UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE CAUSES AND CONSEQUENCES OF TECHNOLOGICAL INNOVATION: A STUDY OF SMALL AND MEDIUM ENTERPRISES IN VIETNAM BY TRAN THI NHU Y MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2016 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE CAUSES AND CONSEQUENCES OF TECHNOLOGICAL INNOVATION: A STUDY OF SMALL AND MEDIUM ENTERPRISES IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRAN THI NHU Y Academic Supervisor: LE VAN CHON HO CHI MINH CITY, DECEMBER 2016 DECLARATION “This declaration is to certify that this thesis entitled “The causes and consequences of technological innovation: a study of small and medium enterprises in Vietnam” which is conducted and submitted by me in partial fulfilment of the requirements for the degree of the Master of Arts in Development Economics to the Vietnam – The Netherlands Programme The thesis constitutes only my original works and due supervision and acknowledgement have been made in the text to all materials used.” Tran Thi Nhu Y i ACKNOWLEDGEMENTS Completing this thesis is a challenging and interesting journey as well I found the research field that I would love to dedicate in and am proud of the outcome In this journey, I find myself lucky and honor to have the companionship of respected and generous people Foremost, I would like to express my sincere thanks and my deep respect to my supervisor, Dr Le Van Chon His wisdom and coaching always encourage me to embrace challenges and right things He is always accessible and generous to answer and explain thoroughly all my questions despite my partly weird available time due to my business schedule I am grateful for the valuable comments on my thesis research design from Dr Pham Khanh Nam and Dr Vu Viet Quang My gratitude to Dr Truong Dang Thuy for his straight forward suggestion to the very first draft of my thesis With it, I could go this far I am blessed with the encouragement of my classmates, especially those that VNP Office call them “my group” They are smart, studious and good friends who are always available when I need them They are Phuong Lan to support me with the regression test, Que Anh to provide me the sources for searching data, Anh Thu Truong, Anh Thu Le, Thao Nguyen, Thanh An and Tuong Vy to listen to me and encourage me continuously Next, VNP Office are one of the best service team I have ever known Its kindness and professionalism let me really enjoy the time learning here My family is the precious source of encouragement and support Finally, it’s my profound thanks to a special person who lets me see the importance of the thesis and shares every of my concerns and joy, his name is Cuong Thank you for all the best you gave me I am committed to this thesis enthusiastically and joyfully with your companionship, and I hope that this thesis could make you proud ii ABBREVIATIONS MSME: Micro, Small and Medium Enterprise OECD: The Organization for Economic Co-operation and Development R&D: Research and Development SME: Small and Medium Enterprise iii ABSTRACT Innovation has been long considered as a paradigm of achieving economic growth and sustaining nations’ wealth In which, technological innovation, including both product and process innovation, plays a crucial part, especially in the knowledge economy Collecting data from the non-state manufacturing SMEs survey in 2011 and 2013, this study conduct an empirical research to find the causes and consequences of technological innovation at firm level The analysis of causes to technological innovation is divided into three areas: firm characteristics, internal innovation factors and external innovation factors Except for firm age which is negatively associated to innovation occurrence, others factors are positively correlated, including firm size, employees with degree, innovation expenditure, R&D investment, spillover pressure from suppliers and customers, industry network and competition level Concerning the influence of innovation on firm performance, the empirical result shows evidence for a positive impact while suggesting a new approach to resolve the simultaneous causality between these two concepts iv TABLE OF CONTENTS Chapter 1: INTRODUCTION 1.1 Problem statement 1.2 Research questions 1.3 The scope of the study 1.4 Structure of the study Chapter 2: LITERATURE REVIEW 2.1 Definition and classification of innovation 2.1.1 Definition of innovation 2.1.2 Main types of innovation 2.2 The causes of technological innovations 10 2.2.1 Firm characteristics and technological innovation 10 2.2.2 Internal innovation factors 14 2.2.3 External innovation factors 16 2.3 Technological innovation’s impact on firm performance 20 2.4 The conceptual framework 23 Chapter 3: RESEARCH METHODOLOGY 25 3.1 Estimated models 25 3.2 Estimation approach 28 3.2.1 Equation 1: The causes of technological innovation 28 3.2.2 Equation 2: The impact of innovation on firm performance 29 Chapter 4: EMPIRICAL RESULTS 31 4.1 Data description 31 4.2 Empirical results 37 4.2.1 The measurement of innovation 37 4.2.2 The impact of innovation on firm performance 40 Chapter 5: CONCLUSION 46 5.1 Main findings 46 5.2 Policy implications 47 5.2.1 Implications for SMEs 47 5.2.2 Implications for government 48 v 5.3 Limitations and future researches 49 REFERENCES 51 LIST OF FIGURES Figure 1.1 Number of MSMEs in Vietnam Figure 2.1 The causes of firm-level technological innovation 23 Figure 4.1 The recorded time of revenue and innovation variables for the year in question of 2013 33 LIST OF TABLES Table 4.1 Variable description 32 Table 4.2 The correlation matrix 34 Table 4.3 Panel data structure 35 Table 4.4 Percentage of innovators by firm size 35 Table 4.5 Percentage of innovators by firm age 36 Table 4.6 The presence of R&D investment, Spillover pressure from suppliers or customers, industry network and competition 36 Table 4.7 Regression results and marginal effect controlling for the robustness for the sources of innovation 38 Table 4.8 Regression results with random effect and fixed effect 41 Table 4.9 Hausman test for random effect and fixed effect model 42 Table 4.10 Summary of firm facing competition and firm facing no competition 43 Table 4.11 Regression results of competition and non-competition group 44 vi CHAPTER 1: INTRODUCTION 1.1 Problem statement The significant contribution of micro, small and medium enterprises (MSMEs) to the economic growth has been historically recorded, especially its role in providing employment opportunities Due to the fact of lacking update from the national statistics on MSMEs in Vietnam since January 2013, the most recent report of Asian Development Bank (2014) utilizes the figures of the year of 2012 and shows that in 2012, there were in total 333,835 MSMEs in operations, accounting for 97.7% of the total enterprises that paid corporate tax Figure 1.1 Number of MSMEs in Vietnam Source: Asian Development Bank (2014) The MSME sector employed 5.1 million workers in 2012 and accounted for 46.8% of the total workforce in the country The sector observes an increase of number and employees of 5.3% and 2.4% respectively after five years of two-digit growth (from 2007 to 2011) Though the percentage of labor in the MSME sector is not adequate to the dominant number of MSMEs in Vietnam, it is undeniable that MSMEs take a crucial contribution to the national economy Among MSMEs in Vietnam, though taking only 15.7% of total active MSMEs in 2012 – after the wholesale & retail trade and service sectors accounting for 39.8% and 20.5% respectively, manufacturing is a labor-intensive industry, employing majority of employees in the MSME sector, 31.8% of total MSME employees, 14.9% of total domestic workforce This figure partly shows the important role of manufacturing MSMEs in the economy In the recent time, manufacturing companies are faced with unstable economic environment with frequent shocks and increasingly fierce competition Moreover, the knowledge-based mechanism, which has been ignited since 1990s, has evolved the market place to be more dynamic and competitive To some extent innovation can be acknowledged as an inevitable means for firms to increase their competitiveness in adapting to the requirements of this challenging and unstable environment From long ago, Schumpeter (1950) recommends that firms innovate for refreshing their asset value Even before this, at the time that the “innovation” term may not have been popularly used, researchers admit the important role of economic and technological change (Lorenzi et al., 1912; Veblen, 1899; Schumpeter, 1934) Firms have been forced to focus on their business strategies, especially their direction towards innovative activities to cope with the progressively fierce global competition after 1980s (Hodgetts et al., 1998) Also, due to that tenacious situation, at present, both individuals and companies start to assess and Table 4.9 Hausman test for random effect and fixed effect model (b) fe Innovation in the Previous Period Firm Age Total Assets Total Employees Professional Innovation Expenditure R&D Investment Spillover Pressure from Suppliers or Customers Industry Network Competition Level 0.048 0.013 0.151 0.011 0.005 0.000 0.135 (B) (b-B) sqrt(diag(V_b_V_B)) re Difference S.E 0.166 0.010 0.426 0.020 0.031 0.001 0.170 -0.118 0.016 0.023 -0.275 -0.009 -0.025 -0.001 -0.035 0.003 0.016 0.001 0.002 0.000 0.078 0.056 0.173 -0.117 0.034 0.043 0.055 -0.012 0.020 0.026 0.032 -0.005 0.010 b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic chi2(10) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 528.57 Prob>chi2 = 0.0000 Source: Author’s self-calculation Nevertheless, firms under different circumstances may be impacted differently The analysis should be expanded to some firm classifications Deriving from the fact that firms with innovation have more competitiveness in different aspect throughout the value chain, it is reasonable that firms operating in a competitive environment have strong motivation for innovation to capture the competitive advantage over their competitor, resulting better performance In addition, the above analysis also shows that it is likely that innovators are facing with higher competition level than noninnovators Therefore, I classify firms into two groups: Competition group consists of firms facing with competition, at a lower, equal or higher competition level comparing to two years 43 before and Non-competition group consists of firms facing with no competition comparing to two years before Table 4.10 summarizes some characteristics between two groups It is obvious to recognize that though the mean values of Revenue of both groups are quite similar, the mean values of all other variables from the non-competition group are lower than the ones from the competition group Especially the variables denoted for innovation factors, for example: the average percentage of employees with degree in competition group is nearly double that of non-competition group, the figure is four times for R&D investment and more than double for spillover pressure Table 4.10 Summary of firm facing competition and firm facing no competition Revenue Innovation Innovation in the Previous Period Firm Age Total Assets Total Employees Professional Innovation Expenditure R&D Investment Spillover Pressure Network Number of observations Number of firms Source: Author’s self-calculation Mean Competition Non-competition 13.965 13.189 0.341 0.196 0.470 0.331 14.931 13.189 14.257 13.625 14.330 11.127 3.579 1.801 14.765 10.148 0.008 0.002 0.061 0.027 0.853 0.807 3,538 550 2,256 495 However, to make a comprehensive, we will conduct the regression with fixed effect model for both groups, using the same technique of above regression to control for endogeneity problem 44 For firm facing no competition, the dataset records only one case of R&D investment availability amongst 550 observations Hence, this variable is omitted from the regression results Innovation does not have significant impact on firm performance, and even have negative sign Nevertheless, the percentage of labor with degree, one of its driving force, has sound impact on revenue at 99% significance level If the percentage of labor increases one percentage point, the revenue increases 5.2%, ceteris paribus This figure is compelling However, the sample size of non-competition group is small for this figure to be reliable for a conclusion Table 4.11 Regression results of competition and non-competition group Revenue Innovation in the Previous Period Firm Age Total Assets Total Employees Employees with Degree Innovation Expenditure R&D Investment Spillover Pressure from Suppliers and Customers Industry Network Competition Level _cons Number of observations Fixed effect (Competition) 0.076** (0.036) 0.014*** (0.004) 0.150*** (0.028) 0.008*** (0.002) 0.004 (0.004) 0.00084* (0.0005) 0.077 (0.175) 0.039 (0.074) 0.028 (0.043) -0.029 (0.029) 11.450*** (0.404) 3,538 Fixed effect (Non-competition) -0.072 (0.149) -0.005 (0.014) 0.029 (0.074) 0.0067 (0.005) 0.052*** (0.017) -0.00156 (0.00167) -0.273 (0.219) 0.064 (0.214) 12.700*** (1.069) 550 45 Number of firms R2 within R2 between R2 overall 2,256 0.077 0.586 0.566 495 0.183 0.404 0.414 ***, **, * Significant at the level of 1%, 5%, 10%, respectively; Standard errors in parentheses Source: Author’s self-calculation The group of firm facing with competition have significant impact of innovation on firm performance Innovation presence can dramatically increase revenue by 7.6%, ceteris paribus, at the significance level of 95% Innovation expenditure also shows limited impact on revenue, one percentage point increase in innovation expenditure expects 0.084% increase in revenue, ceteris paribus Firm age, total assets and total employees positively correlate with the revenue Other variables have no statistical significance We can see that the internal innovation factors have positive signs in this regression Concerning the external innovation factors, though having the positive signs, all the three proxies are not significant statistically 46 CHAPTER 5: CONCLUSION Based on the knowledge captured in the literature review and empirical results, this chapter will summarize the key findings, provide the policy implications and indicate the research limitations and suggestions for future studies on this area 5.1 Main findings Using data collected from 2,420 small and medium manufacturing firms with 4,088 observations in 2011 and 2013 in ten provinces in Vietnam, this study aims to find the causes and consequences of technological innovation at firm-level In the scope of this study, we classify the causes of technological innovation into three groups: firm characteristics, internal innovation factors and external innovation factors Regarding firm characteristics, total assets and total employees are positively correlated to innovation occurrence This results shows that firms of larger size tend to be more innovative than their smaller cohorts The firm age, on the other hand, is negatively correlated to the probability that technology can happen, pointing out that entrant and young enterprises have more capability of innovative than the long-established ones Besides the basic characteristics, the effort of firms in delivering improvement is also put into consideration in estimating causes to innovation, including three proxies: employees with degrees, innovation expenditure and R&D investment All the three factors are positive correlated to innovation probability, demonstrating that the effort of firms in recruiting qualified employees, in investment in innovation expenditures and in R&D contributes considerably to their capability of delivering innovation As firms operating in a market, paralleling to their vertical and horizontal network, this study also put the external innovation factors in to the model of regression The result 47 shows that, the three external factors, including spillover pressure from suppliers or customers, network with other companies in the same industry and the level of competition take a significantly positive part in the probability of technology innovation occurrence Firms facing pressure of improvement from suppliers or customers, contacting to the other companies in the same industry or suffering with higher competition level tend to be more innovative than the other firms Concerning the consequences of technological innovation, it is evident that technological innovation affect firm performance in a positive way By using the dynamic data of innovation in the previous period, the research solves the problems of simultaneous causality between firm performance and innovation The results also show the positive relation between some the internal and external innovation factors and firm performance, though only innovation expenditure shows statistically significant figure 5.2 Policy implications 5.2.1 Implications for SMEs Facing with increasing competition and growing market demands, SMEs are recommended to take initiatives in technological innovation for improving revenues To so, SMEs can consider following implications: First, firms need to take advantages of the innovation applied in the past for grasping lesson learnt and making continuous improvement, in terms of technological innovation, including both product innovation and process innovation Second, as innovation is beneficial to revenue enhancement and firm age is negatively correlated to firm innovation, firms with long-establishing time should examine their 48 innovative capability and search for method of creating and applying more technological innovation in operation Third, firm can consider some measures from internal resource for triggering innovation Notably, firm could enhance the innovation probability by increasing the percentage of employees with degree to improve the human capital Training can be a good tool to improve the current staffs The investment to innovation activities such as investment on machinery, equipment, plants, training or R&D are recommended Amongst these factors, R&D is considerably important Despite of very small percentage of firm employing R&D investment, this activity is strongly correlated at a large extent to firm innovation capability Fourth, firms may take advantages of demanding suppliers and customers to improve firm capability, including firm innovativeness SMEs can get more information by joining different associations or kinds of seminars that are related to different process of firm value chain Listening to customers’ feedbacks is also a good channel for firm to improve their performance with technological improvement The vertical improvement pressures from suppliers and customers should be great sources for firms to find new ways of providing products and to better position firm capability with innovation Fifth, keeping contact with other firms in the same industries can be a good method to solve current firms’ issues and exchange application of new technological innovation This channel has been developed with variety of industry associations 5.2.2 Implications for government At macro-policy level, government should encourage SMEs in generating innovation through different measurements 49 First, improving the education quality to equip future qualified labor with knowledge and skills that are required by firms are inherently crucial to economic growth in general, and in this case, to firm innovation in specific Not just fulfilling the current labor demand, education systems should also be capable to predict the potential requirements to build appropriate programs Educational institutes such as colleges and universities should be encouraged to connect with firms for getting feedbacks, cooperating in training curriculum and collaborating in R&D activities for more technological innovation Second, government can stimulate the vertical impact on firm innovation by encouraging foreign firms with new technology to operate and make a spill-over effect vertically The presence of foreign firms may raise the competition level Fortunately, this competition exposure effect will also benefit firm innovativeness Third, the related parties should build up different industry associations and increase the network as well as the platform for experience exchange with the aim of capture the best practice in the industry and establish a great source for innovation references and continuous improvement 5.3 Limitations and future researches Though solving a wide range of corporate matters related for innovation for non-state manufacturing SMEs in Vietnam, there are some limitations for future improvements The dataset, though being a panel dataset, embraces two years in question only This selection is mainly explained by the availability of important data of one external innovation factor, the spill-over pressure from suppliers and customers Future research can expand the time-span by removing such factor from the empirical model Additionally, extending the time- 50 span can also help researchers to understand more about the innovation activities at firm-level in different time context, e.g before and after the world recession in 2007 The measurement of innovation can be change to the quantitative one instead of the current binary variables For instances, the revenue of innovative products or the percentage of new products output over total output, etc However, there is currently no 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