UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLAND VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS Determinants of Product Innovation Activity: The case of Vietnamese SME Firms BY DANG THUY TRANG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, May 2015 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS Determinants of Product Innovation Activity: The case of Vietnamese SME Firms A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By DANG THUY TRANG Academic Supervisor: LE CONG TRU PhD. HO CHI MINH CITY, May 2015 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT This study examine two manors of product innovation including improving existing product and making new product with the scope of Vietnamese SME's firms. The aim of this study is to figure out what determinants have significant impact on each type of product innovation and whether correlation between these two manors exists. Determinants are categorized into internal and external factors.
The first group includes age, experience of entrepreneur, firm size, training cost, and R&D cost. The second group includes competition level, outsourcing cost, external consultant, networking, knowledge of market/marketing cost, and export orientation. Bivariate-probit model is used for attaining research's purposes above. The model is applied on 1418 SME's firms which are separated into five sections: textile & shoes, food manufacturing and processing, mechanics and electricity, wood processing and all other sections.
Five factors are figured out to have significant influence on product innovation activity of firms including firm size, age of entrepreneur, export, competition level and network. Marginal effect calculated from bivariate-probit regression are helpful evidence for firms to adjust significant determinant to improve their innovation performance. ABBREVIATION R&D Research and Development SMEs Small and Medium Enterprises CIEM Central Institute for Economics Management OECD Organization for Economic Co-operation and Development MIT Ministry of Industry and Trade 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.4 Scope of the study.5 Structure of the study. 8 CHAPTER II: LITERATURE REVIEW .1Definition of innovation .2 Popular indicators of innovation activity in SMEs: .3 Classification of innovation: .4 Characteristics of innovation activities in developing country .5 Comparison between large enterprises and SMEs based on indicator of product innovation .1 Definition of product innovation .2 Classification of product innovation .3 Reviews of Related Theories .4 Reviews of Empirical Studies .1 Determinants of product innovation .2 Empirical review of methodology.
30 CHAPTER III: RESEARCH METHODOLOGY AND DATA. Data and sample .2 Variables and Measurement .1 Empirical model, estimation method .1 Innovation activity of SMEs in Vietnam. 50 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. 55 CHAPTER V: CONCLUSION AND RECOMMENDATION.
Limitation and Future Research. 61 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 1: The innovativeness indicators for SMEs in different dimentions. 11 Table 2: Comparison between large enterprises and SMEs based on indicator of product innovation. 13 Table 3: Dependent variables.
37 Table 4: Determinants of Product Innovation. 40 Table 5 : Innovation Rates in Manufacturing SMEs. 45 Table 6: Number of observations with improved and new product. 46 Table 7: Four cases of combination between improving existing product and creating new product.
46 Table 8 : Descriptive statistics. 47 Table 9 : Correlation between some independent variables. 49 Table 10 : Summary of results from bivariate - probit regression. 50 Table 11: Marginal effect.
55 LIST OF FIGURES Figure 1: Conceptual Framework. 35 Figure 2: Methodology model. 44 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.1 Problem statement International economic integration allows more firms to be established and more foreign firms to enter domestics market. Under such intensive competition pressure, firms need to continuously innovate their products to attain comparative advantage from other opponents.
This is due to limited life cycle of individual product and more arising demand of customers. Banbury and Mitchell (1995) proved that the more often firms create new products, the better they perform and the higher their probability of surviving in long term is. This is applicable for both small and large firms (Vermeulena, De Jong, & O'shaughnessyc, 2005). Chris Freeman and Soete (1997) - even asserted that ‘not to innovate is to die’.
Due to such important role of innovation, a large amount of studies have been done to identify factors having influence on product innovation of small firms (Martinez-Ros,1999; Jong, 2006; Fritz,1989; Vega-Jurado, Gutierrez-Gracia, Fernandez- de-Lucio & es-Henriquez, 2008; Hadjimanolis,2000; Freel, 2000). It requires more than expenditure on R&D for attaining improved or new products. Factors with considerable influence on innovation activity that should be taken into account include firm size, production technology ( ratio of sales over fix assets), origin of ownership, spending on market insight. (Avermaetea, et al.
How much these factors may affect innovation activity is not equal and depends on economic section of firms. Thus, a model simulating impacts of aforementioned elements is necessary to be established. While there are a range of international researches addressing this topic, number of papers on such matter at Vietnamese scale is quite limited. As Vietnam is a developing country, a moderate technical progress may result in huge increase of firm' sale or market share.
Thus, a model applying this matter for Vietnamese scenario is essential to be devised. This paper is expected to achieve that target. 7 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Both Vietnamese enterprises and policy makers can utilize results of this paper. First of all, enterprises can refer to this model when they are in need of promoting innovation for their product.
As the model points out specific elements and the level such elements need controlled. This is also a useful guidance for policy makers. In detail, being aware of influential elements of each industry allow policy makers to make proper decision to assist innovation of that specific section.2 Research objectives: The study is expected to figure out determinants with significant impact on product innovation activity of Vietnamese SMEs and influential level of each factors. By understanding the interaction between the internal and externals factors having impact on product innovation, enterprise’s leaders may adjust firm’s strategy to adapt to characteristics of environment to gain the highest performance in product innovation activity.3 Research questions There are two main questions addressed in this study.
The first one is what indicators have considerable impact on product innovation behavior of firms. The second one is to which extent product innovation is influenced by these factors.4 Scope of the study The study examines Small and Medium enterprises across Vietnam with data extracted from SMEs survey 2011.5 Structure of the study This paper includes five chapters. The first chapter - Introduction presents the issue and background of the issue addressed in this paper, then discussing research objective. Chapter II–Literature review presents the theoretical and empirical foundation of the topic which aims at creating a conceptual framework for the research.
This part explains the definition of innovation, product innovation, theoretical and empirical theory about determinants of product innovation activity of firms, the methods applied to 8 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com measure product innovation. Chapter III – Research Methodology focuses on the method, data description and the analytical model applied in this paper. Chapter IV– Findings and Discussions discuss the regression results and marginal effect of each factor on product innovation probability. The final part Chapter V–Conclusion and Recommendations suggest policies for policy makers and for top management of firms when they want to increase the rate of innovating product.
9 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER II: LITERATURE REVIEW II.1Definition of innovation According to Hyvarinen (1990), innovation activities involve both internal and external activities of firms with the target of creating new products, enhancing existing products, process, governance or marketing. Most of innovation activities originate from research and development (R&D). Some may be acquired by firms via other sources such as licensing, seminars, consultants, customers, providers. Technologies can be applied in various ways in each firms.
When technology is aware at a broader sense rather than relating to products only, innovation activities will play a key role in development of SMEs (OECD, 1982) II.2 Popular indicators of innovation activity in SMEs: There are three popular proxies usually used to indicate levels of innovation: input, output and impact. These indicators could be analyzed in general or particular meaning and measured by quantity or quality. The measurement units used most frequently are number and rate. Among various inputs of producing, time, capital and labor are the common factors used to measure effectiveness of innovation.
Because these factors can be collected more easily and exactly than others belong to output or impact, the input method is preferred than the other two methods. The second indicator- output involves in analyzing straight outcome of innovation, creation, expertise, proficiency and absorption of technique. The typical proxy of output is patent as its data can be found in most country’s statistic system. However, patent is not the most significant in all companies and all industries.
Some innovations may not be registered for patents. Besides, patent refers to invention rather than innovation. Output method sometimes utilized number of license as indicator. The last and the latest among three methods is impact indicators.
This method relates to innovation in larger aspect and refer to qualitative outcomes rather than quantity. Impact is comparison between cause and effect of innovation and the variation of sales, capital, productivity, development, etc. of firm 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ( Harrison& Hart, 1987;Kamien & Schwartz, 1975; Meyer-Krahmer,1984; Walsh, 1984 and Scholz ,1988) The table below describe three indicators of innovation when they are examined based on four dimensions including technology, individual, enterprise, market/ environment. Table 1: The innovativeness indicators for SMEs in different dimentions Dimension Input Output Impact Technology * Personnel participating R&D * Innovations types and ideas * Change in enterprise ‘s * Inventions * Inventions technology * Science * Patents * Improved technologies * Different technologies information * Licenses * Other innovations * Information * Delays in reaction to * New ideas * Know-how from outside - information in results of * Renewals * Timetables - innovation process * Development possibilities * Degree of newness * Diffusion of innovation * Life cycle Individual * Know-how * Job satisfaction * Development of individual * Ideas * Profit * Better living standard * Financial input * Dividends * Employments * Motivation * Know-how * Status * Attitude * Skill * Motivation * Working hours * Adoption and/or development * Education of ideas Enterprise Personnel Growth Success Funds Profit Improved value added Strategy Better strategies Equity increases Information Innovations Enlarged-market Know-how Improved know-how Better image Competition Skills Rewards Cooperation between-departments Publications Development of enterprise Exports Internationalization Market and Education Payback of loans Development of branches environment Infrastructure Taxes New enterprises Political inputs Products Employment Branch Innovations Regional development Market Markets Facts Competition Know-how Hostility Economic growths Location Diffusion of innovation Interest group Source: Hyvarinen (1990) 11 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.3 Classification of innovation: There are four criteria which are usually used to classify innovation: time, influencer (firm/entrepreneur), market, and technology.
Firstly, innovation can be ranked based on its newness. The order from the oldest to the latest is basic, applied and incremental innovation. The time within the concept of innovativeness of small- and medium sized industrial enterprises gives the opportunity to notify the following: degree of newness of innovation, delay in the reactions of SME to changes in environment and in the information about them, time-related development of a SME , time dependent innovation process, the delay between the output and impact and input of innovation activities.