo encourages keeping the core labor force by not contract out Finally, a firm contract out because the suppliers have specialized services that emphasizes economics of scale rather than another market factors (Abraham & Taylor, 1993) In another research, the enterprise decides

to outsource when it faces a technical problem in the assembly line or to smooth at the peak of workload Moreover, the enterprise may have subcontractors provide services related to high skill experts, advanced equipment or specialized parts that they do not possess This may be the fact that to enjoy the highest returns the firm pays attention for its own sake by producing core activities (EIM, 2009)

In the globalization era, when technology and production techniques have changed rapidly, the product lifecycle becomes shorter (Bayarçelik, Taşel, & Apak, 2014), and products become more sophisticated (EIM, 2009); firms thus are facing the fierce competitiveness Taking into the fact that innovation is an important factor for companies’ survival Innovation helps firms adapt the instability of external environment Moreover, innovation is the key driver for creating and maintaining competitive advantage, growth, and development As a result, the innovation plays a critical role for firms to the growth of output and productivity

2.2 Innovation in subcontracting

It is well recognized in the literature that innovation plays a central role

to maintain the competitive advantage, productivity, and growth of the firm

or nation Innovation is an extensive concept that encompasses a wide area of all aspects of the economy, such as technical, economic, scientific, technological, organizational, financial and commercial fields and it is recognized is not just high-technology products Innovation motivations are usually expected to create the market power or survival in the severe competitive markets Innovation constantly entails the learning, creation, invention as well as comprises of factors such as new technology, patents, new manufacturing process, or new creative design The success of innovation is the commercialization of new or improved products or services and proposed new customer value (Carlson & Wilmot, 2006)

At the macro level, the innovation is firstly mentioned by Schumpeter (1934) and it also has developed in the production function as the studies of Solow (1957) In the years 1990, Romer (1990) developed the growth pattern

Figure 1 Theoretical framework

-SYSTEM

of economies in the endogenous growth model based on the technology change Besides, it also is approached to growth theories of many economists

or in the international trade theory of Krugman (1979) Theories and models

of production have seen innovation as total factor productivity (TFP) to explain the differences in development through economies For the developed countries, they have to keep innovation in order to sustain competitive advantage and “must continually innovate, not just to grow, but even to maintain their real incomes” (Krugman, 1979) For the less developed and developing countries, the progress of new products is mostly slow or, even not due to the gap of technological development In those countries, their technologies are come from developed countries by technology transfer (Cassiman & Martinez-Ros, 2003) Moreover, based on the learning-by-exporting hypothesis, firms adapt new technologies and then take part in innovation process through the foreign markets by learning from their foreign contracts or sub-contracts (Palangkaraya, 2012) The paper of Ghazal and Zulkhibri (2015) shows that through the international trade, firms in host countries (e.g developing countries) participate to the process of technology transfer through foreign direct investment (FDI) flows, joint venture or multinational companies In developing countries, FDI attractive strategies are built on the commitment from local governments, foreign firms are encouraged to transfer more advanced technologies than multi-national corporations (MNCs) do for their subsidies Furthermore, due to the risk of nationalization in some developing countries technology transfer for MNCs’subsidies are often older or lower than those in developed countries

At the firm level, studies of innovation virtually focused on the definition, nature, research and development (R&D) activities, and productivity According to Harris and Moffat (2011), R&D not only induces innovation but also creates intangible assets for firms through the process of learning and absorbing new knowledge from research and practices Cohen and Levinthal (1990) also share the common view by stating that innovation

is as a by-product of R&D activities Innovation is an important factor that makes the differentiation among firms; innovators thus obtain higher expected returns than non-innovators do Owing to the benefit of innovation, firms have incentives to maximize their profit by seeking investment opportunities and expanding their markets (Teece, 1986) Moreover, innovation is taken into account as economic performance of the enterprise It

is expected that innovation help firms obtain and sustain their competitive advantage in both domestic and global markets by the monopoly position On the other hand, due to the innovative motivation, innovation firms are price-makers (Hirsch & Bijaoui, 1985) and have choices to decide whether or not entered in foreign markets (Cassiman & Martinez-Ros, 2003)

In the view of business and marketing, market size and structure are a key determinant of success Market-orientation firms have considered doing the research market to explore potential customer’s needs and wants by using skills and resources themselves In this context, those firms can detect new knowledge and technologies From that point, new products or improve existing products or process will be innovated to satisfy customer needs Therefore, Le Bars et al (1998) showed that innovation is a “result of marketing capabilities”

While the innovation of the large companies is heavily given rise to R&D activities and patents, the innovation of small firms mostly has based on the interaction of external environment and internal force within firms The internal force is usually the core-competencies (Cohendet & Llerena, 2005) that come from entrepreneurs’ abilities and skilled staffs (Avermaete, Viaene,

& Morgan, 2004) For innovation studies in small firms, the innovation has to

be suitable for firm’s attributes and human resources Moreover, innovativeness in small firms largely depends on the factors of external environments, such as information or other inputs The external environment

is very often related to the information that firms may obtain from their customers, clusters or from doing market research There is some evidence

proved that although the external information supports the innovation it should be taken into account the relevant sectors and the quality of information Therefore, those factors are very important for innovativeness of the small firms Some scholars suggested that the QSE (Qualified Scientist and Engineers) indicator have seen a capability of science and technology within firms Yet, other researchers proved that QSE indicators seem less suitable for firms that are low and medium technology (Avermaete, Viaene,

& Morgan, 2004)

Although external business environment leads to innovation, entrepreneurs still play the powerful role in innovation recognition

Avermaete et al (2004) also state that the innovation recognition of the

entrepreneur is influenced by seminal work of Schumpeter (1934, 1942) and Mascitelli (2000) He illustrates that entrepreneur’s abilities are very powerful for small enterprises because their recognition of innovation is very important

to set up the competitive strategies

2.3 The role of the subcontractor in the supply chain and its

innovative capability

The development of new technologies and production techniques make enterprises increasing the specialized capability Meanwhile, the competitiveness is severe more and more by not only price or quality, but also

by technological features of products and customers’ satisfaction In this context, large enterprises, on one hand, tend to focus on activities that create high adding value, such as R&D, design, marketing and, on the other hand, delegate specialized subcontractors to take responsibilities for other production phases For some reasons, while the large firms actively move out their resources to the developing world and collaborate with local enterprises for production, the local enterprises as subcontractors use their own entire resources to associate with to exploit the economics of scale On the other hand, these subcontracting relationships have opened a chance for subcontractors so that they can take the technology transfer and practiced by

modern technology and equipment As results, they have leaned, developed new skills and characteristics, and increased the competitiveness (Kumar & Subrahmanya, 2011) Thus, this shapes reciprocal relationships between prime contractors and subcontractors (EIM, 2009) The mutual benefit relationships between contractors and subcontractors are illustrated in figure

2 as below

Figure 2 The mutual benefit relationships between contractors and subcontractors

Subcontracting agreement

Use spare capacity

Economic

of Scale

Greater organizational productivity

Enhanced labor

& capital productivity

Increased revenue

Job creation

The relationship between the contractors and subcontractors is important

to build an efficient structure Two ideal structures is based to organize subcontracting system are star-shaped and tier-shaped structure (see figure 3) (Lahtinen, 2001)

 In a star-shaped structure, subcontractors are organized as a wide network with the original equipment manufacturer (OEM) The subcontractors and OEM contact directly with each other, in which the OEM plays the central role in information and material flows This structure restricts several indirect subcontractors The structure will be efficient if applying in the cases that customer offers highly fluctuate or environmental change because of easy shifting

 A tier-shaped structure is organized as a pyramid vertical organization with multilayer subcontractors In this structure, the OEM plays two roles: controlling the end-use products and

Tier-shaped structure Star-shaped structure

monitoring the first-tier subcontractors This structure has applied widely in the assembly manufacturing (automobile, electronics, aircraft…) during last decades This is a narrow structure aims to reduce the number of direct subcontractors and suppliers at first-tier level The structure is well known as “Toyota model”.

Table 1 Summary of advantages of star- and tier-shaped structure

Advantages of broad networks:

- adaptable to change

- more switching opportunities

- hedge against uncertainty

- cost competitive

Advantages of narrow networks:

- collaborative innovation

- rigid and strong

- wider access to knowledge

- dense flows of information

(ii) The structure dimension of the network, and

(iii) The distinct kinds of process nexuses to the other in the supply chain

During last decades, the structure and evolution of the subcontractor have been an evident trend towards the tier-shaped structure that is the goal of OEM to narrow the number of subcontractors and suppliers down because the large size firms are organized too complexly and difficulty Therefore, the tier-shaped structure is being become the best practice model for supply chain

in the case of complex products The efficiency of information flows of this model facilitates the technology exchange between OEM and subcontractors and supports the supply chain participants to manage more easily

3 Harland C M (1996b) Supply Chain Management: Relationships, Chains and Networks

The subcontractor is, in recent year, not only delegated to produce peripheral or simple products but also manufactured highly specialized products required knowledge-intensive contents In the paper of Bocquet (2011) found that there ample of studies try to shed light on the new

“collaborate outsourcing mode” based on arm’s length transactions, but little empirical research shows the subcontractors’ key role (Lahtinen, 2001) and their capacity of innovative application as well as technology transfer related

to this “new mode” (Bocquet, 2011) It is believed that subcontracting come

to be more important in the production networks In fact, the role and position

of subcontractors become more crucial in developing innovative solutions and enhancing firm’s productivity and performance for both themselves and contractors However, there is little empirical study was done on this matter (Lahtinen, 2001; Bocquet, 2011)

There are many basic theories related to approaching the important role

of the subcontractor in the economy According to Kimura (2001), he suggested the theoretical background to subcontracting by four approaches The first approach is transaction cost theory, the second is networking approach, the third is game theory approach, and the fourth is the economics

of information approach In the two first approaches, the author described the chosen subcontractor was based on its owned specified resources, such as certain specific-assets, or specialized technologies, or even unskilled labor Besides, thanks to the long-term relationship firms might save cost from market transactions For the game theory approach, the relationships of subcontractor rely on the stable and dependent nature of the subcontracting agreement The last theory that author mentioned is constructed on the trust

so that the firm can save the monitoring cost On the other hand, the paper of Bocquet (2011) presented two approaches to subcontracting Firstly, similar

to the study of Kimura (2001), she applied transaction cost theory to show that the subcontracting arrangement is a solely cost-reduction device In this case, contractors have seen the subcontractor as traditional and they are

delegated to produce peripheral products Yet, in the manufacturing process itself, the labor assignment and machine arrangement are considered as innovative operation For that reason, there is the existing knowledge that generated by the manufacturing process Secondly, she approaches the subcontractor’s process-by-learning bases on abilities of absorption and creation of knowledge through the relationship between contractors and subcontractors In her view, the success of such a relationship is the practices and tools that guarantee to meet a given requirement

The role of innovation capability of subcontractors is not mentioned much in recent studies In recent years, most research approached the concern

of subcontractor through contractors’ viewpoints it thus skips innovative abilities of subcontractors (Nobeoka et al., 2002) To assess the innovation capabilities of the subcontractor it needs empirical and theoretical studies to explain and shed light on this issue For this reason, the paper will approach transaction cost theory and emphasizes the important role of knowledge creation process of the subcontractor through knowledge-based theory

2.4 Transaction cost theory (TCE)

According to the transaction cost theory, the economic transactions are formed by organizational mode that allows firms to compare between internal cost and external cost in order to make an optimal decision based on the assumption that human is opportunism and bounded rationality

In the paper “The nature of the firm”, Coase (1937) explain why firm exists and first mentions the term “transaction cost” Previous economists argued that there was an economic system, in which it automatically operated

by a “price mechanism” In this context, price mechanism plays the role of privilege in the allocation of resources However, in this case, people still anticipate its operation in the short-term to cope with it Owing to the operation of resource allocation, cost of organizing production process is different for similar products Coase showed that “there is a cost of using

price mechanism” to determine “relevant prices” is what he tried to give the explanation of the reason why the firm was established to substitute this price mechanism In the fact that, the long-term contracts took more advantages than the short-term contracts, thank to reducing risks and transaction costs However, the prediction of contingencies was difficult, firm, in this case, appeared to resolve the short-term problems This paper also described the firm’s decisions related to “make or buy” that, if the transaction costs were higher firm would carry out activities within firm and therefore the firm size that measured by number of transactions increased In contrast, outside provider would perform activities if the transaction costs were lower than the firm do, as a result, the firm size decreased

In the perspective of transaction cost economics theory, the firm is described as an economic organization with incentive is increasing economic efficiency by reducing transaction costs (Williamson O E., 1989) Knight (1941) also stressed that, in general, the economic concern of a person is commonly expecting their tasks and their business “efficient”

Williamson (1989) stated that the agents who are participating in economic transactions have assumed two prominent characteristics of behavior are, based on the traditional concept of maximization, bounded rationality and self-interest but opportunism In the one hand, Herbert Simon views the behavior of bounded rationality of the economic actors are

“intendedly rational, but only limitedly so” (Simon 1961, p.xxiv) Bounded

rationality of an individual within a firm is a limitation on human mental abilities and on human language The former limitation hinders human abilities from foreseeing entire attainable contingencies and estimating their best activities The later obstructs the ideal communicated environment for known-knowledge These limitations create information-exchange mechanism becomes too costly (Cohendet & Llerena, 2005) Williamson states that individual human beings have “intended rationality” to their economizing activities He also cited the quotes of Herbert Simon [Simon

(1975, p.199)] that natural nature of human beings is limited knowledge that

“organizations are useful investments for the achievement of human purpose” (Williamson O , 1989) On the other hand, self-interest behavior is taken into account to react to information from external environment Furthermore, it encourages a sly behavior and firm thus plans manipulative strategy to take advantages Evidently, self-interest behavior expresses as “opportunism”,

“moral hazard”, and “agency” (Williamson O E., 1989)

Transaction cost differs depending on both (1) the nature of transactions, and (2) the governance structure Different transactions require differences of attributes of transacting purpose Therefore, governance structure is established to resolve asymmetric information According to Williamson (1989), there are three main dimensions to describe attributes of the nature of the transaction are (1) the frequency of transaction, (2) the uncertainty of transaction, and (3) the specificity of assets Williamson also emphasizes that although all of them are critical, the specificity of assets is the most important (Williamson O., 1989) He has classified asset specificity into five types, including (1) site specificity; (2) physical asset specificity; (3) human asset specificity; (4) dedicated asset; and (5) brand name capital Transaction cost economics also suggests the transaction as basic component

of analysis that requires alternative governance structures to determine transacting activities Governance structure is as the way organized to make a configuration through three ways: (1) the frequency (via market), (2) the uncertainty degree and type (vertical integration), and (3) the condition of asset specificity (via contracts)

Similar to principal theory, in the transaction cost theory, the relationships between firms is asymmetric, and information is imperfect which allows opportunistic agent to find rent-seeking, so firm needs the governance structure to avoid these problems In this perspective, firms are considered as “processor of information” means that if the input of information is the same firm will produce the same result of action, However,

Cohendet and Llerena (2005) have rejected that point and consider firm as a rational entity (Cohendet & Llerena, 2005) The adoptation of the way to approach the transaction cost theory as the contractual approach and behavioral assumption of bounded rationality show that cognitive capabilities

of agents is limited This approach is obviously extremely restricted; the assumption seems to ignore learning and innovative capabilities of firms Some scholars stated that even in such circumstance the passive learning process is still taken place by improving processes within firm (Bocquet, 2011; Cohendet & Llerena, 2005) For this reason, it needs complemented theories to examine this problem in the extensive scope; this allows us to analyze learning capabilities of firm deeply

2.5 Knowledge-based theory

In recent years, science and technology are rapidly developing; it is a foundation to economies and industries to build a new economic growth model based on the knowledge For that, science and technological development lead industries to pace in the new period The development trend permits them exploit the advantage of global value chain and the international market (ADB, 2014) The value chains are requiring a larger proportion of knowledge than ever Production and distribution activities of firms reflect this trend by investing and applying hi-tech equipment, using skilled labor in order to enhance productivity and growth Shortly, it is said that knowledge is a driver of the development of an enterprise, or a country

Nonaka et al (2008) state that knowledge and information are similar;

both knowledge and information have common features as the systematicness, replication and reproduction in low cost, externality (depending on number of people), and they are too hard to evaluate Nevertheless, knowledge is not a direct synthesis of information, it is differentiated other resources by generating from the human interactions The knowledge is an extensive concept thus needs to understand in specific sense Many theories of information still have viewed organization as a ‘processor

of information’ This theories’ vision has observed human is as ‘noise’ thus needs to eliminate out of the processor for efficiency Cohendet and Llerena (2005) indicated that this is a norrow vision that ignore the mechanism of the knowledge creation (Cohendet & Llerena, 2005) On the other hand, some scholars have viewed knowledge is a substance Nonaka et al (2008) argue that human plays an important role of creating the knowledge, so he suggests that the more understand the human nature, the more perceive the knowledge The differences of the substance resources and information are by utilization

of human being

In academic domains, many researchers have taken into account that firm as a learning organization (Cohendet & Llerena, 2005; Cohen & Levinthal, 1990; Palangkaraya, 2012; Nonaka & Takeuchi, 1995; Nonaka, Toyama, & Hirata, 2008; Bocquet, 2008, 2011) This is an important feature for attaining and maintaining the firm’s sustainable competitive position Other papers focused on analyzing the role of learning capabilities of the organization or networks, in which the ultimate goal is to consolidate the firm’s competitive advantages Nevertheless, these papers have not yet explained specifically the generation process of knowledge, or the establishment of organization networking (Dyer & Nobeoka, 2000), or the configuration and formation of inter-organization learning although, external knowledge sources are significantly important for knowledge creation of the firm no matter what the level of organization is at This is true for nations and industries (Cohen & Levinthal, 1990)

At a certain threshold of learning level, the organizational routines have been formed, develop and apply new knowledge in order to commercialize the products and services (Cohen & Levinthal, 1990; Cohendet & Llerena, 2005; Dyer & Nobeoka, 2000) The definition of learning routine came into existence as following the papers of Grant (1996) and Miner (1991) Accordingly, Dyer and Nobeoka (2000) claim that learning routine is as “a regular pattern of interactions among individuals that permit the transfer,

recombination, or creation of specialized knowledge”, and “a coordinated, repetitive set of organizational activities” (Levin, 2002) Yet, Dyer and Nobeoka, (2000) do not indicate the creating process of knowledge, they argue that the role of learning routine is to make the knowledge transferring easily Moreover, in the case study of Toyota, they suggest that production network is more effective than firm for the knowledge transfer due to the diversified knowledge Of course, the definition has emphasized the learning and knowledge management and, in a certain specific context, the knowledge

is created by the organizational routines The organizational routines are the firm’s fundamentals and keep firm consistently (viewed firm as “processor of knowledge”) in the transformative process from existing knowledge become new knowledge (Cohen & Levinthal, 1990; Cohendet & Llerena, 2005) In this process, Cohendet and Llerena (2005) emphasize the critical role of organizational routines are:

(1) Organizational routines as the shortcut to remember the specific dimensions of routines (motivation, cognition, and coordination) to do the tasks

(2) Organizational routines are as awareness instruments that allow allocating the scarce resources in the organization, and viewed as a filter to eliminate unnecessary and unefficient tasks

(3) Organizational routines must be placed in crucial dependent” The routines occur at a given and particular place, in which the context is the principal matter, and the location (i.e., in organizations or communities) is critical to recognize the specific dimensions as well as to grasp the organizational structure There is a growing consensus that organization routines take place in organizations or communities, and it is an outcome comes from the regular interactions at the individual and organizational levels

“context-The interaction of individuals and organizations aims to convert the individual’s owned knowledge into common knowledge of collectives that can codify and diffuse to others or in an organization and vice versa, through the interaction in the organizational routines, an individual can absorb the existing knowledge to build the new knowledge Most studies have classified knowledge into two prime types: tacit and explicit knowledge Explicit knowledge is, in general, relevant to information, it is easy to codify and transmission Conversely, tacit knowledge is related to the skills that can accumulate through education, training, experiences and practices Tacit knowledge thus is too hard to codify and evaluate According to OECD (1996), knowledge is categorized into four kinds: know-what, know-why, know-how, and know-who

 ‘Know-what’ are things that are available in the real world Knowledge of this kind is usually called ‘information’

 ‘Know-why’ is mentioned about nature of science and society This kind of knowledge is to explain the phenomena and causes

of things or express the development of production in most industries

 ‘Know-how’ is relevant to abilities, skills to carry out a task It is also the secret of a person or organization to take an advanced position It is thus significant in economies

 ‘Know-who’ refers to information that who knows what and/or who knows how to do what That the reason why this kind of knowledge is growing critical Because when know-how is increasingly important, know-who become the determinant factor

to know where is possible get access expertise and apply advanced knowledge efficiently

Explicit knowledge is relevant to know-what and know-why and tacit knowledge consist of know-how and know-who There are numerous ways and method to embrace whole types of knowledge that are mentioned above

Explicit knowledge can be learned by educational system (e.g universities, colleges), training (e.g on-the-job training, vocational center), or reading books This knowledge is primarily a foundation for practices While, tacit knowledge obtained from the specific or specialized environment For instance, the employees in an organization are apprenticed to be the skilled workers through training system under the skilled master or experts Some skills will be trained in specialized educational environments Through the interaction between individuals or organizations, all kinds of knowledge can

be shaped and developed (Cohen & Levinthal, 1990; Cohendet & Llerena, 2005; Dyer & Nobeoka, 2000; OECD, 1996; Nonaka & Takeuchi, 1995; Nonaka, Toyama, & Hirata, 2008)

In general, knowledge is created from the learning and accumulating process of existing knowledge and experiences (Cohen and & Levinthal, 1990; Cohendet & Llerena 2005; Bocquet, 2008) Nonaka (2008) argued that knowledge is a process even if, knowledge is a substance as specific products,

it has had the development process from the existing product to become new product through user’s experiences (Nonaka, Toyama, & Hirata, 2008) Cohen and Levinthal (1990) argued that the degree of individual’s own initial related knowledge generates the ability to evaluate the external knowledge and information, embrace and convert external knowledge into useful knowledge, and commercialized this knowledge into the products This process is as the absorptive capacity of knowledge Individual’s abilities are important for firm’s innovative capabilities There are many methods to create absorptive capacity Previous researchers suggested that absorptive capacity is the outcome that has generated by research and development (R&D) activities or production process Through manufacturing processes, the organization can collect new knowledge and then combine with initial related knowledge to restructure the production The absorptive capacity is, according to authors, based on the “knowledge structure”, in which prior knowledge as well as the positive interactions within a firm and/or between

the firm as well as external environments are critical to capture the knowledge base The trained personnel with advanced techniques are also the source to contribute directly to absorptive capacity The role of technical staffs in the organization is viewed as the translator of information from the environment where they take part in Because of having expertise in their field, technical staffs can absorb the new knowledge from outside firm or group, the knowledge after converted and codified into the simple kinds would be diffused it within the organization, or their group The organizational absorptive capacity depends on the competencies of the translator and the knowledge gap between them and low-skilled workers If the background knowledge of entire individuals and experts is different, it will produce the inefficient mechanism of information transmission Therefore, the organization is “the group as a whole must have some level of relevant background knowledge, and when knowledge structure are highly differentiated, the requisite level of background may be rather high” (Cohen

& Levinthal, 1990; p.132) That means dialogue is an effective communication tool to transmit the common shared knowledge and expertise through images, signs, and shared language

For the study of Cohendet and Llerena (2005), authors have viewed the knowledge is built by the accumulating process, they highlight that the organizational competencies are intentionally generated, formed, sustained, and saved Although they share the common view with Cohen and Levinthal (1990) that knowledge is as a process and appreciate the role of the organization, they claim that an individual cannot understand and master the information of complicated and multiplex production process, firm thus plays

a major role as a device in order to coordinate this information In addition, through this information coordination, a large amount of knowledge is generated and then diffuses to all members of the organization who engage in the interaction

Obviously, in spite of the fact that two approaches are completely different, both contribute the common viewpoint that knowledge is generated through experiences and by the interaction between tacit knowledge and explicit knowledge Tacit knowledge and human subjectivity of an individual are externalized to form the explicit knowledge and objectivity in order to

share and combine Nonaka et al (2008) suggest that tacit knowledge and

explicit knowledge interact with each other in order to create an oneness It is like an iceberg in which explicit knowledge is as the underwater part and tacit knowledge is as above water part The interaction activities are in a dynamic dialectical process owing to opposite attributes of tacit and explicit knowledge As a result, new knowledge is created in this dynamic process The dynamic knowledge creation process is the continuous converted process of tacit and explicit knowledge consists of four dimensions: Socialization – Externalization – Combination – Internalization or SECI (Nonaka & Takeuchi, 1995)

Figure 4 Knowledge-creation process - SECI model

Source: Nonaka & Takeuchi (1995)

 Socialization: Sharing and creating knowledge through direct experiences

In this stage tacit knowledge of individuals’ is shared to each other what they together experience in daily interaction to create new knowledge Because the tacit knowledge is too hard to generalize as well as its inherent features related to specific dimensions, tacit knowledge only shares between individuals have the same experiences by five senses Knowledge in this process is only grasped by the perception and action (not excluding conflict) The experiences incorporate other knowledge, putting oneself into customer, supplier, and even competitor’s place Those things often are taken place in a place where everyone live and/or work together for a long time For instance, apprenticeship or on-the-job training related to this stage

 Externalization: Articulating tacit knowledge by dialogue and

reflection

This stage introduces the process that makes tacit knowledge explicit Owing to socialization process, individual’s own tacit knowledge become increasingly clear and is described through ideas, image of words, metaphors, analogies Explicit knowledge is turned to understandable form (Lindsay & Norman, 1997) Afterwards, the successful translated explicit knowledge is shared to group of individuals in the organization Through the dialogue, face-to-face communication is growing important, it allows individuals share their ideas, beliefs and receives feedback so that they can learn how to articulate their thinking better Cohen and Levinthal (1990) also emphasize that for high effective communication entails individuals in an organization are a whole that must have common shared language and signs that have formed from shared knowledge and expertise

 Combination: Systemizing and applying explicit knowledge and information

At this process, explicit knowledge is documented and it can be transmitted in the form of documents, email, databases In the combined stage, formed explicit knowledge and explicit knowledge gathering from internal and external organization, which are combined, arranged or processed to become a complex systemization This process includes the breaking concepts down into ‘small’ notions and then attaching them to organizational philosophy and/or activities in order to make the explicit knowledge more efficiently systemized The conflict occurs in this process will be solved logically Combination permits entire organization access systemized explicit knowledge

 Internalization: Learning and acquiring new tacit knowledge in practices

After generation, explicit knowledge is shared in entire organization, and then it is converted to tacit knowledge in the internalization This are as organizational routines which explicit knowledge is applied and utilized in the actualized conditions, after that, becomes fundamentals for new processes Therefore, explicit knowledge, such as notions of product or production process, has to be actualized by the action, refection, and practice

to form individual’s own tacit knowledge The new tacit knowledge (has complemented and absorbed) can be continuously shared through new externalization in order to begin another SECI process

It must be understood that SECI process is knowledge-creation spiral In this spiral, tacit and explicit knowledge is enlarged through four dimensions The spiral will be increasingly growing in the condition that four dimensions

of SECI are continuously developed Nonaka et al (1995, 2008) claim that

the knowledge is created through SECI process proceeds across interactive communities, and goes across the regional, subsidiaries’ boundary even organizational It can be transferred outside the organization, and the organizational knowledge interacts with each other in the knowledge-creation process (Nonaka, Toyama, & Hirata, 2008; Nonaka & Takeuchi, 1995)

In summary, the literatures have reviewed the process of sharping and development of subcontractor and important role of learning and knowledge-creation processes, and most authors have shared a common view that knowledge is generated by the interactions between entities The learning and knowledge-creation processes and the absorptive capabilities of a firm are the key determinants to explain the innovation of a firm Especially, for the subcontractors that is the main point to take into account in this thesis

2.6 Empirical review

Regardless of the analysis methods of studies, there are several empirical studies have indicated the relationship between the innovation and subcontracting agreements Most of researchers have used datasets come from the manufacturing sector to examine the factors that effect on the process and product innovation such as Bocquet (2011), Avermaete, Viaene and Morgan (2004)

In the study of Bocquet (2011), she analyzed 93 small manufacturing firms in France to investigate the abilities of product and process innovation based on the subcontracting relationships The results have revealed that subcontractors who involve in the process/product conception of the contractor are more likely to innovate rather than traditional subcontractors that have an aim of cost reduction It seems that the subcontractors have been delegated more responsibilities for mutual commitment The study also has showed that organizational practices and R&D activities have the impact on the innovation but unclearly In which, quality management positively impacted on the process innovation, organizational practices are highly likely

to innovate if the subcontractor has devoted to quality management and logistical tools That means the quality management is critical to the subcontractor in order to collaborate with the contractor However, it seems not to be true that the organizational practices do always effect on innovation The innovation is affected by R&D activities and training is very clear in this study While R&D activities completely affected on the process innovation,

the training had a positively significant impact on the product innovation The study shows that the majority of the impacted factors have identified the process innovation is the more important object of small firms than the product innovation

The empirical study of small food firms in EU of Avermaete et al (2004) showed that R&D activities in these firms take place in the small extent Therefore, their innovation was not affected by the R&D activities However, the R&D effort of innovative firms gave rise to the collaboration with customers and research institutes Surprisingly, the results of this study show that the education and experiences of the manager do not affect innovation Similar to other studies, this study indicates that the number and proportion of high skilled employees had the tendency to stimulate the innovativeness of innovative firms Theoretically, investment in know-how obviously creates innovation The result of study is in line with its hypothesis when it also indicated that expenditure in training and marketing makes firms innovative

CHAPTER 3 DATA AND RESEARCH METHODOLOGY

Chapter 2 demonstrates that the existing literatures of the subcontracting and innovation based on two main theories of TCE and knowledge-based theory are inadequately supplied to explain the impact of subcontracting activities on innovation of subcontractor in Vietnamese Small and medium-sized enterprises sector Because the underlying assumptions of the previous theoretical and empirical studies have not yet encompassed the context of Vietnam, this thesis therefore construct an appropriate analytical framework based on the literatures and dataset of Vietnamese Small and medium-sized enterprises to identify and discuss this perspective

3.1 Data and sample

3.1.1 Small Medium – sized Enterprises (SMEs)

Most of Vietnamese Small and medium-sized enterprises are households accounting for approximately 90% in census and 63% in the sample of SME

in 2015 This is a group belongs to informal legal status Additionally, the major of firm size is micro firms (the number of employees less than 10), accounting for 72% of the sample, and the small- and medium-size accounting for 22% and 6%, respectively The distribution of Small and medium-sized enterprises is separate comprehensively in the three regions in Vietnam Their major manufacturing industries are food and beverages, fabricated metal products, and wood The employment growth of the informal group is lower than the formal groups In general, Vietnamese Small and medium-sized enterprises is viewed as the backbone of the economy and accounts for 98%, but the development of them is not equal to state-owned enterprises (SOEs) and foreign direct investment enterprises Therefore, this sector should be interested in research and policies in order to boost them to become a stronger growth engine

There are many various definition and measure of SME across countries; each country has a different criteria, SME is defined base on

number of employees, total asset, capital, annual turnover… There also have

no any uniform standard to define SME For instance, Indonesia and Ireland Small and medium-sized enterprises determine by number of employees and annual turnover or base on the scale of firm, several countries define SME is less than 500 employees, another define enterprise to be an SME if the number of employees are not greater than 250 According to World Bank, SME is defined as ranking from zero to 200 employees includes formal as well as informal enterprises In Vietnam, SME has defined as a firm have business license in accordance with law and they are seprated into three groups including Micro-, Small-, and Medium-sized enterprises In this thesis, the definition of SME is based on Decree 56/2009/ND-CP of Vietnamese government, in which the classifiction is described by number of employees and/or total capital as following

Table 2 Classification of Small-, and Medium-sized enterprises

Sector

Number

of employees

Total capital

Number of employees Total capital

Number of employees

3.1.2 Data of Vietnamese Small and medium-sized enterprises

The data set of Vietnamese Small and Medium-Sized Enterprises is conducted every two years by Central Institute for Economic Management (CIEM) – Ministry of Planning and Investment (MPI), Institute for Labor Science and Social Affairs (ILSS) – Ministry of Labor, Invalid and Social Affairs (MOLISA), and Department of Economics (DoE) – University of Copenhagen together with Royal Embassy of Denmark in Vietnam This

dataset is concentrated on characteristics of manufacturing sectors of SME The subsequent survey based on the previous ones that built on in-depth interviews more than 2,500 small and medium sized non-state enterprises operating in the manufacturing sector of Vietnam It was employed in 10 provinces and cities in Vietnam including Hanoi, Hai Phong, Ho Chi Minh,

Ha Tay4, Phu Tho, Nghe An, Quang Nam, Khanh Hoa, Lam Dong, and Long

An

Vietnamese small and medium-sized enterprises data is a rich dataset containing a large number of Vietnamese small and medium-sized enterprises’ characteristic information However, this is an unbalance data since some firms have ceased to provide their information for several reasons such as mergers, shutdown, no response, or, new firms established in middle survey period The data is collected by interviewing directly with a main questionnaire This thesis uses only one-year firm-level survey data in 2015 from the survey

4 Ha Tay province is merged into Hanoi City in 2008

Table 3 Sample of Vietnamese subcontractors

Source: Vietnamese Small and medium-sized enterprises data 2015

3.2 Definition and classification

The research problem states in this thesis have two key concepts that are innovation, and subcontracting Each of these concepts has defined and classified differently in various studies In this thesis, subcontractor is a part

of small and medium-sized enterprises, it thus is necessary to find specific definition and classification of these important concepts to ensure that the research findings are valid and appropriate in thesis’s goal Each of definitions following understood and adopted in point of view of this thesis 3.2.1 Definition of Innovation

In general, innovation itself is a sizeable concept Base on the scope of study, various studies have defined innovation in the way related to their research objective It seems to be too ambiguous or complex to a common understanding because author(s) defines innovation in the way that suit the scopes, industries or domains that they studying For instance, some scholars have defined innovation as the combination of sub-processes; other scholars suggested that innovation is management process of development of idea, technology, manufacturing and marketing Many researchers have considered innovation as creative process

According to OECD (2005), innovation consists of four types including product innovations, process innovations, organizational innovations, and marketing innovations The firm is called innovative firm or innovator if it has to implement at least one of four types of innovation during the period of survey (OECD, Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition, 2005)

Following previous studies of innovation of the firm, this thesis concentrates on two types of innovation that are product (new products and improving the existing products) and process In addition, this thesis concentrates to analyze the impact of subcontracting activities on the innovativeness of the enterprise in manufacturing sector, for this purpose, the thesis bases on the definition of product and process innovation following the guide of Oslo Manual as below

A product/process innovative firm is one that has implemented a new or

significantly improved product or process during the period under review (OECD, 2005: p.47)

According to this definition, two prime characteristics that needs to consider a subcontractor being the innovative firm are implemented a new product (or process) or significantly improved product (or process) That means if firm either implemented a new product or process or significantly improved product or process is viewed as an innovation subcontractor

Innovation can be measured by various ways based on the studied scope

or domain The traditional measured indicators of innovation are number of research and development (R&D), patents (Bleaney & Wakelin, 2002), expenditure for R&D, or the measured indicators of the innovation of SME are identified by three dimensions including input, output and impact (Hyvarinen 1990)

The innovation can be influenced by a number of reasons; First, if analyzing the innovation in term of product, reasons may be economic