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SMEs' ability to generate and introduce product innovation into foreign markets

An EU-funded project investigated the determinants of innovation and export decisions at firm level and the effects on macroeconomic performance of countries' global investment at sector level.
SMEs' ability to generate and introduce product innovation into foreign markets
Researchers on the project INTINN (Microeconomic and macroeconomic implications of firms' internationalization and innovation strategies: The role of demand and informational barriers) studied the importance of a firm's size in the context of innovation and internationalisation activities. They concluded that small and medium-sized exporting firms are more likely to introduce product innovations compared to non-exporting ones. The typical supply side factors aren't conclusive to explain firms' behaviour; however, the type of goods they produce can be used as an explanation.

The first part of the study examined microeconomic factors in firms' innovation and internationalisation activities. It focused on small and medium-sized enterprises' (SMEs) export performance and the role of taste diversity, using country-level ethnic diversity, as a proxy, in export destination markets. Higher taste diversity implies that small firms may have the ability to display more flexibility in customising products, when interacting with diverse consumers, positively affecting SMEs. Results also suggest a potential link between migration flows and firm size distribution.

Researchers also investigated the upstream-downstream relationships in production. Increased production of intermediate goods leads to a complex buyer-supplier network of manufacturing firms. The inter-firm relations could also explain the SMEs' innovation and internationalisation activities. They could represent a source for mutual learning but also an easy way to introduce product innovation into foreign markets. This is also more relevant for SMEs that cannot bear the costs of innovation on their own.

The team also investigated the role of foreign buyers in the reduction of the cost of product innovation and internationalisation of small and medium-sized firms. The results were also examined from a policymaker's point of view. They suggest that policies facilitating the international match between downstream and upstream firms located in different countries should be adopted. Finally, results demonstrate that a firm's ability to produce customised goods is as important as its cost competitiveness.

INTINN explored the ways which the sectorial composition of production and trade can affect a country's performance at the aggregate level. Results show that the international fragmentation of production is a relevant predictor of EU countries' current accounts and that it can be a channel of technology spillovers, possibly affecting world income distribution.

Researchers compiled various data sources and found that the income level of a country and the income distribution is related to the sectorial composition between tradable and non-tradable goods.

This project’s research was significant and provided added value through its focus on SMEs rather than bigger companies, in the microeconomic analysis of firms’ innovation and internationalisation process. Through its results, the project also suggested a topic for further study, on the role that IFP may play, as a potential channel affecting the world income distribution.

Related information

Keywords

SMEs, product innovation, foreign markets, macroeconomic, INTINN, internationalisation
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