It has been found that R&D does not provide a true picture of innovation in SMEs since smaller
enterprises will not have a specialist R&D department (Crespi et al, 2003). Further to this it appears that most innovations originate in certain sectors (Robson et al, 1988) as likewise most R&D (Scherer, 1982).
In relation to these aspects this review considers R&D activities in small businesses according to demand, organisation, innovation, imitation and diffusion, complementary assets, networking and government
influence on small business R&D.
Demand
With regard to demand it is apparent that the motivation to undertake R&D has involved variables representing market demand conditions which present demand as a major influence on such decisions
(Crespi et al, 2003). Unfortunately, as noted by Mowery and Rosenberg (1979) this does not convey much since managers or entrepreneurs will consider the demand outcome before undertaking the development process which is likely to be expensive.
Organisation
According to the Schumpeterian perspective innovation and R&D activities in modern times have required large firms or concentrated industries (Crespi et al, 2003). Consequently, there will be sectors where the spend on R&D will be determined by the minimum operation scale but there will be other sectors where concentration will be in small and medium sized enterprises (SMEs) (Acs and Audretsch (1990) and
Audretsch (1995) explain this according to different technological régimes across the different sectors and firm size). Acs and Audretsch (1990) further describe the differences in innovative activity between small and large firms according to the R&D intensities gap. Cohen (1995) notes that the scale economies in R&D may be a possible explanation for the impact of large sized firms. Contrary to this there may be diseconomies with larger firms and as a result government focus in many economies has changed to
considering SMEs (Crespi et al, 2003). Further, data on small businesses has tended to underestimate their R&D effort (Tidd et al, 2001). According to von Tunzelmann (1995) all productive units involve the four functions of administration and finance, products, production processes and technology (with
augmentation by R&D). In the literature on scale economies in R&D there is justification for merging large high technology firms (Fisher and Temin, 1973; Kohn and Scott, 1982) and in a literature survey by Martin et al (2003) it is shown that for scale economies in university research at team level scale economies are usually obtained by teams of between five and nine people in a subject. Economies in R&D
will involve merging diverse technological fields for production and cost advantages (Crespi et al, 2003).
Contrary to examples of fusion that are successful there will also be cases where fusion has not been successful in a company (Kodama, 1991). The cycle time is the speed for R&D to be turned into new products and in order to be first to market there will be pressure for small businesses to shorten the time (Crespi et al, 2003). Taking aside increase in complexity a faster cycle time has its own costs (Scherer and Ross, 1990).
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Innovation and Small Business: Volume I
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Innovation, imitation and diffusion
Ownership of innovation and intellectual property rights (IPRs) will be fundamental to determine the attractiveness to carry out R&D. Recent studies, however, have suggested that R&D is often undertaken in ways that appear more like imitation than innovation (Crespi et al, 2003). Indeed, the work of Cohen and Levinthal (1989, 1990) highlight absorptive capacity which they describe as the capacity to absorb
technologies which are generated elsewhere. They contend that R&D increases absorption even if the R&D is not innovative but rather duplicative.
Complementary assets
Within enterprises there is a danger that there will be too narrow focus on innovation and R&D since as well as the ability to create new products and processes absorptive capacity will depend on the other resources and functions within and outside the organisation (Crespi et al, 2003). Teece (1986) has called these other resources complementary assets. In relation to this Dodgson and Rothwell (1994) have
purported that SMEs will be likely to encounter difficulties translating external opportunities due to limited internal capabilities. According to many studies a significant determinant of R&D in SMEs appears to be financing of innovation and the role of cash flow (Crespi et al, 2003). In the literature on appropriate methods for the evaluation of the financing of R&D Myers (1984) has suggested options valuations instead of payback procedures or conventional discounted cash flow (DCF). A problem is that if a company leaves an R&D project it may be far more expensive to return at a later date (Mitchell and Hamilton, 1988). Marketing functions also need to be taken into account since there may be a
considerable gulf between marketing and R&D (Crespi et al, 2003). Most studies have found a positive connection between R&D intensity and diversification and recent research shows that when the share of external contracted out R&D rises this leads to higher returns (Bönte, 2003).
Networking
Industries have always depended on sources external to the company for technologies for R&D and some of those that have had in-house R&D in recent times have externalised part of the function (Crespi et al, 2003). The performance of R&D in the UK by higher education institutions (HEIs) has increased from a figure below similar countries in 1980 to the same as similar nations (von Tunzelmann, 2004). It is thought that this has arisen due to the triple helix of activities between government, industry and universities (Etzkowitz and Leydesdorff, 2002). It appears that the interrelationship between HEIs and industry is a significant driver regarding the intensity of R&D (Crespi et al, 2003).
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Innovation and Small Business: Volume I
Research and Development and the Small Firm
Government influence on business R&D
There are a number of ways government activities can influence business R&D and these include basic research funding, industrial R&D finance (by the tax system indirectly or directly) and through IPR. Gains in technological achievements through more R&D and patents can be caused by rising Gross Domestic Product (GDP) and other macroeconomic forces (von Tunzelmann and Efendioglu, 2001). Indeed, surveys of business R&D have revealed that a strong incentive is a macro economy in a buoyant situation (von Tunzelmann, 2003). Furthermore, governments see their contribution to technology from pump priming
basic research funding with an emphasis on basic research arising from market failure (funding will contribute to business R&D through the subsidisation of private sector laboratories and spillovers complementing private R&D) (Crespi et al, 2003). There has also been concern since the 1980s over private sector R&D being crowded out by government R&D (Kealey, 1996; David et al, 2000). Other studies in the UK have suggested that increases in government R&D in defence activities resulted in skilled researchers being drawn away from commercialisable and private R&D (Walker, 1980). A study by von Tunzelmann and Efendioglu (2001) of the cross country effects of interest rates on R&D since the 1960s provided a positive long term correlation.
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Governments can influence the level of R&D expenditures by small firms in two principal ways and these are by offering fiscal incentives or by directly subsidising such expenditures (an OECD survey in 2002
showed that in order to encourage business R&D countries have used fiscal incentives and these have involved tax deferrals, allowances and credits) (Crespi et al, 2003). Bloom et al (2001) in a study of the effect of fiscal incentives on R&D spending used an econometric model of R&D investment for nine countries from 1979 to 1997 to investigate the relationship between the level of R&D expenditure and tax changes (a ten per cent decrease in the cost of R&D via tax incentives caused a one per cent increase in the short term level of R&D and ten per cent in the longer term). Similar results have been found for US
and Canadian studies (Hall and van Reenan, 2000). Furthermore, there is little evidence as to whether non-R&D performing companies can be influenced by tax incentives (Crespi et al, 2003). Governmental considerations over the contribution to R&D are still influenced by supply push and market failure models and the case for market failure is affected by high private and social returns for R&D (Steinmueller, 1994).
Conclusions
It has been recognised that the technological development of small firms is influenced by various sources of know-how including R&D, industry contacts, learning, ICT and publications. R&D is therefore a major source for technological progress in the modern economy. A principal justification for support of R&D
policy activities will rest upon the positive spillovers which are the positive externalities from R&D
(Revesz and Boldeman, 2006). The studies undertaken in the literature have revealed the major concepts involved in the study of R&D in industrial sectors. In particular the importance of R&D in enhancing technology absorption is considered important for small firms. The approach to the assessment of R&D
activity in this chapter has therefore been to focus down from the national (macro) level of policy making to consider the sectoral regional level (meso) and the individual small business level (micro).
Recommended Reading
Acs, Z. and Audretsch, D. (1990) Innovation and Small Firms, MIT Press, Cambridge, MA.
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Allen Consulting (2005) The Economic Impact of Co-operative Research Centres in Australia –
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