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The antecedents of SME innovativeness in an emerging transition economy.pdf

Technovation29 (2009) 438 450 The antecedentsofsmeinnovativenessinanemerging transition economy Sonja Radas, Ljiljanaboz ic'The Instituteofeconomics, Trgj. F. Kennedy7, 10000zagreb, Croatia Abstract Understanding forcesthatcontributetothesuccessofsmallandmediumenterprises (SMES) isveryimportant, astheseenterprisesare vital forbothdevelopedanddevelopingeconomies. Sinceinnovativenessisamongthemostimportantmeansthroughwhichsuch businesses contributetoeconomicgrowth, numerousresearchstudieswereconductedtodeterminewhichfactorspositivelyimpact SME's innovativeefforts. Thisisanevenmoreimportantissuefordevelopingeconomies, wheresmesareoftenfacedwithinadequate infrastructure. Sincethereisalackofstudiesonsmeinnovationindevelopingeconomies, oftenpolicyinsuchcountriesisbasedon findings fromdevelopedcountries. In thispaper, weexplorefactorsthatdriveinnovationactivitiesinsmesinasmallemergingtransitionec nomy (Croatia), and compare itwithfindingsfromdevelopedeconomies. Inadditiontofactorsusedinmostpreviousstudies, weconsidermarketscope, firm's marketorientationandpresenceofstrategic, managerialandmarketingchanges. Wefindthatmostfactorsthatwerefoundtobe important indevelopedeconomiesareimportantindevelopingeconomiesaswell. Inadditiontothat, marketscopewasdiscoveredtobe a veryimportantfactorinbothproductandprocessinnovation. Implementingcorporatechangeshaspositiveimpactonradicalproduct innovation whileimplementingneworganizationalstructureshaspositiveeffectonincrementalinnov tion. Wheninvestigating determinants ofproductinnovation, wedistinguishnewproductsoflownoveltyfromnewproductsofhighnovelty, andshowthatthey need tobesupportedbydifferentpolicies. Togainadditionalinsightininnovationefforts, weexamineobstaclestoinnovation. We findthatfirmsthatreportfacingobstaclesarenotlesslikelytoinnovateless, whichsuggeststhatinnovatorsareabletowork around obstacleswithoutdamagingeffectstoinnovation. Thisstudyisbasedonapostalsurveyof448smesincroatia, whichwas performed in2004. r 2008 Elsevierltd. Allrightsreserved. Keywords: SME; Innovation; Developingcountry 1. Introduction Small andmediumenterprises (SMESINFURTHERTEXT) are consideredtobetheengineofeconomicgrowthand employment. Oneoftheprimarymeansthroughwhich SMES areexpectedtoaccomplishthistaskisbydeveloping and commercializinginnovations. Innovationmaybeeven more importantforsmesthanforlargefirms: some authors (Fritz, 1989; Sweeney, 1983) deemthatsmesuse productinnovationsasameanstobecomingcompetitive to ahigherextentthantheirlargecounterparts. Inthis paper byinnovation, wemeananeworsignificantly improvedproduct (goodorservice) introducedtothe market aswellasneworsignificantlyimprovedprocess introducedwithintheenterprise. Weinvestigateboth incrementalandradicalproductinnovations. Incremental innovationreferstoproductlineextensionsormodifica-tions ofexistingplatformsandproducts, whilebyradical innovationswemeanproductsthatarenewtothemarket as wellasforthecompany. Becauseoftheimportanceofthesmesectorincreating economic growth, bothdevelopedanddevelopingcoun-tries areveryinterestedinfindingwaystostimulatesmes in realizinginnovations. Butinwhichwayscansmesbe helped toinnovate? Whatisthebestwayforpolicymakers to encourageinnovation? Manyeffortshavebeenmadein ARTICLEINPRESS www. elsevier. com/locate/technovation 0166-4972/$-seefrontmatter r 2008 Elsevierltd. Allrightsreserved. doi: 10.1016/j. technovation. 2008.12.002 Correspondingauthor. Tel.:++38512362238; fax:++38512335165. E-mail addresses: sradas@eizg. hr (S. Radas), ljbozic@eizg. hr (L. Boz ic'.'that directionduringthelastfewdecades (Keizeretal. 2002). ) Ifwecouldunderstandhowsmesinnovateand what propelsthemtoinnovate, answeringthesequestions wouldbemucheasier. Interestingly, despitethestrong commitmenttosupportingsmes, theactualprocessby which suchfirmsundertakeinnovativeactivityremains unclear (Hoffman etal. 1998). ) Therefore, thefirststepin devisingtherightincentivestosupportinnovationinsmes is aninvestigationintowhichfactorsimpacttheinnovation efforts ofsmesandinwhichway (Keizeretal. 2002). ) Since SMESAREINTEGRATEDINTHEREGIONINWHICHTHEY exist tomuchlargerextentthanlargefirms, thedetermi-nants ofinnovationforsmesdependonspecificitiesof that region (Kaufmannandtodtling, 2002. Forexample, Keizeretal. 2002) show thatusinginnovationsubsidies, having linkswithknowledgecenters, andthepercentageof turnover investedinr&darethemostimportantfactors for innovationinsmesinnetherlands (moreprecisely, in the Brabantregion), whichhasdirectimpactontheir policy recommendations. However, basingpolicymeasures on theseresultsmaybeineffectiveforothercountries becausethesamefactorsmaynotbeascrucialfor another regionandanothereconomy. Forexample, Kaufmannandtodtling (2002) in theirinvestigationof SMES inupperaustriashowthatsupportmeasuresthat are notintunewithrealsituation‘‘ontheground''canbe rather ineffective. Most publishedresearchstudies, whichdealwith determiningfactorssignificantforsmeinnovation, come from developedeconomies. Asnotedin Hadjimanolis (1999)‘‘The studyofinnovation, includingtheobstaclesto its successfulimplementation, whilerelativelywellre-searchedintheindustrializedcountriesisratherneglected in less-developedcountries.''''Itisnotknowntowhich extent thefindingsfromdevelopedcountriescanbe generalizedtodevelopingeconomies. Forexample, inthe context oftechnologymanagement, Cetindamaretal. 2009) showtheimportanceofquestioningtheappropri-atenessofus-basedmanagementtheorieswithregardto their useindevelopingcountries. Yetpolicymakersin developingcountries, facedwiththetaskofcrafting regulationstosupportsmeinnovation, oftendrawupon the stockofknowledgefrominvestigationofsmesin developed economies. Soanimportantissueforpolicy makers wouldbetofindouttowhichextenttheycanrely on thesefindings. Inthispaper, weshedsomelightonthis questionbyinvestigatingfactorsthatsignificantlyimpact innovationinsmesincroatia, asmalldeveloping economy. Ininvestigatingthesefactors, webuildupon the existingfieldofresearchaboutinnovationdeterminants in SMES. Ourdatacomefromthecommunityinno-vationstudyperformedin2004andcoversperiodfrom 2001 to2003. Following Keizeretal. 2002), wedefinealistof variablesandthenproceedtoexaminetheirsignificancefor innovationincroatiansmes. Wetakerelevantfirm characteristics (asisusualintheliterature), butinaddition we includesomenewvariables. Weinclude (1) market scope,(2) presenceoforganizationalandstrategicchanges in thefirmand (3) marketorientationofthefirm. Tothe authors'knowledge, exceptformarketorientationin Salavou andlioukas (2003) study ofgreeksmes, the three mentionedvariableswerenotconsideredinthis context before. Weincludemarketorientationbecauseit was showntohavestronglinkwithinnovation (Kohliand Jaworski, 1990; Deshpande'et al. 1993; Slater andnarver, 1994; Atuahene-Gima, 1996; Langeraketal.,, 2004. We consider organizationalandstrategicchangesbecause willingness andabilitytotransformisimportantforfirms in developingeconomieswhichneedtoimproveinorderto competeandsurvive. As Hadjimanolis (1999) points out‘‘While firmsinless-developedcountries, intherecentpast, were operatingwithinarelativelyprotectedenvironment, they mustnowfacetheglobalforcesofcompetition. The globalizationofthemarketsrequirestheadaptationof firms inordertosurvive.''''Wealsoinvestigatetheeffectof market scope, i e. firm'sdominantmarketoninnovation (dominantmarketcanbelocal, nationalorinternational), as thisisanimportantissueforasmalleconomy. Since innovatingwithincrementalinnovationsisdifferentthan innovatingwithradicalinnovationsintermsoffactors (Balachandraandfriar, 1997) andskills (Freel, 2005) required, inthispaperwedistinguishnewproductsoflow novelty (incrementalinnovations) fromnewproductsof high novelty (radicalinnovations. Inthisrespect, our approach issimilarto Amaraetal. 2008) who considered both theinnovationandnoveltyofinnovationintheir study oflearningandinnovationinsmes. By exploringdeterminantsofinnovation, wegain knowledgeaboutwhatpropelsanenterprisetoinnovate. This pictureisnotcompletewithouttheinvestigationof hamperingfactorsthatpreventfirmsfrominnovating. This iswhyinthispaper, wealsoexamineobstacles to innovation. 2. Theoreticalbackgroundandliteraturereview Stimulatinginnovationinsmesisaveryimportant matter foraneconomy; anumberofstudieswere conductedrecentlywiththegoaltodiscoverwhichfactors contributetoinnovationeffortsbysmes (Keizeretal. 2002). ) Following Keizeretal. 2002), thefactorsthathave effect oninnovationcanbedividedintointernaland external, whereinternalvariablesrefertocharacteristics and policiesofsmeswhileexternalvariablesreferto opportunitiesthatsmecanseizefromitsenvironment. 2. 1. Internalfactorsbearingimpactoninnovation Amongtheinternalfactorsshowntobethemost importantdeterminantsofinnovativeactivityarehigh incidenceofqualifiedscientistsandengineers, andstrong leadershipprovidedbyahighlyeducateddirectororfounder (Hoffman etal. 1998; Leblancetal. 1997), althoughsome ARTICLEINPRESS S. Radas, L. Boz ic'/Technovation29 (2009) 438 450 439 studiesdonotfindthateffect (Keizeretal. 2002). ) Among otherinternalfactors, Docterandstokman (1988) and Oerlemansetal. 1998) reportthatexistenceoftechnology policyinstrumentsinthefirmandplanningforthefutureare internal factorslinkedtoinnovationefforts. Larsonetal. 1991) and Meeretal. 1996) claimthatapplicationof projectmanagementstructureshasbearingontheinnova-tionactivities. Strategyisanotherinternalfactorthatis shown tohaveimpactoninnovationinsmes. Inparticular, Birchalletal. 1996) and Carrier (1994) mentionexplicit strategiestoincreaseandstimulateinternalcreativityand risk takingbehavior. Yetanotherinternalvariableis investmentsinr&d (Birchalletal. 1996; Oerlemansetal. 1998). ) Amongotherinternalfactorsthatwerefoundtobe importantdeterminantsofsuccessofinnovativeeffortsare the natureofthecommercializationandmarketingeffort, thedegreeofmarketinginvolvementinproductplanning and firmcompetenceintheareaoftechnologystrategyand technologymanagement (Hoffman etal. 1998). 2. 2. Externalfactorsbearingimpactoninnovation Regardingexternalfactors, Keizeretal. 2002) group them intothreesets: collaborationwithotherfirms, linkageswithknowledgecentersandutilizingfinancial resourcesorsupportregulations. Entrepreneursconsider collaborationwithotherfirmsasaveryimportantpartof their innovationefforts (Massa andtesta, 2008. In particular, Kaminskietal. 2008) showthatcollaboration with supplierscancontributetoinnovativenessofsmes. Collaborationwithsuppliersmayalsohavethegoalto overcome sizeconstraintsasreportedin Lippariniand Sobrero (1994), whilecollaborationwithbothsuppliers and customersmaybeperformedforthepurposeofco-design (Birchall etal. 1996; Meer etal. 1996; Docterand Stokman, 1988; Davenport andbibby, 1999. Collabora-tion withcustomerscanbeasourceofimproved technology (Le Blancetal. 1997). ) Strategicalliancesare also showntobeimportantinfluencersofinnovative efforts whentheyareintegralpartoffirm'sdevelopment plan (Forrest, 1990; Cooke andwillis, 1999. Linkages withknowledgecentersincludecontributions by professionalconsultants, universityresearchersand technologycenters (Le Blancetal. 1997; Hoffman etal. 1998; Oerlemans etal. 1998), aswellascontribution by innovationcentersandchambersofcommerce (Oerlemans etal. 1998). ) Regardingvariableswhichrelatetoutilizingfinancial resourcesorsupportregulations, availabilityofr&d funding wasshowntobeanimportantinfluencerof innovativeeffortsinsmes (Le Blancetal. 1997; Birchall et al. 1996; Hoffmanetal. 1998). 2. 3. Internalandexternalfactorsinextantstudies Most ofthesestudiesexplorejustoneorafewofthe mentionedvariables, exceptfor Keizer etal. 2002) who consider alistofbothinternalandexternalvariables. Although formostofthedescribedvariables, thesugges-tion isthattheyhaveadirectandapositiveeffecton innovativeefforts (Keizer etal. 2002), thereisnoabsolute consensus onthat. Forexample, while Hoffman etal. 1998) report thatinternalfactorshavemorebearingon innovationthanexternalfactors, Keizeretal. 2002) find a limited numberofbothexternalandinternalvariablesthat have asignificantinfluenceoninnovationeffortswhere external factorsprevail. Evenforaparticularfactor, different studiesmayyielddifferentresults. Forexample, regardingtheeducationlevelofemployeesandmanagers, Keizer etal. 2002) find intheirstudyofmechanicaland engineering sectorsmesthatneithertheeducationofthe manager northepercentageofemployeeswithhigh educationissignificantinexplaininginnovativeefforts, which iscontrarytopriorresearch (Hoffmanetal. 1998; Le Blancetal. 1997). ) Contradictoryresultswerealso found regardinglinkageswithsourcesofknowledge, as reported by Hoffman etal. 1998). ) Similarly, different views existontheroleoffinancialfunding (Hoffmanetal. 1998) andtheproportionofturnoverspentonr&d (Oerlemansetal. 1998; Birchall etal. 1996). ) All thesefindingspointtothefactthatitisstill unresolvedwhichvariablesinfluenceinnovationeffortsin SMES andinwhichway. Generalizationsaredifficultdue to thecomplexityofthesystemweareobserving; namelyas the behaviorofsmesdiffersbyindustrysectorsand geographically, itishardtoinfergeneralrulesthatwould hold acrosstheboard. Onewaytolearnmoreabout determinantsofinnovativeeffortsinsmesistoconducta variety ofstudiesunderdiverseeconomicconditionsandin different geographicalareas. 3. Researchmodel In thissection, weproposetheresearchmodelwhich containsdeterminantsofinnovationtogetherwiththe obstacles. Fig. 1 outlinesourconceptualmodel. 3. 1. Modelingfactorsthatpropelinnovation As theindicatorofinnovationeffort, weusethefact that thefirmdevelopedandlaunchedanyproduct innovationorprocessinnovationin3-yearperiod ARTICLEINPRESS Determinants of innovation External factors Internal factors Obstacles to innovation Innovation Whether innovated or not Type of innovation Fig. 1. Conceptualmodel. S. Radas, L. Boz ic'/Technovation29 (2009) 438 450 440 (2001 2003. Threetypesofproductinnovationare studied: lineextensions,‘‘me-too''products, andradical productinnovation. Thefirsttwotypesofinnovationsare usuallyreferredtoasincrementalinnovations. Line extensionreferstominormodificationofanexisting product, while‘‘me-too''productsareimitationsof competitors'productsthatalreadyexistonthemarket. Both incrementalandradicalinnovationshaveanim-portant role. Managersdesignincrementalinnovationsto satisfy aperceivedmarketneedwithproductsthatcanbe developed inarelativelyshortperiodoftime (Ali, 1994. The introductionofincrementalinnovationiscriticalfor the longtimesurvivaloffirms (Banbury andmitchell, 1995. Ontheotherhand, radicalinnovationisamajor innovation, theproducttotallynewtothemarketaswellas to thecompany. Itcouldbebasedonnewtechnologyoron satisfyingalatentmarketneedbydisruptingincumbent markets (Iyer etal. 2006). ) Inthispaper, eachofthefive types ofinnovation (product, process, lineextension, ‘‘me-too''andradical) isrepresentedbyadummyvariable, where1denotesthatsuchinnovationwasintroducedinthe time period2001 2003, and0denotesotherwise. Next wefocusondefiningfactorsthatimpactinnova-tion. Followingtheworkof Keizeretal. 2002), weclassify our independentvariablesasexternalandinternal. All variablesrefertotheperiodfrom2001to2003. 3. 1. 1. Externalfactors Following Keizer etal. 2002), Birchalletal. 1996) and Meer etal. 1996), asexternalfactorsweconsider innovationsubsidiesbymunicipality, innovationsubsidies by thegovernmentandcollaborationwithotherfirmsor institutions (Table 1). Withincollaboration, wesingleout cooperationwithuniversitiesorresearchinstitutes. Regarding theindustry sciencecollaboration, itisnotclear what wecanexpecttofind. Somestudiesshowthat industry universitylinksintransitioncountriesarequite weak (Koschatzky, 2002; Radas, 2004; Radas andveho-vec, 2006; itisevenmoreworrisomethatalthoughfirms may besatisfiedwiththequalityofthecollaboration, they may notrateitscommercialresultshighly (Radas, 2004). This situation, whichisinalllikelihoodcausedby weaknessesofbothparties, canpotentiallyhavenegative effects oninnovation. A newexternalfactorthatweaddtothisanalysis, one which hasnotbeeninvestigatedinthissettingbefore, is market scope (Table1. Bymarketscope, wemeanthe most importantmarketforthecompany (local, nationalor international. Forsmallcountriesinparticular, themarket where thefirmoperatesisimportantforthewaybusinessis conducted. Forexample, firmsthatarepresentonlyin small localmarketscanbemorecomplacentandless motivatedtoinnovatethanthefirmsthatareactiveon wider (international) markets. Firmsthatgointernational encounterstrongercompetitorsandthereforehaveto innovateinordertogainandkeeptheirposition. Actually, survival onamorecompetitivemarketrequiresasteady stream ofinnovations. Additionalpushtoinnovatecomes from thefactthatmorecompetitivemarketsoftenoffer higher incentivesforinnovation (Sorescu etal. 2003). ) For a smalldevelopingcountry, thefurtherfromthehead-quartersthecompanygoes, theharderitbecomesto competebecauseamongotherthingsthefirmhastosolve increasinglycomplexsupplychain, logisticandmarketing issues whilecontendingwithincumbentcompanies. Inthe model, weintroducetwodummyvariables; oneindicates firm's presenceonnationalmarketandtheotherindicates its presenceoninternationalmarkets (Table 1). 3. 1. 2. Internalfactors Weinvestigatetwotypesofinternalfactors. Thefirst group offactorsisrelatedtofirmcharacteristicslikefirm age, shareofhighlyeducatedemployees, andshareoffull-time equivalentemployeesengagedinintramuralr&d (Table2. Wedidnotconsiderfirmownershipbecause almost allthefirmsinoursampleareprivatelyowned. The second groupoffactorsspeaksaboutimplementationof changes instrategy, marketing, managementandorganiza-tional structure (Table 3) andaboutmarketorientation (Table4. Intheremainderofthissection, weexplainour choice offactorsanddiscusstheirpossibleeffecton innovationefforts. 3. 1. 2. 1. Firmcharacteristics. Firmage: Althoughthereis no resultconcerningageofsmesandinnovation, thereis some evidence (Hausman, 2005) thatyoungersmallfirms (up to10employees) aremoreinnovativethanoldersmall firms. Namely, smallbusinessesbecomelessinnovative ARTICLEINPRESS Table 1 External factors: definitionofvariables. External factors Factor definition Innovationsubsidiesfromamunicipality 1 ifthefirmreceivedinnovationsubsidiesfromamunicipality, 0otherwise Innovationsubsidiesfromthegovernment 1 ifthefirmreceivedinnovationsubsidiesfromthegovernment, 0otherwise Collaborationwithotherfirmsororganizations 1 ifthefirmhadanycooperationagreementoninnovationactivitieswithother enterprises, 0otherwise Links withuniversitiesorresearchinstitutes 1 ifthefirmhadanycooperationagreementoninnovationactivitieswithuniversities and researchinstitutes, 0otherwise National market 1 ifthedominantmarketisnational, 0otherwise Internationalmarket 1 ifthedominantmarketisinternational, 0otherwise S. Radas, L. Boz ic'/Technovation29 (2009) 438 450 441 over timeastheybecomelessawareofenvironmental changes orinnovativesolutions (Hausmanandfotentot, 1999. Thisquestionisevenmoreinterestinginour context, becausetransitioncountrieshavechangedfrom centrallyplannedtomarketeconomy. Inourstudy, the dividingpointforoldandnewfirmsis1990, whichis acceptedasthebeginningoftransitionperiod. Oldfirms are moreentrenchedandexperienced, buttheyalsomaybe organizedinanoldfashionedway, lackinginentrepre-neurial spiritandnecessaryskills. Thus, wemayexpectthat they willbelessinnovative. However, sincetheperiod covered inourstudywas2001 2003, whichcomes11years after beginningoftransition, itispossiblethatallthe differences betweentheoldandnewfirmshaddisappeared. Proportionofhighlyeducatedemployees: Aswediscussed in theprevioussection, oneoftheinternalfactorsshownto be amongthemostimportantdeterminantsofinnovative activityforsmesisahighincidenceofhighlyqualified employees (Hoffmanetal. 1998). ) Thesehighlyqualified employeesrepresenttheknowledgebaseofthecompany, which isasourceofideasfornewproductandprocess development. Insupportofthatclaim, Mohnenandro ller (2005) show thathumancapitalisoneofthecrucialfactors in innovativeactivities, andthatabsenceofnecessaryskills is aseriousimpedimenttoinnovation. Modernliterature emphasizesimportanceofknowledgeableemployeesin all businessfunctions, notjustinr&d (Leiponen, 2005), as innovationinmodernfirmsrequirestechnical, marketing and integrativecompetencies (Iansiti, 1995; Kogut and Zander, 1992. Thisisinparticularcaseinsmallerfirms wherefunctionalboundariesaresometimesblurred. Keizer et al. 2002) also considertheproportionof all highly educated employees. Literatureshowsthathighlyeducated employeespositivelyaffectfirm'sinnovativecapability, so we alsoexpecttofindthatforatransitioneconomythe proportionofhighlyqualifiedemployeesinsmeshas positive influenceoninnovativecapability. Proportionoffull-timeequivalentemployeesengaged in intramuralr&d: Althoughforinnovationinsmes, it is importanttohavehighlyeducatedemployeesacrossall businessfunctions (Leiponen, 2005), itispossiblethat R&d isthestrongestdriverofinnovation. Toinvestigate that issue, weconsiderproportionoffteemployeesin R&d. Weexpectthatindeedthestrongerther&d function is, themoreinnovativethefirmwouldbe. 3. 1. 2. 2. Strategy, managementandmarketorientation. In order tounderstandinnovationatayetdeeperlevel, we need togetintoissuesofstrategy, managementand marketing. Strategicandmanagerialchanges: Well-definedcorpo-rate strategy, soundmanagementpracticesandorganiza-tional structuresareshowntobeimportantenablersof innovationindevelopedcountries (Birchalletal. 1996), while theirabsencecanseriouslyundermineinnovation (Kaufmannandtodtling, 2002; Freel, 2000. SMESIN developingcountries, inparticulartransitionones, started with verylowlevelsofcorporate, managerialand organizationalexpertise. Inordertoremaincompetitive, they neededtoadoptsignificantchangesinallthreeareas. We positthatthesechanges, whichinvolveadoptionof new skillsandpractices, arecertaintohavesignificant positive effectoninnovation. Wedefinethreevariables, oneforeacharea. Since corporatestrategyisrecognizedasaninternalfactor that isshowntohaveimpactoninnovationinsmes ARTICLEINPRESS Table 3 Internal factors: strategy, managementandmarketingchanges. Internal factors Factor definition Factors relatedtostrategicandmanagerialchanges Implementationofneworsignificantlychangedcorporatestrategies 1 ifsuchachangewasimplementedin2001 2003, 0otherwise Implementationofnew, advancedmanagementstrategies 1 ifsuchastrategywasimplementedin2001 2003, 0otherwise Implementationofneworsignificantlychangedorganizationalstructures1ifsuchastruct rewasimplementedin2001 2003 , 0otherwise Factors relatedtochangesinmarketing Significant changesinfirm'smarketingconceptsorstrategies 1 ifsuchachangewasimplementedin2001 2003, 0otherwise Significant changesinestheticappearanceordesign 1 ifsuchachangewasimplementedin2001 2003, 0otherwise Table 2 Internal factors: firmcharacteristics. Internal factors Factor definition Firm age 1 ifthefirmswasfoundedafter1990, 0otherwise Proportion ofhighlyeducatedemployeesinthefirm Number ofemployeeswithuniversitydegreedividedbytotalnumberofemployees we compute thisratiofor2001and2003andthentaketheaveragenumber Proportion offulltimeequivalentemployeesengagedin intramural R&d Number offteemployeesemployedinther&ddividedbytotalnumberof employees wecomputethisratiofor2001and2003andthentaketheaveragenumber S. Radas, L. Boz ic'/Technovation29 (2009) 438 450 442 (Hadjimanolis, 1999), weincludevariable implementation of neworsignificantlychangedcorporatestrategy (Table 3). We considermanagement'sstrategiesbecauseaspointed out in Freel (2000) innovation, beingacomplexand inclusiveprocess, requiresaneclecticbaseofmanagerial competency, andmanagerialdeficienciescanpresenta seriousobstacleforinnovation. Thisiswhywedefine variable implementationofnewadvancedmanagement strategies (Table 3). Finally, inordertooptimallymake use ofhumancapitalandotherresourcesavailabletothe firm, thefirmhastohaveasuitableorganizational structure. Inextantresearch, itwasshownthatcontinuous adaptingoftheorganizationalstructureisoneofthebasic functionsofinnovationmanagement (Tomala andse'nechal, 2004. Leonard-Barton (1988) also foundthat innovationiscloselyconnectedwithorganizationalchange. To assesstheimpactoforganizationalchange, wedefine the variable implementationofneworsignificantlychanged organizationalstructures (Table 3). Changesinmarketing: Toinvestigatethedynamicaspect of marketingfunction, weusetwoindicatorvariables (Table3. Firstwemeasurewhether significant changesin marketingconceptsorstrategy wereimplemented. Second, we investigatepossible significantchangesinesthetic appearanceordesignofproducts. Aswithstrategicand managerialchange, intransitioncountriesthesechanges signal adoptionofnewknowledgeandskills, whichis expectedtopositivelyimpactinnovation. Marketorientation: Amonginternalfactorsthatare shown tohaveimpactonthesuccessofsmesinnovative efforts aremarketingeffortandthedegreeofmarketing involvementinproductplanning (Hoffmanetal. 1998). ) We broadenthescopetoincludeseveraldimensionsof market orientation. Simplydefined, marketorientationis implementationofmarketingconcept, ortheprocessof generatinganddisseminatingmarketintelligenceforthe purpose ofcreatingsuperiorvalueforthecustomer (Narverandslater1990; Kohli andjaworski, 1990. Numerousstudieshavefoundthatthemarketorientation is positivelyrelatedtobusinessperformance (Narverand Slater, 1990; Slaterandnarver, 2000; Cano etal. 2004; Tse etal. 2003; Hooley etal. 2000). ) Marketorientation representsbusinessculture (Narverandslater, 1990) or businessbehavior (Kohli andjaworski, 1990) thatleadsto superiorperformancepartiallybecauseitencourages innovationactivities (Langeraketal. 2004). ) Innovation is importantcontributortothebusinessperformance. Therefore, positivemarketorientation innovativenessre-lationship isfrequentlyhypothesizedandempirically supportedinmanystudiesinmarketingliterature (Kohli and Jaworski, 1990; Deshpande'et al. 1993; Slater and Narver, 1994; Atuahene-Gima, 1996; Langeraketal.,, 2004. However, evidenceaboutlinkbetweenmarket orientationandinnovationcomesmostlyfromstudyof large firms, andthisconnectionisunder-researchedin SMES (Salavou andlioukas, 2003. Thereforeinthis paper, weincludemarketorientationamongpossible drivers ofinnovationinsmes. Marketorientationismeasuredbywidelyaccepted Narverandslater (1990) market orientationscalethat covers threebehavioralcomponentsofmarketorientation. These are Customerorientation, Competitororientationand Interfunctionalcoordination and theyareequallyimportant componentsofmarketorientation. Eachofthesecompo-nents isanindexmeasuredbyasetofquestions (Table4. The valueofeachindexiscomputedastheaveragevalueof the itemscomprisingtheindex. Reliabilityanalysiswas performedforeachoftheindices, andcronbach a's are 0. 84,0. 83and0.83, respectively. Averageinter-item correlationsare0. 48,0. 54and0.51, respectively. These numbers indicateaveryhighlevelofreliabilityofthese indices. Marketorientationindexisaverageofrespon-dents'scoresoncustomerandcompetitororientationas well asinterfunctionalcoordination. Allthreecomponents of marketorientationarestronglycorrelatedandtherefore converge onacommonconstruct (Narver andslater, ARTICLEINPRESS Table 4 Internal factors: marketingorientation. Market orientationindex: componentsa Customer orientationindex 1. Weconstantlymonitortheleveloforientationtoservingcustomers'needs 2. Ourbusinessobjectivesaredrivenprimarilybycustomersatisfaction 3. Ourstrategyforcompetitiveadvantageisbasedonunderstandingof customer needs 4. Ourbusinessstrategiesaredrivenbyourbeliefsabouthowwecan create greatervalueforcustomers 5. Wemeasurecustomersatisfactionsystematicallyandfrequently 6. Wegivecloseattentiontoaftersalesservice Competitor orientationindex 1. Werapidlyrespondtocompetitiveactionsthatthreatenus 2. Oursalespeopleregularlyshareinformationwithinourorganization concerningcompetitors'strategies 3. Topmanagementregularlydiscussescompetitors'strengthsand strategies 4. Wetargetcustomerswherewehaveanopportunityforcompetitive advantage Inter-functionalcoordinationindex 1. Allofourbusinessfunctions (marketing/sales, manufacturing, R&d, etc. areintegratedinservingtheneedsofourtargetmarkets 2. Allofourbusinessfunctionsaddepartmentsareresponsivetoeach other's needsandrequests 3. Ortopmanagersfromeveryfunctionregularlyvisitourcurrentand prospectivecustomers 4. Wefreelycommunicateinformationaboutoursuccessfuland unsuccessfulcustomerexperiencesacrossallbusinessfunctions 5. Ourmanagersunderstandhoweveryoneinthebusinesscancontribute to creatingcustomervalue afor eachoftheitems, firmsindicatedtheiragreementwiththe following statementsonthescalefrom1 (completelydisagree ) to5 (completely agree. S. Radas, L. Boz ic'/Technovation29 (2009) 438 450 443 1990), the marketorientationindex. Reliabilityanalysisfor this indexyieldscronbach a of 0. 91andinter-item correlationsof0. 45, whichindicatesveryhighdegree of reliability. 3. 2. Obstaclestoinnovation To gainmorecompleteunderstandingofinnovationin SMES, weinquireaboutobstaclesandhamperingfactors. SMES areexpectedtohavemoreproblemswithbarriersto innovationthanlargefirmsduetoinadequateresources and expertise. Obstaclestoinnovationcanbeclassifiedas externalandinternal (Piater, 1984. Externalobstacles include thosethataresupplyrelated, demandrelatedor environmentrelated. Internalobstacleshavetodowith difficultiesthatarerelatedtoresourceswithinthefirmor human capital. Inthisstudy, welookatthemixtureof internalandexternalobstacles, seekingtoidentifythemost importantones (Table5. Inparticular, weconsider demand forfirm'sproducts, financingissues, statesupport, businessenvironment, organizationalissues, andavailabil-ity ofinformationaboutmarketsandtechnology. Weask firms (1) iftheyencounteredobstaclesintheirinnovation activities, andthen (2) weaskthemtorateeachobstacle. In this paper, weseektoexamineifobstacleshaveanybearing on whetherfirmsinnovate. Inhisstudyofsmesincyprus, Hadjimanolis (1999) found thatobstaclesarenotcorre-lated toinnovation. Theexplanationheoffersforthis interestingresultisthatinnovativefirmsaresomehowable to getaroundobstacles, sothatalthoughtheyrecognize barriers toinnovationthosebarriersdonotcripplethem. To investigatethatissueincroatia, weanalyzethe relationshipbetweenbarrierstoinnovationandthefact that thefirminnovated. Wemeasurehamperingfactorsbytwoindexesthatare formed eachfromthreestatementsthatrequireanswerson the scalefrom0 (indicatingnoimportance) to3 (high importance. Indexesarenamed financingandexpenses, and internalfactors (Table5. Weperformedreliability analysis foreachoftheseindexes. Thecronbach a for the indexes is0. 72for financingandexpenses (average inter-item correlationis0. 47), 0. 82for internal factors (average inter-item correlationis0. 6). Thetwo a's togetherwith high inter-itemcorrelationsindicatehighindexreliability for financingandexpensesandinternalfactors. Thevalue of theindexiscomputedastheaveragevalueoftheitems that comprisetheindex. 4. Researchmethodology The datapresentedinthisstudywerecollectedaspartof Communityinnovationsurveyconductedoncroatian companiesfrommanufacturingandservicesectorsduring year 2004. Thecompanieswerechosendependingontwo characteristics: mainactivityandnumberofemployees. The datawerecollectedbymailsurveyfollowedupbytwo telephoneprompts. Thisparticularsurveywasthefirstcis performed incroatiaanditreferstoinnovationactivities over theperiodfromthebeginningof2001totheendof 2003. Wedefinesmeasafirmemployingbetween10and 250 people (microfirmsareexcluded. Bothserviceand manufacturingfirmsareincluded. Theresponserateforthe SMES was16%.%Moreprecisely, theresponseratefor the servicesectorwas17. 5%whiletheresponserateforthe manufacturingsectorwas15%(incomparingoursample with thepopulationwefindnostatisticallysignificant difference inprofitsandexports; however, sinceourfirms are onaveragesomewhatlargerinnumberofemployees care shouldbetakenwhengeneralizingtheresultsofthis papers toverysmallfirms..Afterexaminingandcleaning the data, 448firmswereusedinthisanalysis. In thisstudy, wedefinealistofpossiblefactorsthathave bearing oninnovation (Tables1 4). Ourgoalistofind those factorsthathavesignificantimpactoninnovationin SMES inasmalldevelopingcountry. Thedependent variables inourstudyarebinary (indicatingthepresence of innovationornot), whichcallsforlogitmodeling. Followingtheapproachin Keizeretal. 2002), westart by examiningbivariaterelationshipsbetweenthesefactors and thedependentvariablesthatdescribeproductand process innovation, andonlythosefactorsthatare significantlyrelatedtodependentvariablesareretained. The significanceisdeterminedonthebasesof w2 statistics ARTICLEINPRESS Table 5 Variables relatedtoobstaclestoinnovation. Variable Definition Encountered obstacles 1 ifanyofthestatementsbelowistrueaboutany innovationactivity, 0otherwise It wasseriouslydelayed It waspreventedfrombeingstarted It wasburdenedwithseriousproblems Hampering factors Financing and expenses Firms indicatedtheiragreementwiththefollowing statementsonthescalefrom0 (noimportance) to3 (high importance): Innovation costsaretoohigh Lack ofappropriatesourceoffinance Insufficient supportfromthestateforinnovation activities The threeabovestatementsareusedtoformtheindex Internal factorsfirmsindicatedtheiragreementwiththefollowing statementsonthescalefrom0 (noimportance) to3 (high importance: Lack ofqualifiedstaff Lack ofinformationconcerningtechnology Lack ofinformationconcerningmarket The threeabovestatementsareusedtoformtheindex S. Radas, L. Boz ic'/Technovation29 (2009) 438 450 444 (this statisticsindicateswhetherthemodelobtainedby additionofthatonevariablesignificantlydiffersfromthe intercept-onlymodel. Those retainedfactorsarethenusedinfivenew multivariablelogitmodels. Twomodelshaveproductand process innovation, respectively, asdependentvariable; while theotherthreemodelsconsiderthreetypesofnew products, namelylineextensions, ‘‘me-too''productsand radicalnewproducts. w2 statistics andmcfadden's R2 are computedforeverymodel. In theanalysisofobstaclestoinnovation, weuse ANOVAANALYSISANDTHEPEARSON w2 test. 5. Results 5. 1. Factorsthatimpactinnovation Examiningbivariaterelationshipsbetweenindependent factorsanddependentvariablesshowsthatthefactorsnot significantlyrelatedtoinnovationareinnovationsubsidies, firm ageandproportionoffull-timeequivalentemployees engaged inintramuralr&d. Althoughotherauthors (Keizer etal. 2002) haveshownsubsidiestobesignificant driversofinnovation, ourdatainterestinglyshowno evidence thathavingreceivedmunicipalityorgovernment subsidy increasestheprobabilitythatthefirminnovates (the proportionofinnovatorsthatreceivedsubsidiesisnot significantlydifferentfromtheproportionofinnovatorsin the othergroupasevidencedbythepearson w2 of 0. 87. There isapossibilitythatwedonotobservetheconnection because thereisatimelagbetweensubsidyanditsresult. However, thisabsenceofimpactoninnovationmaybe caused bythefactthatsubsidiesincroatiaarenot sufficientlylargetoenableafirmtomakesignificant investment ininnovationactivities. Subsidies, firmageandproportionoffull-timeequiva-lent employeesengagedinintramuralr&dareomitted from furtheranalysis. Theremainingfactorsareusedas independentvariablesinalogitmodelwithinnovation variablesasdependent. Wefitalogitmodelforeach innovationvariable. Table6 shows theresults. All themodelsin Table6 are significantlydifferentfrom null model. Mcfadden's R2 in everymodelisacceptable for across-sectionaldatamodelobtainedfromlarge-scale surveys ofthistype. Out oftheexternalfactors, collaborationwithother firms ororganizationshaspositivesignificantimpacton process innovationandincrementalproductinnovation, but ithasweaknegativeeffectonradicalproduct ARTICLEINPRESS Table 6 Relationshipbetweenfactorsandinnovation. Factor Product innovation Process innovation Line extension Me too product innovation Radical product innovation Collaborationwithotherfirmsororganizations 0. 84 1. 55***1. 27**1 . 22**0. 79 (0. 59)( 0. 55)( 0. 53)( 0. 55)( 0. 6) Links withuniversitiesorresearchinstitutes 1. 72 0. 61 0 . 81 0. 63 2. 01***1. 19)( 0. 73)( 0. 71)( 0. 71)( 0. 74) National market 0. 73***0. 39 **0. 63**0. 89***0 28 (0. 19)( 0. 19)( 0. 26)( 0. 22)( 0. 21) Internationalmarket 0. 66***0 . 48***0. 68***0. 54***0. 16 (0. 17)( 0. 16)( 0. 21)( 0. 18)( 0. 18) Proportion ofhighlyeducatedemployeesinthefirm 1 . 42 0. 62 1. 26 0, 49 2. 5***0. 89)( 0. 79)( 0. 87)( 0. 8)( 0. 82) Implementationofneworsignificantlychangedcorporate strategies 0. 59 0. 57 0. 06 0. 22 0. 85*(0. 46)( 0. 42)( 0. 50)( 0. 45)( 0. 47 ) Implementationofnew, advancedmanagementstrategies0. 05 0. 40 0. 87*0. 27 0. 07 (0. 42)( 0. 40)( 0. 5)( 0. 44)( 0 . 47) Implementationofneworsignificantlychangedorganizational structures 0. 36 0. 48 0. 24 1. 01**0. 32 (0. 4)( 0. 37)( 0. 44)( 0. 39 )( 0. 42) Significant changesinfirm'smarketingconceptsorstrategies 0. 09 0 19 0. 1 0. 36 0. 36 (0. 44)( 0. 39)( 0 . 47)( 0. 43)( 0. 43) Significant changesinestheticappearanceordesign 1. 32***0. 55 0. 61 0. 72*0. 67*(0. 38)( 0 . 35)( 0. 42)( 0. 37)( 0. 38) Marketing orientation 1. 74 0. 12 0. 14 0. 09 0. 14 (0 . 28)( 0. 27)( 0. 34)( 0. 29)( 0. 3) LR w2 (11) 82.62 52.18 65.65 61.44 39.49 Log-likelhood 109.05 121.32 90.31 109.6 105.52 Mcfadden's R2 0. 27 0. 18 0. 27 0. 22 0. 16 Coefficientsmarkedby*aresignificantto0. 1level thosemarkedby**aresignificantto0. 05, andthosemarkedby***aresignificantto0. 01. Standard errorsareshowninparenthesesundercoefficientvalue. Duetodeletionofmissingcases, numberofobservations N 218. S. Radas, L. Boz ic'/Technovation29 (2009) 438 450 445 innovation. Thisconfirmssomeofthefindingsfromthe literature (Birchall etal. 1996). ) However, havinglinkswith academicandresearchinstitutionshasverystrongpositive effect onradicalproductinnovation, whiletheeffecton other typesofinnovationislacking. Kaufmannand Todtling (2000) report similareffect, whichisconsequence of thefactthatradicalinnovationsneedcreativeideasand advanced knowledgethatusuallyresidesinacademiaand researchcommunity. Thisiscongruentwith Massa and Testa (2008) finding thatforacademicsonlytheradical innovationisconsideredasinnovation, whileentrepreneurs tend todefinethetermmorebroadly. Ingeneral, our resultsconfirmthoseintheliteratureconcerningexternal collaboration, inparticularthefindingfrom Keizeretal. 2002) about positiveeffectthatlinkswithknowledge centershaveoninnovation. Thisfindingisespecially interestingintransitionsetting, becauseitsuggestthat althoughthecooperationbetweenindustryandacademia may beinfrequentandburdenedwithproblems, itbears some fruitandthereforeshouldbeencouragedbypolicy. Anothersignificantexternalfactorismarketscope, which haspositivesignificanteffectoneverykindof innovationexceptonradicalinnovations. Presenceon nationalandinternationalmarkethasastrongpositive effect onprobabilitytoinnovate. Thisfindingisinlinewith the factthatwidermarketsaremorecompetitive, and survivalonmorecompetitivemarketsrequiresinnovation. The resultthatmarketscopeishighlysignificantforall types ofinnovationsexceptforradicallynewproducts makes sensebecauseofalargedifferencebetweenradical innovationsandinnovationsoflowernovelty. Radical innovation, beingsomethingcompletelynewtothemarket, is amuchlesscontrollableeventthanincremental innovationduetomuchhigherlevelofriskandunpredict-ability, whichisoffsetbytheproduct'spossibilitytoopen up newmarketsandgenerateveryhighprofits (Ali, 1994. It isnotjusttheconsequencesofinnovationbutalsothe antecedentsthatdiffer. Inthestudyofsmallfirmsby Subrahmanya (2005), itisreportedthatradicalinnovation dependsoninternalfactors, whileincrementalinnovation dependsmoreonexternalfactors. Thisiswhymarket competitiveness (reflectedinmarketscope) asanexternal factordoesnothaveimpactonradicalinnovationwhileit is averysignificantfactorinincrementalinnovation. Additionalexplanationisthatfirmsthatoperateon competitivemarketsneedasteadystreamofinnovations to sustaintheirpositionandthuscannotaffordtotake time andresourcesawayfromincrementalinnovationsto invest itinriskyradicalinnovations. Regardinginternalfactors, datashowthatthepropor-tion ofhighlyeducatedstaffhasapositiveeffectonradical productinnovation, whileithasnoeffectonothertypesof innovation. Thisisunderstandablesinceradicalinnova-tions requiresubstantivecreativeeffort, whileintroducing productsthataresimilartothosealreadyexistingonthe market doesnotrequireasmuchoriginalinputfromfirm's own staff (i e. theworkcanbecompletedbyless-skilled employees. Itismoresurprisingthatproportionofhighly educated staffisnotasignificantpredictorinprocess innovation. Thisfindingcanbeexplainedbyconsidering characteristicsofthefirmsinthesample. Namely, alarge majorityofthesampledfirmsareinmediumandlow technologysectors (thisisaconsequenceofthestructureof Croatianeconomy), whereprocessinnovationisof relativelylownovelty. Beingoflownovelty, itdoesnot require highemployeeskills. Interestingly, proportionoffull-timeequivalentemploy-ees engagedinintramuralr&dwasnotfoundtohaveany relationshipwithinnovation. Thisfindingisareflectionof the factthatinmodernfirmsinnovationisnotconfined only tor&d (Leiponen, 2005), inparticularinsmalland medium firms‘‘wherer&dactivityisbeingdistributed across anumberofoperationalareas, ratherthan concentratedwithinasingleanddiscreter&dfunction''(Freel, 2005. Among factorsthataddressstrategicandmanagerial changes, implementationofadvancedmanagementstrate-gies isnotsignificantlyrelatedtoprobabilityofinnovation (except forlineextensions), whichismostlikelybecause SMES aresmallenoughthatinformalandmorehorizontal managementstylesarestillquiteeffective. Implementation of significantlychangedcorporatestrategieshasapositive effect onradicalinnovation. Thisisthereflectionofthe fact thatthetopmanagement (includingceo) hasavery influentialpositioninsmes; inparticular, topechelonis playing animportantroleindeterminingstrategicorienta-tion ofthefirm. Salavou andlioukas (2003) showthat strategic choicesbytopmanagement (forexampleadopt-ing entrepreneurialorientation) havesignificantpositive impact onradicalinnovationinsmes. Onewaytoexplain this isthatentrepreneurialorientationsupportsproactive new productdevelopmentthatfavorsnovelty, incontrast to defensivestrategiesthatfavorimitation. Beingriskyand expensive, radicalproductinnovationrequirestimeand involvementofthebestandthebrightestpeopleinthe company. Todevoteallthoseresourcestoradical innovationisadeliberatedecisionthatonlytopmanage-ment canmake. Thosefirmsthathaveimplementedneworsignificantly changed organizationalstructureshavehigherprobability of me-tooinnovation, butthepositiveeffectdoesnot extend toothertypesofinnovation. Becauseme-too innovationsarecopiesofcompetitors'products, creativity and proactivestancearenotallthatimportantintheir development. Thechallengehereistoproducetheproduct at thelowestcostanddeliverittocustomersintheshortest time, andthisiswheregoodorganizationalstructures become essentialtoensurethattheseactivitiesbe performed efficientlyandontime. Interestingly, havingimplementedchangesinfirm's marketing conceptsorstrategieshasnoeffectonthe probabilitytoinnovate. However, firmsthathadimple-mented significantchangesinestheticappearanceand product designaremorelikelytoproduct innovate. ARTICLEINPRESS S. Radas, L. Boz ic'/Technovation29 (2009) 438 450 446 It seemsthatinnovatorspayseriousattentionto all aspectsoftheirproductportfolio, notneglecting the‘‘superficial''changesinproductslikeappearance and design. Although literaturehasdocumentedalinkbetween market orientationandinnovation ourstudydoesnot supportthat. Previousstudies (performedmostlyonlarge firms) showedthatmarketorientationhasimpactonboth radical (Christensenandbower, 1996) andincremental innovation (Sandviketal. 2000), butitispossiblethat SMES aredifferentinthatrespect. Ourresultconfirms Salavou andlioukas (2003) who intheirstudyongreek SMES didnotfindconnectionbetweenmarketorientation and innovation. Weofferthesameexplanationas Salavou and Lioukas (2003: namelyinthepresenceofother variablesmarketorientationappearstoplayalesserroleor no roleatall. 5. 2. Obstaclestoinnovation Regardingobstacles, ourfirstgoalistoinvestigateif firms thatreportobstaclestendtoinnovateless. Although 40%offirmsinoursamplereporthavingfacedserious problemsininnovationactivities, interestingly, wedonot find thathavingobstaclespreventsfirmsfrominnovating. Data showthatthereisnodifferenceinprocess innovationbetweenfirmsthatreportobstaclesandthose that donot (N 172, w2 1. 9, p 0. 17. Regarding productinnovation, thereisaweakrelationshipshowing that farfrombeing less innovative, firmsthatreported obstaclesare more innovativecomparedwithotherfirms that didnotreportobstacles (81.16%ofthosethat reportedobstaclesinnovatedcomparedwith68. 93%of those thatdidnotreportobstacles N 172, w2 3. 2 and p 0. 07. It ispossiblethatalthoughobstaclesdonotpreventfirm from innovating, theremightbeotherdamagingeffects. Namely, obstaclesmaycausedecreaseinthenumberof new introductionsand/ortheirshareinincome. Inorderto investigatethatissue, welookedintothenumberofnew productsandtheirshareintheincome. Weperformed ANOVAANDFOUNDNOSIGNIFICANTRELATIONSHIPSONEITHER the numberofnewproductsorontheirshareinincome, althoughonaveragethosefirmsreportingobstacleshave introducedsmallernumberoflineextensionsandradical new products. Allthesefindingssuggestthatfirmsthat report obstaclesaresomehowabletodealwithproblems and preventthepotentialseriousnegativeimpacton innovation. Thisconfirmstheresultfrom Hadjimanolis (1999), whointhestudyofsmesincyprusshowsthat barrierstoinnovationarenotcorrelatedtoinnovativeness nor economicperformance. Toquote Hadjimanolis (1999),‘The reasonmaybethatinnovativefirmsalthoughfacing importantbarrierstendtofindwaystoovercomethem, while non-innovativefirmswhichdonotmakeserious efforts toinnovatetendtounderestimate (ornotbeaware of) thepitfalls/problemsassociatedwithinnovationy''Next wefocusonhamperingfactors. Firmsthatreport obstacles quoteboth financingandexpense and internal factors as significantlymoreimportant (ANOVARESULTS are N 95, F 4. 46, p 0. 04 for financingandexpense and N 98, F 6. 7, p 0. 01 for internal factors. Although extantresearchshowsbothfactorstobe challengingforsmes (Freel, 2000), inoursample financing and expense is thefactorthatpresentsthemostproblems. The factthatfinancingandinnovationcostisratedas the mostimportanthamperingfactorbyallfirmsconfirms findings fromotherstudiesthatindicatefinancingasoneof the mostimportantissuesforsmes (Hadjimanolis, 1999; Kaufmannandtodtling, 2002; Bertlett andbukvic, 2006. More detailedinvestigationofdatashowsthatsourcesof financing areindeedlacking: mostcroatiansmesfinanced their innovationactivitiesinternally (145firms), followed by bankcredits (48firms) andsuppliercredits (31firms. Other financinginstrumentsareveryrare. Thisfindingisin line withotherstudiesthatfindthatsmesgenerallyshow lack ofawarenessofalternativesourcesoffinance (Freel, 2000. Regardlessofproblemswithfinancing, datareveal that 85.5%ofthefirmsthatreportedobstaclesmanagedto secure sourcesoffunding (mostlyinternalfollowedby credits frombanksandsuppliers), whichsuggeststhat SMES incroatiasomehowfindawaytoworkaround that problem. Internalfactorsencompassinglackofqualifiedstaffand lack ofinformationabouttechnologyandmarketsarealso rated assignificantlymoreimportantbythefirmsthat report obstacles, althoughingeneraltheseissuesarenotas importantasfinancingandinnovationexpenses. This confirms findingsfromextantresearch, becauseproblems with attractingqualifiedemployees, aswellaswithhaving skills andknowledgearewelldocumentedinotherstudies (Freel, 2005; Kaufmannandtodtling, 2002). 6. Conclusionandpolicyimplications Bothdevelopedanddevelopingcountriesarevery interestedinfindingwaystostimulatesmesinrealizing innovations, duetoimportanceofsmesectorincreating growth andemployment. Moststudiesondeterminantsof innovationareperformedindevelopedcountries, and consequentlypolicymakersfromdevelopingcountries mostly lookatthosefindingswhencraftingpolicy measures. However, asfewstudiesindevelopingeconomies were performedonthistopic, itisnotknowntowhich extent itispossibletogeneralizethosefindings. Itisalso known thatdriversofsmeinnovativenessdependon geographicarea, whichaddsanotherlayerofcomplexity that policymakershavetoconsider. Summarizingthemainfindingsofourstudy, wecansay that mostfactorsthatarefoundtobeimportantinstudies of SMESINDEVELOPEDECONOMIESAREALSOCONFIRMEDTOBE importantinthisstudy, suchashavingexternallinks with othercompaniesandhavinglinkswithacademic and researchinstitutions. Weconfirmedfindingsfrom ARTICLEINPRESS S. Radas, L. Boz ic'/Technovation29 (2009) 438 450 447 developed economiesaboutthepositiveimpactthat proportionofhighlyeducatedstaffhasonproduct innovation (Freel, 2000; Hoffman etal. 1998), butwe did notfindthatinnovationisrelatedtothenumberof peopleemployedinr&d. Unlikely developedeconomies (Keizeretal. 2002), we found thatinnovationsubsidesarenotlinkedtoinnova-tiveness, whichmaybetheconsequenceofpoordesignof those incentives. Thistogetherwiththefactthatavery small numberoffirmsreceivedasubsidysuggeststhatthe existing subsidyschemesarenoteffective, andthatpolicy makers needtodevisebetterincentives. In developingcountries, inparticularintransition countries, SMESSTARTEDWITHVERYLOWLEVELOFSKILLSAND expertiseincludingcorporate, managementandorganiza-tional. Wefoundthatimplementationofsignificantly changed corporatestrategiesraisesprobabilityofradical innovation, whileimplementationofneworsignifi-cantlychangedorganizationalstructuresraisesprobability of me-tooinnovation. Interestingly, thefirmsthathad implementedsignificantchangesinestheticappearance and productdesignarealsomorelikelytointroduce productinnovations. We alsofindmarketscopetobeveryimportantin fostering innovativeness; namelyfirmsoperatingon wider marketsaremorelikelytoinnovate. Thisresultis very importantforasmallopendevelopingeconomy like Croatia, becauseitsuggeststhatbyencouraging exportingitmaybepossibletoencourageinnovation as well. Regardingfactorsthathamperinnovation, financing and innovationcostisthemostimportantproblem, which correspondstofindingsfromdevelopedeconomies (Hadjimanolis, 1999; Bertlettandbukvic, 2006. This factorisfollowedbylackofqualifiedemployeesand informationabouttechnologyandmarkets, whichisalso recognizedasaproblemindevelopedeconomies. Interestingly, wefindthatfirmsthatreportfacingobstaclesarenot less likelytoinnovateless, whichsuggeststhatinnovators are abletoworkaroundobstacleswithoutdamaging effects toinnovation. Similareffectisfoundincyprus, another developingeconomy. All inall, ourfindingsshowthattheremaybemany similaritiesbetweendevelopedanddevelopingeconomies. In otherwords, ifcroatiancaseisindicativeofother developingcountries, findingsfromdevelopedeconomies may travelacrossgeographicandeconomicboundaries betterthancouldbeexpected. However, theremaybesome particularitiesthatpolicymakersindevelopingcountries should address. Incroatia, wefoundthatpolicyshouldbe encouragingsmestoimplementchangesinvolvingcorpo-rate strategyandorganizationalstructure. Thiscanbe done throughofferingtrainingforsmes, sothatfirmscan become informedaboutpossibleorganizationaland corporatestructures, trendsandstrategies. Anotherway to enablechangescouldbethroughsponsoredconsulting programsrunwiththepurposetohelpenterprisesassess what isrightforthemandassiststheminmakingnecessary changes. Anotherpolicymeasure (inparticularinsmall economies) shouldbeencouragingsmestobecome exporters. Firststepwouldbetodeterminewhat possible obstaclestoexportingthereareandthen address thosewithasetoftargetedmeasures. Incentives that wouldhelpfirmstoaccesswidermarketscouldalso encourage innovation. Policyshouldencourageemploymentofhighlyqualified people bysmes. Employingeducatedpeoplehaspotential to strengthentieswithacademiccommunity, sothatwould most likelyalsoimproveexternalnetworks. Policycould encourage inter-companycooperationbyaidingincluster formation thisstrategyhasshowngoodresultsin Slovenia (Bertlettandbukvic, 2006. Thatlaterstrategy should beeasiertoimplementthanforgingtieswith academics, as Massa andtesta (2008) find thatentrepre-neurs prefercollaboratingwiththeirpeers, otherentrepre-neurs and/ortheirsocialnetworks. One thingtoconsiderwhendevisinginnovationincen-tives isthatsmestraditionallyfacehightransactioncosts in accessinggovernmentprograms. Thismaybeparticu-larly difficultforsmesintransitioncountrieswhere system isundergoingconstantchanges. Forexample, we find thatverysmallpercentageofcroatiansmesreceived existing subsidieswhichseemtobenon-efficient. Apart fromdesigningeffectiveincentives, policymakers need tothinkaboutmakingtheapplicationprocesseasy and enterprise-friendly. Inaddition, wehaveshownthat radical andincrementalinnovationhavedifferentante-cedents, sopolicymakerscandevisedifferentincentive schemes dependingonwhichtypeofinnovationtheywish to encourage. Wealsofindthatsomeofourfindingsconfirmthose from Cyprus (Hadjimanolis, 1999) andgreece (Salavou and Lioukas, 2003. Althoughwehavetobecarefulin drawing conclusionsintheabsenceofotherstudieson SME innovationdriversfromthegeographicregionof South Easterneurope, thissuggeststhatsmesinthesame geographicregionmaysharemanysimilaritiesintheir innovationpractices. Futureresearchshouldinvolvesimultaneousinvestiga-tion ofseveraldevelopingcountriesaswellasseveral developed countriesusingthesamesurveyinstrumentto address thesamesetoffactors. Acknowledgments Thispaperwaspresentedatthe2005technology Transfersocietyconference (specialsessiononr&dand Regionaleconomicperformance. Authorswouldliketo thank sessionchairandparticipantsforusefulcomments. 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