ARE SMES REALLY INNOVATIVE? A STUDY REGARDING THE MAIN DIFFICULTIES IN PORTUGUESE SMES Ana Ussman, Mário Franco, Luís Mendes and Anabela Almeida

Abstract Face to markets' internationalisation, companies need to adapt themselves to changes, and even to adopt an aggressive innovation policy. In fact, innovation is being considered a key factor in company's competitiveness. However, the research made is essentially oriented to larger companies and few researches have focused on small and medium-sized enterprises (SME). The purpose of this paper is to present some findings from a research about difficulties felt by Portuguese SME regarding innovation. Results are based on the analysis of data gathered through a questionnaire. Keywords: Innovation; SME; Difficulties; Strategy 1. Introduction The increasing of competition, both at a national level and international level, and markets' internationalisation, force firms to face changes and to change themselves. According to Forrest (1990), managers recognise that innovation is a key factor in firms' competitiveness and so, a basic point in its generic strategies. Pettit (1990) claims that innovation is generally pointed out as an important feature in a changing process, which can support business' development in markets more and more dynamic. González et al. (1997) argue that firms need to adapt themselves to external changing environment; thus they need an aggressive innovation policy which could convert innovation into competitive advantages. Concepts of environment and organisation influence innovation (Hyvarinen, 1992). Thus, firms' organisational and environmental conditions promote or restrict innovation, as well as its structure, its resources and governmental policy. Russel (1998) refers that capacity to innovate is needed both to facilitate changes in the sector and to respond or adapt to environmental changes. Firms must adopt quickly and efficiently new characteristics whenever competitors begin their own innovation or when changes in external environment imply new behaviour. Innovation is not something firms make once and then forget; it is a capability that needs to be developed and practised frequently. Factors affecting organisational innovation can be determined according several dimensions (Kanter, 1988) as, for example, people's creativity, problem solving style, decision process, organisational dimension and control (Koberg, et al., 1996).

The technological evolution is increasing. For Simões (1997), actually the development time of products is more and more fast; life cycles are more and more shorter. This implies strong requirements in terms of capacity to conceive, to manufacture and to launch in the market new products and to introduce new functionalities. According to this researcher, these movements of change have implications for companies, mainly for SME, in diverse plans, and particularly regarding attitudes face to innovation and the management capacity as well as strategical reflection. The innovation -- in technological, commercial and organizational areas -- becomes thus decisive for SME's competitive advantages. The entrepreneur is the person who begins, organise and develop the firm. He tries to increase productivity, through invention and innovation. So, innovation is the main feature of entrepreneurship and creativity is the entrepreneur's nuclear characteristic. He has the potential, the desire to promote innovation, the capability to accept personal responsibility, to create a venture and wish to initialise higher projects (Wiratmo and Wibawa, 1996). Studies regarding innovation activities in companies are habitually related with larger companies or technologybased SME. The research questions have been focusing, mainly, in the innovation types (Pettitt, 1990). A possible reason for the lack of progress in research about innovation is that the current research, according to Russel (1988), focuses on the contextual factors associated to innovation, but ignores the organisational strengths that motivate and lead the process. In fact, the successful innovation requires a set of organisational conditions that stimulates and supports the development and the execution of new ideas. For Hyvarinen (1992), there is not a clear definition for "innovative behaviour" of an industrial SME. Generally, innovation within a company is understood as the "creativity" or "ability in creating innovations", this is, new and better products as well as being creative. 2. Size and entrepreneurial innovation The main observations highlighted by the literature review, underline the necessity to deep the knowledge about innovation processes, exploring mainly the existing relations between the innovative behaviour and firms' dimension. As referred by Birchall et al. (1996), the technology management, with particular emphasis on innovation within SME, is becoming, currently, a subject with strong interest for managers and investigators. The few studies carried out about this problematic had highlighted contradictory conclusions. In fact, there is not a clear definition for the "innovative attitude" regarding the company's several dimensional steps. From the beginning of 80s, technological innovation capability (and, therefore, the job creation ability) in SME has been debated by many researchers, with particular emphasis in the refreshing of the perspective developed by Schumpeter (1934). However, results obtained are often inexact and badly defined (Birchall et al., 1996). Studies carried out are giving a bigger attention to the contribution that SME can have in the innovation field. According to Jones-Evans et al. (1996), the studies show that technologically innovative SME in UK have growth rates above the average regarding assets, and exportations. Moreover, such companies tend to have minors bankruptcy rates. Other studies have evidenced that small companies seem to have a bigger impact in the innovation capability, comparing to larger companies, mainly, because these small companies have a shorter development cycle and a higher proximity with market (Riedle quoted in Birchall et al., 1996). In fact, only very recently researchers and managers have started to suggest that SME can manage its technological knowledge and its know-how in a more systematic form than larger companies.

This discussion about the relation that can exist between firms' size and the innovative capability currently continues to be approached. Some researchers (González et al., 1997) argue that larger companies are more dynamic in innovation activities. However, other authors claim that SME, due to its specific features, can more easily generate changes inside the organisation. As underlined by Harrison and Watson (1998), SME are generally more flexible, adapt themselves better, and are better located to develop new ideas and to implement them. Traditionally, two opposing positions existed. On one hand, those authors who followed the arguments of Schumpeter (1944) who considered that large companies were those that had a more innovative behaviour. On the other hand the ones who defended that due to SME's characteristics, these would be more inclined to the introduction of organisational changes and therefore to innovative activities. The flexibility of these small companies, its simple organisational structure and its low risk and aversion to changes, would be, according to González et al. (1997), essential features for SME to become innovative, both inside the organisation, and in the market where they act. Some old studies adopted a global perspective based on the organisational structure and had found an association between higher levels of innovation in more "organic" structures (Burns and Stalker 1961). Other studies (March and Simon, 1958; Thompson, 1967) confirmed that companies more "bureaucratic" were less innovative. Positive associations between innovation and decentralised structures had also been found (Hage and Aiken, 1970; Shepard, 1967; and Thompson, 1967) and between innovation and informal structures (Cohn, 1981; Rosner, 1968). These researches strengthen the idea that structures more simple seem to support innovation, meanwhile bureaucratic, typical structures in larger companies, tend to inhibit innovation activities. Some empirical studies have attempted to clarify this relation between size and innovative capability, but without definitive conclusions. For example, the studies carried out by Scherer and Hamberg, quoted in González et al. (1997) and the empirical research carried out by Simões (1997), highlight that there is no relation between these two variables. It means that firm's size does not influence their innovation level. Those same authors argue that when there is any association, the innovation activity decreases as companies grow. In the study developed by Simões (1997), this hypothesis was confirmed. For the majority of the companies this causal relation was inverse. Other investigators (Acs and Audrestsch, quoted in Wiratmo and Wibawa, 1996), used a database to create a set of economical analyses and concluded that: (1) there are no differences regarding quality of innovation between small and medium firms, (2) small firms generate more innovations by employee than larger companies, (3) both microcompanies, and larger companies are more innovative than companies in general. Those researchers concluded that SME have a higher innovative behaviour compared to many large companies in some industries. The ambiguity regarding the role that the variable dimension assumes in the capability of generating innovation by companies is more than evident. If on the one hand, larger companies with a steady number of products, a great dimension, a larger diversity of capabilities, better channels marketing, and economies of scale, are more innovative (Baldwing and Scott, 1987). On the other hand, small companies will have to be highly innovative to attract more attention and overcome its competitors' advantages to attract its customers (Utterback and Abernathy, 1975; Kotabe and Swan, 1995). In this context, some authors argued that the introduction of successful products by larger companies resulted from innovations created by small companies (Grandstrand and Sjolander, 1990). Large companies are in a more favourable position, to learn and to imitate production and distribution advantages of small companies (Miles and Snow, 1978).

According to Burns and Stalker (1961) and Thompson (1967), for many entrepreneurs, the innovative spirit is lost as the company grows in size and complexity. SME have a higher innovative capacity in the first stages of the life cycle, where the entrepreneur has an active and basic role and where the company has a reduced size. Thus, firm's size can represent a basic role in the innovative behaviour of the companies. Finally, it is important to point out that firm's dimension, in itself, is not nor an advantage nor an inconvenience. But each dimensional step involves a series of specific characteristics that depending on the objective (innovative behaviour) can represent advantages or obstacles. Lara (1990) concluded that the main problem with SMEs in innovation process is the restriction in technical, economical, and human skills. Furthermore, even when SME innovate, competitors and imitators profited more from the innovation than the first firm to commercialise it. As claimed by the same researcher, the problem is greater as the imitator tends to be a large firm. The purpose of this paper is to analyse the innovative behaviour and the main difficulties felt by Portuguese SME. Innovation is considered as a set of activities limited in space and time and supposes new products, new processes, new organisational techniques, or new social methods. 3. Research objective and methodology 3. 1. Research objective SME represent the main part of Portuguese industrial sector. About 76.5% of firms have less than 10 employees and firms with more than 500 are less than 0.2%. Similarly, the Beira Interior region has 82.8% of micro firms (less than 10 employees) and only 9 large firms (Ussman et al., 1998). The same research found that industrial firms are concentrated in traditional activities as textile and clothing representing 69.8% of total employment in the region, food industry -- 10% and wood industry -- 9%. These SME are mainly based on intensive labour and don't diversify their products or markets. In this context, the region's competitiveness depends on its firms' innovation capability. Thus, this research pretends to know about innovative behaviour in Beira Interior SME and mainly the main difficulties felt by such companies. 3.2. Sample and data The sample was collected from a database (Statistics Official Institute). In order to examine the difficulties felt by companies of this sample, data were collected from a survey constructed in a precedent empirical research. This database focused on SME from the Beira Interior region and in all the sectors. About 300 questionnaires were sent; however, only 42 were returned, that means 14% of answers. Such rate may be due to the fact that small companies have bigger problems with answering to mail questionnaires than larger companies mainly when the subject is relatively new as in this study. In order to evaluate the main difficulties in innovation, business owners were asked to respond to a set of statements on a seven point Likert scale (1 = "completely disagree" to 7 = "completely agree"). See table 1 for a complete list of items. 3.3. Statistical analysis

Based on statistical tools (frequencies' analysis and factorial analysis) and using the Statistical Package for Social Sciences (SPSS), data collected were analysed and allowed to generate some knowledge and to gain an overview about SME' innovative behaviour. Firstly, we proceed to frequencies' analysis (means and standard deviation) of all variables about the difficulties to innovate in order to gain some insights about an SME' innovative behaviour in this region. Secondly, results were obtained from a factor analysis between the variables that indicate the main difficulties felt by these SME regarding innovation. Some variables were dropped from the analysis of results in order to have a better factor analysis. Table 1 -- Innovation difficulties Item # Survey item 1

There is not information on supports' innovation

2

Sector's success doesn't depend on innovation

3

Innovation through co-operation is too risky

4

Firm's strategy is not based on innovation

5

The market is too small

6

There are not innovative people

7

It is hard to get funds from banks to innovate because it is too risky

8

There is no research department

9

The firm is too small

10

Clients like the products as they are

11

There are not funds directed toward innovation

12

There is no time to think about innovation

13

Competition is not innovating

14

Innovation can produce negative results

15

The use of licenses or patents is expensive

16

It is necessary too much bureaucracy to get support to innovate

4. Results and discussion 4.1 Sample's characteristics The firms in the sample have an average of 19 years old ranging between 7 and 90 years old. Firms are in a variety of industrial sectors from industry to commerce or services. The most part of firms (84.4%) are family businesses. The company's average size is 26 employees but there are firms with only 2 employees and one firm with 342.

Table 2 allows more information about the companies in this study. The sample is quite well representative of Beira Interior economic structure. Table 2 -- Sample's characteristics Demographic variable

N

%

Before 1951

6

14.7

1951-1960

6

14.7

1961-1970

4

9.8

1971-1980

6

14.7

1981-1990

16 35.0

After 1990

3

Firms foundation

7.3

Industry Manufacturing

15 35.7

Construction

3

7.1

Service

8

19.0

Commerce

15 35.7

Transportation

1

2.4

Annual Sales 50.000.000$ * or less

20 48.8

50.000.001$-250.000.000$

12 29.3

250.000.001$-1.000.000.000$

4

9.8

1.000.000.001$-2.400.000.000$

1

2.4

2.400.000.000$ +

4

9.8

Employees 1-9

28 73.7

10-50

6

15.8

51-100

1

2.6

101-250

2

5.3

250-500

1

2.6

Family firms Yes

27 84.4

No

5

15.6

* Portuguese Currency (1 Euro = 200,482 PTE). 4.2 Innovative behavior Firms in the sample are not very innovative. In fact, 92.7% don't have a research department, a predictable due to the company's average size in the study. But also 86.1% have never had relationships with institutions, Universities, Technological Centers or Polytechnic Schools, that could support them in innovation activities. Burns and Stalker (1961) and Thompson (1967) related the lost of innovative spirit with growth in size and complexity, suggesting that innovative spirit could also be associated with firm's age. However, in this study, 42% of the companies are less than twenty years old, which would suppose a potential for innovation; but in fact they don't have an innovative spirit. This lack of innovative behavior can be seen in table 3. Table 3 -- Areas of innovation in last 5 years* Have you ... in the last 5 years? Registered any patent

11.1 Installed news equipment

68.3

Registered any trade mark

22.0 Improved the production process 70.6

Introduced new products

41.5 Changed the sales process

37.5

Introduced new packaging forms 21.6 Changed the organization

42.5

Introduced new products design

21.6 Changed the work methods

53.7

Introduced new product utilities

19.4 Used new financing sources

22.0

Improved quality of products

56.4 Improved work conditions

52.5

* Percentage of positive answers. The few areas where it is possible to find representative percentages of activities innovation are production process, equipment and with less importance work conditions, work methods and quality of products. Regarding the other areas most of companies don't innovate. Innovation still is related with technological aspects. This is a very limited concept.

4.3 Innovation difficulties To determine what were the main difficulties felt by small firms regarding innovation, companies were asked to value a set of variables that were submitted latter to a factorial analysis. From the factorial analysis five factors resulted (see Tab. 4). Table 4 -- Principal components factor analysis of innovation difficulties in SME Item # Mean

FACTOR 1 FACTOR 2 FACTOR 3 FACTOR 4 FACTOR 5 Environment Dimension Internal culture Information Institutions

2

3.32

0.788

4

3.53

0.506

6

2.81

0.589

10

3.20

0.739

5

3.83

0.876

9

4.80

0.800

12

3.38

0.556

13

3.73

0.714

14

3.45

0.764

1

4.18

0.855

11

3.85

0.666

7

4.30

0.506

16

5.83

0.870

Eigenvalue

3.960

1.782

1.453

1.149

1.023

% Variance explained

30.462

13.707

11.178

8.842

7.868

Cumulative variance

30.462

44.169

55.347

64.189

72.057

According to the variables within each group, five factors were classified, as following: (1) environment, (2) dimension, (3) internal culture, (4) information and (5) institutions.

Factor 1 -- Environment -- is related with a set of variables that represent the company's environment: industry, people, clients and company itself. The variables with higher loading in this factor are precisely the sector (0.788) and clients (0.739). Other studies (Ussman et al, 1998) concluded that small companies in the Beira Interior region operate in traditional sectors and are based on very traditional processes; this means that such reality does not allow an innovative culture. If such innovative environment is not present, small firms feel difficulties in innovating. As Hyvarinen (1992) pointed out, firms are influenced by the environment and it is felt as contrary to innovation. All around the firm suggest a noninnovative environment, so why should firm innovate? In fact, it is a wrong environmental perception from companies because competition is more and more aggressive and calls for some change. Factor 2 -- Dimension -- shows that small companies operate in small local markets with small production levels. Such panorama does not motivate companies to innovate. Due to the market's size and the dimension of internal operations it would be difficult to get good results from innovation. In fact, both variables are strongly and equally representatives in the factor with significant loadings (0.876 and 0.800). This is contrary to those studies (Harrison and Watson (1998) that suggest that small firms are more innovative, but confirms Baldwing and Scott's research (1987) that large scale of operations in big firms are useful in there innovative effort. Factor 3 -- Internal culture -- suggests some fear regarding innovation combined with some routine. Companies feel that competitors are not innovating, so, why to take risks? It seems better to go on as usual. The variables with higher loading in this factor are precisely the "fear to have negative results with innovation" (0.764) and "the perception that competitors are not innovating" (0.714). It may be also understood as a kind of resistance to change: why to innovate if it can produce negative results? This is a cultural problem, probably the result of environmental conditions. Factor 4 -- Information -- contains two variable "supports' information " and "funds to finance innovation". Small companies have problems to get access general information. Regarding innovation the situation seems worse. In fact, there is a lot of European programs which main objectives are financing the "industry's modernization" but most of small firms don't have enough information about it. Factor 5 -- Institutions -- suggests two main ideas: bureaucracy and banks. It is difficult for small firms to interact with some institutions that could support them with innovation activities. However, such institutions don't be really helpful, mainly due to the high "bureaucracy" implied in all process. In fact, the variable "bureaucracy" had the higher loading (0.87). Small firms need a special support due to their lack of resources, like human resource to handle with some institutions. Innovation is not an exception. Lara (1990) also referred the lack of resources as a difficulty to innovate. 5. Conclusions Most of the firms are in traditional sectors, using traditional methods and seem to be unaware to innovation's importance. Related with their reduced size, firms don't have their own innovation department, but worthily, they don't look for partnering with the local university or other institutions, which could support them with the innovation process. Innovation is still viewed from a technological perspective, it means, related to the production process, or the product itself, far away from new concepts and forgetting organisational aspects.

Environment, small size, internal culture, lack of information and difficulties in accessing some institutions can explain the lack of innovation in Portuguese SME. Cultural aspects can't be changed in a short term as well as routine. However, the markets' internationalisation and competition pressures from Europe companies lead companies and society to reflect on the necessity to change attitudes and beliefs regarding innovation. The two other main difficulties could have an easier solution. The central government and specialised institutions must paid attention to small firms' special characteristics. In fact, the central government based on European funds developed a set of financial programs to support the modernisation/innovation of Portuguese industry. However, SMEs don't seem to gain access to these funds. The problem seems to be essentially an information problem. The main panorama seems very pessimistic. As others regions in European Union, the Beira Interior region is far away from decision and political centres, is based on traditional activities and faces great difficulties to compete in a global market. So, innovation should be a major preoccupation in order to achieve a higher competitiveness and a more balanced economy, but it seems that SME have great difficulties to internalise the concept of innovation. Note This study was developed within NECE (Research Unit) and financed by the Science and technology Foundation. References Baldwing, W.L. and Scott, J. (1987): "Market Structure and Technological Change", Harwood Academic Publishers, Chur, Switzerland and New York. Birchall, D.W., Chanaron, J.J. e Soderquist, K. (1996), "Managing Innovation in SME's, A Comparison of Companies in the UK, France and Portugal", International Journal of Technology Management, Vol. 12, N. 3, pp. 291-305. Burns, T. and Stalker, S. (1961): The Management of Innovation", London, England: Tavistock Publications. Cohn, S. (1981): "Adopting Innovations in a Technology Push Industry", Research Management, September. Forrest, J.E. (1990), "Strategic Alliances and the Small Technology-Based Firm", Journal of Small Business Management, July, pp. 37-45. González, A., Jiménez, J.J. e Sáez, F.J. (1997), "SME's Innovative Behaviour: An Empirical Study", Internal Paper of the University of Castilla-La Mancha, Albacete, Spain. Grandstrand, O. and Sjolander, S. (1990): "The Acquisition of Technology and Small Firms by Large Firms", Journal of Economic Behavior and Organization, Vol. 13, pp. 367-386. Hage, J. and Aiken, M. (1970): "Social Change in Complex Organizations", New York: Random House. Harrison, N.J. and Watson, T. (1998): "The Focus For Innovation in Small and Medium Service Enterprises", Conference proceedings of Western Decision Sciences Institute, 27th Annual Meeting (Reno NV; April 7-11). Hyvarinen, L. (1992), "Innovativeness and Its Indicators in Small-and Medium-Sized Industrial Enterprises", International Small Business Journal, Vol. 9, N. 1, pp. 65-77.

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Ussman, A., Almeida, A., Franco, M., Silva, P., Jimenez, J., Garcia, P. and Gonçalez, A. (1998), "Aspectos de la Dirección de las PYMES de las Regiones de Castilla-la-Mancha y Beira Interior, Un estudio Comparativo", comunicação apresentada nas VIII Jornadas Luso-Espanholas de Gestão Científica, Universidade Portucalense, Março de 1998. Utterback, J.M. and Albernathy, N.J. (1975): "A Dynamic Model of Product and Process Innovation", Omega, Vol. 36, pp. 639-656. Wiratmo, M.M. and Wibawa, F. (1996), "Creating Entrepreneur Through Technological Innovation", conference proceedings of United States Association for Small Business and Entrepreneurship, 10th Annual National Conference -- Atlanta, Georgia, Vol. VI, January 12-14. About the Authors Ana M. Ussman, professor at the Department of Management and Economics, University of Beira Interior -Portugal. Mário Franco, professor at the Department of Management and Economics, University of Beira Interior -- Portugal. Luís Mendes, professor at the Department of Management and Economics, University of Beira Interior -- Portugal. Anabela Almeida, professor at the Department Management and Economics, University of Beira Interior -Portugal. Contact person: Ana Maria Ussman Universidade da Beira Interior Departamento de Gastão e Economia Estrada do Sineiro 6200 Covilhã -- Portugal Phone: +351 75 319600 Fax: +351 75 319601 E-mail: [email protected]