Knowledge acquisition and assimilation as antecedents for ...

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2

Knowledge acquisition
and assimilation
as antecedent
s

for innovation
implementation in SMEs


Richard Harris*, Rodney McAdam**, Irene McCausland


and Renee Reid


*

University of Glasgow

** University of Ulster



Dundalk Institute of Technology



Glasgow
Caledonian University


Abstract

Purpose:

The advent of Knowledge Management has offered new opportunities for SMEs
to

further implement innovation
, especially in peripheral regions of the economy
. The innate
flexibility and closeness to customers in SMEs

h
as raised the possibility that knowledge
from
multiple sources
can be translated into innovation despite traditional SME limitations
of
resources

and skills

and
the
geographical limitations of distance
.
The aim of this paper is to
determine how SMEs in the
se peripheral regions
can
effectively acquire
and assimilate
knowledge to achieve innovation
implementation
goals.

Methodology:

A survey of 606 SMEs was undertaken in the North West European peripheral
regions of Ireland, Northern Ireland, and South West
Scotland
was administered
where
knowledge is the only main source of competitive advantage. The survey explores the role of
knowledge acquisition
and assimilation
as an antecedent
in helping to achieve three
classifications
evidence of effective
innovation

implementation
: introducing and new
products/services; engaging in innovation which
resulted in major product/service

innovation

(radical)
, and engaging in innovation activities which did not result in major product
innovation

(incremental), and non
-
innov
ative
.

Findings:

The findings show that
more
innovative firms were more likely to source external
knowledge through various (gate keeping) methods, and consequently were more likely to
have higher levels of levels of absorptive capacity or ability to inter
nalise external knowledge
in all of the regions
in the study
. Thus external knowledge gathering is indicated to be a key


3

antecedent of a range of innovation from radical to incremental.

Knowledge assimilation was
more likely to be implicit within leadershi
p and cultural types conducive to innovation
implementation.

Originality:

The
re is a paucity of studies which systematically and empirically links
knowledge management to innovation in SMEs. This paper makes a contribution to this area in
relation to know
ledge acquisition and its affect on a range of innovation levels.


Keywords:

Knowledge acquisition;
Knowledge assimilation;
Innovation; SME; Survey
.


4

Introduction

The increasing level of competition, globalisation and technology development, and
economic
ne
cessity of
doing more with less (Hughes et al, 2009; Bierly and Daly, 2007; de Plessis, 2008)
has challenged SMEs to increase their levels of innovativeness (Raymond and St
-
Pierre, 2010;
Laforet and Tann, 2006; Mohannak, 2007).
However, SMEs have many inna
te limitations in
terms of resourcing innovation efforts. Traditionally they have
fewer resources

than large
organisations to drive innovation efforts (
Vester and Boshoff, 2007; Nooteboom, 1994
);
and
a
lack of skills
, training and development

to develop in
novation competencies (
Pinho, 2008;
Barclay and Porter, 2005
)
. In many cases SMEs are seen as deriving their innovation
vicariously through large customers to whom they supply (
Bessant et al, 2005
)

with their
overall contribution to innovation
being

limite
d in comparison to larger organisations (
Barclay
and Daly, 2007
). However, the rapid and emergent development of Knowledge Management
(KM) concepts and practices offer new ways of inquiring into innovation in SMEs. For
example, knowledge
,

when
conceptualis
ed
as an open and multi source phenomena rather than
a preserve of
resource intensive

R&D Laboratories, offers resource limited SMEs the
opportunity of acquiring low cost intellectual capital by exploiting their innate flexibility and
closeness to the thei
r customers (
Pinho, 2008; Prajogo and Sohal, 2003
)
i.e.

they are ideally
placed to access and a
c
quire new knowledge as a key antecedent of innovation (
de Plessis,
2008
).


SMEs in p
eripheral regions (such as North West Europe as in this study) offer a

furth
er
challenge to innovation implementation in which there are few studies
(Cooke, 1996;
Soderquist et al, 1997), with a consequent need to clarify
how knowledge based approaches
which are low resource intensi
ty

can help overcome the

innate barriers to inno
vation within
SMEs
in these regions
. Peripheral regions
compound the limitations of SMEs in that
they

are
those areas which are least accessible in relation to the centre of administration or government
and are characterised by infrastructure deficiencies,

small scale traditional enterprises, high


5

servicing costs
and
economic disadvantage (Paelinck and Polese, 1999, Nash and Martin,
2003).


The purpose of the study is to explore how SMEs in these peripheral regions
can use

emergent
KM approaches to increas
e their innate resource and geographic limitations in terms of
increasing
innovation implementation

and ultimately producing new products and
services
.
Any
such developments offer the possibility of also creating a regional innovative ratchet
affect amongs
t SMEs where inward investment from multinationals is unlikely

and the
re is a

need for indigenous SME growth based on innovation as suggested by Bhaskaran (2006).
The
aim of this paper is to determine how SMEs
in these peripheral regions effectively
acqui
re
and
assimilate
knowledge to achieve innovation goals.


Challenges to innovation for SMEs in peripheral regions

In terms of defining innovation for the purposes of the paper Harris and Robinson (2002) refer
to innovation which includes technological and
organisational aspects as being a “
broad
definition of innovation….including not only the ‘hard’ technologically determined definition
but also the organisational and managerial practices”.

Similarly,
Tushman and Nadler (1986)
discuss

product, process and
technological innovation
, suggesting
that

“innovation

is the
creation of any product, service or process, which is new to a business…..the vast majority of
successful innovations are based on the cumulative effect of incremental change in ideas or
methods.

Moreover, consistent with Tidd et al (2009) in relation the ‘pipeline’ of innovation,
t
he innovative process is outlined by the DTI (1998) who claim
“It is a process of continuous
renewal involving the whole company and technological developments; it is a
n essential part
of business strategy and every day practice”.

Based on this broad inclusive approach to
innovation, Klein and Sorra
’s

(1996)
seminal work has

developed the concept of innovation
implementation which they describe as “
the overall, pooled or

aggregate consistency and
quality of targeted organisation members’ innovation use
”.
These definitions are consistent


6

with the Open
I
nnovation concepts developed by Chesborough where innovation is a more
inclusive and wider construct in comparison to tech
nical innovation.
In this study, innovation
implementation in organisations covers both organisational and technological perspectives of
innovation (Mosey et al, 2002).
While innovation implementation is useful, it needs to be
deconstructed into levels to
show different levels of attainment by SMEs.
Three levels of
attainment are suggested in decreasing order of magnitude,
radical, incremental and lack of
innovation.
The wider view and levels of attainment of innovation implementation
must be
combined in th
eoretical and practical approaches to innovation implementation in SMEs where
internal boundaries are less
formalised and
distinct than in larger organisations due to
employee multi
-
tasking (Ghobadian and Gallear, 1997).



The p
rocess of innovation
impleme
ntation

has been shown to be
complex, non
-
linear, and
eclectic and suffers from lack of connectedness (Dougherty and Hardy, 1996). This complexity
is compounded in
SMEs

where there are scarce resources, lack of skills, scepticism towards
formal training, t
he need for flexibility and lack of systematic measurement (
Pullen et al, 2009;
Vossen, 1999; Freel, 2000).
However the wider view of innovation and the recent advances in
KM suggest that this obstacle may be averted in a contingent manner (
Laforet and Tan
n,
2006
).


L
arge organisations with their increased
search for new markets in economically challenging
environments
are
increasingly
targeting niche markets, once the unique preserve of SMEs
(Gunasekeran et al, 1996).
Hence, there is a need for change in S
MEs

beyond that of
incremental improvement (Bhaskaran, 2006) and
which focuses
on innovation as a sustainable
source of competitive advantage. Ghobadian and Gallear (1999)
state that
SMEs
:


must re
-
examine and modify their competitive strategies by fully
incorporating innovation within their
people, processes and products
”. However, despite such views, there remains a lack of


7

systematic research studies on how organisational and technological innovation can be
effectively implemented in SMEs (Scozzi et al,

2005; Freel, 2000; Klein and Sorra, 1996).


The
barriers to innovation in SMEs are

compounded when these organisations are located in
p
eripheral regions
.

As stated by Dolereux (2003) and Cooke et al (1997), innovation
development here will be influenced
by the characteristics of the region.
One of the main traits
indicative of most peripheral economies, and
in the current study,
is organisation size. Areas
on the periphery of large economies, such as the EU or the UK, tend to have a larger
percentage of S
MEs (250 employees or less) in comparison to other regions (Nash and Martin,
2003). Janz et al’s (2003) cross national study and Bhattachatya and Bloch's (2004) Australian
manufacturing study shows that innovation positively correlates with firm size. Howe
ver, the
effects are non
-
linear due to factors such as the localised market knowledge of some small
firms.
Overall, t
here is a paucity of studies on innovation and SMEs in peripheral regions
(Cooke, 1996; Soderquist et al, 1997).

Cooke and Morgan (1994) s
tress the need for horizantal
knowledge
networks between
SMEs
and an

institutional system of vocational training and substantial public and private investment
in innovation,
to compensate for SME and
peripheral region

resource limitations
.
Hence,
within a
peripheral region
,

approach
es

to innovation
are likely to benefit from
knowledge
based
networks and alliances where
knowledge and
innovation can be rapidly and effectively
disseminated

using limited resources and skills

(Cooke, 1996).


A knowledge perspec
tive on SME innovation


In a review of theoretical conceptions of innovation
,

which incorporate knowledge principles
,

Galende (2006) develops the idea of evolutionary theory. This theory
analyses innovation as
having dynamic properties in terms of its deve
lopment in organisations and contrasts with the


8

static and linear model of innovation.
Evolutionary

theory suggests

that

the process of
innovation is linked to the
firm’s

historical development or accumulation of knowledge
through feedback
in a path manner
,

and hence its innovative capabilities are difficult to
replicate by others.
The evolutionary model proposes that
the

process of innovation is

diverse,
dynamic, continual

and accumulative and its principal component is

knowledge.


From this perspective t
he firm is seen as
accumulating

knowledge constantly and continuously
over time,
which ultimately

determines the absorptive capacity of the firm

(Cohen

and
Levinthal, 1990).

K
nowledge
is viewed

as a driver for innovation
and as
a multi
-
source
phenomenon

(
W
ang et al, 2010; Hughes et al, 2009
) which is readily accessibly by SMEs
using simple
implicit

routines
to garner knowledge, ra
ther than
using
large scale investment.
Galende (
2006
)
,

Winter (1984)

and Von Hippel (1988) refer to these multiple sources of
kn
owledge
,

and associated organisational learning
,

as being

internal or

e
xternal and in addition
to traditional investments in R&D can include,

business

e
xperience,
s
uppliers, customers,

universities or other firms, products of the competition (inverse engin
eering

processes), the
movement of specialized technical staff

among firms, the hiring of consultants

or new staff
,
scientific publications,
and courses and seminars
.


Consistent with the evolutionary view Cohen and Levinthal (1990) suggest that SMEs need
to
develop the dynamic capability of recognising and acquiring new external knowledge from
different sources, assimilate it, and apply it to develop innovation in terms of innovation in
new products or services (Cohen and Levinthal, 1990). This approach to

knowledge and
innovation is
referred

to as Absorptive capacity (ACAP) and models how an organisation can
effectively acquire, use, transform and implement knowledge to achieve innovation; ACAP
“…enhances a firm’s ability to gain and sustain a competitive

advantage”
(Zahra and George,
2002:185).




9

In this paper Absorptive Capacity is used as a possible approach
in

helping
to
further
understand the role of knowledge in relation to innovation in SMEs.

Error! Not a valid link.

Figure 1


Absorptive Capacity framework (adapted from Zahra and George, 2002)


The theoretical framework of Absorptive Capacity (ACAP)

(Figure 1)
has been developed
as
an overarching framework to show how organisati
ons acquire new knowledge and leverage it
to achieve innovation
and
competitive advantage in a path
dependant
,

and hence difficult to
replicate
,

manner (Cohen and Levinthal, 1990). There are four key dimensions or constructs
within Absorptive Capacity as s
hown in Figure
1

namely Acquisition
-

how new knowledge is
obtained, Assimilation


how knowledge is incorporated, Transformation


how knowledge is
used to develop processes and routines and Exploitation


how knowledge is used to increase
commercialisatio
n. Zahra and George (2002) have further developed Cohen and Levinthal’s
(1990) study to suggest that within the four dimensions there are two distinct but interrelated
dyadic stages: namely Potential Absorptive Capacity (PACAP) and Realised Absorptive
Capa
city (RACAP) (Figure
1
). PACAP are the processes undertaken to acquire and assimilate
new knowledge while RACAP describes how new knowledge is transformed to bring about
commercial gain (Figure
1
). In addition, Zahra and George (2002) have developed sets o
f key
influencing factors for each of the four dimensions within Absorptive Capacity. This approach
enables the framework to be contextualised in a wide range of settings, such as SMEs, by
relating the influencing factors to specific contexts. For example,

Zahra and George’s (2002)
framework for Absorptive Capacity has been applied in a number of SME based studies
(Fosfuri and Tribo, 2008

-

used a PACAP model to inquire into knowledge flows as
antecedents of innovation performance; Rothaermel and Thursby, 2
005


use of
Absorptive
Capacity framework to evaluate the effect of knowledge flows on small firm incubator
performance; Jones
,
2006

-

Absorptive Capacity interpretation of an SME in a university
partnership. Comprehensive reviews and critiques of Absorpt
ive Capacity has been conducted


10

both by Lane et al (2006) and Todorova and Durisin (2007) resulting in the framework of
Zahra and George (2002) remaining largely unchanged; hence its use in the current study as
being representative of Absorptive Capacity (
ACAP).


Consistent with the evolutionary view (Galende, 2006), Lane et al (2006) and Zahra and
George (2002) conceptualise Absorptive Capacity as a dynamic capability that organisations
develop in relation to each of the ACAP dimensions of the acquisition,

assimilation,
transformation and exploitation of knowledge flows. The organisation
s

in the current study
are
SMEs in peripheral regions within which various actors seek to procure sources of knowledge
to incorporate within learning routines to achieve inn
ovation
implementation and indicative
outcomes (Galende, 2006). Lane et al (2006) and Todorova and Durisin (2007), consistent with
Zahra and George (2002), have added to the conceptualisation of Absorptive Capacity by
showing that individuals and teams wit
hin an organisation can use organisational routines and
practices to develop
knowledge and
Absorptive Capacity at individual and group levels which
ultimately accumulates to that of the overall Absorptive of an organisation (consistent with
Galende’s

(2006
)

conception
of
knowledge and learning within the evolutionary view). Thus,
in relation to the current study, the SME staff and stakeholders are seen as interacting
through
informal and implicit
routines and practices to contribute individual and team base
d
Absorptive Capacity towards the overall Absorptive Capacity of the SME (the organisation
-

Rothaermel and Thursby, Lin et al, 2002). It is shown by Lane et al (2006) that these
stakeholders (or “powerful actors”


Todorova and Durisin, 2007) interact to
socially construct
new knowledge in the form of new routines and improved practices for developing innovation;
thus emphasising the dynamic capability representation o
f
knowledge acquisition and
assimilation.
Hence
knowledge based
Absorptive Capacity

can b
e generated by a range of
means such as social constructionist groups which
construct

new knowledge within an
organisation and its environs (e.g. the extended enterprise)

(Cope, 2005).

These types of
groups include Communities of
P
ractice and distributed l
earning networks (
de Plessis, 2008
).


11

The key underlying assumption of this development is that knowledge is not the preserve of
either a privileged or highly trained/resourced group. In this conception knowledge is seen a
large untapped resource available
at all levels of the organisations in different forms; moreover
it can be codified or made explicit and readily understood
to

a range of audiences (Bessant and
Caffyn, 1997; Nonaka and Takeuchi, 1995). These developments help to challenge the innate
resour
ce and skill barriers to knowledge and innovation where only a narrow technical view of
knowledge
is

espoused leading to knowledge being privileged with R&D departments with a
requisite high degree of resources and skills (Bessant and Caffyn, 1997).
It is
suggested that
t
his more informal and wider concept of knowledge suits the less structured format of SMEs
(
Hyland and
Beckett
, 2005
).


The emphasis on the acquisition of knowledge
as a multi source phenomenon
, and as an
antecedent
or incipient
precursor

fo
r innovation implementation within the Absorptive
Capacity framework, coupled with the purpose and aim of the paper, leads to two interrelated
research questions
. First, consistent with
Cohen and Levinthal (1990) t
here is a need to
determine the main sourc
es of know
l
edge that
that SMEs in peripheral regions draw upon
t
o
drive their innovation efforts, leading to the first research question:

RQ1: What are the sources of knowledge that are accessed by SMEs
in peripheral regions
in
the study in seeking to impl
ement innovation?

Second,
Subramanian and Youndt (2006),
consistent

with
Raymond and St
-
Pierre (2010) and
Pullen et al (2009)

suggest there is a need for empirical studies which probe
how this view of
organizational knowledge contributes to innovation

impl
ementation

where the innovation is

manifested as

radical
,

incremental
, or non
-
evident

levels, leading to the second research
question:

RQ2: Is there a link between knowledge acquisition
and assimilation in relation to
different
levels of
innovation impleme
ntation within the SMEs

in the study?




12

Research Methodology


The research was

approach was designed to provide
information on
how Knowledge
Management within SMEs contributed to innovation

in the peripheral European Union areas of
North

West Europe. This g
eographical area covered the border counties of the Republic of
Ireland and Northern Ireland, and South Western Scotland (as designated in the
EU
RDF
guidelines (
2010
).

A questionnaire was designed where e
ach question and construct within the
draft questio
nnaire was derived from a triangulation of literature, case data, previous
scales/questionnaires and semi
-
structured interviews. This process is in

line with that
suggested by Hoyle and Panter, (1995) and Robson, (2002). The initial scales were then teste
d
and refined
using

a pilot study. The pilot sample contained 10 SMEs and 10 academics who
worked in related disciplines, each with extensive experience about the SME environment.
These pilot tests led to improvements in the wording throughout the question
naire and the
removal and/or addition of some questions.

A large
-
scale
telephone

survey approach was
chosen
due to the ability to clarify ambiguities in understanding and hence to give increased
reliability
(Remenyi et al, 1999).
The
updated
questionnaire

was piloted using five companies
in each of the three sub regions
(i.e. n=15)
to check for understanding and validity.
All three
Development Agencies operating in the Border Regions gave us access to their full list of SME
client companies operating in th
e Border Regions (1,334 for NI; 346 for RoI; and 495 for
Scotland).
A random sample of these
SMEs
was used

for the telephone surveys and there is

no
evidence that suggests
the

samples were not representative of the population of client firms
operating in e
ach region.
The

tel
ephone survey was undertaken o
f 606 small
-
to
-
medium sized
enterprises (SME’s



up to 250 employees based on the European
definitions)



with
a target

of 200 useable responses for sub region.

The companies were clients of the three
Govern
ment
Development Agencies (Enterprise Ireland; Invest Northern Ireland, and Scottish Enterprise),
and provides a profile of the firms already being assisted by government agencies, as these are


13

more likely to
have developed knowledge and innovation agendas

in terms of future assistance
provided by the public sec
tor to firms in these regions.


Table 1 shows the industrial breakdown of the firms surveyed; as expected, manufacturing is
the dominant sector in all regions, given that government aid has tradition
ally been
concentrated on these types of firms. However, fewer firms in the West of Scotland Border
Region belonged to manufacturing compared to the other regions, reflecting both a relatively
lower manufacturing presence as well as some movement in recent

years on the part of
Scottish Enterprise towards assisting firms in other sectors. The information in Table 1 also
indicates that on average assisted firms in the West of Scotland were larger in terms of
employment, especially in manufacturing but general
ly in other sectors as well.


Responses received were captured in SPSS version 15 as they arrived until the closure date.
Data was cleaned as necessary, resulting in a useable sample.



14

Table 1:

Comparison of distribution of SME firms in ICE survey by i
ndustry and region
a














a

The areas covered in each region are
as per Figure
2
.



Scotland

Northern Ireland

Republic of Ireland

Industry

Total
employment

No. of
firms

% of
firms

Total
employment

No. of
firms

% of
firms

Total
employment

No. of
firms

% of
firms

Manufacturing

7,836

86

41.7

4,751

140

70.0

5,591

166

8
3.0

Construction

854

18

8.7

351

11

5.5

108

6

3.0

Wholesale & Retail trade; repairs

960

26

12.6

140

11

5.5

131

9

4.5

Hotels & Restaurants

342

13

6.3

21

1

0.5

0

0

0.0

Transport, Storage &

Communication

1,857

5

2.4

12

2

1.0

22

1

0.5

Real Estate, Renting

and
Business Activities

964

18

8.7

248

11

5.5

122

5

2.5

Education & Health

595

11

5.3

8

2

1.0

0

0

0.0

Other service activities

630

17

8.3

291

14

7.0

539

2

1.0

All other industries

1335

12

5.8

97

8

4.0

526

11

5.5

Total

15,373

206

100.0

5,919

200

100.0

7,039

200

100.0



15

Results

Market
drivers for innovation

T
able 2:

Certain characteristics of SME firms in ICE survey by region
a


Scotland

Northern
Ireland

Republic
of
Ireland

All firms

A
ge (in years)

28

21

34

28

Average FTE employed

75

30

35

47

% family
-
owned

44.7

64.0

62.5

56.9

% sales within own country

55.8

46.3

63.6

55.2

% of sales sold outside British Isles

15.3

13.9

13.7

14.3

Headquarters outside region

15.1

6.0

3.0

8.1

Compe
titive edge: product design
b

28.2

29.5

34.0

30.5

Competitive edge: cost
effectiveness
b

27.7

22.5

30.0

26.7

Competitive edge: process
technology
b

14.1

15.5

13.5

14.4

Competitive edge: marketing
b

15.5

20.5

8.5

14.9

Over last 3 years competition has
incre
ased significantly
b

17.5

18.5

33.0

22.9

In last year overall performance
significantly better than rivals
b

18.4

10.0

9.5

12.7

a

The areas covered in each region are set out in footnote 1.

b

Figures are % of firms in each region reporting ‘yes’ to the que
stion.



Table 2 provides information on certain characteristics of the firm
s

often associated with
differing levels of productivity (and thus long
-
run growth). Northern Ireland companies were
on average ‘younger’ (i.e., had been in business for a shorter
period) and smaller. A smaller
percentage of Scottish firms were family
-
owned (defined as 50% or more of the ownership
residing within the family). In terms of sales, the majority of goods and services produced went
to other firms and households within the

same country, while around 14% of sales went to
customers outside the British Isles (there was little difference across the three Border Regions
with respect to the importance of exporting). The differences across the Border Regions in
terms of the percen
tage of sales sold outside the country but within the British Isles is 100%
minus the two figures presented in Table 2. For Scotland this is 28.9% (of which 23.6% of this
was sales to England and Wales


there was little to Northern Ireland or the Republic

of


16

Ireland); for Northern Ireland the figure is 39.9% (little of which went to Scotland, but 19.7%
and 15.6% went to the Republic of Ireland and England & Wales, respectively); and for the
Republic of Ireland the figure is 22.6% (again there was little tr
ade with Scotland while 10.5%
and 8.9% was sold to Northern Ireland and England & Wales, respectively).


As to the percentage of firms that were ‘foreign’ owned, some 15% of Scottish Border Region
companies had their company headquarters outside of Scotlan
d (2/3rds of this figure
represented companies headquartered in England & Wales), while far fewer of the SME’s in
the Irish Border Regions (North and South) were externally
-
owned


which is perhaps a little
surprising for Northern Ireland SMEs (assisted by

Invest Northern Ireland).


Table 2
also shows the
answers given to the question “in the next 3
-
5 years what single most
important factor will provide the competitive edge of your business”. Overall some 30% of
companies in the ICE survey answered that ‘
product design’ (i.e., quality factors) was most
important (there is little difference across the Border Regions, although firms in the Republic
of Ireland were slightly more likely to put this factor highest); while nearly 27% overall
thought that ‘cost e
ffectiveness’ was most important (with fewer/more firms in
Northern/Republic of Ireland putting this factor first). The other two factors, which were most
important for just over a quarter of firms in the survey, were process technology and marketing
(with

respect to the latter, there was a more significant difference between firms either side of
the Irish Border).


Lastly, Table 2 shows that around 23% of firms thought that competition had increased
significantly in the three years leading up to the survey
; this was especially evident in the 6
Southern border counties of Ireland


where one
-
third of firms believed that competition was
much stronger


and probably reflects the greater impact of the recent recession in Ireland vis
-
à
-
vis the UK. As to whether
firms thought that their performance was significantly better than


17

their rivals in the 12 month period before the survey, only around 10% of firms operating in
the Irish Border regions thought this to be the case, while over 18% of Scottish firms answered
that they experienced significantly better performance.

Classification of
Innovation

levels in the SMEs


Firms in the survey were asked a series of questions about
: first,

whether they had introduced
any new products/services in the last 3 years;
second,

whether they were involved in
innovation related activities (defined for the purpose of the survey as “
committing resources

to
developing new products, processes or services and/or significantly improving existing
products, processes or services, or devel
oping new niches for the firm); and
third,
whether such
innovation activities had resulted in any
major

product or process innovations introduced into
their plants in the last 3 years. Note, the definition of innovation related activities did not
mention R
&D specifically (to avoid the use of a narrow interpretation of the resources they
may have committed in this area
1
), and firms were also allowed to distinguish between major
and minor innovations, and those developed locally as opposed to in other branche
s of the firm
located outside the Border Regions.







18

Figure
2
:

Product innovation in SME firms in ICE survey by region
a

62.6
60.5
67.5
40.5
49.5
25.7
20.5
22.0
30.6
39.0
28.5
43.7
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Scotland
Northern Ireland
Republic of Ireland
Border Regions
percentage of firms
% introducing any new products/services
% engaging in innovation activities which resulted in major product innovation
% engaging in innovation activities which did not result in major product innovation
% not engaging in innovation related activities

a

The areas covered in each r
egion were the Border regions of the Republic of Ireland and
northern Ireland and South West Scotland.



F
igure 2 shows that
first,
overall some 63% of firms stated that they had introduced new
products/services in the last 3 years, with the highest level of innovation in the Border Region
of the Republic of Ireland (67.5%) and the lowest in Northern Ireland (
60.5%). However,
second,
when firms in the survey were asked if they were engaged in innovation related
activities, and whether the commitment of such resources had resulted in any major product
innovations in the last 3 years, only 45% answered ‘yes’ (aga
in with the highest percentage


49.5%


being located in RoI); thus overall some 18% of firms
(i.e. % introducing new
products services (red) less those engaged in innovation related activities which had resulted in
major product innovations in the last 3

years (blue))
reported that they introduced new
products/services but these were either ‘not major’ and/or had not been as a result of
innovation activities undertaken in the local firm

as opposed to off
-
site locations
.



The more important figure is whet
her there were major product innovations locally, resulting
from an investment of local resources in innovation activities. Thus Figure 2 also shows the
percentage of firms engaging in innovation activities which did not result in a major product


19

innovatio
n (overall 23% of firms were in this category
-

yellow
), as well those not involved in
innovation (33% of all firms, but relatively much higher in Northern Ireland at 39% compared
to 28.5% of firms located in the Republic of Ireland

-

green
). In summary, so
me 55% of the
assisted firms in the survey did not produce major local product innovations

(yellow plus
green)
;

with those based in Northern Ireland having the worst outcome as nearly 60% did not
innovate.


Knowledge sources for innovation



















Figure
3
:

Most important factors influencing new product/service design and
development in innovating SME firms in ICE survey by region
a,b

a

The areas covered in each region
are as per Figure
2
.


b

Only firms that introduced new pro
ducts/services in last 3 years are included.
57.4
53.5
43.4
41.1
38.8
38.8
7.0
8.5
8.5
52.1
52.1
57.0
47.9
51.2
41.3
17.4
12.4
14.9
76.3
71.9
64.4
62.2
45.9
48.9
23.0
14.8
7.4
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Cooperation with
customers crucial
Production staff at
the establishment
crucial
Market
testing/evaluation
crucial
R&D department
crucial
Financial
resources crucial
Technical inputs
from customers
crucial
Local consultant
advice crucial
Consultant advice
from outside
(NI/ROI/Scotland)
crucial
Company staff
located outside
(NI/ROI/Scotland)
crucial
% of firms stating factor was very influential .
Scotland
Northern Ireland
Republic of Ireland


20

In relation to the most important
knowledge sources
Figure
3

shows that cooperation
with customers and production staff at the establishment were the most crucial factors
(on average between 60
-
62% of all firms
in the survey rated these as crucial); these
factors reflect the internal and external knowledge, capabilities and resources
available to the firm with ‘cooperation with customers’ an indication of the
importance of external knowledge and ‘production staff
’ representing internal
influences. The next two most important factors (rated as crucial by 51
-
55% of all
firms) were (i) market testing/evaluation; and (ii) the importance of having an R&D
department; and again these reflect external and internal process
es impacting on the
firms. Financial resources (which are often thought to be one of the most binding
constraints on innovation activities), were rated as crucially important by around 45%
of firms (this was higher at 51.2% of firms in Northern Ireland, pr
obably reflecting
the overall smaller size of surveyed SMEs in this Border Region), while technical
inputs from customers (as opposed to cooperation) is rated overall as crucial by
around 43% of all firms in the survey. Other factors (the importance of ad
vice from
local and external consultants; and the role of company staff located outside the
region) were significantly less important as crucial factors influencing the innovation
process (especially in Scotland).


One other major result that stands out i
n Figure
3

is that on almost every factor, more
firms in the Border Region of the Republic of Ireland rated their influence as being
crucial when compared to the other two regions. This suggests that RoI firms were
more aware of the importance of these fac
tors, which could reflect a number of
influences such as: assisted manufacturing firms dominate this Border Region (Table
1); their relatively l
arger size in terms of turnover
; the greater concentration of sales in


21

local (RoI) markets and the greater impor
tance placed on product design, as well as
concerns expressed about increasing competition (Table 2); and, lastly, a slightly
greater concentration on innovation activities (Figure
3
)
.



Knowledge based
characteristics of
the firms and innovation


Whethe
r a firm is involved in innovation related activities (resulting in a major
product innovation in the last 3 years or no product innovation) or not, is likely to be
related to its characteristics (such as size, market orientation, and approach to
competiti
veness). Thus certain of the characteristics listed in Table 2 are related to
innovativeness to see if there is any link between them. Although a certain
characteristic may vary across innovation sub
-
groups

(based on the three innovation
levels above)
, th
is does not mean there is necessarily a strong statistical link; thus, we
test the (null) hypothesis that there is no trend either upwards or downwards across
the sub
-
groups

of innovation levels

to see if we can reject this hypothesis at a high
level of si
gnificance (1%), medium significance (5%), or low significance (10%).
Rejecting at any of these levels shows there is a statistical trend, but obviously a
strong(er) rejection of the hypothesis requires a high(er) level of significance.


Table
3

shows tha
t generally larger firms (in terms of their employment size) are more
likely to be successful at innovation; i.e., there is a positive link between firm size and
moving from not engaging in innovation related activities to producing a major
product innovat
ion. The link is strongest in the Republic of Ireland firms that were
surveyed; weaker in Scottish firms (but still significant); but no significant
relationship is found for firms in Northern Ireland (even though employment size
changes across the sub
-
gro
ups with the expected pattern). In part this positive


22

relationship between size and innovativeness suggests that larger firms have more
resources for investing in innovation related activities.

Generally there is little relationship between the number of y
ears the firm has been
operating and innovativeness. However, there is a strong negative (positive) link
between the amount sold within the country (amount exported) and successful
innovation related activities. This is as expected
, as

there is a well
esta
blished
literature that shows that exporting firms have higher levels of productivity (Harris
and Li, 2009).




23


Table
3
:

Characteristics of firms and innovation related activities in SME firms in ICE survey by region
a,b,c





% of sales sold


Competitive

edge


FTE
employment

Age of
firm
(years)

within
own
country

O
utside
British
Isles

% family
-
owned

product
design

cost
effectiveness

Scotland








Major product innovation

95

31

37.1

23.9

37.8

45.6

18.9

No major product innovation

75

26

58.0

13.8

41.5

17.0

26.4

Not engaging in innovation related activities

45

27

80.8

4.3

57.1

12.7

41.3


*


***

***

**

***

***









Northern Ireland








Major product innovation

34

16

34.3

23.2

58.0

42.0

9.9

No major product innovation

32

30

49.3

7.8

58.5

26.8

22.0

Not engaging in innovation related activities

24

22

57.1

7.3

73.1

17.9

35.9



*

***

***

**

***

***









Republic of Ireland








Major product innovation

43

29

57.9

19.3

61.6

38.4

24.2

No major product innovation

34

42

61.0

13.8

65.9

45.5

2
2.7

Not engaging in innovation related activities

23

36

75.8

3.9

61.4

17.5

45.6


**


***

***


**

***









All firms








Major product innovation

57

26

43.8

22.0

52.6

41.9

18.1

No major product innovation

49

32

56.4

12.0

54.3

29.0

23.9

Not enga
ging in innovation related activities

30

28

70.0

5.4

64.6

16.2

40.4


***


***

***

***

***

***

a

The areas covered in each region are
as per Figure
2
.

b

All firms are included
.

c

Stars indicate ability to reject null of no trend across innovation sub
-
grou
p at *=10%/**=5%/***=1% significance level.





24

With the exception of the Republic of Ireland, being family
-
owned is associated with
lower levels of innovativeness. And lastly, firms who believe that their competitive
edge in the next 3
-
5 years will come fr
om product design (cost effectiveness) are
much more likely to engage in successful innovation related activities, reflecting a
different strategic approach between such firms.

Knowledge ac
quisition
, assimilation and
linkages

Table
4

considers the relation
ship between knowledge acquisition and networks,
relating to how information/knowledge outwith the firm was identified and employed.
Firms introducing major innovations in the last three years were more likely to agree
that they conduct frequent market res
earch to be aware of customers needs; they were
less likely to disagree that they used licensing as a means to obtain
information/knowledge of technology (not significant in the RoI firms); they were
more likely to agree they had developed new products/ser
vices and/or processes in
collaboration with other firms (only significant in Scotland); they stated they were
more aware of the information/knowledge and technologies being developed by their
competitors; and they were more likely to agree that they had b
ecome an
information/knowledge or technology supplier to other firms in their sector.
Innovative firms in the Republic of Ireland Border region were also more likely to
agree that they went to outside public sector bodies to find fresh opportunities for
in
troducing new products/services (innovative firms in the other two regions also
were more likely to agree they did this, but the differences were not significantly
different to other firms in the survey). In short, innovative firms were more likely to
sou
rce external knowledge through various (gate
-
keeping) methods, and consequently
were more likely to have higher levels of absorptive capacity (i.e. the ability in
internalise external knowledge), even though such firms did not systematically differ


25

from ot
hers in terms of internal knowledge processes. Thus, external knowledge
gathering seems to be more important in association with achieving successful
innovation outcomes.


Lastly Table
4

shows that responses relating to statements on networking resulted in

significant differences across firms in the three innovation sub
-
groups. In Scotland,
successful innovators were more likely to state they agreed that they had sufficient
resources allocated to support network activities, and that the organisation uses a
range of activities and mechanisms to initiate new relationships with others. In
Northern Ireland, firms were more likely to agree that network activities were
systematically linked to organisation plans if they had committed resources to
innovation acti
vities had not introduce
d

a major new innovation.

Firms were
presented with 6 statements which were related to how internally the organisation
incorporated or used knowledge and information. None of these resulted in
statistically significant differences a
cross the 3 innovation sub
-
groups being
considered, which was unexpected.



26

Table
4
:

Knowledge acquisition and networks linked to innovation

Whether firm strongly agrees (coded
2) to strongly disagrees (coded
-
2)
with statement:

Scotland

Northern Ireland

Re
public of Ireland

(1)
d

(2)

(3)

(1)

(2)

(3)

(1)

(2)

(3)

We conduct frequent market
research to be aware of customers
needs

0.744

0.038

0.175

0.852

0.561

0.218

0.606

0.614

0.193

Licensing is a method we often use to
obtain information/knowledge of
techno
logy

-
0.700

-
1.189

-
1.095

-
0.790

-
1.122

-
1.154

-
1.364

-
1.455

-
1.561

We have developed new
products/services and/or processes
in collaboration with other firms

0.311

-
0.189

-
0.778

-
0.086

-
0.293

-
0.103

-
0.030

-
0.432

-
0.491

We are well aware of the
informat
ion/knowledge and
technologies being developed by our
competitors

0.622

0.736

0.127

0.926

0.341

0.628

0.768

0.432

0.439

We have become an
information/knowledge or
technology supplier to other firms in
the sector

0.178

-
0.736

-
0.651

-
0.198

-
0.512

-
0.564

-
0
.384

-
0.773

-
0.772

We usually go to outside public
sector bodies (e.g. universities) to
find out about fresh opportunities for
introducing new products/services

0.044

-
0.396

-
0.238

0.037

-
0.098

-
0.244

0.030

-
0.273

-
0.333

Sufficient resources are allocate
d to
support network activities

0.400

0.208

-
0.159

0.086

0.171

-
0.090

0.152

-
0.114

0.088

The organisation uses a range of
activities and mechanisms to initiate
new relationships with others

0.467

0.189

-
0.190

0.123

0.244

0.051

0.152

-
0.136

-
0.070

Networ
k activities are systematically
linked to organisation plans

0.011

-
0.245

-
0.222

-
0.185

0.317

-
0.397

-
0.192

-
0.273

-
0.421

a

The areas covered in each region are
as per Figure
2
.

b

All firms are included.

c

Colours indicate ability to (i) reject null of no

trend across innovation sub
-
group at


=10%/

=5%/

=1% significance level;

(ii) reject null of no deviation from trend across innovation sub
-
group at


=10%/

=5%/

=1% significance level.

d
(1) =
Major product innovation; (2) = No major product innovation
; (3) = Not engaging in innovation related activities



27

Table 5
:

Lifecycle, strategic focus and leadership
linked to innovation

Whether firm strongly agrees (coded
2) to strongly disagrees (coded
-
2)
with statement:

Scotland

Northern Ireland

Republic of Ire
land

(1)
d

(2)

(3)

(1)

(2)

(3)

(1)

(2)

(3)

The company continually searches
for new market opportunities

1.478

1.264

0.984

1.654

1.512

1.436

1.455

1.591

1.105

Management fosters creative
thinking and innovation in the
company

1.367

1.453

1.143

1.617

1.3
66

1.385

1.566

1.500

1.263

Our top managers like to try new
ways of doing things

1.289

1.340

1.127

1.543

1.366

1.231

1.505

1.455

1.333

Management spend adequate time
planning change

0.889

0.887

0.540

0.901

0.683

0.628

1.051

0.864

0.596

If the company is

performing well,
change is still a priority

1.178

1.245

0.603

1.272

1.146

0.987

1.404

1.432

0.842

Management encourages everyone in
the firm to come up with new ideas

1.156

1.264

0.841

1.321

1.122

1.154

1.333

1.318

1.175

The management team take time to

think constructively/creatively about
the future

1.156

1.226

1.095

1.481

1.268

1.282

1.384

1.205

1.105

a

The areas covered in each region are
as per Figure

2
.

b

All firms are included
.

c

Colours indicate ability to reject null of no trend across innovat
ion sub
-
group at


=10%/

=5%/

=1% significance level.

d
(1) =
Major product innovation; (2) = No major product innovation; (3) = Not engaging in innovation related activities






28

I
n Tables
4 and 5
, only those questions that provided (statistically signifi
cant)
different answers across the 3 innovation related activities sub
-
groups (as used in
Table 5) are included; the other questions asked


where there is no (statistically
significant) difference. All the questions asked respondents to rank from: strongl
y
agree (coded 2) through to strongly disagree (coded
-
2). The average result for each
innovation sub
-
group is reported in Tables
4 and 5
.
In addition to reporting the
average scores of respondents in Tables
4 and 5
, we have also tested the (null)
hypothes
is that there is no trend either upwards or downwards across the sub
-
groups
to see if we can reject this hypothesis at a high level of significance (1%), medium
significance (5%), or low significance (10%). In addition, we also test a different
(null) hypo
thesis that there is no deviation from trend across the innovation sub
-
groups; this allows us to see if (in our case) one or more sub
-
groups report
significantly different values to the other sub
-
group(s), but there is now no linear
progression from low
-
to
-
high values, or from high
-
to
-
low values (i.e. there is no
straight
-
line trend across the values reported). In the tables we report only the (null)
hypothesis that was most strongly rejected (if, as sometimes occurred, both
hypotheses were rejected), using

a colour scheme reported in the table footnotes.


Table
5

shows that t
hose
SMEs
that had achieved a major innovation in the last 3
years were more inclined
to
strongly agree that their company continually searches for
new market opportunities.
A
ll compani
es (irrespective of which innovation sub
-
group
they belonged to) tended towards agreeing or strongly agreeing with the statement
that they continually searched for ne
w market opportunities; however, as shown

in
Table 5

(ba
cked
-
up by statistical testing),

o
n average the strongest positive responses
were given by innovating firms.
In relation to leadership innov
ative firms were


29

generally more likely to agree that management fostered creative thinking and
innovation in the organisation; that they were more lik
ely to try new ways of doing
things (although this was only significant in Northern Ireland); they allowed for
adequate time in planning change (although less so in Northern Ireland); and they
took time to think constructively/creatively about the future (
this is less obvious in
Scotland). Innovative firms were also more likely to agree that if the company is
performing well, change is still a priority; while there was little difference across sub
-
groups in response to the statement that the organisation i
s working to a clear business
plan (the exception being the Republic of Ireland where more positive answers were
received for firms that had innovated). Lastly, only in Scotland was there any
indication that innovative firms were significantly more likely
to have their
management encouraging everyone to come up with new ideas. In summary, the
results for ‘leadership’ suggest that there were important differences in the role and
direction of managers in innovative firms, when compared to non
-
innovative firms

where creativity, planning and the likelihood of change was less in evidence.




30

Table
6
:


Culture and business improvement methods linked to innovation

Whether firm strongly agrees (coded
2) to strongly disagrees (coded
-
2)
with statement:

Scotland

Northe
rn Ireland

Republic of Ireland

(1)
d

(2)

(3)

(1)

(2)

(3)

(1)

(2)

(3)

There is a strong team spirit at all
levels of the organisation

1.200

1.245

1.143

1.494

1.268

1.192

1.485

1.500

1.088

The culture in this organisation
promotes change

1.067

1.075

0.683

1.346

1.268

0.949

1.424

1.159

1.018

Two way communication happens at
all levels of the organisation

1.089

1.075

0.857

1.407

1.195

1.103

1.394

1.318

1.228

The structure of the organisation
facilitates change

1.056

0.981

0.937

1.370

1.220

1.090

1.343

1.31
8

1.053

Overall, employees have access to all
the resources needed to get the job
done

1.156

1.208

1.048

1.481

1.317

1.397

1.444

1.636

1.404


a

The areas covered in each region are
as per Figure
2
.

b

All firms are included
.

c

Colours indicate ability to
(i) reject null of no trend across innovation sub
-
group at


=10%/

=5%/

=1% significance level;

(ii) reject null of no deviation from trend across innovation sub
-
group at


=10%/

=5%/

=1% significance level.

d
(1) =
Major product innovation; (2) = No maj
or product innovation; (3) = Not engaging in innovation related activities


In relation to the culture of the organisation
Table 6 shows that
inno
vative firms were
generally more likely to agree that there was a strong team spirit at all levels of the
org
anisation (although differences across innovation sub
-
groups were less evident in
Scotland); that the culture of the organisation promoted change; and that the structure
of the organisation facilitated change (although ‘structure’


rather than ‘culture’


was weaker, especially in Scotland). When asked whether two
-
way communication
happened at all levels in the organisation, only firms in Northern Ireland were
different in terms of innovation sub
-
groups (those innovating were significantly more
likely to a
gree than were non
-
innovators). And only in the Republic of Ireland was
there a statistical difference with regard to the statement that “overall employees have
access to all the resources
needed to

get the job done”
; however, it was those

firms
that had e
ngaged in innovation related activities, but not achieved a major product
innovation, who were most likely to strongly agree with this statement.

Discussion


The results showed that a range of levels were evident in terms of innovation in the
SMEs

i.e. .i
nnovation
implementation
activity leading to a major product/service
innovation, innovation activity leading to non major product/service development,
and little evidence of innovation activity or outcomes. These levels i.e. radical,
incremental and none,
contribute to
Gadene’s (2006)

call for knowledge and
innovation studies using a

range of innovation levels. The results of Figure
2

indicate
that although the Government
assisted firms in the survey indicat
ing

that they were
‘one
-
step
-
ahead’ of the local c
ompetition, overall the results suggest that firms in the
survey that were involved in product innovation were relatively risk
-
adverse towards
making a strong commitment to introducing new products and services
, which is
consist
ent with studies on innovati
on
in

SMEs (
Bessant et al, 2005
)
.


32



The markets drivers for innovation (Table
2
) showed that cost effectiveness,
competitive pressure and maintaining a competitive edge in process technology,
and
marketing
,

were all key drivers for innovation consistent wi
th SME studies on
innovation pull factors (
Ibrahim et al, 2008; Ottenbacher and Harrington, 2008
)

where

the range of innovation levels is also evidence of a diverse range and intensity of
these pull factors. The larger fir
ms
within the SME sample (i.e. mor
e than 100 and
less than 250 employees)
were more likely to invest in innovation related activities

consistent with
Moy and Luk’s (2003) growth study;

so were firms that exported

(Neupert et al, 2006); a
s were those who believed that ‘product design’ was t
he most
important factor in determining their competitiveness in the next 3
-
5 years. Family
-
owned firms were generally
associated with lower levels of innovativeness

which
Ibrahim et al (2008)

found was associated by
family
member’s

unwillingness to share
knowledge throughout the organisation and its environs.



In terms of the
knowledge sources for innovation practices Figure
3

shows that a wide
and eclectic range of sources were accessed consistent with Gadeene
(2006)

and
Winter’s (
1984
) suggestions for o
rganisations in general. The attraction to the low
resourced SMEs for many of these sources of knowledge was the relatively low cost
of tapping the sources and suggests that the knowledge based approach can help
SMEs o
v
ercome some of their innate limitatio
ns in relation to innovation as suggested
by
Vester and Boshoff (2007) and Nooteboom (1994); Pinho (2008), and Barclay and
Porter (2005)
. The types of sources in Figure
3

also suggested that both technical and
social knowledge was being accessed consistent

with Cohen and
Levintahal’s

(1990)
findings for knowledge acquisition as an antecedent of innovation.


33



In regard
to the relationship between internal and external knowledge acquisition
,
assimilation

and innovation related activities

(Table
s 4 and 5
)
, inno
vative firms were
more likely to source external knowledge through various (gate
-
keeping)
statistically
significant
methods, and consequently were more likely to have higher levels of
A
bsorptive
C
apacity (i.e. the ability in internalise external knowledge)

consistent with
the studies of
Cohen and Levinthal (1990)
.
Successful innovators were more likely to
state they agreed that they had sufficient resources allocated to support network
activities for knowledge acquisition, consistent with the findings of
C
ope (2005)
,

and
the SMEs used a range of activities and mechanisms to initiate new relationships with
others.
The results indicated that for the SMEs the
external knowledge gathering
seems to be more important in association with achieving successful innov
ation
outcomes

than assimilation activities overtly associated with innovation. However, as
shown in Table
5

it is suggested that leadership and
cultural

items which encouraged
idea
generation

and creativity and which allocated sufficient time and other re
sources
for employees to
engage in innovation activities, were the key means for
assimilat
ing
and integrat
ing

the acquired knowledge.
Therefore, i
t is likely that the
loosely

structured approach within
SMEs

and lack of formal nomenclature
, in comparison to

large organisations,

has resulted in the
acquisition

routines being implicit within the
leadership and cultural norms as suggested by
Cope (2005)
.


Conclusions

The study seeks to contribute to the relative paucity of studies on knowledge and
innovation us
ing a consistent theoretical approach. SMEs face a number of innate
limitations

in terms of developing innovation however the results show that the

34


knowledge based view of innovation can help address some of these limitations in a
contingent manner. The st
rong relationship between multi source knowledge
acquisition and both radical and incremental innovation shows that SMEs were
tapping into relatively low cost antecedents of innovation as suggested by

de Plessis
(2008) and
Prajogo and Sohal (2003)
i.e.

th
ey
were

ideally placed to access and
a
c
quire new knowledge as a key antecedent of innovation.



In terms of assimilation the loosel
y structured SMEs relied on cond
ucive leadership
and cultural factors
(as found by
Cope, 2005 and Bessant and Caffyn, 1997,

i
n
relation to fostering innovation in SMEs)
to ensure the
acquired

knowledge became
embedded and ultimately used to increase innovation
, in contrast to explicit
knowledge assimilation routines used in larger companies
.


The evolutionary theoretical view (
G
adene, 2006)
of knowledge and innovation was
found to be effectively operationalised and integrated with the Absorptive Capacity
framework (
Zahra and George, 2002
) which helped to analyse the
acquisition

and
assimilation of knowledge in
pursuit

of innovati
on at different levels
. It is
suggested
that

more research is needed on SMEs facing innovation challenges to further explore
the assimilation and transformation routines
and
dimensions of knowledge (both tacit
and explicit) and innovation development.







35



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