Innovation and international )smes)
Innovation and international
involvement of Dutch SMEs
drs. S.J.A. Hessels
Zoetermeer, July, 2006
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INNOVATION AND INTERNATIONAL INVOLVEMENT OF DUTCH SMES
S. Jolanda A. Hessels
EIM Business and Policy Research
Italiëlaan 33, P.O. Box 7001
2701 AA Zoetermeer
tel. +3179 343 02 00
Paper prepared for the International Journal of Entrepreneurship and Small Business
This study focuses on the relation between innovation and the international
involvement of small and medium sized enterprises (SMEs), taking into account
export as well as import activities of firms. The analysis is based on a sample of more
than 1.800 Dutch SMEs using regression analysis. First, a positive impact is found for
innovative investments on international involvement. The results of the analysis also
suggest that there is a significant positive effect of several innovative realisations or
practices on international involvement. More specifically, the results indicate that
product innovations, strategic attention for innovation and inter-firm cooperation are
positively related to export behaviour and export intensity. The results also indicate
that product innovations, process innovations and supplier-driven innovations are
positively related to import behaviour. Further, product innovations as well as
innovations in distribution systems show a positive relation to a firm’s import
intensity. Finally, some evidence is also found that international involvement may
stimulate firms to investment in product innovations and in new distribution systems.
Keywords: internationalisation; innovation; SMEs.
Various studies suggest that small firms play an import role in realising technological
innovations and in shaping a nation’s innovation and competitiveness (e.g. Acs, 1996;
Rothwell, 1989; Audretsch & Thurik, 2000; Audretsch, 2002). This is related to the
revival of small businesses in Western economies from the 1970 onwards, commonly
referred to as the emergence of the Entrepreneurial Economy (Audretsch & Thurik
2001; 2004). Increased globalisation and economic integration, developments in ICT
and the increased importance of knowledge in the economic process (Thurik et al.,
2002) have resulted in the re-emergence of small firms and in an increased
specialisation in and importance of knowledge based activities in Western economies
(Audretsch & Thurik 2000, 2001).
Furthermore, because of developments such as globlisation and technological
changes, firms are increasingly involved in international markets. Yet only a small
proportion of small and medium-sized enterprises (SMEs) are internationalising. This
is one of the reasons why research on internationalisation of enterprises is
traditionally strongly focused on large multinational enterprises. However, currently
there is more attention for SME internationalisation, as it is recognised that SMEs are
increasingly involved in international markets (European Commission, 2004).
The aim of this study is to explore whether a link exists between the
innovativeness of SMEs and their internationalisation activities (imports and exports).
Research into internationalisation of SMEs used to be primarily focused on exports. In
recent years however, it has been increasingly acknowledged that exporting and
importing are interrelated processes and there is more attention in research for imports
and other inward modes of internationalisation (e.g. Korhonen, 1997; 1999; Liang &
A number of studies have explored the relationship between innovation and
internationalisation of SMEs (e.g. Lefebvre & Lefebvre, 2002). These studies mainly
focus on the relationship between innovation and export. However, there are also
indications that a relation exists between innovation and import (Van de Graaff &
Overweel, 2002; Blalock and Veloso, 2005) but there is a lack of empirical studies
that address this relationship. Therefore it was decided to include imports as well as
exports in the analysis.
In this study innovativeness is assessed by a number of indicators, such as the
recent introduction of new products or services, the recent introduction of new or
improved internal business processes and inter-firm cooperation. International
involvement is defined as being involved in exporting and/or importing activities.
First, it is examined whether a positive relation exists between innovation (innovative
investments and innovative practices or realisations) and international involvement of
the enterprise. Second, it is also investigated whether international involvement
influences innovative investments. The analysis is based on SMEs located in the
Netherlands. The data relate to a sample of Dutch SMEs. Elaborating on existing
research into innovativeness of SMEs (e.g. Vermeulen et al., 2003), indicators for
innovation will be used that are specifically developed for SMEs.
The paper is organised as follows. Section 2 provides a discussion of relevant
literature and states the hypotheses. Section 3 elaborates on the main data used to test
the hypotheses. Next, the results of the regression analyses are described in section 4.
In section 5 the conclusions are presented.
2. LITERATURE ON INNOVATION AND INTERNATIONALISATION
2.1 Innovation in SMEs
Innovation involves the targeted renewal of products, services or working methods.
Entrepreneurs innovate in order to be able to better address the demands of customers,
to improve their competitiveness or to achieve better financial results for their
businesses. For this reason innovation is as important for small enterprises as it is to
large firms (Van de Graaff & De Jong, 2004). A growing body of literature states that
small firms are important contributors for realising innovations and for shaping a
country’s innovativeness (e.g. Acs, 1996; Rothwell, 1989; Audretsch & Thurik, 2000;
There are a number of differences between SMEs and larger enterprises with
respect to the way innovation takes place (Rothwell, 1991; Rothwell & Dodgson,
1994; Hadjimanolis, 2000). For example, SMEs traditionally have more limited
resources for conducting R&D. Also, innovation is often less formalised in smaller
enterprises. For many small firms, product innovations are not the result of a
structured process or formal strategy (see e.g. Acs & Audretsch, 1990). On the other
hand, SMEs are more flexible than larger firms, which enables them to respond more
quickly to changes in the market than larger firms. For this reason SMEs are often
successful in developing new product-market combinations and in adapting products
to the demands of niche markets or individual customers (Bernardt et al., 2001).
These differences between small and larger enterprises affect the ways in which
innovation is measured in SMEs. Many traditional indicators of innovation, such as
expenditures on R&D are not very useful in measuring innovation in SMEs (e.g.
Vermeulen et al., 2003). That is why specific indicators have been developed for
measuring the innovativeness of SMEs based on insights from literature (see e.g.
Vermeulen et al., 2003; Van de Graaff & De Jong, 2004). In this study the focus will
be on these specific indicators.
2.2 Internationalisation of SMEs
The international activity of SMEs is of increased importance in a globalised
economy. Traditionally, research on internationalisation of enterprises has strongly
focused on large multinational enterprises. Currently there is more attention on SME
internationalisation, since it is recognised that SMEs are increasingly involved in
international markets (European Commission, 2004). Also, it is expected that as a
result of increased globalisation and economic cooperation, SMEs will increasingly
have to deal with international competition, even if the firm itself is active only in the
domestic market (e.g. Reynolds, 1997; Hessels et al., 2005).
Studies on the internationalisation of SMEs initially mainly focused on export
activities (e.g. Bloodgood et al., 1996; McDougall & Oviatt, 1996). More recently
there has been more attention for imports and other inward modes of
internationalisation in the fields of internationalisation research (e.g. Korhonen, 1997;
1999; Liang & Parkhe, 1997). It is important to study imports, for example because
imports may contribute to the upgrading of products or services and may contribute to
improving a firm’s competitiveness.
Research has found that the majority of internationalised enterprises are involved
in outward (e.g. export, foreign direct investment) as well as inward (e.g. import)
international activities (Fletcher, 2001). The majority of Dutch SMEs that are
involved in exporting activities, for example, are also involved in importing activities
(Hessels et al., 2005). It is increasingly recognised that inward and outward modes of
internationalisation are interrelated processes (e.g. Korhonen, 1999; Van de Graaff &
Overweel, 2002). For example, specific foreign inputs may be needed in order to be
able to produce products that are competitive for selling on foreign markets. Also,
foreign purchasing, for example, may stimulate enterprises to start exporting
(Korhonen, 1999; Lefebvre & Lefebvre, 2002; Van de Graaff & Overweel, 2002).
The logic behind this idea is that the step to start exporting may be smaller when an
enterprise already has business contacts in foreign countries. A firm that is involved in
importing maintains a channel to a foreign market through which it gets information
about this market. Lefebvre & Lefebvre (2002) found that import activity is a strong
determinant of the probability for SMEs to export and of the export performance of
SMEs. However, it is also possible that the export activity of firms may result in
(more) imports. It is advisable not to study export and import behaviours of firms as
isolated activities. In the current study, inward (imports) as well as outward (exports)
modes of internationalisation are included in the analysis.
2.3 Innovativeness and internationalisation of SMEs
The link between innovation and trade has been gaining attention for a considerable
length of time in several studies. A number of previous studies (e.g. Gruber et al.,
1967; Baldwin, 1971; Lowinger, 1975; Stern & Maskus, 1981; Hughes, 1986; Vestal,
1989) focusing on the US, the UK and Japan have reported a significant positive
influence of R&D efforts on trade in general. Also, various firm-level studies have
been conducted in which technological orientation of firms is linked to their export
behaviour, focusing on innovative investments as well as innovative realisations or
practices. For example, a study by Hirsch & Bijaoui (1985) found that firms that
undertake R&D-activities are more likely to be exporters as compared to other firms
in the same industry. A study by Sterlacchini (1999), focusing on Italian
manufacturing firms, demonstrated an important impact of R&D activities on export
performance. Kleinknecht and Oostendorp (2002) showed that a firm’s R&D intensity
significantly influences the probability that a firm will be an exporter. Lefebvre &
Lefebvre (2002) found that R&D is an important determinant of the probability that
SMEs (defined as firms with up to 500 employees) will export, and of export
A number of empirical studies suggest that innovativeness of enterprises is likely
to affect the probability or propensity of enterprises to export, for example because
innovation may improve the international competitiveness of an enterprise (see e.g.
Wakelin, 1998; Sterlacchini, 1999; Roper & Love, 2001; Karagozoglu & Lindell,
1998). For example Karagozoglu and Lindell (1998) argue, in their study on small and
medium-sized technology based firms, that innovative enterprises are more likely to
export, because prospects in international markets are more promising as compared to
prospects in national markets. Also, the potential market for products of innovative
firms may be much wider than is the case for less innovative firms (Autio et al.,
2000). In addition, innovative firms often have to anticipate competitive responses,
which may encourage them to make international commitments (Franko, 1989).
Therefore, innovation may result in (more) international involvement.
In explaining the relation between innovation and export performance it may be
advised to distinguish between product and process innovation (Kleinknecht and
Oostendorp, 2002). Product innovations may make it possible for enterprises to target
new markets. Improved, modified or new products may give enterprises a (temporary)
competitive advantage in foreign markets (Van Dijken & Prince, 1997).
Furthermore, improved or renewed business processes make it possible for firms
to adapt or innovate products, to increase the speed of the production process and to
reduce costs (Van Dijken & Prince, 1997). The acquisition of new process technology
may motivate enterprises to review or revise their strategic direction and market focus
(Bell et al., 2004). This may stimulate enterprises to undertake international business
activities or to accelerate their internationalisation process.
Most previous studies focus only on the link between innovation and export.
Innovation, however, may not only stimulate enterprises to export but may also have
an effect on the propensity of enterprises to import goods or services from abroad. In
order to realise the necessary product and/or process innovation enterprises may need
to purchase foreign inputs. Indications can be found that a positive relationship exists
between innovativeness and a firm’s importing activities (e.g. Blalock & Veloso,
2005; Van de Graaff & Overweel, 2002). However, there is a lack of empirical studies
that address the link between innovation and import at the firm level.
Since a positive relation between innovation (innovative investments as well as
realisations/practices) and the propensity of enterprises to export and/or import is
expected the following hypotheses are formulated in the research design:
Hypothesis 1: Innovative investments of SMEs are positively related to
Hypothesis 1A: Innovative investments of SMEs are positively related to
export behaviour and export intensity.
Hypothesis 1B: Innovative investments of SMEs are positively related to
import behaviour and import intensity.
Hypothesis 2: Innovative realisations or practices of SMEs are positively
to international involvement.
Hypothesis 2A: Innovative realisations or practices of SMEs are positively
related to export behaviour and export intensity.
Hypothesis 2B: Innovative realisations or practices of SMEs are positively
related to import behaviour and import intensity
Also, in previous research evidence is found for a reversed influence or an impact of
export on innovation. For example, Hughes (1986) and Zhao and Li (1997) have
found evidence of a mutual or reciprocal relationship between R&D and exports.
Dahlman and Westphal (1982) have demonstrated, focusing on firms from Korea, that
export activity enables firms to gain improvements in product quality. Kleinknecht
and Oostendorp (2002) found that export intensity has a positive impact on the
probability of firms to engage in R&D and on a firm’s R&D intensity. The idea is that
exporting provides access to new markets, knowledge, product ideas and technologies
which may (further) enhance innovative capabilities (see e.g. Cavusgil & Zou, 1994).
Furthermore, foreign market expansion can increase the probability for a firm to pick
up foreign technology spillovers (Kleinknecht and Oostendorp, 2002). The same
arguments may also hold for imports. Therefore, the following hypotheses are
Hypothesis 3: The international involvement of SMEs is positively related to
Hypothesis 3A: Export behaviour and export intensity of SMEs is
positively related to innovative investments.
Hypothesis 3B: Import behaviour and import intensity of SMEs is
positively related to innovative investments.
The hypotheses are tested by using SME Policy Panel data. This panel is set up and
controlled by EIM Business and Policy Research in the Netherlands. The panel is
used for both cross-sectional and longitudinal research. Twice a year about 2000
Dutch business owners participate in this panel. The panel is stratified in two size-
classes and eight economic sectors of industry.1 For the current research detailed
information on innovativeness and international business activities was collected from
the business owners that participated in the SME Policy Panel in July 2004. The
sample consists of 1,846 Dutch SMEs (firms with up 100 occupied persons). The
hypotheses will be tested using regression analysis.
1 The size classes are: 0 through 9 employees, 10 through 99 employees. The sectors of industry are:
Manufacturing, Construction, Trade, Lodging, Transport, Business services, Financial services and
In the following section the measures that are used in the analysis are described.
Several measures of international involvement are used in this paper. The measures
were identified by asking the entrepreneurs whether they were currently undertaking
exporting and or importing activities. Enterprises were categorised into the following
(1) Export and/or import (2004). This variable takes the value 1 for
enterprises that are exporting and/or importing goods or services and 0 for
enterprises that are not involved in these modes of internationalisation.
(2) Export and import (2004). This variable is coded 1 for enterprises that
are involved in exporting as well as importing activities and otherwise
(3) Export (2004). This variable gets the value 1 for enterprises that are
involved in exporting activities, and the value 0 for all other enterprises.
(4) Import (2004). This variable takes the value 1 for enterprises that are
involved in importing activities, and 0 for all other enterprises.
Furthermore, two variables that relate to intensity of exports and imports were also
included in the analysis:
(1) Export intensity (2004). This variable indicates the share of exports in a
firm’s total sales.
(2) Import intensity (2004). This variable indicates the share of imports in a
firm’s total business costs.
Innovativeness was measured by several dichotomous (0/1) variables developed
specifically for measuring the innovativeness of SMEs.
The following measures for the realisation of innovations were used:
Recent product/service introductions: new to the firm (past 3 years). This
variable is a proxy for product innovation or the renewal of products and/or
services that a firm offers. The variable is coded 1 when the firm introduced at
least one product new to the firm during the last three years; otherwise coded
Recent changes or innovations in internal business processes (past 3
years). This variable is a proxy for process innovation or the renewal or
improvement of the working methods that are used. The variable is coded 1
when the firm has introduced changes or innovations in internal business
processes during the last three years, and coded 0 otherwise.
Recent changes or innovations in distribution systems (past 3 years). This
variable is a proxy for innovations or renewals in patterns of distribution. The
variable is coded 1 when the firm has introduced changes or innovations in
distribution systems during the last three years, and otherwise it is coded 0.
Recent changes or innovations developed by suppliers (past 3 years). This
variable is a proxy for innovations that are driven or proposed by suppliers.
The variable is coded 1 when the firm has introduced changes or innovations
that were developed by suppliers during the last three years, and coded 0
Also, the following measures for innovative practices were included in the
Strategic attention for innovation (2004). When the firm is continuously
seeking and providing support to innovative opportunities this variable is
coded 1, and coded 0 in all other cases.
Use of external networks (2004). This variable is coded 1 for enterprises that
maintain regular contacts with an external network of universities, suppliers
and/or knowledge institutes to extend its knowledge base, and is coded 0
Inter-firm cooperation (2004). When the firm formally cooperated with other
firms or institutes to initiate or develop any renewal activities (evidenced by a
formal agreement), this variable is coded 1; otherwise it is coded 0.
Finally, a number of measures were included that refer to a firm’s innovative
investments. One measure relates to a firm’s past expenditures:
Expenditures on innovation (2003). When the firm indicates having spent
money on innovation in 2003 this variable is coded 1; it is coded 0 when this
has not been the case.
The following measures refer to a firm’s future innovative investments:
Plans to invest in new products/services (next 12 months). When the firm
will certainly or probably invest in new products or services in the next 12
months this variable is coded 1, and in all other cases coded 0.
Plans to invest in renewals in internal business processes (next 12
months). When the firm will certainly or probably invest in renewals in
internal business processes in the next 12 months this variable is coded 1, and
coded 0 otherwise.
Plans to invest in new distribution systems (next 12 months). When the
firm will certainly or probably invest in new patterns of distribution in the next
12 months this variable is coded 1, and in all other cases coded 0.
The following control variables were used:
Sector of industry: The firms were assigned to one of the following eight
industries: (1) manufacturing, (2) construction, (3) trade, (4) lodging, (5)
transport, (6) financial services (7) business services, and (8) other services.
‘Other services’ was used as a reference category in the regression analysis.
Firm size: Two size classes were distinguished for the SMEs in our sample:
(1) 0-9 employed persons, (2) 10-99 employed persons.
Gender: This variable takes the value 0 for females and the value 1 for males.
4. EMPIRICAL ANALYSIS
4.1 Correlation analysis
The bivariate correlation coefficients between the variables for innovation and current
international involvement are presented in Table 1. A significant positive correlation
is found between all indicators for innovation and all categories of internationalised
enterprises. In order to shed more light on the relations between the measures for
innovation and international involvement regression analysis is carried out.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
1 International involvement (2004) 1.00
2 Export and import (2004) 0.58*** 1.00
3 Export (2004) 0.73*** 0.79*** 1.00
4 Import (2004) 0.85*** 0.68*** 0.48*** 1.00
5 Export intensity (2004) 0.49*** 0.56*** 0.67*** 0.34*** 1.00
6 Import intensity (2004) 0.52*** 0.52*** 0.38*** 0.62*** 0.33*** 1.00
7 Expenditures on innovation (2003) 0.17*** 0.18*** 0.19*** 0.16*** 0.13*** 0.11*** 1.00
Product/service introductions: new to firm
(past 3 years) 0.24*** 0.24*** 0.28*** 0.19*** 0.18*** 0.17*** 0.34*** 1.00
Changes or innovations in internal business
processes (past 3 years) 0.13*** 0.13*** 0.13*** 0.13*** 0.08*** 0.09*** 0.42*** 0.25*** 1.00
Changes/innovations in distribution
systems (past 3 years) 0.07*** 0.06** 0.08*** 0.05** 0.07*** 0.09*** 0.24*** 0.25*** 0.22*** 1.00
Changes/innovations developed by
suppliers (past 3 years) 0.07*** 0.09*** 0.06** 0.10*** 0.01 0.05** 0.22*** 0.13*** 0.21*** 0.13*** 1.00
12 Strategic attention for innovation 0.18*** 0.17*** 0.21*** 0.14*** 0.16*** 0.11*** 0.40*** 0.36*** 0.41*** 0.25*** 0.28*** 1.00
13 Use of external networks 0.09*** 0.08*** 0.10*** 0.07*** 0.07*** 0.03 0.25*** 0.21*** 0.21*** 0.15*** 0.18*** 0.28*** 1.00
14 Inter-firm cooperation 0.16*** 0.16*** 0.20*** 0.12*** 0.14*** 0.08*** 0.31*** 0.30*** 0.23*** 0.19*** 0.18*** 0.32*** 0.35*** 1.00
15 Invest in new product/services (next 12
months) 0.15*** 0.17*** 0.18*** 0.14*** 0.14*** 0.10*** 0.30*** 0.36*** 0.22*** 0.20*** 0.17*** 0.39*** 0.21*** 0.29*** 1.00
16 Invest in renewals in internal business
processes (next 12 months) 0.12*** 0.13*** 0.13*** 0.12*** 0.07*** 0.08*** 0.32*** 0.23*** 0.42*** 0.21*** 0.15*** 0.37*** 0.23*** 0.24*** 0.32*** 1.00
17 Invest in new distribution systems (next 12
months) 0.08*** 0.10*** 0.12*** 0.06** 0.11*** 0.09*** 0.18*** 0.17*** 0.15*** 0.34*** 0.09*** 0.20*** 0.16*** 0.16*** 0.23*** 0.22*** 1.00
Mean 0.33 0.14 0.21 0.26 6.34 5.53 0.59 0.39 0.69 0.18 0.36 0.63 0.51 0.40 0.45 0.58 0.15
Standard Deviation 0.47 0.35 0.41 0.44 18.60 15.31 0.49 0.49 0.46 0.38 0.48 0.48 0.50 0.49 0.50 0.49 0.35
Observations 1846 1846 1824 1822 1815 1804 1843 1844 1843 1842 1835 1843 1846 1844 1775 1813 1816
Standardised regression coefficients; ***: p<0.01; **: p<0.05;
4.2 Regression analysis: impact of innovative investments on international
First, it is investigated whether innovative investments have an impact on international
involvement. ‘Expenditures on innovation in 2003’ is taken as a proxy for innovative
investments. Table 2 shows the results of the logistic regression analysis when
expenditures on innovation in 2003 are used as an explanatory variable. Various
categories for international involvement are taken as the dependent variable. Considering
the binary nature of the dependent variables, logistic regression analysis is used. For each
of the dependent variables, both the control variables and the predictor variable are
included. It is found that larger enterprises are more likely to undertake international
trading activities than smaller ones (p =
0.01). Also, it can be seen that males show higher
international involvement than females (p =
0.01). Furthermore, manufacturing and trade
are the industries that are most likely to engage in international business activities. The
predictor variable ‘expenditures on innovation in 2003’ has a positive impact on the
categories ‘export and/or import’ and on the combination of export and import. With the
purpose of gaining more insight into differences between the impact of innovation on
export and import activities, export and import are also taken separately as dependent
variables. It can be seen that manufacturing and trans