small enterprises as innovators: shift from a low performer to a high performer

154 Int. J. Technology Management, Vol. 56, Nos. 2/3/4, 2011

Copyright © 2011 Inderscience Enterprises Ltd.

Small enterprises as innovators: shift from a low performer to a high performer

Helena Forsman* and Ulla Annala Lappeenranta University of Technology, Lahti School of Innovation, Saimaankatu 11, 15140 Lahti, Finland E-mail: [email protected] E-mail: [email protected] *Corresponding author

Abstract: This paper focuses on innovation development in small enterprises. It explores what kinds of innovations have been developed in small enterprises and what is the diversity of innovation types. In addition, this paper examines the features characterising the journey of a small enterprise from a non-innovator to a diversified innovator. The empirical evidence is based on quantitative data gathered through an e-mail questionnaire, which yielded 733 qualified responses from the representatives of Finnish small enterprises with fewer than 50 employees. The results suggest that the degree of innovation capabilities, R&D investments and profitability are associated with the diversity of developed innovation types. The findings display four alternative routes when a small enterprise moves from a non-innovator to a diversified innovator. Applying these results will provide more specific questions for studying innovation development in the smallest enterprises.

Keywords: diversity of innovation types; innovation capabilities; profitability; R&D investments; small enterprises.

Reference to this paper should be made as follows: Forsman, H. and Annala, U. (2011) ‘Small enterprises as innovators: shift from a low performer to a high performer’, Int. J. Technology Management, Vol. 56, Nos. 2/3/4, pp.154–171.

Biographical notes: Helena Forsman has a DSc (Tech.) degree in Engineering and Technology Management. She is working as a Senior Researcher at Lappeenranta University of Technology, Lahti School of Innovation. Her research interest focuses on business development and innovation management in the context of small business.

Ulla Annala has an MSc (Tech.) degree in Industrial Management. She is working as a Researcher at Lappeenranta University of Technology, Lahti School of Innovation. Her current research focuses on performance measurement and performance management in private enterprises and public organisations.

Small enterprises as innovators 155

1 Introduction

Despite their important role in an economy, innovation development in the smallest enterprises has received only scant attention. The majority of the studies are focused on medium-size and large enterprises in high-technology industries. This paper aims at contributing to filling the above gap. It explores innovation development in small enterprises with fewer than 50 employees.

The innovation types developed by small enterprises have been examined in current literature with inconclusive results. Some researchers have found that smaller enterprises invest more in product innovations while large enterprises invest more in process innovations (cf. Cohen and Klepper, 1996). Contrary to this, de Jong and Marsili (2006) found that process innovations are more widespread in small enterprises than product innovations. Finally, some researchers have suggested that innovation patterns are as rich in small enterprises as they are in larger enterprises (cf. Bertschek and Entorf, 1996; Turner et al., 2009). Meanwhile, the question of how innovation development diversifies in small enterprises is an almost unexplored field.

Literature also introduces a variety of research results of the needed resources and capabilities which predict successful innovation development. Most of these studies have explored the impact of individual factors on product and service innovations. There is, however, a need to examine innovation capabilities and other resources more holistically in relation to the diversity of developed innovations.

Challenged by the above inferences, this paper seeks answers to the questions: what kinds of innovations have been developed in small enterprises and what is the diversity of developed innovation types. In addition, it examines the features characterising the journey of a small enterprise from a non-innovator to a diversified innovator. The features are examined based on the degree of innovation capabilities, R&D investments and the trend of profitability. To study innovation development in small enterprises, an email questionnaire was developed. It yielded 733 qualified responses from the representatives of small enterprises with fewer than 50 employees.

The structure of this paper is as follows: The next section introduces the challenges of innovation development in small enterprises. Subsequently, the methodology is presented followed by the findings. The results are discussed with the aim of answering the proposed research questions. The final section summarises the conclusions of the study and provides the implications for future research.

2 Innovation development as a challenge in small enterprises

Researchers have developed a variety of theories of innovation types separating radical innovations from incremental innovations (Dewar and Dutton, 1986), product innovations from process innovations (Damanpour and Gopalakrishnan, 2001), component modifications from architectural innovations (Henderson and Clark, 1990) and sustaining innovations from disruptive ones (Christensen, 2003). A commonly studied typology is the distinction between product and process innovations. Product innovation reflects changes in end products or services while process innovation represents changes in the way an enterprise produces products and services (Dibrell et al., 2008). Instead, the distinction between product and service innovations is not clear. Quite

156 H. Forsman and U. Annala

often, the services provided by the enterprises of the service industries are equated with the product innovations developed by the enterprises of the manufacturing industries (McAdam et al., 2004). Another common typology is the distinction between incremental and radical innovations. Incremental innovations are often aimed to improve processes, make operations more effective, enhance the quality and decrease costs while radical innovations are characterised by discontinuity in technology and the market (Garcia and Calantone, 2002).

Studying innovation development in small enterprises is challenging not only because of the above mentioned ambiguity between the different innovation types but also because innovations are not necessarily the result of formal R&D. They may be the result of daily business development, customer and supplier collaboration or optimisation of processes (Forsman, 2008; Santamaría et al., 2009). This could result in difficulties in distinguishing innovation development from other business activities. If the distinction between conventional business and innovation development is not clear, it also leads to difficulties in assessing the contribution of innovation development to performance (Nystrom et al., 2002).

There are multiple studies of the relationship between innovation development and profitability of enterprises. Their focus is primarily on studying the impact of formal R&D activities and R&D investments on profitability. In the main, the findings of these studies support the assumption of a positive relationship, but there are also some diverging observations among researchers. Leiponen (2000) has studied the profitability effects of both process and product innovations and states that process innovation has a positive effect on profitability while product innovation tends to have a negative effect. Instead of a return on individual innovations, Geroski et al. (1993) found that the innovation process mattered for profitability. This is supported by Love et al. (2009), who found that the capabilities improved through innovation process explain why innovators earn higher profits than non-innovators.

Literature provides a substantial number of research results of the capabilities that predict successful innovation development. The concept of absorptive capacity has been a commonly used framework which Cohen and Levinthal (1990) define as an ability of an enterprise to identify the relevant new knowledge, assimilate it and combine with internal knowledge and to transform the knowledge into competitive advantage (see also Zahra and George, 2002). Several authors have utilised the theory of absorptive capacity and introduced results of the needed capabilities for developing certain types of innovations. Damanpour and Wischnevsky (2006) emphasise that adopting innovations relies on managerial and organisational capabilities to select and assimilate knowledge while generating innovations rests heavily on capabilities to acquire new knowledge and on capabilities to exploit the developed innovations. This is supported by Herrmann et al. (2007), who suggest that transformation capabilities are essential for developing radical innovations in established companies. They also highlight the importance of risk-propensity and customer orientation. Gruenberg-Bochard and Kreis-Hoyer (2009) stress interaction-oriented capabilities for ensuring success in collaborative networks, and Leskovar-Spacapan and Bastic (2007) finalise the list of the capabilities by entrepreneurial orientation needed to recognise and exploit opportunities. Forsman (2009) argues that, instead of one or few capability dimensions, the composition of capabilities predict innovation success in small enterprises. In line with Love et al. (2009), she emphasises the interaction between capabilities and innovation development in a way that innovation development drives capability creation while improved capabilities enable


adopting even more challenging innovation goals. Also, Damanpour et al. (2009) have found that the synergy achieved from innovating across types affects the firm’s abilities. This leads to suggest that the diversity of developed innovation types is associated with the innovation capabilities of an enterprise.

3 Methodology and findings

The aim of this study is to examine what kinds of innovations have been developed in small enterprises and what is the diversity of developed innovation types. In addition, this paper examines what are the features that characterise the journey of a small enterprise from a non-innovator (Low Performer) to a diversified innovator (High Performer). The features will be examined building on the degree of innovation capabilities, R&D investments and the trend of profitability.

3.1 Data and variables

The empirical evidence is based on quantitative data gathered through an e-mail questionnaire which yielded 733 qualified responses from the representatives of Finnish small enterprises with fewer than 50 employees (the response rate was 13.5%).

The respondents of the questionnaire reported what types of innovations have been developed in their enterprises during the past four years. The given options for innovation types were: service, product, process, production method and single action. The respondents were also asked to specify whether the developed innovations were radical or incremental. A radical innovation was defined as a concept that differs dramatically from the competitors’ concepts while an incremental innovation was defined as an improvement to an existing product or service (cf. Dewar and Dutton, 1986). The data has been grouped to four innovator categories based on the radicalness of developed innovations: a Low Performer, an Incremental Performer, a Radical Performer or a Balanced Performer. The category of Low Performers consists of non-innovators, i.e., enterprises that have not developed any innovations during the past four years. The category of Incremental Performers is comprised of enterprises in which innovation development is characterised exclusively by incremental improvements while the category of Radical Performers consists of enterprises in which innovation development is biased towards radical innovations. Finally, the fourth category consists of enterprises that have developed both radical and incremental innovations.

The diversity of developed innovation types was studied by examining how many different kinds of innovation types had been developed in enterprises. The results are graded into four diversity levels. At Level 0, the enterprises have not developed any innovations during the past four years. Level 1 consists of enterprises which have developed 1–2 different innovation types. At Level 2, enterprises have developed 3–4 innovation types and finally, the enterprises which have developed more than four innovation types belong to Level 3. In this study, the enterprises at Level 0 are called Low Performers and the enterprises which have achieved Level 3 are called High Performers.

The features that characterise the journey from a Low Performer to a High Performer are examined based on R&D investments, profitability and the degree of innovation


capabilities. The rate of R&D investments was reported by respondents as a percentage of sales. Profitability was reported as a trend of profitability during the past four years. In order to examine innovation capabilities, seven capability dimensions were specified: entrepreneurial capabilities, networking capabilities, utilisation of knowledge, risk propensity and risk management capabilities, capabilities to implement change, business development capabilities as well as customer and market knowledge (cf. Damanpour and Wischnevsky, 2006; Forsman, 2009; Herrmann et al., 2007; Gruenberg-Bochard and Kreis-Hoyer, 2009; Leskovar-Spacapan and Bastic, 2007). Each capability dimension consists of three items into which the concept of absorptive capacity was incorporated (Zahra and George, 2002). The first item assesses the capability to acquire and assimilate knowledge in relation to the dimension in question, the second item assesses the capability to transform and utilise knowledge for developing new concepts and solutions, and the third item assesses the capabilities to exploit knowledge and developed solutions in business. The dimension of the capabilities to implement change is an exception. It was reported based on one item in which the respondents assessed the abilities of their enterprise to quickly incorporate new procedures and processes.

The degree of capabilities was reported based on a three-point scale: 1 = low, 2 = medium and 3 = high. A sum factor consisting of a set of three items was calculated to every capability dimension. The applicability of the sets of the items to measure new latent factors was examined by using correlations and explorative factor analysis. The results supported the use of sum factors. The internal consistency was measured with Cronbach’s alpha. The values for the sum factors are above the critical limit of 0.6 (cf. Jokivuori and Hietala, 2007).

Because the data exhibits skewness, which implies departures from normality, the distribution-free non-parametric tests are used to examine whether there exist significant differences across the diversity levels within innovator categories. The Mann-Whitney test is used for two group comparisons and the Kruskal-Wallis test is used for multigroup comparisons. The research questions for the comparisons are: RQ1 Are there differences in developed innovation types across the diversity levels

within the innovator categories? RQ2 Are there differences in innovation capabilities across the diversity levels within

the innovator categories? RQ3 Are there differences in R&D investments across the diversity levels within the

innovator categories? RQ4 Are there differences in the trends of profitability across the diversity levels

within the innovator categories? The null hypothesis is that there are no differences and it is rejected if Sig. ≤ .05.

3.2 The types and diversity of developed innovations

The most common developed innovation types are incremental in nature. Slightly less than half of the respondents reported that they had developed exclusively incremental innovations while only 7.5% had developed merely radical innovations. One-third of the enterprises had developed both radical and incremental innovations and the rest, approximately 8% of the enterprises, had not developed any innovations during the past four years.


Table 1 Summary of the developed innovations, R&D investments and the trend of profitability (N = 733)

Leve

l 0

Le

vel 1

(1–2

inno

vatio

n ty

pes)

Leve

l 2 (3

–4 in

nova

tion

type

s)

Le

vel 3

(> 4

inno

vatio

n ty

pes)

Bala

nced

pe

rfor

mer

Low

pe

rfor

mer

Radi

cal

perf

orm

er

Bala

nced

pe

rfor

mer

In

crem

enta

l pe

rfor

mer

Radi

cal

perf

orm

er

Bala

nced

pe

rfor

mer

In

crem

enta

l pe

rfor

mer

Radi

cal

perf

orm

er

(R)

(I)

Incr

emen

tal

perf

orm

er

Dev

elop

ed ra

dica

l inn

ovat

ion

type

s

Pr

oduc

ts

-

56.0

%

73.7

%

-

100.

0%

53.0

%

-

100.

0%

68.3

%

47.3

%-

Se

rvic

es

-

36.0

%

21.1

%

-

66.7

%

40.9

%

-

100.

0%

70.0

%

35.7

%-

Pr

oces

ses

-

20.0

%

- -

88

.9%

16

.7%

-

10

0.0%

60

.0%

20

.5%

-

M

etho

ds

-

20.0

%

5.3%

-

22

.2%

7.

6%

-

100.

0%

65.0

%

15.2

%-

Fu

nctio

ns

-

16.0

%

- -

77

.8%

30

.3%

-

10

0.0%

66

.7%

36

.6%

-

Dev

elop

ed in

crem

enta

l inn

ovat

ion

type

s

Pr

oduc

ts

-

- 10

.5%

33

.8%

- 27

.3%

76

.3%

- 35

.0%

53

.6%

100.

0%

Se

rvic

es

-

- 42

.1%

39

.9%

- 43

.9%

82

.8%

- 33

.3%

66

.1%

100.

0%

Pr

oces

ses

-

- 5.

3%

14.2

%

-

43.9

%

40.9

%

-

40.0

%

78.6

%10

0.0%

M

etho

ds

-

- 5.

3%

13.5

%

-

36.4

%

43.0

%

-

36.7

%

83.9

%10

0.0%

Fu

nctio

ns

-

- 36

.8%

56

.8%

- 56

.1%

89

.2%

- 33

.3%

64

.3%

100.

0%

Not

e: P

erce

ntag

e in

dica

tes t

he sh

are

of e

nter

pris

es th

at h

ave

deve

lope

d th

e in

nova

tion

type

in q

uest

ion.


Table 1 Summary of the developed innovations, R&D investments and the trend of profitability (N = 733) (continued)

Leve

l 0

Le

vel 1

(1–2

inno

vatio

n ty

pes)

Leve

l 2 (3

–4 in

nova

tion

type

s)

Le

vel 3

(> 4

inno

vatio

n ty

pes)

Bala

nced

pe

rfor

mer

Low

pe

rfor

mer

Radi

cal

perf

orm

er

Bala

nced

pe

rfor

mer

In

crem

enta

l pe

rfor

mer

Radi

cal

perf

orm

er

Bala

nced

pe

rfor

mer

In

crem

enta

l pe

rfor

mer

Radi

cal

perf

orm

er

(R)

(I)

Incr

emen

tal

perf

orm

er

Inve

stm

ent i

n de

velo

pmen

t (%

of r

even

ues)

<

1%

43.1

%

28

.0%

21

.1%

50

.0%

22.2

%

19.7

%

37.6

%

14

.3%

15

.0%

19

.6%

41.0

%

1–

2%

10.3

%

20

.0%

31

.6%

20

.9%

- 27

.3%

26

.9%

19.0

%

21.7

%

30.4

%24

.6%

3–

5%

3.4%

12.0

%

26.3

%

7.4%

22.2

%

21.2

%

14.0

%

14

.3%

23

.3%

17

.0%

15.6

%

>

5%

5.2%

24.0

%

10.5

%

2.0%

44.4

%

18.2

%

4.3%

38.1

%

28.3

%

25.0

%3.

3%

C

anno

t ans

wer

37

.9%

16.0

%

10.5

%

19.6

%

11

.1%

13

.6%

17

.2%

14.3

%

11.7

%

8.0%

15

.6%

To

tal

100%

100%

10

0%

100%

100%

10

0%

100%

100%

10

0%

100%

10

0%

Tren

d of

pro

fitab

ility

Im

prov

ed

22.4

%

36

.0%

52

.6%

41

.9%

44.4

%

51.5

%

46.2

%

52

.4%

63

.3%

54

.5%

42.6

%

N

o ch

ange

s 36

.2%

24.0

%

21.1

%

28.4

%

33

.3%

22

.7%

29

.0%

14.3

%

13.3

%

18.8

%32

.8%

Fl

uctu

atin

g 25

.9%

28.0

%

15.8

%

18.9

%

22

.2%

19

.7%

20

.5%

14.3

%

20.0

%

17.9

%16

.4%

Im

paire

d 12

.1%

12.0

%

- 6.

1%

-

6.1%

2.

2%

9.

5%

1.7%

7.

1%

2.5%

N

/A

3.4%

- 10

.5%

4.

7%

-

- 2.

2%

9.

5%

1.7%

1.

8%

5.7%

To

tal

100%

100%

10

0%

100%

100%

10

0%

100%

100%

10

0%

100%

10

0%

N

58

25

19

14

8

9 66

93

21

60

112

122

Not

e: P

erce

ntag

e in

dica

tes t

he sh

are

of e

nter

pris

es th

at h

ave

deve

lope

d th

e in

nova

tion

type

in q

uest

ion.


As Table 1 demonstrates, 86% of the enterprises at diversity Level 1 have developed only incremental innovations. Correspondingly, the incidence of radical innovations increases while the diversity level increases. More than half of the enterprises at diversity Level 3 have developed both incremental and radical innovations.

Figure 1 illustrates how the developed innovation types diversify within different innovator categories. There are two extremities for shifting from diversity Level 0 (Low Performer) to Level 3 (High Performer): diversifying exclusively through radical innovations or diversifying solely through incremental innovations. Balanced Performers who have developed both incremental and radical innovations can be found between these two extremities.

At Levels 1 and 2, Balanced Performers comprise quite a homogenous group in terms of developed innovation types whereas at Level 3 they start to diverge to two different routes: two-thirds of Balanced Performers lean towards incremental innovation development abbreviated by (I) while the rest of Balanced Performers lean towards radical innovation development abbreviated by (R).

As Figure 1 displays, Radical Performers have focused at diversity level 1 on product development. When moving to Level 2, innovation development extends to radical processes and single functions. The shares of radical production methods and services increase at diversity Level 3. Accordingly, Incremental Performers have started by developing single functions. The share of incremental products and services increases at Level 2, and at Level 3 innovation development has diversified into incremental processes and methods. Balanced Performers have developed radical products accompanied with incremental services and single functions at Level 1. When moving to Level 2, the shares of radical functions, incremental processes and methods increase. At diversity Level 3, the enterprises biased towards the radical wing (R) have diversified their innovation development into radical processes, services and methods while the enterprises biased towards the incremental wing (I) have diversified innovation development into incremental products.

Figure 1 Alternative routes from a Low Performer to a High Performer


Table 2 The results of non-parametric tests for the developed innovations types

Level 1 Level 2 Level 3 K-W Sig. Mean Std. d Mean Std. d Mean Std. d

Radical performer Radical

products 1.56 .507 2.00* .000 2.00 .000 .000

Radical services

1.36 .490 1.67 .500 2.00* .000 .000

Radical processes 1.20 .408 1.89* .333 2.00 .000 .000 Radical

methods 1.20 .408 1.22 .441 2.00* .000 .000

Radical functions 1.16 .374 1.78* .441 2.00* .000 .000 Incremental performer Incremental

products 1.34 .475 1.76* .427 2.00* .000 .000

Incremental services

1.40 .491 1.83* .379 2.00* .000 .000

Incremental processes

1.14 .350 1.41* .494 2.00* .000 .000

Incremental methods

1.14 .343 1.43* .498 2.00* .000 .000

Incremental functions

1.57 .497 1.89* .311 2.00* .000 .000

Level 1 Level 2 Level 3 (I) Level 3 (R) K-W Sig

Mean Std. d Mean Std. d Mean Std. d Mean Std. d

Balanced performer Radical

products 1.74 .452 1.53 .503 1.47 .502 1.68 .469 .102 .114

Radical services

1.21 .419 1.41 .495 1.36 .481 1.70* .462 .283 .000

Radical processes

1.00 .000 1.17 .376 1.21 .406 1.60* .494 .091 .000

Radical methods

1.05 .229 1.08 .267 1.15 .360 1.65* .481 .207 .000

Radical functions

1.00 .000 1.30* .463 1.37 .484 1.67* .475 .006 .000

Incremental products

1.11 .315 1.27 .449 1.54* .501 1.35 .481 .000 .117

Incremental services

1.42 .507 1.44 .500 1.66* .476 1.33 .475 .007 .462

Incremental processes

1.05 .229 1.44* .500 1.79* .412 1.40 .494 .000 .008

Incremental methods

1.05 .229 1.36* .485 1.84* .369 1.37 .486 .000 .026

Incremental functions

1.37 .496 1.56 .500 1.64 .481 1.33* .475 .069 .030

Note: *Mann-Whitney test indicates statistically significant differences (Sig. ≤ .05) in means between a level and the previous level above it.


Table 2 introduces the results of the Kruskal-Wallis tests indicating if the differences across the diversity levels are statistically significant within the innovator categories (Research Question 1). As Table 2 illustrates, the differences in innovation types across the diversity levels are statistically significant within the Incremental Performers related to all incremental innovation types. Correspondingly, the differences across the diversity levels within the Radical Performers are statistically significant related to all radical innovation types. Amid Balanced Performers (I), which are biased towards incremental innovation development, the differences are statistically significant with incremental products, services, processes and methods, and with radical single functions. Meanwhile, within the Balanced Performers (R), which are biased towards radical innovation development, the differences are statistically significant related to radical services, processes, methods, single functions and incremental processes, methods and functions.

In Table 2, the results of the Mann-Whitney test indicating statistically significant differences between two adjoining levels are marked by an asterisk sign (*) after the mean value. The results demonstrate that within Radical and Incremental Performers there are statistically significant differences related to all developed innovation types between diversity Levels 1 and 2 or between Levels 2 and 3. Instead, within Balanced Performers most of the statistically significant differences can be found between diversity Levels 2 and 3.

3.3 Innovation capabilities and the diversity of developed innovations

The features that characterise the journey from a Low Performer to a High Performer are examined based on the innovation capabilities of small enterprises, their R&D investments and profitability. Table 3 introduces the mean values of capability dimensions grouped by innovator categories and further by diversity levels. In addition, the accumulation of capabilities has been illustrated by the sum of all capability dimensions. The results of the Kruskal-Wallis tests indicating if the differences across the diversity levels are statistically significant within the innovator categories are introduced in column K-W Sig. while the results of the Mann-Whitney tests, which indicate statistically significant differences between two adjoining levels, are marked by an asterisk sign (*) after the mean value (Research Question 2).

In general, the mean values indicate that when an enterprise moves from a Low Performer towards a High Performer (diversity Level 3), the degree of innovation capabilities becomes higher regarding all the capability dimensions. Based on the results of the Kruskal-Wallis tests, the differences in innovation capabilities are statistically significant related to all capability dimensions when the Low Performer shifts to the High Radical Performer or to the High Balanced Performer (R). During the journey from the Low Performer to the High Balanced Performer (I), the differences are statistically significant with all the other capability dimensions but not with the change management capabilities. Finally, when the Low Performer shifts to the High Incremental Performer, the differences in innovation capabilities are statistically significant related to entrepreneurial capabilities, development capabilities, customer and market knowledge and accumulation of capabilities.


Table 3 The results of non-parametric tests for the innovation capabilities

Le

vel 0

Leve

l 1

Le

vel 2

Leve

l 3

M

ean

Std.

d

M

ean

Std.

d

M

ean

Std.

d

M

ean

Std.

d

K

-W. S

ig

From

Low

Per

form

er to

Hig

h In

crem

enta

l Per

form

er

K

now

ledg

e 1.

92

0.85

1.98

0.

78

2.

11

0.78

2.16

0.

80

.1

49

En

trepr

eneu

rial

1.65

0.

79

1.

87

0.76

1.99

0.

77

2.

10

0.75

.003

Ris

k m

gt

1.57

0.

77

1.

59

0.71

1.56

0.

68

1.

66

0.75

.791

Net

wor

king

1.

91

0.89

2.10

0.

82

2.

07

0.79

2.13

0.

86

.5

09

D

evel

opm

ent

1.50

0.

80

1.

69

0.78

1.93

* 0.

78

1.

96

0.79

.001

Cha

nge

mgt

1.

98

0.81

1.96

0.

73

2.

09

0.71

2.09

0.

65

.4

09

C

usto

mer

and

Mar

ket

1.59

0.

80

1.

71

0.81

1.71

0.

77

1.

97*

0.77

.007

Sum

of c

apab

ilitie

s 11

.92

3.75

12.9

9 3.

66

13

.57

3.46

14.0

9 3.

70

.0

11

From

Low

Per

form

er to

Hig

h R

adic

al P

erfo

rmer

Kno

wle

dge

1.92

0.

85

2.

32

0.78

2.71

0.

49

2.

47

0.70

.014

Entre

pren

euria

l 1.

65

0.79

2.27

* 0.

77

2.

86

0.38

2.61

0.

61

.0

00

R

isk

mgt

1.

57

0.77

1.86

0.

85

2.

33

0.82

2.42

0.

77

.0

02

N

etw

orki

ng

1.91

0.

89

2.

33

0.80

2.67

0.

52

2.

50

0.82

.035

Dev

elop

men

t 1.

50

0.80

2.20

* 0.

77

2.

57

0.53

2.56

0.

70

.0

00

C

hang

e m

gt

1.98

0.

81

2.

09

0.73

2.71

* 0.

49

2.

42

0.77

.039

Cus

tom

er a

nd m

arke

t 1.

59

0.80

2.04

* 0.

82

2.

50

0.55

2.41

0.

71

.0

01

Su

m o

f cap

abili

ties

11.9

2 3.

75

14

.68*

4.

24

18

.17

1.72

17.1

4 4.

13

.0

00

Not

e: *

Man

n-W

hitn

ey te

st in

dica

tes s

tatis

tical

ly si

gnifi

cant

diff

eren

ces (

Sig.

≤ .0

5) in

mea

ns b

etw

een

a le

vel a

nd th

e pr

evio

us le

vel a

bove

it.


Table 3 The results of non-parametric tests for the innovation capabilities (continued)

Le

vel 0

Leve

l 1

Le

vel 2

Leve

l 3

M

ean

Std.

d

M

ean

Std.

d

M

ean

Std.

d

M

ean

Std.

d

K

-W. S

ig

From

Low

Per

form

er to

Hig

h B

alan

ced

Perf

orm

er (I

)

Kno

wle

dge

1.92

0.

85

2.

56*

0.62

2.38

0.

78

2.

29

0.79

.007

Entre

pren

euria

l 1.

65

0.79

2.06

0.

87

2.

18

0.74

2.26

0.

79

.0

00

R

isk

mgt

1.

57

0.77

1.94

0.

83

2.

09

0.85

1.95

0.

82

.0

11

N

etw

orki

ng

1.91

0.

89

2.

50*

0.71

2.43

0.

75

2.

31

0.79

.010

Dev

elop

men

t 1.

50

0.80

1.94

* 0.

77

2.

49*

0.74

2.17

* 0.

81

.0

00

C

hang

e m

gt

1.98

0.

81

2.

00

0.75

2.05

0.

73

2.

24

0.69

.127

Cus

tom

er a

nd m

arke

t 1.

59

0.80

1.89

0.

94

2.

11

0.87

2.26

0.

79

.0

00

Su

m o

f cap

abili

ties

11.9

2 3.

75

15

.36*

3.

56

15

.72

3.43

15.5

9 4.

01

.0

00

From

Low

Per

form

er to

Hig

h B

alan

ced

Perf

orm

er (R

)

Kno

wle

dge

1.92

0.

85

2.

56*

0.62

2.38

0.

78

2.

57

0.65

.000

Entre

pren

euria

l 1.

65

0.79

2.06

0.

87

2.

18

0.74

2.48

* 0.

72

.0

00

R

isk

mgt

1.

57

0.77

1.94

0.

83

2.

09

0.85

2.19

0.

78

.0

01

N

etw

orki

ng

1.91

0.

89

2.

50*

0.71

2.43

0.

75

2.

46

0.73

.004

Dev

elop

men

t 1.

50

0.80

1.94

* 0.

77

2.

49*

0.74

2.58

0.

67

.0

00

C

hang

e m

gt

1.98

0.

81

2.

00

0.75

2.05

0.

73

2.

43*

0.67

.005

Cus

tom

er a

nd m

arke

t 1.

59

0.80

1.89

0.

94

2.

11

0.87

2.16

0.

83

.0

04

Su

m o

f cap

abili

ties

11.9

2 3.

75

15

.36*

3.

56

15

.72

3.43

17.0

4*

3.13

.000

Not

e: *

Man

n-W

hitn

ey te

st in

dica

tes s

tatis

tical

ly si

gnifi

cant

diff

eren

ces (

Sig.

≤ .0

5) in

mea

ns b

etw

een

a le

vel a

nd th

e pr

evio

us le

vel a

bove

it.


It seems that when innovation development expands and diversifies in enterprises, it puts a great strain on capability building. The most substantial capability creation is needed with those enterprises that choose the route from a Low Performer to a Radical Performer or to a Balanced Performer (R). The need for capability creation is topical especially when moving from diversity Level 0 to Level 1. In addition, Radical Performers have a leap in capabilities between Levels 1 and 2 while Balanced Performers (R) have a leap between Levels 2 and 3. Instead, the enterprises biased towards incremental innovation development have not been confronted with such a demanding situation. The Incremental Performer and the Balanced Performer (I) exhibit only minor changes in the degrees of capabilities.

3.4 R&D investments and profitability

Table 4 introduces the mean values of R&D investments and profitability grouped by innovator categories and further by diversity levels. The results of the Kruskal-Wallis tests indicating if the differences across the diversity levels are statistically significant within the innovator categories are introduced in column K-W Sig. while the results of the Mann-Whitney tests which indicate statistically significant differences between two adjoining levels are marked by an asterisk sign (*) after the mean value (Research Questions 3 and 4).

With regard to R&D investments, radical innovation development is associated with considerably bigger inputs than incremental innovation development. It also seems that when moving to the upper diversity levels, the investments tend to be bigger. As Table 4 demonstrates, there are some leaps in R&D investments across the diversity levels within the innovator categories. With Incremental Performers a statistically significant increase can be found between diversity Levels 1 and 2, while Radical Performers have a statistically significant leap between Levels 0 and 1. Also, Balanced Performers increase their R&D investments considerably when shifting from Level 0 to Level 1 followed by a smooth increase along the journey to Level 3. The differences in R&D investments across the diversity levels are statistically significant within all innovator categories.

The relationship between the trend of profitability and the diversity of developed innovations types is not as clear as it is between R&D investments and diversity levels. In general, it can be noticed from Table 4 that the trend of profitability has the lowest values at diversity Level 0, but it varies across Levels 1 to 3. The differences in profitability across Levels 0 to 3 within the innovator categories are statistically significant within Incremental and Balanced Performers but not within Radical Performers. The results of the Mann-Whitney tests suggest that profitability of Incremental and Balanced Performers increases when they shift from diversity Level 0 to Level 1, but after that there are only minor changes.


Table 4 The results of non-parametric tests for R&D investments and profitability

Fr

om L

ow P

erfo

rmer

To H

igh

Perf

orm

er

Le

vel 0

Leve

l 1

Le

vel 2

Leve

l 3

K-W

Sig

M

ean

Std.

d

M

ean

Std.

d

M

ean

Std.

d

M

ean

Std.

d

Lev

0–3

Incr

emen

tal P

erfo

rmer

s

R&

D in

vest

men

ts

1.53

.9

4

1.52

.7

7

1.82

* .9

0

1.78

.8

9 .0

18

Th

e tre

nd o

f pro

fitab

ility

2.

11

.59

2.

38*

.60

2.

45

.54

2.

40

.54

.006

R

adic

al P

erfo

rmer

s

R&

D in

vest

men

ts

1.53

.9

4

2.38

* 1.

24

3.

00

1.31

2.89

1.

18

.000

The

trend

of p

rofit

abili

ty

2.11

.5

9

2.24

.6

6

2.44

.5

3

2.47

.7

0 .0

85

Bal

ance

d Pe

rfor

mer

s (I)

R&

D in

vest

men

ts

1.53

.9

4

2.29

* .9

9

2.44

1.

07

2.

51

1.11

.0

00

Th

e tre

nd o

f pro

fitab

ility

2.

11

.59

2.

59*

.51

2.

45

.61

2.

48

.63

.001

B

alan

ced

Perf

orm

ers (

R)

R

&D

inve

stm

ents

1.

53

.94

2.

29*

.99

2.

44

1.07

2.74

1.

10

.000

The

trend

of p

rofit

abili

ty

2.11

.5

9

2.59

* .5

1

2.45

.6

1

2.62

.5

2 .0

00

Not

e: *

Man

n-W

hitn

ey te

st in

dica

tes s

tatis

tical

ly si

gnifi

cant

diff

eren

ces (

Sig.

≤ .0

5) in

mea

ns b

etw

een

a le

vel a

nd th

e

prev

ious

leve

l abo

ve it

.


4 Discussion and conclusions

The findings of this study are in line with the previous research results validating that small enterprises do not comprise a homogenous group of innovators (cf. Kirner et al., 2009). In accordance with Bertschek and Entorf (1996), the evidence demonstrates a rich diversity of developed innovations in small enterprises. In relation to innovation types, the majority of the enterprises are biased towards incremental innovation development. It has resulted in a variety of innovation types: products, services, processes, production methods and single functions. Instead, radical innovation development has most often yielded new products, services or single functions. These results are somehow conflicting with the findings introduced by de Jong and Marsili (2006). They found that process innovations are more widespread in small enterprises than product innovations. The findings of this study suggest that both the radical and incremental product innovations are more common in small enterprises than process innovations. Instead, the share of process innovations increases at the higher diversity levels when an enterprise has already developed other innovation types.

Based on the diversity of the developed innovation types, four alternative routes for the journey from a Low Innovation Performer to a High Innovation Performer can be illustrated. The most common routes run through solely incremental innovation development or through development which is strongly biased towards incremental innovations. Approximately 75% of High Performers have chosen these options. Less than 10% of small enterprises which have developed innovations during the past four years follow the route characterised exclusively by radical innovation development. When enterprises have developed one or two different innovation types, 86% of them have developed only incremental innovations with emphasis on products, services and single functions. The share of radical innovations starts to increase among the enterprises which have developed at least three different innovation types, but still more than half of the enterprises have developed only incremental innovation types. Finally, more than half of the High Performers have developed both incremental and radical innovations. The evidence suggests that the share of radical innovations increases while the diversity of innovations increases.

Innovation capabilities were studied building upon seven dimensions: knowledge exploitation, entrepreneurial capabilities, risk management capabilities, networking capabilities, business development capabilities, and the capabilities to implement change as well as customer and market knowledge. The results indicate statistically significant differences in innovation capabilities across the diversity levels. When the diversity of developed innovation types increases the degree of capabilities increases. The Low Performers have the lowest capability values while the High Performers, i.e., enterprises which had developed more than four innovation types, have the highest capability values. This finding is in line with Damanpour et al. (2009), who suggest that the synergy achieved from developing different innovation types affects the abilities of enterprises. This study proposes that the capabilities can be improved especially through radical innovation development. Instead, the incremental innovation development affects capability profiles only slightly. When innovation development expands and diversifies in small enterprises, it also puts a great strain on capability building. The shift from a Low Performer to an Incremental Performer seems to be a common choice for small enterprises and it is a journey characterised by smooth capability improvements. Instead, the shift from a Low Performer to a Radical Performer is more challenging and it


demands substantial capability creation especially when taking the first steps for developing radical innovations.

In relation to R&D investments and the trend of profitability, statistically significant differences can be found when a Low Performer at diversity Level 0 shifts to Level 1. A considerable increase in R&D investments takes place when an enterprise develops its first radical innovation. After that the investments have only minor changes. The category of Incremental Performers is an exception to this. The share of investments has a leap value between diversity Levels 1 and 2, i.e., a situation in which innovation development diversifies to incremental products and services. The relationship between profitability and diversity level is not as clear. In line with Love et al. (2009), profitability improves when an enterprise shifts from a non-innovator to an innovator, i.e., in this study from diversity Level 0 to Level 1. After that the trend of profitability remains similar. Radical Performers are exceptions. Their profitability has only minor, non-significant changes when moving from a Low Performer to a High Performer. Table 5 summarises the findings of the basic characteristics of the four alternative routes from a Low Performer to a High Performer. Table 5 Summary of the routes from a Low Performer to a High Performer

From a Low Performer to a High

Incremental Performer

to a High Balanced

Performer (I)

to a High Balanced

Performer (R)

to a High Radical

Performer Developed innovation types Level 1 Incremental

functions Radical products and incremental services and functions

Radical products

Level 2 Incremental products and services

Radical functions and incremental processes and methods

Radical processes and single functions

Level 3 Incremental processes and methods

Incremental products

Radical services, processes and methods

Radical services and methods

Capabilities Minor improvements

Significant improvements between Levels 0 and 1

Significant improvements when shifting from Level 0 to Level 1 followed by noticeable improvements when shifting towards High Performer

R&D investments

Significant increase when shifting from Level 1 to Level 2

Significant increase between Levels 0 and 1 followed by a noticeable increase between Levels 1 and 3

The trend of profitability

Significant improvement when shifting from Level 0 to Level 1

Insignificant changes

This study suggests a number of implications with regard to further research. The empirical evidence is based on cross-sectional data. A longitudinal study may be useful in order to gain a deep understanding of the progress of enhancing innovation activity in small enterprises. The research data has been provided by single informants. Reliance on small business owner-managers is justified with the prior evidence because they possess the most complete information about innovation development in their enterprises. Further


studies may attempt to gather information from multiple respondents. The empirical evidence is gathered from Finland. It would be interesting to extend the analysis to other countries. Finally, this paper has studied innovation patterns based on innovation input and innovation output. There is a need to study how innovation input has been transformed into innovation output, and thus the innovation process of small enterprises should be studied further.

The value of the present study lies in the better understanding of innovation development in small enterprises. It suggests that in the context of small business the degree of innovation capabilities, R&D investments and profitability are associated with the diversity of developed innovation types. The application of these results may provide more specific questions for studying the characteristics of innovation development in small enterprises. In addition, the results may give new insights for those responsible for designing public policies on how to support small enterprises to exploit their potential in innovation development.

Acknowledgements

The corresponding author gratefully acknowledges the financial support from the Finnish Cultural Foundation, Päijät-Häme Regional Fund (Suomen Kulttuurirahasto, Päijät-Hämeen Maakuntarahasto). In addition, we would like to thank the reviewers for their detailed and highly valuable feedback, which significantly improved the quality of this paper. The researchers would also like to express their gratitude to Mrs. Pirkko Airas for reviewing their English.

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small enterprises as innovators: shift from a low performer to a high performer

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