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AREPORTFROMTHECENTREFORBUSINESSRESEARCHFORTHECOUNCILFORSCIENCEANDTECHNOLOGYBarrierstoInnovationandGrowthinHightechnologySMEs:theRoleofAbsorptiveCapacityAndyCosh,AnnaBullock,IsobelMilner26thFebruary2007ExecutiveSummaryIntroductionThisreportisconcernedwithidentifyingthosefactorswhichconstrainsmallandmedium-sizedenterprises(SMEs)fromattainingtheirfullgrowthandinnovativepotentialinhightechnologyindustries1.Thereportfocusesinparticularonthosecharacteristicswhichreflectafirm’sabilitytorecogniseknowledgeneeds,obtainaccesstosuchrelevantknowledgeandabsorbandutiliseiteffectively.Wetakethesecharacteristicsasmeasuresofafirm’s“absorptivecapacity”,orabilitytoexploreaccessandexploittheknowledgebaserelevanttoitsinnovativeandcompetitivestrategy.Wegroupthesecharacteristicsunderthreeheadings:management,collaborationactivities,sourcesofknowledge.WealsoexaminetheirR&Dactivity.Inadditiontoabsorptivecapacitycharacteristicswealsoattempttodistinguishsuccessfulfromunsuccessfulfirmsinthesehightechnologyindustriesintermsoftheirgrowthambition,start-upandothermarketandcompetitivecharacteristics.Wedefinesuccessintermsofeithergrowthorinnovativeperformance.Wealsoconsidersuccessintermsofcombinedgrowthandinnovativeperformance.Ouranalysisisbaseduponexistingsurvey-baseddatabasesoftheSMEsectorintheUKheldbytheCentreforBusinessResearch.Ouranalysisisprimarilystatistical.Wedo,however,useoursurvey-basedsamplestodrawasub-sampleofcompanieswhichcouldserveasfuturecasestudies.Thesecompaniesareselectedtobeexemplarcompaniesinthesensethattheyrepresentparticularcombinationsofgrowthandinnovationwhichcharacteriseourmainsamplefindings.Onthebasisofarangeofpublicly1Ourhightechnologysectorsaredrawnbothfrommanufacturingandfrombusinessservices.Theyaresectorsthatarecharacterisedbyaboveaverageresearchanddevelopmentexpendituretosalesratiosand/oraboveaveragescientificandskillintensityintheirlabourforces.AfulllistofthesectorsisincludedinFootnote2inthefullreport.2availableinformationaboutthesecompaniesweusethemtoillustratesomeofthefindingsemergingfromourstatisticalanalysis.Beforeturningtothefindings,somecaveatsareinorder.First,asexplainedabove,wearelookingonlyathightechnologysectorsandsotheaverageinnovationbenchmarkishigherthanifthewholesmallfirmsectorwereincluded.Second,ouranalysisfocusesonassociationratherthancausation.Thelatterwouldrequireafullerin-depthanalysisthanispossiblewithintheconfinesofthisshortproject.Third,theanalysishasbeencarriedoutonavariable-by-variablebasisandthismayfailtotakeaccountofsignificantassociationsbetweenthem.However,whenappropriatewetakethisintoaccountinourdiscussionbelowandintherecommendationsforfurtherwork.Finally,itisimportanttonotethatthisreportisbasedontheviewsofthefirmsthemselvesasrepresentedintheirresponsestothebiennialSMEsurveycarriedoutbytheCentreforBusinessResearch.Inrelationtomeasuresofinnovativeperformancethismeansthatwearedealingwithlargelysubjectivemeasuresofthefirms’innovativeactivity.Arangeofinnovationmeasuresbasedonthisapproachareused.Theserelatetowhetherornotaninnovationwasintroducedbythefirminthepastthreeyearswasnewtoitselfornewtotheindustry.Innovationsnewtotheindustryaretermednovelinnovations.Innovationsnewtothefirm,butnottotheindustryrepresentdiffusioninnovations.Wealsocanmeasuretheintensityofinnovationascapturedbythepercentageofsaleswhichthefirmreportsisduetosignificantlyneworimprovedproductsintroducedinthelastthreeyears.Whilstallthesemeasuresare“subjective”,theyproducesectoralinnovationpatternsconsistentwiththeuseofmore“objective”measuresandareparticularlyreliableforwithincountrycomparisons.TheyarewidelyusedbothintheEuropeanCommunityHarmonisedInnovationsurveys(CIS)intheUKandEuropeaswellasintheCBRsurveysoftheSMEssector.ThefindingsInthissectionwepresentinturnthekeycharacteristicsofthefirmsinourstudy.Usingtableswhichsummarisethestatisticalresultspresentedinsections1-3ofthemainreport.Wegroupourdiscussionofthecharacteristicsofthesamplefirmsintermsofgrowthandinnovativeperformance,theirambitions,theirmanagementcharacteristics,theextentandnatureoftheircollaborativeactivitiesandtheirrangeanduseofknowledgesources.Thesesectionscoverourmainabsorptivecapacitycharacteristics.Thisisfollowedbysectionsonthedemandandcompetitioncharacteristicsofourfirmsandthefinancialandeconomicfactorsaffectingtheirinnovativeandgrowthactivity.3PerformanceFastgrowthfirmsandthosecarryingoutnovelinnovationsaresomewhatlargerbutthedifferencesinnotsignificantbymostsizemeasures–sizeisnotabarriertogrowthandinnovation(Table1).Youngerfirmsaremorelikelytobeinnovativeandmuchmorelikelytobegrowingfast.Aswouldbeexpected,novelinnovatorshavelargerR&Dinputsandahigherproportionoftheirsalesgoingtoneworimprovedproducts(Table2).Theyarealsomoreexportintensive.Fastgrowthfirmsarenotfoundtobemoreinnovativeinthesenseoftheincidenceofinnovation,buttheyhaveahigherproportionofsalesduetoneworimprovedproductsthanotherfirms.Novelinnovatorsarenotfoundtobefastergrowingthanotherfirms.Inthewiderpopulationofsmallfirmswetendtofindanassociationbetweeninnovationandgrowth.Wehavenotfoundthisherewhen