SME Innovation and Economic Growth

Introduction

In the present world’s economic development times, small and medium enterprises (SMEs) have come to play a considerable role (Ndesaulwa and Kikula, 2016). Hence, a number of studies are focused on SMEs stimulate economic growth. The reason why they are explored in terms of stimulating economic growth is because SMEs are more innovative than larger firms. This viewpoint is held because of their flexibility and ability to integrate inventions arising out of companies’ development activities (Li, 2003). In addition to this, a number of studies support the finding that the innovative activities as pursued by SMEs lead to enhanced performance (e.g. Freel, 2000; Gerorski, 1992). Since, innovation leads to better performance for SMEs hence, it is of particular relevance to scientists, practitioners, and policy makers to develop support strategies for such small and medium enterprises. Ndesaulwa and Kikula (2016) assert that SMEs are important contributors to any country’s economy however, the marginal treatment they receive cause them to face harsh conditions, which cause them to fail and be unable to grow into large corporate entities. Hence, the purpose of this proposal is to explore the relationship between innovation and performance of SMEs in KSA and see if SMEs are worth the support strategies. The proposal will provide the research aim and objectives. In addition to this, there will be a brief overview of literature followed by research methodology, ethical concerns to be considered, and the plan for the submission of entire project.

Problem Statement

Businesses exist to grow and to become profitable. One way in which firms grow is by coming up with innovations. Hii (1998) for example, presents that innovation can lead to positive benefits for businesses in the form of better business performance. However, at the same time it is held that business performance is not solely driven by innovation and that innovation cannot be viewed as a sufficient cause of business performance and survival. Therefore, in light of this viewpoint, it is useful to explore how much of a role innovation plays in business performance of SMEs so that it can be seen to what extent investments should be made in innovative strategies of such businesses.

Research Aim, Objective and Questions

The aim of this research study is to determine the effect of innovation on performance of SMEs. In order to fulfill the main aim, the case analysis of KSA SMEs will be explored in order to narrow down the focus of the topic. Hence, to fulfill this broad objective, the research study will carry out the fulfillment of the following research questions:

What is the effect of innovation on the performance of SMEs?

To what extent SMEs in KSA invest in innovation?

Comparison between SMEs in KSA, which innovate with those which do not.

To what extent investment in innovative strategies is justified for the case of KSA SMEs?

Research Rationale

The rationale behind this study is that it has been stated in literature that SMEs are a source of economic growth. In addition to this, SMEs are a source of employment as well especially in underdeveloped countries. Moreover, they also help in economic development and poverty alleviation. However, despite such positive contributions, SMEs are not given the importance that they should. It has therefore been considered that SMEs must be allowed investment in innovative activities. The study will therefore explore the effect of innovation on performance of SMEs so that it can be concluded on the basis of the findings as to whether the marginal treatment to them is justified. The case of KSA SMEs will be considered in order to narrow down the scope of the study.

Literature Review

OECD (2015) defines innovation as the new and better processes that are introduced and the introduction of goods and services that are produced on the basis of new technology and information. The term is often contrasted with invention. Invention refers to the formulation of a new idea for the production of a good whereas innovation is the act of putting the idea into practice. As far as the meaning of SMEs goes, different studies consider different criteria to define SMEs, Ndesaulwa and Kikula (2016) define it as per the number of workers, investment and the sales turnover. One thing however worth consideration is that SMEs differ from large organizations in terms of ownership structure in that SMEs are often owned by a few partners or family members. While different meanings exist for innovation and SMEs, at the same time there are different proxies for firm’s performance. Sirilli (2000) for example provide that performance can be measured in terms of sales per worker, or growth rate in revenue or the operating profit ratio or return on investment. Ndesaulwa and Kikula (2016) provide that the underlying meaning however is the increase in financial gain and how innovation contributes to it. A number of research studies have examined the relationship between innovation and performance. Hajar (2015) for example, explore the relationship between innovation and performance of SMEs producing wooden furniture. The study explores the case of Indonesia. The findings support that the effect of innovation on firm’s performance was positive. Terziovski (2010) further supports that studies on innovation and SME performance reveal that those SMEs, which have a culture of innovation and pursue innovative strategies report them as key drivers for performance. Kuswantoro (2012) provide that distribution channels innovation has a positive effect on firm’s performance. The study reveals that those entrepreneurs of SMEs who were also innovative were more successful. Atalay (2013) was yet another study, which provided the case of Turkey. The study explored the innovation and performance of automotive industry. The results showed that the type of innovation also determined the performance of firms. It was for example, revealed that technological innovation, also referred as product and process innovation had a significantly positive effect on the performance of the firm. On the other hand, non-technological innovation such as organizational and marketing innovation had no demonstration of any significant relationship with firm’s performance. While Atalay (2013) found technological innovation to lead to better results, Lin (2007) on the other hand provided that organizational innovation and not technological innovation was the most vital factor contributing to increased sales. There were also further studies in literature, which considered yet another type of innovation. Johne (2000) for instance, found that marketing innovation contributed to increased consumption of products and hence led to increase in the profits of firms.

While the above studies all support a positive relationship between performance and innovation, Lin (2007) on the other hand considering the case of Taiwan asserts that empirical evidence supported no significant relationship between innovation and performance. The proxy for performance was sales. However, the study at the same time provided that tendency of entrepreneurs to come up with new ideas and experiment them led to an influence on the performance of SMEs. Ngungi (2013) was another study, which considered the case from a different angle. The relationship between innovation and operational sustainability of SME was considered and a strong relationship was found between the two. Marquez (2009) provided the case of Portugal’s SMEs. It was found that innovative capacity led to enhanced performance. Salim (2011) was a study on Malaysian SMEs and again a positive relationship was found. Both studies found that information sharing, innovation in assortment and coordination in transportation had a positive relationship with firm’s performance. Isaga (2012) considered the relationship between the influence of entrepreneur and the growth of SMEs in Tanzania. A positive relationship was found between the two variables. It was hence concluded that the cognitive abilities of entrepreneur allowed SMEs to exhibit potential in growth. While this study did not directly consider the case of innovation and performance, however it did support innovative mindset of entrepreneurs to cause better results for SMEs. In addition to the above, there were studies, which did not support a significant relationship between innovation and performance of SMEs. Saunila (2014) for example, provided that determinants of capability in innovation had a moderate effect on performance of firms. Studies were performed for the case of America and it was found that innovation and performance of SMEs had a significant positive relationship. An empirical study performed by Oke (2015) showed that different types of innovations had different relationship with firm’s performance. This study revealed that innovation types exhibited a diverse set of findings and that innovative performance in general played only a mediator role between types of innovations and performance. What makes KSA the most suitable case study for innovation as appertains to the SMEs? The study focuses on the best tool of measure for the merits of business innovation and KSA is considered because the Kingdom has been at the forefront when it comes to regulations reforms in the Arab region. The context is relevant that the Kingdom underscores the best-case scenario when it comes to the relationship between innovation and performance in Small and Medium enterprises. The Arab nation in matters entrepreneurship is notable and according to the report by Doing Business (DB) it appeared in the top 20 chart (Salem, M. I. (2014). It ranked 13th globally and emerged the best in the region after retaining the position. This study focusses on the scenario that involves favorable aids to trade. That aside, the country has shown a steady position on consistency. The DB economic ranking involves selected economies using a set of six pointers. The Kingdom as at 2004 was at position 35 and the great leap demonstrates its consistency. The result is due to a series of policy implementation starting with embracing of the French law as framework within which it would improve its guidelines. This does not lie within the scope of the study. According to other methods modelled around the effective institutional basis, KSA improved from position 28 to 21. This is according the most recent World Economic Forum (WEF) Global Competitive Index (GCI 2010-2011). Other associated criteria of this ranking include sophistication of the business establishments and efficiency of the markets in place. Note that the relevant authority has seen to it that Saudi Arabian General Investment Authority (SAGIA), enactment of a better foreign investment law and new moves like privatization of more public companies have been appealing to more startups in the nation.

Not all the improvements can be addressed without mentioning some impediments faced specifically in the human resources. A mention involves labor matters such as enforcement of binding contracts between parties involved. Following the findings of the study Global Entrepreneurship Monitor Survey (2009), KSA was found with the least total entrepreneurship activity (TEA) rate. The findings by the report of Michael Porter (2008) bring us to the very reason why KSA was chosen for the case study. It reported that the nation could realize a new economy, which would compete better in the international stage. Moreover, the promise of diversification of the economy could be achieved by an approach that guided the business environment to a more open and competitive entrepreneurship spirit. As it stood, the Kingdom was heavily reliant on energy for income as the citizens were not well skilled with negative attitudes to new ideas (Schröl, H, 2011). KSA adopted standard practices easing operation of businesses. For instance, in 2006, it cut time of wait during registration from 64 to 39 days at the Ministry of Commerce. SAGIA finally made it official in partnership with about 17 government organs. The commercial registration fees at the Ministry of Commerce were reduced to 20% of its original value and simultaneously reducing the period of starting a company by 2 days. SMEs registered as companies received a major boost in 2009, the Ministry of Commerce spearheaded the one-stop system program in which the registration process for local limited liabilities was bundled together. In 2007, the Kingdom by removed the very high minimum paid in capital a prospective investor in the economy would pay to do business in KSA. Being the 5th largest in the world at that time, the sum stood at $124464. The minimum capital paid in was outrageously high. The reform brought a positive impact to the economy when the number of investors registered annually by 81% (Schröl, H, 2011). Among the any other important factors that have helped KSA revamp its innovation investment by improving the aids to trade, in2009, it cut fees at the port in Jeddah by 50%. Generally, conditions at the port were improved. Embracing technology therein reduced the trading time in the port by about 2 days. They did away with the requirement for businesses to have consular certificates but instead opt for a system that allowed for submission of requisite clearance information electronically. In 2010, an expansion of the port industry saw the launching of container terminus at Jeddah Islamic Port and in the process further cutting the time of import to 17 days (Audretsch, D. B., 2010).

The vision of the new 2030 in KSA is captured in part by a proclamation by King Salman Bin Abdulaziz Al-Saud who says that the primary goal is to be a leading nation in all aspects. The vision 2030 is quite bold yet achievable. The crown prince of KSA is the chairperson of the Council of Economic and Development Affairs. This body has put 13 programs in place to help achieve the vision. The KSA vision 2030 is embodied on 96 strategic objectives whose implementation shows the success of the venture. Lying at the heart of the Islamic and Arab worlds, the Kingdom is a hub connecting 3 continents. The vision shows the long-term aims that the nation expects to achieve. Despite all impediments, the country is in the right path based on the changes they have embraced to make the economy favorable for fair competition and in the quest for diversification of the economy (Audretsch, D. B., 2010). KSA is the most explicit subject of the case study of the relationship between innovation and performance in SMEs.

Research Methodology

In order to fulfil the requirements of the research objective and to find conclusions to the set of research questions, it is imperative that a research methodology is defined. Kothari (2004) provides details of the types of research approaches available to the researcher. The study differentiates between quantitative and qualitative research approach. The former is based upon empirical findings whereas the latter is descriptive in nature. In addition to this, Kothari (2004) provides that the researcher needs to decide whether descriptive approach will be followed or analytical. It has been presented that descriptive approach involves fulfillment of surveys and face finding enquiries where the researcher considers the existing state of affairs. On the other hand, with analytical approach the researcher uses information already available to make critical evaluation of the situation at hand.

For the purpose of this research study, it has been decided that a combination of quantitative and qualitative research approach will be considered. The quantitative research will define proxies for innovation and performance and then find out the relationship between the two. As far as qualitative approach is considered, a set of open-ended questions will be formed and then asked from a sample of SMEs entrepreneurs in KSA where questions will focus upon what viewpoint regarding innovation and performance is generally held. In addition to this, an analytical evaluation will be done where the existing literature will be seen and on the basis of the literature findings, and quantitative research findings, analysis will be performed so as to see if the empirical findings support the findings of the literature at large. The researcher plans to target the population of SMEs in KSA. A sample of 100 firms will be drawn. Empirical computations will be done for them on the basis of their financial data available. Moreover, the entrepreneurs of those firms will be interviewed where they will be requested to fill a list of open-ended questions.

Ethical Considerations

This study plans to make use of primary data, which involves taking firsthand information from entrepreneurs of SMEs, as well as using seconding data, which involves a critical analysis of the available literature. In terms of primary data and its availability, the researcher will seek the permission of the university as well as approach the entrepreneurs through an official way. These respondents will be ensured confidentiality of information. On the other hand, for secondary data, the researcher will ensure that no content is plagiarized. Hence, the researcher will ensure to give due recognition to the researchers of different studies in order to avoid any issues of plagiarism.

Timescale/Plan

It is essential to define a research plan so that the researcher can set targets and then meet them to avoid any delays in submission. Hence, it has been planned that by the end of July 2022, the proposal will be submitted, and feedback will be awaited before any other task is performed. Thereafter, as soon as feedback is obtained, the research will complete literature review. In addition to this, the researcher will approach entrepreneurs from different SMEs in KSA through email so as to obtain approval from them to participate in the research program of this study.

Resources/Costs

The researcher will access online databases to find results of proxies defined for performance and innovation. Since this will involve secondary access to data therefore no costs are being expected. In addition to this, the researcher will conduct entrepreneurs through online forums. Hence, it is part of the researcher’s program to avoid any costs that may occur.

References

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Hii, A. N. a. J. (1998). Innovation and Business Performance: A Literature Review. United Kingdom: University of Cambridge.

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Kuswantoro. (2012). Impact of Distribution Channel Innovation on the Performance of Small and Medium Entreprices. International Business and Management, 15, 50-60.

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Ngungi. (2013). Effect of the type of innovation on the growth of small of small and medium enterprises in Kenya: a case of garment enterprises in Jericho, Nairobi. . European Journal of Management sciences and Economics, 1(2), 49 – 57

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Sadi, M. A., & Al-Ghazali, B. M. (2012). The dynamics of entrepreneurial motivation among women: A comparative study of businesswomen in Saudi Arabia and Bahrain. In The GCC Economies (pp. 217-227). Springer, New York, NY.

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