Small Firms, R&d, Technology And Innovation In The Uk

Pergamon PII: S0166-4972(97)00102-8

Technovation, 18(1) (1998) 39–55  1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0166-4972/98 $19.00 + 0.00

Small firms, R&D, technology and innovation in the UK: a literature review Kurt Hoffman, Milady Parejo, John Bessant* and Lew Perren Centre for Research in Innovation Management, University of Brighton, Brighton BN1 9PH, UK

Abstract The importance of small and medium-sized enterprises (SMEs) in economic growth has made them a central element in much recent policymaking. Of particular interest have been policies designed to promote and facilitate the operation of the innovation process within SMEs, and there has been substantial expansion of this kind of effort. Despite this interest, the knowledge base about how SMEs actually undertake innovative activities remains limited. This paper reports on a literature survey of UK work over the past decade and tries to characterise the state of knowledge about SMEs and innovation. It concludes with a discussion of gaps and weaknesses in the literature and some requirements for future research in this field.  1998 Elsevier Science Ltd. All rights reserved

1. INTRODUCTION Small and medium-sized enterprises (SMEs) are increasingly seen as an important focus for the attention of policymakers. Most economic structures are largely composed of SMEs, and despite the presence of large firms most employment is concentrated in this group. Whilst definitions vary, there is general recognition of the need to look closely at the characteristics and behaviour of this majority of enterprises, especially in view of their perceived importance in economic growth and job creation.

example, there is now an extensive innovation support infrastructure across the European Union targetted on SMEs, and many individual countries operate SMEdirected support schemes — for example, the Business Links programme in the UK provides access to innovation and technology counsellors to help SMEs with innovation-related problems.1

Of particular interest is the ways in which SMEs innovate, and much recent policymaking has been directed at mechanisms to support this activity. For

Despite this strong commitment to supporting innovation within SMEs at both regional and local level, the actual processes whereby small firms undertake innovative activity remain unclear. We know little, for example, about the volume of SMEs involved in innovative activity, nor about the nature of that activity; what we can detect from R&D and other statistics is likely to be only the tip of a much bigger

*Author for correspondence.

1 For a fuller discussion of SME innovation support policies see Dodgson and Bessant (1996).

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iceberg, since SMEs do not necessarily innovate in formally recognised ways. It is likely that they make much more extensive use of external linkages and emphasise process innovation as much as product innovation — but with whom are these linkages formed, of what type, with what purpose, etc. remain largely unanswered questions. Concern with these themes led to a commission from the UK Department of Trade and Industry to carry out a short literature survey summarising recent (post-1986) academic research on innovation in SMEs. Among the particular questions in which interest was expressed were the following: — what types/categories of SME use R&D — is it more important in some sectors than others; — from where do SMEs not carrying out R& D get their knowledge; — how many SMEs are active in the generation and/or use of R&D — how do these SMEs fund the R&D which they need; — what sources of R&D expertise are used; — how do SMEs fit R&D activities into their business; — who is responsible for new product development, process improvement and other R&Drelated activities. An additional set of issues, significantly broader than the original terms, pushed the enquiry further towards wider questions about SMEs’ innovative efforts in general and the impact of policy. These included: — The components of innovation in SMEs — do ‘lean and mean’ firms innovate; are slack resources essential; how important are external sources of technology, information etc.; — UK SME strengths/weaknesses — how are UK SMEs placed in their possession of the relevant factors; is available technology effectively utilised; are poorly equipped firms surviving through the crisis; do macro-economic factors dominate SMEs’ innovative efforts; — Technology take-up — role of intermediaries; is intermediation effective or irrelevant; is there a ‘not invented here’ syndrome; is there, and why is there, low take-up of technology; — SME innovation: progressive or defensive? — do weak companies innovate; — Policy targeting issues — any further evidence on whether or not to support growth firms

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with over 10 employees; how do we recognise growth potential firms. In this paper we briefly summarise the key findings of the literature as they relate specifically to R&D emphasis and more selectively to the wider concerns with innovative effort and policy in SMEs, as well as highlighting other issues of possible interest. We conclude with some comments on possible future research directions for this field.

2. COVERAGE AND METHODOLOGY Our search of the UK literature concentrated on four types of material: (i) published journals and published books which have the UK academic and policymaking community as their main audience; (ii) papers submitted to the two principal annual conferences concerned with SMEs — the Small Business and Enterprise conferences and the National Small Firms Policy and Research conferences; (iii) other research and work-in-progress papers prepared for a variety of ad hoc and regular conferences focusing on innovation, technology and management issues; and (iv) other sources of ‘grey’ unpublished literature. In addition, some leading authorities in the field were consulted and other libraries visited, but most of the work was carried out with reference to the resources of CENTRIM and the University of Brighton. The bibliography contains approximately 120 items. More than 70% of these date from 1990 onwards, though the research work they are based upon sometimes dates from the late 1980s. Approximately 50 of these references report back on primary empirical research, with approximately 12 of these based on small-sample, case study research and the remainder using survey-based research methods that frequently relied extensively on postal surveys. We use the qualifier ‘approximately’ above because single research projects often give rise to multiple papers whose empirical origin is not always easy to distinguish, and which sometimes present different findings of the research and sometimes present the same findings with a bit of product differentiation thrown in for good measure!

Small firms, R&D, technology and innovation in the UK: a literature review

3. THE SME/R&D/INNOVATION LITERATURE: SOME GENERAL OBSERVATIONS The SME literature is large and diverse; in general, the quality of the work carried out is high and the attention given to methodological issues is notable (if sometimes excessive in our opinion). There are now recognised centres of excellence in the field and there would appear to be vigorous and open lines of communication between SME researchers and policy makers (see Carter and Faulkner (1986) and Curran (1986) for early critiques). However, despite the impressive scope of the SME literature in general, it should be noted at the outset that the literature reviewed does not, unfortunately, provide robust, conclusive answers to most of the questions raised above. It does, of course, shed useful light and insight on many aspects of some of the issues. But (inevitably perhaps) the gaps in empirically based knowledge in the specific topics identified in the terms of reference are significantly greater than in those areas where we can draw definitive answers. Thus we feel it would be worthwhile drawing attention at the outset to some significant gaps and biases in the treatment of R&D/innovation in the SME literature since these gaps go a long way towards explaining why we believe our literature review can shed relatively little convincing light on the specific questions posed in the terms of reference. These issues include the following.

3.1 Mixing service sector and industrial SMEs together in the sample population The first bias stems from the fact that most observers and researchers are interested in SMEs (as a general category of economic agents) because of their allegedly vital role as a key source of employment and employment growth. This means that: 쐌

a significant share (approximately 70% in the context of our review) of empirical surveys tend to include SMEs from both the service and industrial sectors — whose fundamentals, particularly as regards the role of technology and its impact on firm performance, sectoral development and competitive dynamics are very different; 쐌 the researchers tend not to be too fussy about the composition of the industrial/manufacturing activities covered as long as the sample firms are broadly distributed across sectors; 쐌 the samples frequently exhibit a bias toward micro enterprises (firms with less than 10 employees); and

쐌

the samples are frequently constructed with a particular geographical catchment area in mind.

This approach to sector coverage is perfectly legitimate for the purposes of the authors’ stated research objectives — which in turn obviously derive from the legitimate intellectual preoccupations of SME researchers (and the research funders) with employment issues. However, this tendency towards inclusiveness when sector/activity selection is taking place significantly reduces the value of any R& D/innovation/technology-related findings that emerge from this work either as an accurate descriptor of national SME reality or as a basis for government policy. The problem is straightforward enough but has fairly profound implications. The universe of SMEs covered by the research carried out over the last ten years is simply too small, too broad and at the same time too narrowly distributed to allow us to draw any firm conclusions from the findings reviewed. (Most of the references could be cited here but see, for example, the sample structure in Moore and Sedaghat, 1992 and Adam-Smith and McGeever, 1995.)

3.2 Narrow focus on selected high-technology sectors The second bias lies at the other end of the spectrum and stems from the over-concentration of the SME research community on a fairly narrow set of technology-intensive and new technology-based sectors, most notably biotechnology and, to a lesser extent, IT. (For example, 80% of the case studies with a high-technology focus in our review are concerned with these sectors.) Again, this focus is entirely legitimate, given the general importance that has historically been attached to the employment potential of high-technology firms. And as a result of this work we do now know a good deal about the approach of these firms to R&D and technology management. However, because researchers have not gone very far afield in their examination of other sectors that are technology intensive in one sense or another, the sample universe on which we have empirical information — and thus our ability to generalise outward from existing research on a few high-technology sectors to other high-tech sectors particularly and industry more generally — is very limited. For those surveys (as opposed to case study projects) that focus on high-technology SMEs, a different sort of coverage limitation arises because of the high incidence of non-manufacturing firms in the

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sample as opposed to software firms and providers of consultancy services, testing and analysis, research and training. (See Monck et al., 1988 and Westhead and Storey, 1994 (where only 25% of the science park firms surveyed were engaged in manufacturing activity).)

3.3 Inadequate treatment of innovation The third generic problem with the existing body of research lies in the characterisation of the R& D/innovation/technology variable itself — particularly when these topics are a focus for hypotheses and data collection efforts in studies that have a broad range of research objectives. To be sure, the empirically based, conceptual analyses contributed by some authors have added greatly to understanding of the link between innovation and SME performance. (See for example Goss, 1991; Storey, 1993, 1994; Oakey, 1990, 1991b; Johnson, 1990; Rothwell, 1989; Rothwell and Dodgson, 1993; Monck et al., 1988; Smallbone et al., 1993 and Pratten, 1991.) But in many of the empirical and secondary studies reviewed here, the analytical treatment of innovation within the SME context is underwhelming, both theoretically and methodologically. These studies generally do not set out to measure comprehensively, and then to link, innovative inputs (observed either directly or by proxy) to innovative outputs, nor to explore whether innovative effort has had a measurable impact on firm performance (output, employment, exports, market share etc.). Yet this set of concerns is at the heart of the broader field of innovation studies — and should, we believe, constitute the bedrock of any SME studies that purport to examine innovation and technology issues. There are exceptions, of course, as mentioned above — particularly the work of Oakey and Storey but also with more specific focus: see Monck et al. (1988) and Westhead and Storey (1994) on Science Park SMEs; Harrison and Hart (1986) in relation to Northern Ireland SMEs; and Hall (1991) on the determinants of SME innovation in the instrumentation sector. And no doubt some good analytical work is to be found in those studies we have not been able to review. Moreover, our comments are not meant to undermine the value of those studies that do address innovation/SME issues in some form but do so within the context of the pursuit of understanding of a different set of phenomena. Nevertheless, because of the generally limited treatment of the innovation variable, our ability to draw firm, generalisable conclusions is further

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compromised. A good example of this problem is to be found in the final report on, by far, the largest and thus most authoritative recent empirical survey of SME behaviour carried out by the Cambridge Small Business Research Centre. The research reported on by SBRC (1992) collected data from 2000 or so SMEs across a range of topics, with technology and innovation being but one of them. The overall work carried out is extremely useful; and the insights generated by the study across numerous issues are valuable in general and for our purposes. The work, for example, finds that 60% of the sample had introduced a major product or service innovation in the previous five years — thus suggesting SMEs are highly innovative across sectors. However, the data collected and presented in the section on technology and innovation is largely qualitative, based on subjective perceptions of the SMEs; and the analysis, though suggestive of some useful broad correlations, does not quantify innovative investment nor robustly link innovative effort to some quantitative measure of firm performance. For example, what does the concept of “a major innovation introduced in the previous five years” actually mean in terms of input (i.e., how much did this innovation cost, what share of innovative resources did it consume, how efficiently were these resources used, has there been any improvement over time in the firm’s innovative activities) and in terms of output (its effect on firm performance, market share, profitability etc.)? This question is not answered by the information provided. Without this information, it is simply impossible to judge whether the finding that 60% of the sample have introduced a major innovation in the last five years actually means anything at all in analytical or policy terms. Similar problems of extrapolation and interpretation exist in other empirical surveys. (See for example Leigh et al., 1990; Devins and Kimbara, 1995; Joyce et al., 1993; Lean and Chaston, 1995 and Keeble and Walker, 1993.) Likewise, with a few important exceptions (most of them based on some excellent work on high technology SMEs), the case study research really does not dig into the innovative process in sufficient detail or rigour to give us the sort of understanding necessary to answer the questions posed in the terms of reference at anything other than an anecdotal level. (See, for example, Bedrock and Watson, 1993.) The same can be said for the secondary literature. For example, Stanworth and Gray (1991), an excellent and comprehensive discussion of SME-related devel-

Small firms, R&D, technology and innovation in the UK: a literature review

opments since the Bolton report, barely mentions innovation issues at all in nearly 250 pages of detailed discussion by leading analysts.

3.4 Need for a benchmark survey In the light of the above assessment, we conclude that by far the most significant gap in available information is the lack of an authoritative, up-to-date, macro analysis of the role of SMEs in the UK industrial/manufacturing sector (in terms of numbers (and size) of firms, share of output, employment, value added, investment, export performance etc.), assessed against the best available technology/innovative effort/R&D input and output indicators. This is not to deny the value of earlier work which fits into the type of analysis we are calling for (see for example Barber et al., 1989a; Pavitt et al., 1987 and Rothwell, 1989). Indeed, some analysts (such as Rothwell, Storey, Dodgson and Oakey) have addressed various parts of this task and are extensively and legitimately cited for their analysis and insight. Nor do we suggest that SME researchers are unaware of the need for a broad but rigorous approach to the measurement of innovation in SMEs as called for by Hansen (1992). (See, for example, ACOST, 1992; Devins and Kimbara, 1995 and Westhead and Storey, 1994; see also Hyvarinen, 1991 for some proposals for measuring SME innovation and performance based on US data.) Nevertheless, our review suggests that there is simply not enough of this work being carried out on a large enough and visible enough scale to provide the sort of analytical foundation that SME innovation studies require in the last half of the 1990s if it is to make a solid contribution to policy formulation. Thus a comprehensive study of the sort called for above, combining rigorous survey research with statistical analysis, carried out at the three or four digit sectoral level over a sufficiently long time series (and ideally presented in comparison with other OECD countries) would now seem to be essential. The ‘reflection’ and ‘interpretation’ of existing knowledge that would necessarily underpin this work could go a long way towards generating a widely accepted technology and sectoral based characterisation of industrial SMEs that we believe is also needed by this field (and called for by Oakey (1993), Tither (1994) and Goss (1991)) — where at the moment, apart from the logic underlying research on

high-tech SMEs, sector selection is not driven by technology variables. Such a study would thus provide a benchmark, or at least a starting point, for assessing which sectors and at what levels SMEs are actually playing a significant dynamic role and the relative importance of the technology/innovation variable as a determining factor in their economic contribution — or lack of it. Moving from this knowledge base to answering specific questions of the sort posed in the terms of reference would then be straightforward, sectoral research priorities could be easily set and scarce policy research funds appropriately targeted. Further justification for the work called for above arises from the persistence of doubts and question marks raised by senior analysts (and given weight by some of the research reviewed for this paper) about the validity of some of the most fundamental and cherished tenets of the SME liturgy. For example, there is good but limited evidence in the work surveyed for this review that UK SMEs do generate employment when they grow — but it also appears that this effect is concentrated within a (frequently small) minority of firms. Thus, Patton and Bradley (1995), Storey (1993), Oakey (1990) and Gourlay (1996) all raise some fundamental questions about the genuine contribution to employment growth made by SMEs in general in recent years — and in the future — which still need to be definitively answered. Likewise, convincing doubts have been voiced about the allegedly important role in employment generation played by NTBFs and high-technology SMEs in particular who were and are often depicted as rapidly growing dynamos creating new products, new jobs and new industries. (See Faulkner, 1986 for an early view of their potential.) In fact, whilst there is evidence that some of these firms have done better than average — particularly SMEs in the biotechnology sector located on science parks — it would also appear that most of these firms are destined either to remain permanent infants or to be swallowed up by their larger, predatory competitors. (See Calori, 1990 and Parolini, 1990 in general; and Oakey, 1991a and Walsh et al., 1995 on biotechnology. See Garnsey and Cannon-Brookes, 1993; Westhead and Storey, 1994 and Storey and Strange, 1990 for similar evidence in relation to SMEs operating in UK science parks.)

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4. SMES AND INNOVATION — KEY THEMES In this section, we attempt to pull out of the literature reviewed information and arguments that illuminate the key concerns raised in the terms of reference. As we noted above, it is difficult to generalise from most of the findings in the research available to us, and the evidence presented should be considered in this light.

4.1 Innovation is widespread ... but does it contribute to profitability or success? The comments in the preceding section make clear that while the literature we have reviewed does not allow us to distinguish between sectors in terms of SMEs’ R&D intensity nor even the degree of innovation, there certainly is substantial research evidence that numbers of SMEs in a variety of sectors do engage in innovative activities, and that these activities are likely to be an important determinant of their success. (See Rothwell, 1991; Lawton-Smith et al., 1991; SBRC, 1992; Joyce et al., 1994; Keeble, 1992; Barber et al., 1989b; Moore, 1993 and Herbert, 1988.) These research findings confirm the longstanding impression that SMEs are generally innovative, but we are minded to acknowledge the admonitions voiced by authors such as Storey (1994) and Oakey (1993) that not all SMEs in all sectors innovate. Moreover, the mixture of available research results suggests that though innovative effort appears to be widespread, this does not translate directly into improved firm performance and, ultimately, greater profitability. For evidence of this non-sequitur, see for example the results reported by Hall (1991) that R&D intensity is only slightly associated with profitability among SMEs in the instrumentation sector (and the extent of patenting not at all). These findings parallel those of Oakey et al. (1988) which reported that, whilst a survey of 131 British and US high-tech SMEs found that a large percentage (79%) performed R&D, there was no correlation between R&D investment and firm growth. On a slightly different tack, Keeble (1993) shows that the high growth rates among NTBFs in Scotland, the North East and Wales are not explained either by size factors nor by R&D effort; Westhead et al. (1995) show that innovation and technology factors do not explain success or failure among Science Park SMEs; and Dickson et al. (1995a) show that in their sample of three high-tech firms, overall competi-

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tiveness, marketing effort and size are more important than innovation in determining success; whilst Keeble (1992) shows similar results for rurally based SMEs.

4.2 Some common features of the SMEs’ R&D and innovative effort However, we can say with some confidence that, across industrial sectors, SMEs’ innovative activities tend to exhibit broadly similar characteristics. For example, they: — are more likely to involve product innovation (sometimes based on R&D) than process innovation (which is important nonetheless); — will be focused heavily on producing products for niche markets rather than mass markets; — will be more frequently organised formally within larger SMEs and tend to be more ad-hoc or project driven in smaller SMEs; — will be more common among final product firms and are least likely to be found among component subcontractors; — will generate incremental innovations as well as major breakthroughs; — will frequently involve some form of external linkage (see below); and — are likely to be associated with growth in output, turnover and employment — thus implying that weak firms (little or no growth) are either not successful innovators or are overcome by their weakness in other aspects of the competitive struggle. For examples (not exhaustive) of the above findings, see ACOST (1992); Pratten (1991); Storey (1994); Keeble et al. (1992); Cannon (1985); Keeble and Walker (1993); Oakey (1990); Vaux et al. (1996); Lee (1993a); Lee and Oakes (1995); Hartman et al. (1994a) and Goh and Ridgway (1994). The available research also suggests strongly that, for reasons to do largely with location, rising consumer incomes and increasing business complexity, rural SMEs appear to be more innovative than urban SMEs — yet they are far less likely to be active users of external knowledge sources. (See Keeble, 1990, 1992; Keeble and Walker, 1993 and Keeble et al., 1992.)

4.3 The importance of internal factors Another common finding across studies is that, on balance, internal factors are likely to be more important core determinants of whether innovation

Small firms, R&D, technology and innovation in the UK: a literature review

plays a key role in success or failure than are external factors. This goes for industrial SMEs, broadly speaking, as well as for high-technology SMEs, where innovation (primarily product based) is the raison d’eˆtre and lifeblood of the firm.

4.4 Qualified scientists and engineers (QSEs) and owner managers as key sources of innovative effort Among the internal factors shown to be most important determinants of innovative activity and economic success are, not surprisingly, a high incidence of QSEs (and the knowledge base they represent) among employees and strong leadership provided by a highly educated MD or founder/entrepreneur. Likewise, both of these categories — employed QSEs and technically accomplished OMs — have frequently been found to be central to the R&D effort — either as direct sources of knowledge, ideas and inspiration, as the actual doers of R&D or as managers of the SMEs’ relations with external sources of R&D. Two logical extensions of these commonsense findings are that inability to recruit high quality technical staff can be a serious constraint on growth — for some SMEs but not necessarily all; and that as SME size increases so too does the incidence of dedicated R&D departments and formalised procedures. (See, for example, Allan, 1993; Bedrock and Watson, 1993; Pucik, 1988: SBRC, 1992; Devins and Kimbara, 1995; Young and Francis, 1991; Sedaghat, 1992; Rothwell and Beesley, 1989 and Moore and Sedaghat, 1992.) Finally, somewhat diverging from the above, Philpott (1995) shows that, in the specific case of the Scottish electronics industry, technology access appeared to be a constraint on the development of an SME supplier base whereas being part of a network of automotive component suppliers appears to be contingent on SMEs having a high degree of innovative capability. This finding is reinforced by Lee (1993b) who shows that product design and development capabilities are key to SMEs becoming part of ‘partnership networks’ on which large firms are increasingly relying for component supply.

4.5 Other internal factors Other internal factors that surfaced as important determinants of the success of SMEs’ innovative efforts across our sample are the nature of the commercialisation and marketing effort, the degree of

marketing involvement in product planning and firm competence in the area of technology strategy and technology management. (See Johne and Rowntree, 1991; Barker et al., 1990; Pratten, 1991; Berry and Taggart, 1994; Dodgson, 1991; IRDAC, 1987; Rothwell and Dodgson, 1992 and Moore, 1989.)

4.6 Typologies of founders linked to innovation Some of the research focusing on high-technology firms attempts to develop firm innovation typologies linked to the particular characteristics of the founders — by, for example, differentiating between scientific, technical, academic and industrial entrepreneurs. One important, albeit obvious, conclusion is that academic/scientific entrepreneurs in particular often have difficulty reconciling their research interests and the needs and demands of running a business — a conundrum which, if not solved or addressed, can lead to failure among this type of entrepreneur. (See Dickson et al. (1995a, b).) The analysis of Jones-Evans and Steward (1995) goes beyond this type of categorisation and suggests that the category of ‘research’ entrepreneurs, in particular, is more likely to introduce a novel product technology or new combinations whilst other types of entrepreneur will introduce incremental innovations.

4.7 The psychology of entrepreneurs Almost as an aside, we would observe here that the research cited above is part of a large (and growing) body of work that seeks to explain SME performance (particularly micro SMEs) by linking it (often in a qualitative fashion) to a detailed dissection of the personality and psychological traits and perceptions of individual founders/owner managers. The fascination of researchers with uncovering this degree of detail appears to derive partly from (entirely legitimate) intellectual interest and partly in order to contribute to the trend of policy interventions that were and are intended to help develop policies that promote a high rate of SME start-ups (and thus expand employment). While we understand the intellectual fascination of this set of issues, we are unconvinced about the policy value of this aspect of current SME research. It seems too subjective and too beholden to some idealised view of the heroic nature of the owner–entrepreneur to be of much use in policy terms (a criticism echoed by Curran, 1986). Moreover, as we shall see below, the discipline of the market, as firms struggle to move beyond the startup/micro stage, would appear to be a far more efficient filter of start-ups into the economy than pol-

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icy interventions based on the concept of picking winners based on psychological profiles of the entrepreneurs concerned.

4.8 The role of new technology-based firms (NTBFs) In an interesting departure from this approach, Moore (1989) carried out high-tech SME case study research and concluded that one can view start-ups as the realisation of new product possibilities spotted by research entrepreneurs. This approach highlights a number of common barriers to growth, chief of which is the fact that most high-tech start-ups are born into highly restricted growth circumstances precisely because of their single product focus and niche market character. The problems this constraint poses for achieving growth are exacerbated if the product is truly radical — as then a lack of credibility and demonstrated track record appears to make market access even more difficult. For Goss (1991), this feature of NTBFs — firms arising exclusively on the basis of radical innovation — which marks them out as a very rare commodity and of relatively little real economic significance. This is clearly an important question not fully answered by the literature: are NTBFs, in particular, a significant force for innovation and technological dynamism in the UK economy or simply an interesting phenomenon? Macro research of the type called for in the preceding section could answer this important question.

5. SOME CONTRADICTORY FINDINGS The SME research reviewed for this report also reveals some intriguing divergences over some of the issues surrounding innovative activity within this group. These include the following.

5.1 Impact of macro-economic conditions One area where the research findings are ‘multidimensional’ relates to the impact of the ‘market’ and macro-economic conditions on the innovative performance of SMEs. For example: — Dickson et al. (1995a), Moore (1989) and others show that, for SMEs where the founder is a scientific or academic entrepreneur, the firm’s ability to meet the demands of surviving in a competitive marketplace — be they for good marketing or careful cash flow management and rigorous

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project planning — are more important than the basic innovative capabilities and instinct that led to the launch of the firm in the first place; — Oakey (1994) suggests that poor macroeconomic conditions in the 1980s led many innovative SMEs to adopt a risk and growth averse strategy; Oakey et al. (1990) presented the same arguments for biotechnology SMEs; — Pratten (1991) shows that SMEs are well capable of creating new products and are not threatened by large firm R&D superiority — but they do face serious difficulties in commercialising their products in the marketplace; likewise, market access variables far outranked technology factors as market entry barriers in the work cited by Barber et al. (1989a); — Hall (1991), examining performance factors among 40 instrumentation firms, found that innovative effort had a mildly positive benefit whereas market conditions, in terms of the degree of competition faced, appeared to have no impact at all — yet Parolini (1990), Storey et al. (1989) and Vaux et al. (1996) found exactly the opposite effect’ — Keeble (1992, 1993)) shows that the precise mix of local market and other environmental factors makes a great deal of difference to the extent and nature of regional clustering of high-technology firms, but points to a generally favourable upward trend in the establishment of new clusters outside Cambridge — whereas Bishop (1988), Gripaios et al. (1988) and Lean and Chaston (1995) confirm the importance of local market conditions but suggest also that high-technology regional clusters are in fact not self-sustaining because of the ‘environmental’ constraints of peripheral regions.

5.2 Finance as a constraint on innovative effort Another area where contradictory findings can be reported relates to the role of finance — the lack of availability of which in the UK has long been accepted as a serious constraint on SME growth — particularly in the high-technology sectors. The results reported by SBRC (1992) encapsulate the divergent messages. On the one hand, the Cambridge researchers found strong evidence that the availability of finance was cited by a large share of entrepreneurs as a constraint on expansion and the introduction of new technology — yet they also found that only a very small number of those seeking finance actually failed to find it!

Small firms, R&D, technology and innovation in the UK: a literature review

Walsh et al. (1995) examined R&D funding sources for 150 SMEs in the biotechnology sector and found that while only 1 in 5 had secured venture financing, more than 50% apparently preferred to eschew equity financing and remain dependent on internally generated resources as a means of retaining their independence. (See also Moore (1993), whose results parallel these, and ACOST (1992), which points out that this attitude propels SMEs into a revenue trap because their retained earnings are not sufficient to finance major technology development efforts.) Austin et al. (1995) explored differences between financing mechanisms in France and the UK, confirming the usual blinkered approach and lack of competence of UK banks to properly evaluate financing applications from high technology firms — whilst also pointing to significant differences between the terms and the low level of government-subsidised financing found in the UK and the more generous medium to long term support offered to French SMEs. Murray and Lott (1993) surveyed 40 venture capital firms (accounting for 77% of UK venture financing) and found a distinct bias against SMEs in terms of more stringent rate-of-return requirements, but found in fact this was in line with market expectations and reflected accurately on high-tech SME success and failure rates. (This finding is reinforced by Storey et al. (1989) who found that only 4% of the fast-track start-ups they surveyed were of interest to venture capital firms.) One final thought-provoking divergence in the findings is also highlighted by Murray and Lott (1993), who show that SMEs were disadvantaged when applying for commercial financing if they could not point to success in securing any government-backed funding — a further indictment of UK government policy on subsidised R&D financing. These results would appear to underpin the repeated calls in the literature for the government to expand its role in providing subsidised medium to long term R&D finance on an equity basis. Oakey has further argued that in the particular case of biotechnology this would prevent the asset stripping that currently takes place when large predatory firms take over their smaller, resources-starved colleagues. Yet Wilson (1992) and Goss (1991) suggest that the availability of such finance would run counter to the original start-up objectives of many high-tech SME entrepreneurs — the prospect of a lucrative buy-out of the owner’s equity a few years after start-up!

5.3 External linkages and SMEs’ innovative strength and competitiveness The topic where empirical research has cast most light relates to the existence, nature and impact of linkages between SMEs and external sources of knowledge. A number of issues are pursued by this research — consensus has emerged in some areas and not in others. For example, a substantial body of work, opened up by Rothwell, Beesley and Dodgson in the second half of the 1980s but subsequently extended by others, established that many SMEs, particularly those in high-technology sectors, had diverse and extensive linkages with a variety of external sources of knowledge (public and private) either individually or as members of networks of various kinds. The value of this work lies in three findings: — first, there appears to be no significant structural impediments operating on these SMEs in terms of the availability of and their access to external knowledge sources of a variety of types; — second, these linkages can be important sources of knowledge that directly strengthen the technological competences of the SMEs and thus their competitive strength; — third, however, the management of external linkages to ensure that positive benefit is extracted is neither straightforward nor costless and requires the allocation of considerable technical and managerial resources. For research that illuminates this group of issues (and more) see, for example, Beesley and Rothwell (1987), Dodgson (1989), Keeble (1992), Jones-Evans and Steward (1995), Stockport (1989), Hartman et al. (1994b), Rothwell and Dodgson (1990a), LawtonSmith (1991), Dickson et al. (1995b), Lang (1995), Faulkner and O’Connor (1989), Senker and Faulkner (1992), IRDAC (1987), Ang’Awa (1995), Buisseret and Cameron (1994) and Duff and Gearing (1995). However, despite the strength of the findings subsumed in this body of knowledge, there is also evidence that counters many of the positive assumptions about the value and extent of linkages between external sources of knowledge and SMEs, and suggests these questions are as yet unresolved. For example, as far back as the mid-1980s, Cannon (1985) was demonstrating from approximately 20 case studies of manufacturing SMEs in medium-tech industries that, whilst these firms were actively innov-

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ative and largely successful at commercialising their innovations, relatively little use was made of external relations — with the exception of their trading partners.

in the way of rigorous quantitative assessments measuring additionality and other benefits. Nevertheless, there are some disappointing as well as some encouraging findings.

This finding has been underpinned by the more recent work of Devins and Kimbara (1995), Tang et al. (1995), Leeds TEC Policy Research Unit (1993), Jones and Beckinsdale (1994), Moore and Sedaghat (1992) and Vaux et al. (1996). These studies cover both high-tech and general industrial SMEs and suggest that one cannot generalise about the existence and importance of SME external linkages.

The most disappointing, and no doubt well known, general conclusion has come from the Cambridge survey which argued that, on the basis of assessments provided by the firms themselves (more than 2000), the overall impact of government policy over the last decade has been poor. There is reinforcement for this view scattered throughout the literature we reviewed.

Some serious questions are also raised in this body of work about the contribution of higher education institutions (HEIs) in particular as sources of technology and technical assistance for SMEs. For a whole variety of reasons, they simply do not appear to be playing the role that has been identified for them. Indeed, Tang et al. (1995) and Storey (1992) suggest that there may be an inherent, intractable mismatch between the essentially long-term research interests and focus of most HEIs and the short-term, near-to-market needs of most SMEs. This is a finding that will not surprise Oakey (1993), who has long been decrying the value of university-based science parks, seeing them as culs de sac and diversion of valuable resources — whose existence may suit the perceived needs of the universities to generate rent and to the SMEs for having a low-cost, prestige address but do not contribute a great deal other than that. Westhead and Storey (1994) probably would not go quite so far, but their extensive research into the benefits of science parks to SMEs struggled to find really compelling evidence to counter the Oakey view. Finally, Moore (1993), using case studies on 12 SMEs (from the biotechnology and scientific instruments sectors) engaged in collaborative research ventures of various kinds, reveals that the firms felt that on balance the costs of these collaborations outweighed the benefits. A parallel set of concerns about the benefits of external links is raised by Oakey (1993) in relation to research and other collaborations between large and small biotechnology SMEs.

6. SME POLICY INTERVENTIONS: ARE THEY WORKING? The research literature reviewed for this report is fairly patchy in its geographical, sectoral and programme coverage of the impact of government policy in the SME/innovation area. There is also very little

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At the level of general critiques, Oakey (1991b) offers a strong critical analysis of government policy, as does Johnson (1990). More specifically, Keeble (1992) shows that rural firms are not big users of government services — though he does not put this down to poor design and delivery of the services; Devins and Kimbara (1995) point out how few (less than 5%) of their sample of firms sought government R&D assistance. Curran (1993) and Adam-Smith and McGeever (1995) take a fairly critical posture on TECs, suggesting that they are still not yet reaching the sorts of SMEs and delivering the sorts of services that they were set up to provide. The arguments deployed powerfully by Storey (1993) and other senior analysts over the wisdom of continued government support to promote a high birthrate of start-up firms are echoed in Goss (1991), Joyce et al. (1993) and Patton and Bradley (1995). We would conclude that, despite the arguments used in favour of supporting start-ups (summarised in McMullan and Vesper, 1987), there is a general sense pervading much of the literature that it is far better to find an SME- or firm-directed way of channelling available support to proven firms with unrealised growth potential than to attempt to pick winners from among start-ups. Nevertheless, despite the inevitable criticism of government policy, there were also some fairly encouraging results reported, for example: — There was uniform and positive support for the impact of the Teaching Company Schemes — as summarised in Senker and Senker (1994) and confirmed in Jones and Beckinsdale (1994) and Tiler and Gibbons (1990). — The SMART and SPUR programmes were acknowledged as valuable and useful, with a widely distributed take-up of these awards (Mason and Harrison, 1992; Keeble, 1993; Moore, 1993; Moore and Garnsey, 1991 and Devins and Kimbara, 1995), though there was also a view that the

Small firms, R&D, technology and innovation in the UK: a literature review

schemes were far too small and a good deal more resources could be usefully channelled through them. — Roy and Potter (1990) highlighted the success of government programmes to promote good design in SMEs through the use of subsidised consultants, and found a success rate of two-thirds among more than 1000 grant recipients with an average payback of 15 months.

innovation into their thinking on this, how they mobilise and access resources and how they monitor and control their disposition in innovative projects. Clearly many of the formal and structured approaches used in larger firms and prescribed in business school literature will be inappropriate in the case of the SME. But at the same time a lack of appropriate control and management is likely to lead to high levels of risk and failure.

Most encouraging, there does seem to be a consensus emerging in favour of the direction of current government policy towards supporting SMEs and their innovative efforts as encapsulated in the M90s programmes and the TEC and Business Links schemes. There are criticisms of the TECs (as noted above), and a number of authors note that the Business Links scheme has had limited impact, primarily because it has not been in place long enough. (See Tang et al., 1995; Patton and Bradley, 1995; Hughes and Downing, 1995 and Vaux et al., 1996.)

In the case of the large-scale survey, we suggest that there is a need for an authoritative, up-to-date, macro analysis of the role of SMEs in the UK industrial/manufacturing sector (in terms of numbers (and size) of firms, share of output, employment, value added, investment, export performance etc.), assessed against the best available technology/innovative effort/R&D input and output indicators.

But there is an evolving sense of agreement on the wisdom of a policy, using local intermediaries, which seeks to allow firms to find their way to the range of services and schemes that are on offer and which seeks to cover the gamut of SME needs in the area of support for innovation and commercialisation. The literature suggests that, while current policies may not be as proactive or as comprehensive as the approaches called for by Oakey (1991b) and Storey (1993), they are still better than what was in place before and should be given time to work.

7. CONCLUSIONS This paper has provided an introductory review of literature and related resources covering the theme of SMEs and innovation. It suffers from a number of weaknesses, not least the limitation of coverage to the UK. Clearly there is considerable scope for extending such a study to incorporate literature from elsewhere, especially since there have been notable successes in developing competitive advantage in countries with a strong SME bias — for example, in the Italian furniture industry or in Danish engineering firms. In spite of its limitations, the survey suggests that there are still substantial gaps in our knowledge, particularly about the detailed workings of innovation within SMEs and, at the other end of the scale, about the large-scale patterns of innovative behaviour amongst this group. The former problem requires a closer focus on the question of innovation management — how SMEs develop strategy and incorporate

This is not to deny the value of earlier work which fits into the type of analysis we are calling for, but rather to suggest that there is simply not enough of this work being carried out on a large enough and visible enough scale to provide the sort of analytical foundation that SME innovation study requires in the last half of the 1990s if it is to make a solid contribution to policy formulation.

A comprehensive study, combining rigorous survey research with statistical analysis, carried out at the three or four digit sectoral level over a sufficiently long time series (and ideally presented in comparison with other OECD countries) would now seem to be essential. The ‘reflection’ and ‘interpretation’ of existing knowledge that would necessarily underpin this work could go a long way towards generating a widely accepted technology and sectoral based characterisation of industrial SMEs. This is an urgent need since, at present (apart from the case of research on high-tech SMEs), sector selection is not driven by technology variables.

Such a study would provide a starting point for assessing which sectors and at what levels SMEs are actually playing a significant, dynamic role and the relative importance of the technology/innovation variable as a determining factor in their economic contribution — or lack of it. This knowledge base would provide a framework in which sectoral research priorities could be easily set and scarce policy research funds appropriately targeted.

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Acknowledgements The research reported here was originally carried out on behalf of the UK Department of Trade and Industry. Their support and permission to publish this material is gratefully acknowledged; the opinions expressed remain, however, the responsibility of the authors.

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Small firms, R&D, technology and innovation in the UK: a literature review

United Kingdom. Report to the Department of Trade and Industry, London. Westhead, P., Storey, D. and Cowling, M. (1995) An exploratory analysis of the factors associated with the survival of independent high technology firms in Great Britain. In Partnership for Growth in Small Firms, Partnership for Growth, ed. F. Chittenden, M. Robertson and I. Marshall, pp. 63-99. Wilson, H. (1992) The impact of venture capital funding on the growth of small high technology manufacturing firms in the UK. Mimeo, Department of Business Organisation, Heriot-Watt University. Wimmers, S. (1995) Experiences of small firms with EC research funding programmes. 18th National Small Firms Policy and Research Conference. Young, R. C. and Francis, J. D. (1991) Enterpreneurship and innovation in small manufacturing firms. Social Science Quarterly 72, 149–162. Kurt Hoffman is an industrial economist with 22 years’ experience in a unique variety of positions - as a Senior Fellow at the Science Policy Research Unit, University of Sussex; a senior advisor to government agencies and multilateral development institutions; as a corporate strategy consultant to large and small firms; and as an entrepreneur responsible for planning, securing venture capital investment for and launching two commercial start-up companies. He carried out the work for this project as part of his ongoing association with the Centre for Research in Innovation Management (CENTRIM) as an Associate Fellow.

John Bessant is Professor of Technology Management at the Centre for Research in Innovation Management (CENTRIM), University of Brighton, and also Professor at the Science Policy Research unit (SPRU), University of Sussex. He is the author of numerous books and journal articles, the latest of which, Effective Innovation Policy (Thomson Business Press) appeared in 1996. His research interests include continuous improvement, innovation policy for SMEs and organising for new product development. He is a member of the Editorial board for Technovation. Lew Perren is a principal lecturer in business analysis at the Centre for Management Development, University of Brighton. He was a management consultant prior to joining the university in 1990. Dr Perren’s research focuses on the development issues faced by small firms. He is the author of a range of academic and professional publications. He is currently working with Professor Adrian Berry on a project, funded by the Association of Chartered Certified Accountants, investigating the role of nonexecutive directors in small firm development.

Milady Parejo is a highly successful consultant in national and international projects relating to technology management, technological change and deregulation. From 1984 to 1991 Milady worked as management consultant for the design of policies and strategies for the Venezuelan government in the field of industry and technology. Her most recent experience there was with the privatisation of Venezuelan Telecommunication in 1991, funded by the World Bank. She has also worked as international consultant for the Development Agency UNIDO/PNUD. Milady Parejo is currently Research Fellow at CENTRIM and is completing doctoral research focusing on the management of technology in telecommunication.

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