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Barriers to Entry
Regional economic performance
Potential for spin-off
Attitude towards innovation
Headquarter branch ratio
Figure : External determinants of innovation
The industry specific factors that have been analysed by scholars relate to the nature of competition in the industry related particularly to concentration and barriers to entry, (Kraft, 1989 and Dijk et al., 1997).
Schumpeter (1942) argues that high barriers to entry and industrial concentration motivate innovation by restricting competitive initiative and enhancing profitability. This in turn provides the requisite financial resources for R&D and gives an impetus to innovation. Subsequent work, however, has generated mixed results on the impact of competitive structure in an industry on the innovative conduct of enterprises within it.
On Schumpeter’s side of the argument, though not exactly reiterating the ease of innovation caused by a lack of competition but rather highlighting difficulties of innovation under stiff competition, it is asserted that too much competition may dampen tendencies to innovate and seriously restrict a firm’s innovative action (Kamien and Schwartz, 1982); it would inhibit rather than promote product innovation (Abernathy and Utterback, 1978) and may encourage firms to try and gain competitive advantage through routes other than product innovation (Fritz, 1989).
On the other side of the divide, it is contended that in the absence of competition, innovation becomes unnecessary (Dasgupta and Stiglitz, 1980) and barriers to entry decrease the incentive to be the product pioneer (Kraft, 1989)
SMEs’ innovation, very often, has been studied with a regional focus. Recent SME innovation studies include those that analyse the phenomenon in Portugal (Fontes and Coombs 1996), France (Soderquist et al., 1997), Turkey (Burgess et al., 1998), Cyprus (Dickson and Hadjimanolis 1998), Central London, (Georgellis et al., 2000), Finland (Lindman, 2002), Holland, (Engelen, 2002), Belgium (Avermaete et al., 2003), Greece (Salavou et al., 2004), Northern Ireland, (McAdam et al., 2004), UK, (Boyle 1998, Freel, 1999, Woodcock et al., 2000, Stockdale 2002 and Frenz et al., 2004) and Wisconsin US (Blumentritt 2004).
In one of the early works on the regional dimension of innovation, Oakey (1979) reports that in all planning regions of the UK, there was a strong tendency for short distance intra-regional movement of innovations, which highlights the importance of developing indigenous regional innovation potential.
In an analysis based on 300 important innovations introduced by the UK firms between 1956 and 1978 Oakey et al. (1980) show that branch plants do not produce their expected share of innovation. They conclude that new techniques are more likely to be developed and manufactured on site if the plant concerned is a headquarter factory while ‘branch’ plants are more likely to ‘import’ products developed elsewhere. The location of centres of R&D expertise is clearly a significant aspect in determining the location of a company’s first commercial manufacturer of innovations. Significant more plants, both large and small, produce innovations in the southeast than expected, while in the Development Areas, small firms perform well and large firms perform rather poorly. This might be taken to suggest that small plants are better suited to regional innovations- especially independent small plants – than are larger plants.
In their seminal work on small firm innovation Rothwell and Zegveld (1982) try to address the issue whether innovation and particularly small firm innovation is a regional phenomenon. They report that:
Oakey et al. (1988) in a later work highlight the interaction between the peculiarity of a region and the functioning of high-technology small firms there. Quoting previous research in the field, they explain that:
In relatively more recent explorations on regional context of small firm innovation, it is found that