Technological University Dublin ARROW@TU Dublin
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2020-11
Assessing the Financial Mechanisms for Innovation Support in the Republic of Uzbekistan: A Comparative Analysis of Enablers and Constraints to Innovation Across Two Industries
Ravshan Rakhmonovich Khaydarov Technological University Dublin
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Recommended Citation Khaydarov, R. (2020) Assessing the Financial Mechanisms for Innovation Support in the Republic of Uzbekistan: A Comparative Analysis of Enablers and Constraints to Innovation Across Two Industries, Doctoral Thesis, Technological University Dublin. DOI:10.21427/DYNY-2374
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Assessing the Financial Mechanisms for Innovation Support in the Republic of Uzbekistan: A Comparative Analysis of Enablers and Constraints to Innovation Across Two Industries
Ravshan Rakhmonovich Khaydarov, BSc. M.Sc.
October 2020
Submitted in fulfilment of the requirements for the degree of Doctor of Philosophy in the College of Business, Technological University Dublin.
Supervisors:
Professor Joseph Coughlan and Dr. Claire Mc Bride
Declaration
I certify that this thesis which I now submit for examination for the award of Doctor of
Philosophy, is entirely my own work and has not been taken from the work of others save and to the extent that such work has been cited and acknowledged within the text of my work.
This thesis was prepared according to the regulations for postgraduate study by research of the Technological University Dublin and has not been submitted in whole or in part for an award in any other Institute or University.
The work reported on in this thesis conforms to the principles and requirements of the
University's guidelines for ethics in research.
The University has permission to keep, lend or copy this thesis in whole or in part, on condition that any such use of the material of the thesis is duly acknowledged.
Signature: ______Date: 28/10/2020 f
i Acknowledgements
First praise is to Allah, the Almighty, for giving me opportunity, determination and strength to do my research. Growing up in a condition where I have started to work at age ten to help parents, My ambition from childhood was to study and become a well- educated man. Allah Ta’ala’s continuous grace and mercy was with me throughout my life and ever more during the tenure of my research which allows me to meet the best humankind and expert advisors, outreach my goals in the way to be a well-educated man. Praise to God, Lord of the Universe, Most Compassionate and Merciful, Master of the Day of Judgment, You alone we worship, and you alone we ask for help, Guide us to the right path.
All achievements are achieved through Divine Grace And without His favour nothing is accomplished. Maulana Jalaluddin Rumi (1207 - 1273)
I would like to express my sincere gratitude to my supervisors Professor Joseph Coughlan and Dr Claire Mc Bride, for their continual support and encouragement throughout the journey to completing this thesis. I feel grateful for having such great advisors, and without their invaluable analysis and guidance, this project would never have been fulfilled. I truly enjoyed working in a research environment that stimulates original thinking and initiative, which they offered. This dissertation is a testament to your encouragement, support, and compassion. Thanks, Joe and Claire.
Special thanks go to the former Dean & Director of College of Business Mr Paul O'Sullivan and the current Dean Dr Katrina Lawlor for having faith in my ability and their sincere support during this research. I would also like to thank Mr Paul O'Reilly, the former Head of Research, for his assistance and help with the PhD grant proposal for a Fiosraigh Scholarship, which helped in obtaining the four-year PhD research grant.
I also wish to thank you to the former Head of the School of Accounting and Finance Dr Margaret Fitzsimons and the current Head Dr Eoin Langan for their support over the past three years. Special thanks also go to Dr Lucía Morales and Dr Marek Rebow, thanks to them, the first time I left my home country and come to magic Irish land as an Erasmus Student.
I also owe big thanks to Vice-Rector Professor Dilbar Aslanova of Samarkand Institute of Economics and Service (SIES) [where I got my MSc and BSc] for her consistent support during my study in SIES and PhD research in TU Dublin. Thanks to her and official letters provided by SIES, I have met with Uzbek officials and collected data across two targeted sectors of Uzbekistan for this research. To those who offered their time over the course of this research, I express my appreciation and esteem. This extends to those who participated in interviews, responded to surveys and offered their insights in the research's exploratory phase, whose names I cannot mention for ethical reasons. I thank you all for making this project a success.
My gratitude also extends to my fellow PhD research colleagues for the many office chats that enabled the cross pollination of ideas. They have walked this journey with me, sharing both joy and adversity in room 4033. To all of you, I offer my thanks for your friendship and the beautiful memories.
ii I was also privileged to become part of the unique Irish Chess Union (ICU) society by playing chess for Dublin, Phibsboro, Lucan and Armenian Chess Clubs during my PhD journey in Ireland. My gratitude to ICU for giving me a great opportunity to integrate into Irish society, making great friends and valued advisors across various industries. Wholehearted thanks as well to all my friends and colleagues in Uzbekistan.
At last, but never the least, to my family for their unconditional love and genuine support. My kind Mum, and hard-working Dad, you gave me the strength from your hearts to soar to great heights. You instilled in me a passion for adventure, learning and the courage to grasp opportunity with both hands. I love you both more than I could ever explain, and you mean more to me than anything in this world. To my sister and brothers (Dilafro’z, So’hrob and Jakhongir), I am deeply in your debt for providing me with companionship and support throughout my life. Without you, I would be much lonelier in this world. You have been the inspiration that got me over the finish line.
To my beautiful and precious family. My dear sweet daughter Ruhshona and my graceful, exquisite wife, Parvina. I love you to the moon and back. Our family gave me the foundation of a loving home. You have sacrificed more than I can ever repay, and knowing that every day you are my shining stars, gives me strength. In your light, I sought refuge in the most challenging times of this journey. I offer you my profound gratitude and hope this accomplishment for our family makes you proud. To the memory of my grandfather to my advisor and chess companion, I forever miss you, and I believe you are in a better place.
It was long enough, but it was a great and unique journey. I want to thank all who believed in me and were with me until the end.
iii Table of Contents
Declaration ...... i Acknowledgements ...... ii Table of Contents ...... iv Abstract ...... ix List of Abbreviations ...... x List of Figures ...... xii List of Tables ...... xiv List of Appendices ...... xvii
Chapter 1: Introduction ...... 3 1.1 Introduction ...... 3 1.2 Research Background ...... 4 1.3 Proposed Model ...... 11 1.4 Methodology ...... 10 1.5 Significance of Research ...... 13 1.6 Limitations of the Research ...... 16 1.7 Structure of Dissertation ...... 17
Chapter 2: Innovation and Innovation Systems ...... 22 2.1 Introduction ...... 22 2.2 The Concept of Innovation ...... 23 Defining Innovation ...... 24 Dynamic Evolutionary Innovation ...... 25 Discontinuous Innovation ...... 26 2.3 Theoretical Foundations ...... 29 2.4 Innovation Systems ...... 30 2.5 National Systems of Innovation ...... 36 National Innovation System (NIS) ...... 38 National Systems of Entrepreneurship (NSE) ...... 41 Regional Innovation Systems (RIS) ...... 43 Sectoral Innovation System (SIS) ...... 47 Technological Innovation Systems (TIS) ...... 51 2.6 The Role of Firms in Innovation Systems ...... 53 2.7 Factors Affecting Firm Innovation Performance ...... 55 Absorptive Capacity (ACAP) ...... 56 International Growth Orientation (IGO) ...... 57 Investment in In-House R&D ...... 59 Barriers to Innovation ...... 61
iv 2.8 Conclusion ...... 62
Chapter 3: Financing Innovation ...... 66 3.1 Introduction ...... 66 3.2 Finance and Innovation ...... 67 3.3 Financial Constraint ...... 69 3.4 Theoretical Foundations ...... 72 3.5 Types of Finance for Support Firm-Level Innovation ...... 76 3.6 Internal Finance ...... 78 3.7 External Market Sources ...... 80 Equity Finance ...... 80 Debt Finance ...... 81 3.8 Role of Government ...... 86 Direct Public Funding ...... 92 Indirect Public Funding ...... 95 State Programs for Innovation Support ...... 98 3.9 Conclusion ...... 101
Chapter 4: The Republic of Uzbekistan Country Profile ...... 106 4.1 Introduction ...... 106 4.2 Geographic Structure of Uzbekistan ...... 106 4.3 Geographic Advantages ...... 107 4.4 Geological Advantages ...... 108 4.5 Politics and Economy Uzbekistan ...... 109 4.6 Macroeconomic Environment ...... 110 4.7 Intellectual Potential and Unemployment Rate of Uzbekistan ...... 111 4.8 Foreign Investment and Privatisation Policy of Uzbekistan ...... 112 FDI policy ...... 114 Privatisation Policy ...... 115 Progressive Legislation ...... 117 4.9 Financial Institutions of Uzbekistan ...... 119 Banking System ...... 119 Specialised Financial Institutions ...... 120 4.10 National Innovation System of Uzbekistan ...... 122 SME Sources of Finance ...... 123 Innovative Technopark in Uzbekistan ...... 126 4.11 National Industrial Policy of Uzbekistan ...... 127 Fiscal Support Across Sectors ...... 135 Taxation ...... 137 Localisation Programs ...... 139 v Free Industrial Economic Zones ...... 140 4.12 Focus on Particular Industries ...... 142 Uzbekistan Machine-Building Industry (auto industry included) ...... 142 Uzbekistan Chemical Industry Sector...... 144 4.13 Conclusion ...... 147
Chapter 5: Research Methodology Phase 1: An Exploratory Approach ...... 151 5.1 Introduction ...... 151 5.2 Research Question ...... 152 5.3 Research Objectives ...... 152 Objective 1 ...... 152 Objective 2 ...... 153 Objective 3 ...... 154 5.4 Research Design ...... 158 Research Philosophy ...... 159 Justification for Using a Positivist Research Philosophy ...... 159 Research Approach ...... 160 Impact of Positivist Research Philosophy on Research Design ...... 161 5.5 Phase 1: Qualitative Interviews ...... 162 Sampling Strategy ...... 163 Choice of Interview Type ...... 166 Rationale for Interview Questions ...... 168 Approaching and Conducting the Semi-Structured Interviews ...... 169 Analysing the Data ...... 171 5.6 Key Findings ...... 171 Phase One Informing Phase Two ...... 177 5.7 Conclusion ...... 179
Chapter 6: Research Methodology Phase 2: Quantitative Survey ...... 183 6.1 Introduction ...... 183 6.2 Justification for Survey Strategy ...... 183 6.3 Hypotheses Development ...... 187 6.4 Survey Instrument Design ...... 205 Demographic Information ...... 205 Community Innovation Survey ...... 206 Financing Innovation Survey ...... 207 Access to Government Sources ...... 208 Access to External Market Sources ...... 209 Access to Internal Sources ...... 210 Mediator Variables ...... 211 vi Performance ...... 214 Pilot Test of Survey Instrument ...... 217 6.5 Data Collection ...... 219 Mail Survey ...... 221 6.6 Quantitative Data Analysis ...... 222 6.7 Questionnaire Findings ...... 223 6.8 Respondent Demographics ...... 224 Respondent Job Profile ...... 224 Organisational Characteristics ...... 226 Ownership Types ...... 233 6.9 Community Innovation Survey ...... 237 Chemical Industry ...... 238 Machine-Building Industry ...... 246 6.10 Key Findings ...... 253 6.11 Conclusion ...... 256
Chapter 7: Structural Equation Modelling ...... 260 7.1 Introduction ...... 260 7.2 Structural Equation Modelling (SEM) ...... 261 7.3 SEM steps ...... 263 Model Specification ...... 264 Model Identification ...... 265 Model Estimation ...... 266 Model Testing ...... 267 Model Modification ...... 269 7.4 Mplus ...... 269 7.5 Data Screening...... 270 Missing Data Analysis ...... 270 Outlier Analysis ...... 272 Reverse Coding ...... 272 Latent and Observed Variables ...... 273 7.6 Factor Analysis: EFA & CFA ...... 273 7.7 Reliability and Validity ...... 274 7.8 Measurement Concepts ...... 277 7.9 Conclusion ...... 278
Chapter 8: CFA and Structural Equation Modelling ...... 281 8.1 Introduction ...... 281 8.2 Descriptive Statistics ...... 281 8.3 Measure of Access to Finance ...... 293 vii Measure of Access to Direct Public Funding ...... 293 Measure of Access to Indirect Public Funding ...... 294 Measure of Access to Debt Finance ...... 295 Measure of Access to Equity Finance...... 296 Measure of Access to Internal Finance ...... 297 Reliability of the Access of Finance Components ...... 298 8.4 Measures of Mediators ...... 299 Measure of Absorptive Capacity (ACAP) ...... 299 Measure of International Growth Orientation (IGO) ...... 300 Measure of Investment in In-House R&D (IRD) ...... 302 Measure of Barriers to Innovation (BI) ...... 303 Reliability of the Mediator Factors ...... 305 8.5 Measures of Performance ...... 305 Measure of Incremental Innovation Performance ...... 305 Measure of Radical Innovation Performance ...... 307 Measure of Financial Performance ...... 308 Reliability of the Performance ...... 308 8.6 Financing Innovation (FI) Framework Analysis ...... 309 8.7 Discussion ...... 312 8.8 Summary of Overall Findings ...... 332 8.9 Conclusion ...... 339
Chapter 9: Conclusions ...... 342 9.1 Introduction ...... 342 9.2 Contributions to Theory ...... 342 9.3 Limitations of the Research ...... 354 9.4 Recommendations for Future Research...... 355 9.5 Managerial and Policy Implications ...... 357 9.6 Conclusion of the Thesis ...... 365 References ...... 370 Appendices ...... 429
viii Abstract
Innovation is fundamental not only to individual firms but ultimately to a country's economic growth and stability. Innovation Systems assert that innovation depends not only on how individual firms and external actors operate, but also on the dynamics of their interaction as part of the system. While funding for innovation is a central theme of Innovation Systems models, there is a gap in the literature on this topic, particularly in regard to the role played by government in transition economies (Bruton, Su, & Filatotchev, 2018). The majority of the research has focused on micro/meso-level support, but there is a significant gap at the macro level. This thesis bridges this gap by theoretically conceptualising and empirically testing the effect of macro-level financial support mechanisms on both innovation and performance constructs within a Sectoral Innovation System (SIS), spanning firms’ internal capability and their external context. Using interview and survey data from Uzbekistan’s machine building and chemical industries, this thesis contends that a firm’s internal capability consisting of absorptive capacity, international growth orientation, investment in-house R&D, and barriers in the market where a firm operates, affects this relationship. Specialists from academia, governmental organisations and managers from both industries participated in interviews. A survey of both sectors yielded 351 complete responses. This data was analysed through structural equation modelling using Mplus. The research findings validate the theoretical model put forward and indicate that the existence of macro-level financial support mechanisms impact innovation and performance constructs through mediated factors. Furthermore, control variables such as age, size, and government ownership have a significantly positive correlation with access to finance, absorptive capacity, international growth orientation, and firm performance. Although industry controls show a significantly negative link to incremental innovation and financial performance, there is a significantly positive link to radical innovation performance. This justifies the existence of a differentiated SIS approach for innovation support in Uzbekistan. Interestingly this research found that international growth orientation is a more significant factor than absorptive capacity and in-house R&D respectively, in the relationship between access to finance and innovation performance. A key contribution of this research is that it advances the understanding of factors that contribute to firm level innovation success. It also exposes best practice for firms and government policymakers in order to maximise performance outcomes. The core argument of this thesis is that access to finance and the individual components of firms’ internal capabilities need to be synchronized to maximize value creation and innovative performance. In this process, the role of government is crucial in designing effective financial and legal infrastructures. Absorptive capacity, international growth orientation, and investment in-house R&D are key micro-level components. This multipronged approach, although challenging to implement, would help to drive more favourable outcomes. Managers are offered a framework to analyse the market and internal capabilities which may moderate the supply of finance and work towards aligning them to achieve superior performance outcomes. ix List of Abbreviations
ACAP Absorptive Capacity ADB Asian Development Bank BI Barriers to Innovation CBPL Creative Business Promotion Law CFA Confirmatory factor analysis CFI Comparative fit index CI Confidence interval CIS Commonwealth of Independent States CIS Community Innovation Survey CR Composite reliability CSO Central Statistical Office df Degrees of freedom EAEU Eurasian Economic Union EBRD European Bank for Reconstruction and Development EFA Exploratory factor analysis EI Enterprise Ireland EIB European Investment Bank EIF European Investment Fund EU European Union FDI Foreign Direct Investment FIZ Free Industrial Economic Zone FRD Fund for Reconstruction and Development GDP Gross Domestic Product GFI Goodness of fit index GOVCs Government-owned VC funds HCD Human Capital Development HE High Education IDA Industrial Development Authority IDB Islamic Development Bank IGO International Growth Orientation IMF International Monetary Fund IRD In-house R&D
x IT Information technology IVC Independent Venture Capital JSC Joint-stock company MFN Most-Favoured-Nation MNEs Multinational Enterprises NIP National Industrial Policy NIS National Innovation Systems NNFI Non-Normed fit index NSE National Systems of Entrepreneurship NSF National Science Foundation NSI National Systems for Innovation RBV Resource-based View R&D Research and development RIS Regional Innovation Systems RMSEA Root mean square error of approximation ROA Return on Assets ROI Return on Investment POT Pecking Order Theory SAFE Survey on the Access to Finance of Enterprises SBIR Small Business Innovation Research SEM Structural equation modelling SIES Samarkand Institute of Economics and Services SIS Sectoral Innovation System SIZ Special Economic Zone SMEs Small and Medium-sized Enterprises SRMR Standardized root mean square residual SSCI Social Science Citation Index TIS Technological Innovation Systems TLI Tucker and Lewis index TUD Technological University Dublin VC Venture Capital WBG World Bank Group WTO World Trade Organisation
xi List of Figures
Figure 1.1: Proposed Macro-Level Financing Innovation Model ...... 13 Figure 1.2: Thesis Structure ...... 19 Figure 2.1: National Systems of Innovation (NSI) ...... 37 Figure 3.1: Typical Stages Of Financing A Company ...... 75 Figure 3.2: Types and Sources of Finance for Innovation ...... 85 Figure 4.1: Map of Uzbekistan...... 107 Figure 4.2: GDP growth rate ...... 110 Figure 4.3: Foreign Investment Growth in Uzbekistan (in million USD) ...... 113 Figure 4.4: Number of enterprises and organisations producing innovative product and services (2010-2016) ...... 123 Figure 4.5: Sources of finance for innovation ...... 125 Figure 4.6: Export Growth in Billions USD (1991-2015) ...... 129 Figure 4.7: General industry overview...... 131 Figure 4.8: Uzbekistan National Industrial Policy in 1991 – 2012 ...... 133 Figure 4.9: Uzbekistan National Industry Policy in 2012 – 2030 ...... 134 Figure 4.10: Steady decrease of tax burden (% GDP) ...... 137 Figure 4.11: Main types of Uzbek chemical industry products ...... 145 Figure 4.12: Structure of manufactured products ...... 146 Figure 5.1: Financing Innovation Conceptual Framework ...... 162 Figure 5.2: The research process for the study ...... 179 Figure 6.1: Model and Proposed Hypotheses ...... 186 Figure 6.2: Respondent Firm Age and Firm Size ...... 228 Figure 6.3: Innovation activity rates of chemical industry enterprises, 2013-2015 ...... 238 Figure 6.4: Technological innovation activity rates for chemical industry enterprises, 2013-2015 ...... 239 Figure 6.5: New Product Development Rates - across firm ownership types in chemical industry 2013-2015 ...... 240 Figure 6.6: Process innovation categories rates across respondent firm ownership types in chemical industry 2013-2015 (% scale) ...... 241 Figure 6.7: Technologically innovative firms’ co-cooperation activity rates with other enterprises and institutions in the Chemical Industry 2013-2015 ...... 242 Figure 6.8: Organisational innovation rates by size, 2013-2015 ...... 244 Figure 6.9: Detailed marketing innovation activity rates by size, 2013-2015 ...... 245
xii Figure 6.10: Innovation activity rates of machine-building industry enterprises, 2013- 2015 ...... 246 Figure 6.11: Technological innovation activity rates for machine-building industry enterprises, 2013-2015 ...... 247 Figure 6.12: New Product Development Rates - across firm ownership types -Machine- building industry 2013-2015 ...... 248 Figure 6.13: Process innovation categories rates across respondent firms ownership types in machine-building industry 2013-2015 ...... 249 Figure 6.14: Technologically innovative firms’ co-cooperation activity rates with other enterprises and institutions in the machine-building industry 2013-2015 ...... 250 Figure 6.15: Organisational innovation rates by size class, 2013-2015 ...... 252 Figure 6.16: Detailed marketing innovation activity rates by size class, 2013-2015 ... 253 Figure 7.1: SEM steps ...... 264 Figure 8.1: Structural Model Results Without Controls ...... 310 Figure 8.2: Structural Model Results With Controls ...... 311
xiii List of Tables
Table 2.1: Some characteristic of three main types of RIS ...... 47 Table 4.1: State-owned Enterprises and Facilities and their transfer to private ownership from 2015 ...... 116 Table 4.2: List of Legislation supporting Foreign Investment in Uzbekistan ...... 118 Table 4.3: Uzbekistan Banking System ...... 120 Table 4.4: International Financial Institutions Credit Lines to SME ...... 121 Table 4.5: Costs of technological, marketing and organisational innovations by sources of financing, billion UZS (2010-2016) ...... 124 Table 4.6: Legislative basis of the NIS ...... 126 Table 4.7: The sources of finance NIS, Uzbekistan ...... 135 Table 4.8: The Tax Code of the Republic of Uzbekistan aimed at stimulating innovation activities, information on privileges ...... 138 Table 5.1: Profile of Interview Participants ...... 166 Table 6.1: List of Hypotheses ...... 203 Table 6.2: Items for the Construct Direct Public Funding (DPF) ...... 208 Table 6.3: Items for the Construct Indirect Public Funding (INDPF) ...... 209 Table 6.4: Items for the Construct Access to Debt Finance (ACDF) ...... 210 Table 6.5: Items for the Construct Access to Equity Finance (ACEF) ...... 210 Table 6.6: Items for the Construct Access to Internal Finance (ACIF) ...... 211 Table 6.7: Items for the Construct Absorptive Capacity (ACAP) ...... 212 Table 6.8: Items for the Construct International Growth Orientation (IGO) ...... 212 Table 6.9: Items for the Construct Investment in in-house R&D (IRD) ...... 213 Table 6.10: Items for the Constructs Barriers to Innovation (BI) ...... 214 Table 6.11: Items for the Construct Incremental Innovation Performance (INCIP) ..... 215 Table 6.12: Items for the Construct Radical Innovation Performance (RADIP) ...... 216 Table 6.13: Items for the Construct Financial Performance (FPR) ...... 217 Table 6.14: Summary of responses across two sectors ...... 224 Table 6.15: Respondent Demographics ...... 226 Table 6.16: Firm Employee-based Classification ...... 227 Table 6.17: Respondent Firm Profile ...... 230 Table 6.18: CBNE ...... 232 Table 6.19: Ownership of the three categories ...... 234 Table 6.20: Ownership types of 351 respondent firms across two industries ...... 235
xiv Table 6.21: Formation of company’s ownership in four Age categories ...... 237 Table 6.22: CIS: Key Findings and Comparative Analysis of two Sectors ...... 255 Table 7.1: List of Latent variables ...... 262 Table 8.1: Access to Direct Public Funding...... 282 Table 8.2: Access to Indirect Public Funding ...... 283 Table 8.3: Access to Debt Finance ...... 284 Table 8.4: Access to Equity Finance ...... 284 Table 8.5: Access to Internal Finance ...... 285 Table 8.6: Absorptive capacity ...... 286 Table 8.7: International growth orientation ...... 287 Table 8.8: Investment in in-house R&D ...... 287 Table 8.9: Barriers to Innovation ...... 289 Table 8.10: Incremental innovation performance ...... 291 Table 8.11: Radical innovation performance ...... 292 Table 8.12: Financial Performance ...... 292 Table 8.13: Access to Direct Public Funding Measure Result...... 293 Table 8.14: Access to Indirect Public Funding Measure Result ...... 294 Table 8.15: Access to Indirect Public Funding Measure Result ...... 295 Table 8.16: Access to Debt Finance Measure Results ...... 295 Table 8.17: Access to Debt Finance Measure Results ...... 296 Table 8.18: Access to Equity Finance Measure Results ...... 296 Table 8.19: Access to Internal Sources Measure Results ...... 297 Table 8.20: Access to Internal Sources Measure Results ...... 298 Table 8.21: Reliability Results for Access to Finance components ...... 298 Table 8.22: Absorptive Capacity Measure Result ...... 300 Table 8.23: International Growth Orientation Measure Result ...... 301 Table 8.24: International Growth Orientation Measure Result ...... 301 Table 8.25: Investment in In-House R&D Measure Result ...... 302 Table 8.26: Investment in In-House R&D Measure Result ...... 302 Table 8.27: Barriers to Innovation Measure results ...... 303 Table 8.28: Barriers to Innovation Measure result...... 304 Table 8.29: Reliability Results for Mediator factors’ components ...... 305 Table 8.30: Incremental Innovation Performance Measures Result ...... 306 Table 8.31: Incremental Innovation Performance Measures Result ...... 306 Table 8.32: Radical Innovation Performance Measures Result ...... 307
xv Table 8.33: Radical Innovation Performance Measures Result ...... 307 Table 8.34: Financial Performance Measures Result ...... 308 Table 8.35: Reliability Results for Performance ...... 309 Table 8.36: Result of Hypothesis Testing (with Controls) ...... 331
xvi List of Appendices
Appendix I Defining Innovation ...... 429 Appendix II Exploratory Interview Questions ...... 432 Appendix III Letter from SIES to Machine building and Chemical Industries ...... 433 Appendix IV Pilot Survey Test ...... 434 Appendix V Survey Instrument (English version)...... 444 Appendix VI Survey Instrument (Russian version)……...... 456
xvii
CHAPTER ONE
INTRODUCTION
1
1.1 Introduction ...... 3 1.2 Research Background ...... 4 1.3 Proposed Model ...... 11 1.4 Methodology ...... 10 1.5 Significance of Research ...... 13 1.6 Limitations of the Research ...... 16 1.7 Structure of Dissertation ...... 17
2 Chapter 1: Introduction
1.1 Introduction
In order to boost science, technology, innovation and development, policymakers employ a range of tools which form the basis of public programmes to encourage firms to engage in activities to advance the economy (Hall, 2019; Parrilli & Elola, 2012; Wang, 2018).
Government support for the development of technology is critical within an innovation- driven economy, whether in developed or developing countries (Grobéty, 2018; Okamuro
& Nishimura, 2018; Wonglimpiyarat, 2017b). The overarching framework for such support is known as the National Innovation System (NIS) (Liu, 2019; Watkins,
Papaioannou, Mugwagwa, & Kale, 2015). While there are different forms of supports available, this study focuses on a relatively neglected element: the macro-level financial policy mechanisms to support firm-level innovation. These mechanisms are studied using data from two key industrial sectors in Uzbekistan, namely the machine building and chemical industries. In recent years, the Government of Uzbekistan has provided a wide range of fiscal incentives for the modernisation and technological upgrading of industrial production. The NIS framework places significant emphasis on competitiveness, providing a platform for knowledge creation and commercialisation (Kashani & Roshani,
2019; Schot & Steinmueller, 2018). Finance and access to finance play an important role in the NIS (Mazzucato, 2014), however markets often provide less funding for innovation than would be economically desirable (de la Torre, Gozzi, & Schumukler, 2017). In order to increase funding for innovation activities, governments offer a range of interventions
(Schot & Steinmueller, 2018).
The model proposed by this research is based on a range of inputs: a review of the literature on finance and innovation; exploratory interviews; and a survey derived partially from the Community Innovation Survey (Ireland Central Statistics Office, 2014) and the access to Finance module of the European Central Bank survey (European Central 3 Bank, 2015b). A two-phase research design was employed. Phase 1 consisted of exploratory interviews with key stakeholders. In Phase 2, a survey was implemented to test the model developed. The findings from this study add to the existing body of knowledge on macro-level financial mechanisms in support of firm-level innovation
(Ács, Autio, & Szerb, 2014; Bartels, Voss, Lederer, & Bachtrog, 2012; Jenson, Leith,
Doyle, West, & Miles, 2016a). The research model assesses the impact of access to finance on innovation and performance as mediated by firms’ internal capabilities namely; absorptive capacity (ACAP), international growth orientation (IGO), investment in in-house R&D (IRD). It also considers the role of barriers to innovation (BI) as a mediator. This model can, in turn, provide further assistance in informing the economic development of Uzbekistan. This chapter addresses the background of the research, the research question and associated objectives, a brief overview of the two-phase methodology, the significance of the proposed model and some limitations of the research undertaken. It concludes with an outline of the structure of this dissertation.
1.2 Research Background
Since the 1980s, a significant element of the economics and management literature has focused on reasoning what drives innovation, why some countries are more innovative than others, and how policymakers can facilitate innovation (Chaminade & Edquist,
2006; Gershman, Bredikhin, & Vishnevskiy, 2016; Hall & Maffioli, 2008; Lundvall,
1992; Nelson & Rosenberg, 1993; Nuruzzaman, Singh, & Pattnaik, 2018; Parrilli & Elola,
2012). Governments in industrialised and developing countries alike, afford significant priority to the development of science and technology-based innovation (STI) on one level and learning-by-doing, using and interacting (DUI) on the other (González-Pernía,
Parrilli, & Peña-Legazkue, 2015). Policies and public programmes are also developed to boost STI and development (Parrilli & Elola, 2012; Wang, 2018). These programmes emphasise the crucial role of National Systems of Innovation (NSI), a conceptual
4 framework which has grown to occupy a prominent position in the academic literature, and in turn has influenced policy-makers globally (Intarakumnerd & Goto, 2018; Meuer,
Rupietta, & Backes-Gellner, 2015; Rakas & Hain, 2019).
NSI serve to both describe and analyse infrastructures, policies, and institutions. These are among the factors which determine a country's ability to produce and harvest the benefits of scientific discoveries and technological innovations (Acs, Audretsch,
Lehmann, & Licht, 2016; Lundvall, 2010; Nelson & Rosenberg, 1993). The extant research typically adopts either a national, regional, technological or sectoral perspective, following a technological imperative. These four types of innovation system fall under the NSI framework.
There is a significant relationship between innovation and entrepreneurship at a macroeconomic level. Researchers and policymakers have, for example, emphasised the role of entrepreneurship in delivering national and global prosperity (Autio & Rannikko,
2016; Timmons & Spinelli, 2003). This thesis does not consider entrepreneurship at the organisational level, a literature that primarily addresses managerial attitudes and behaviours, but focusses on how governments can fill the gap between technological opportunities and commercialization (Grundling, Steynberg, & Wang, 2010;
Wonglimpiyarat, 2013a, 2017b). The role of government is vital for enterprise growth both in developed and developing countries (Asheim, 2019; Bartels et al., 2012; Bruton et al., 2018; EBRD, 2014). This research identifies firms’ key capabilities that drive innovation and the role of government in supporting firm-level innovation via macro- level financial mechanisms. Access to these mechanisms leads to higher levels of innovation and financial performance, and ultimately positively impacts national economic growth and stability. This research aims to assess factors which have a
5 significant influence on firm innovation and financial performance in order to optimise financial flows between participants in the Uzbek innovation system.
Financial systems1 play a crucial role in fuelling innovation (Alquist, Berman,
Mukherjee, & Tesar, 2019). Under the investment theory framework, investment in innovation, including R&D along with other innovative activities, offers specific advantages that distinguish it from traditional investment in tangible assets (Savignac,
2008). Given that outcomes cannot be forecasted ex-ante, innovation investment is subject to greater financial constraints than investment in tangible assets (Hall & Lerner,
2009; Himmelberg & Petersen, 1994; Mohnen, Palm, Van der Loeff, & Tiwari, 2008).
Financial constraints span a range of circumstances: a firm may be unable to acquire external funding due to high cost or unavailability, potentially resulting in enduring underinvestment or funding solely through retained earnings (Guariglia & Liu, 2014;
Hall, Moncada-Paternò-Castello, Montresor, & Vezzani, 2016; Lahr & Mina, 2013).
Financial constraints affecting innovation have been identified across a wide range of countries over the last three decades (Agénor & Canuto, 2017; Bhagat & Welch, 1995;
Bond, Elston, Mairesse, & Mulkay, 2003; Bostan & Spatareanu, 2018; Hall, 2002; Hall
& Maffioli, 2008; Hall, 1992; Howell, 2016). While funding for innovation is a central element of Innovation Systems, there is a significant gap in the literature on this topic, especially regarding the role played by governments in transition economies (Bruton et al., 2018). Bruton et al. (2018) focused on micro and meso supports in an SME context, however, there remains a gap at the macro level. In industrialised countries, the private sector is a key player in supporting innovation and R&D through funding sources including Venture Capital (Avnimelech & Teubal, 2008). In contrast, governments in
1 A Financial system, in this research, means a set of institutions, such as banks, insurance companies, and stock exchanges that permit the exchange of funds. Financial systems can be organised using market principles, central planning, or a hybrid of both. Since independence, the economy of Uzbekistan continues to exist as a Soviet-style command economy with a slow transformation to the market economy. Institutions within a financial system include everything from banks to stock exchanges and government treasuries. 6 transition economies take a leading role in providing institutional arrangements as well as programmes in support of R&D and commercialisation (Acs et al., 2016;
Wonglimpiyarat, 2011; Zhang & Guo, 2019).
National economic development is often said to be the outcome of government foresight and long-term strategic investment in innovation (Alexander & Magipervas, 2015;
Bakhtiyor & Doniyor, 2013). Uzbekistan, the context for this study, is following a traditional path by exporting raw materials to fund investment at its current stage of development. It must choose between a position of socially oriented scientific and technological breakthroughs, or, remain on a more traditional trajectory, forging a future as a supplier of raw materials. A precondition for transition to innovation in Uzbekistan is the availability of finance to enable companies to adopt and/or develop better, more advanced, technologies (Artikov, 2009). The Uzbek Government provides a wide range of fiscal incentives for the modernization and technological renovation of production
(Popov & Chowdhury, 2016), however, a gap exists surrounding the creation of an integrated framework for national economic development, by means of financial provision for investment and innovation activities. The literature on financing innovation investigates the relationship between access to finance and a firm’s innovation performance, taking into account mediating constructs. These are not appropriate in examining the effects of both internal and external factors on firm-level innovation and performance. For instance, Filatotchev et al. (2018) examined how a venture’s entrepreneurial orientation influences the relationships with competition and the effect of government ties on firm performance. They found that the government had a significant impact on new venture performance. Other studies examine how absorptive capacity mediates debt and equity finance effects on firm-level innovation (Lin & Hsiao, 2016;
Flatten, Engelen, Zahra, & Brettel, 2011; Liao, Welsch, & Stoica, 2003). However, there is a significant gap in the research in this context. The literature is absent a macro-level
7 research model capable of considering the effect of both external and internal factors on firms’ innovation and subsequent performance linked to access to finance. To fill this gap, the primary goal of this research is to assess the impact of access to different sources of finance on individual firm levels of innovation and performance considering the effect of four distinct mediators. These mediators include three key internal capabilities of a firm, and the barriers to innovation it faces.
The conceptual model for this research is based on access to finance and its effect on innovation and financial performance. The study stands at the crossroads of two themes, namely: (I) Innovation and innovation systems; and (II) Macro-level financial mechanisms which support innovation. To address these themes the research questions, the three objectives and the associated sub-objectives of this study are developed.
Research question:
“How do macro-level financial support mechanisms, affect firm-level innovation and performance within a SIS context?”
Research Objective 1:
“Understanding the current financial mechanisms for firm-level innovation support in two industrial sectors of Uzbekistan.” The first objective focuses on understanding the prevailing financial mechanisms in Uzbekistan.
Research Objective 2:
“Assess the level of innovation across the Uzbek machine building and chemical Sectoral
Innovation Systems (SIS).” The second objective aims to assess the innovation performance of the machine building and chemical industries. This assessment is within the SIS framework, as it is deemed to be the relevant framework, from the range of
8 frameworks available within the Systems of Innovation literature, as it facilitates the mapping of actors and innovation capabilities at the sectoral level.
Research Objective 3:
“Assess the impact of access to financial mechanisms on firm-level innovation and performance.” The third objective of this study is to examine the impact of the level of access to government, external market sources, and internal finance on firm-level innovation and financial performance. These relationships are posited to operate through four mediating factors, three of which are internal capabilities and the final one is the barriers to innovation that firms face.
Research Objective 3.1: To assess the impact of access to financial mechanisms on firm- level innovation and performance as mediated by absorptive capacity. The purpose of the first sub-objective is to understand the influence of absorptive capacity (ACAP) as a mediator in the relationship between access to finance, innovation and financial performance.
Research Objective 3.2: To assess the impact of access to financial mechanisms on firm- level innovation and performance as mediated by international growth orientation. The purpose of sub-objective 3.2 is to understand the influence of international growth orientation (IGO) as a factor which mediates the relationship of a firm’s access to finance and its innovation performance
Research Objective 3.3: To assess the impact of access to financial mechanisms on firm- level innovation and performance as mediated by investment-in house R&D. The purpose of sub-objective 3.3 is to understand the influence of investment in in-house R&D as a mediating variable.
9 Research Objective 3.4: To assess the impact of access to financial mechanisms on firm- level innovation and performance as mediated by barriers to innovation. The purpose of sub-objective 3.4 is to understand the influence of barriers to innovation which occur due to various factors in the market.
1.3 Methodology
The chemical and machine building industries were the focus of this research as these sectors are primary economic engines of the Uzbek economy with significant consequences for the innovative development of other industries. These sectors exercise a multiplier effect on other sectors and are key pillars of economic policy as they engage in import substitution. Government policy in Uzbekistan is shifting its focus from the production of raw materials to finished products with higher added value. The Machine building industry has had significant government support since the early stages of its development. Its exports have a greater degree of technological sophistication than other comparable industry sectors within the country. The Chemical industry has substantial production capabilities, is a processor of raw materials, and has significant scientific and technical potential. It is one of the leading primary sectors of Uzbekistan and contributes significantly to the economic development of the country. As noted, it is a key part of the drive to reduce the reliance on imports.
The data collection process proceeded in two phases. The first phase was exploratory, whereby semi-structured interviews were undertaken with owners and senior managers of firms in the respective sectors, and experts from academia and government organisations in Uzbekistan to better inform the model from a macro-level perspective.
The purpose of this phase was to examine and confirm the comprehensiveness of the proposed macro-level innovation financing framework to ensure that all critical variables were included in the model. A purposive strategy was used to select the sample for the
10 qualitative phase of the research. Twelve professionals working in academia, government organisations and business owners/managers from both sectors participated in the qualitative interview phase. The data was thematically coded and analysed.
The second phase of this research was a major survey. This was conducted to test the model developed for the research. The items used in the survey to examine each of the constructs were developed from existing research. As mentioned previously these include a firm’s absorptive capacity (Escribano et al., 2009; Lane et al., 2006), international growth orientation (Autio & Rannikko, 2016; Moen et al., 2016), investment in house
R&D (Bergek et al., 2008; Gunday et al., 2011), and barriers to innovation (Cincera &
Santos, 2015; Madrid-Guijarro et al., 2009) in the market or region where a firm operates.
An adapted version of Ireland’s Community Innovation Survey (Ireland Central Statistics
Office, 2014) and The European Central Bank survey: access to finance (European
Central Bank, 2015) were also used. The questionnaire included all the constructs necessary to examine research objectives 2 and 3. The survey respondents were selected using purposive sampling and a total of 351 firms across both sectors participated. The data analysis was undertaken utilising Mplus and SPSS. SPSS was used to perform the preliminary descriptive analysis, while the bulk of the analysis was completed using
Mplus.
1.4 Proposed Model
Model to assess the level of Access to Finance on Innovation Performance.
The macro-level innovation financing model proposed in this research is outlined next.
The formulation of the model leverages existing models and studies (Autio & Rannikko,
2016; Bergek, Jacobsson, Carlsson, Lindmark, & Rickne, 2008; Bigliardi, 2013; Cincera
& Santos, 2015; Escribano, Fosfuri, & Tribó, 2009; Forés & Camisón, 2016; Guan &
Yam, 2015; Gunday, Ulusoy, Kilic, & Alpkan, 2011; Bakar & Ahmad, 2010; Lane, Koka,
11 & Pathak, 2006; Leonid, Galina, & Vitaliy, 2014; Madrid-Guijarro, Garcia, Auken, &
Van Auken, 2009; Nishimura & Okamuro, 2011; Radas, Anić, Tafro, & Wagner, 2015), key findings from semi-structured interviews, and a survey derived in part from the
Community Innovation Survey (Ireland Central Statistics Office, 2014) and a European
Central Bank survey on access to finance (European Central Bank, 2015). Four factors which influence a firm’s innovation performance have been identified as mediators through this research. These factors are the primary elements of the conceptual framework that has been developed. The first three factors represent a firm’s internal capabilities including absorptive capacity (Escribano et al., 2009; Lane et al., 2006), international growth orientation (Autio & Rannikko, 2016; Moen, Heggeseth, & Lome, 2016), and investment in in-house R&D (Bergek et al., 2008; Gunday et al., 2011). The fourth and final factor addresses barriers to innovation (Cincera & Santos, 2015; Madrid-Guijarro et al., 2009) in the market or region where a firm operates.
These factors in turn illuminate the relationships between governmental sources, external market and internal financial sources to firm-level outcomes, as measured by both innovation performance and financial performance. The detail of the proposed macro- level model of finance innovation is depicted in Figure 1.1.
12 FIGURE 1.1: PROPOSED MACRO-LEVEL FINANCING INNOVATION MODEL
Source: Author’s own.
1.5 Significance of Research
The core theoretical contribution of this research is the development of a macro-level innovation financing model capable of assessing the impact of financial mechanisms for firm-level innovation support on innovation performance. The research develops a model through which the evaluation of the role of government, as a source of finance, in a particular sector is made possible. In particular, the outcomes of the survey have the potential to inform economic growth and stimulate policymaking. The majority of extant research has focused on micro/meso supports, however there is a significant gap in the literature at the macro level. This research bridges this research gap by conceptualising and testing the effect of macro-level financial support mechanisms on both innovation performance and financial performance within a Sectoral Innovation System (SIS) context. There is currently no macro-level funding specific research model capable of considering the effect of both external and internal factors on firms’ innovation and subsequent performance. The institutional economics literature, as typified by Mazzucato
13 (2014), suggests that the government does not only have the role of fixing market failure but also has to focus on shaping new markets and institutions where all types of firms can benefit. Through consideration of the role of government as a key provider of finance for innovation, this research contributes to this stream of literature. This theory is one of the key pillars of this study as it focuses on disparate streams of economic thinking, which together provide the theoretical basis for the system-wide analysis of the technological development and innovation in the country (Angelucci, Missikoff, & Taglino, 2011;
Dolfsma & Seo, 2013; OECD, 1999).
The macro-level model of financing innovation, developed in this research, assesses the impact of four key elements in the relationships between access to finance and both innovation and financial performance. As noted, there are three internal capabilities of the firm (absorptive capacity, international growth orientation, and investment in in-house
R&D) and the impact of barriers to innovation. These mediate the macro-level financial mechanisms and their influence on innovation and financial performance. Taking this approach, the research contributes to the Resource-based view (RBV) of the firm. The
RBV is a critical theory within this research as it exposes the role of internal capabilities as the basis for both innovation performance and financial performance. Development of internal capabilities, such as absorptive capacity, are not possible without access to financial resources. The same is true of international growth orientation and most particularly for investment in in-house R&D. These capabilities, which this research demonstrates are essential for success in innovation, are only possible for a firm to exploit if it can afford them. The research model suggests that barriers to innovation can be reduced, and thus performance improved, through access to finance. Access to finance increases the potential impact of capabilities and reduces the potential impact of barriers.
14 This research finds that external financing sources are not consistent with the Pecking
Order Theory (POT) of capital structure during firms’ lifecycle due to its availability and access, ownership and industry. The country's unique macroeconomic context affects the choice of capital structure within their institutional frameworks and financial systems.
The thesis contributes to the stream of the literature emanating from the POT literature
(Allini et al., 2018; Faff, 2016) by demonstrating how strong industry effects and the nature of ownership can be decisive factors when accessing external finance across firms’ age and size. This is not surprising considering that Uzbekistan is gradually transforming to a market economy. As has been emphasized in the Uzbek Model, direct and substantial government intervention in resource allocation led to accelerated industrialisation.
Strictly speaking, these results can be characterised as insufficient financial market development in Uzbekistan. Government intervention through the SIS approach permitted additional supports to certain industries that have a multiplier effect on other sectors and firm innovation activities, ultimately leading to sustainable economic growth in the country. In particular, Uzbekistan pursued an import substitution and export promotion policy (Nam et al., 2005), which enabled it to protect its economy from external shocks and record rapid economic growth from the second half of the 1990s after the fall of the Soviet Union (Bae & Mah, 2019).
Overall, the role of government is crucial to design a robust financial system including healthy financial institutions, and a strong legal system and infrastructure, so that all firms can benefit. The internal capabilities of a firm such as absorptive capacity, international growth orientation, and in-house investment in R&D are vitally important for both innovative performance and financial stability. This multipronged approach, although difficult to achieve in practice, would go a long way in ensuring that favourable innovative and financial outcomes could be achieved.
15 1.6 Limitations of the Research
The findings of this study should be evaluated in light of a number of limitations. Firstly, the Financing Innovation Framework is developed in the specific context of the Uzbek chemical and machine building industries. When using this model in other economies, variations may be required. For example, in a more developed economy, there may be a better developed financial system and government may play a lesser role as a provider of finance with its place being taken by private investors or venture capitalists. Secondly, the Financing Innovation Framework is validated using data from manufacturing firms.
Considering that industry dynamics can be significantly different for manufacturing as compared with other industries such as the services or IT sector, future research would require some adaptation. Thirdly, this research reflects a particular point in Uzbek history, as a transition economy with a particular endowment of raw materials. Since the data was collected, a new President has been appointed and this may change the business landscape, and thus the outcomes of the study. Another limitation of the Financing
Innovation Framework pertains to the length of the instrument for measuring the impact of access to finance on firms’ innovation and performance. The survey instrument, in phase two, consists of twelve high level factors and nine of them are latent variables.
Accordingly, the instrument could have been perceived as somewhat onerous by respondents, perhaps reducing the response rate. Finally, this study only controlled for firm-size, age, ownership and industry. This was done in consideration of the length of the questionnaire. More control variables could be introduced to further test the reliability of the model. Further research could also explore how the relationships in the Framework vary dependent on the political connections of the management team, and the informal networks that exist between the different players in the focal industries.
16 1.7 Structure of Dissertation
This research is presented in nine chapters (see Figure 1.2). Chapter two evaluates the extant literature on innovation and systems of innovation and includes the factors which can impact firm innovation and financial performance. The primary definition of innovation used throughout this thesis is determined and absorptive capacity, international growth orientation, in house R&D and barriers to innovation are examined.
These factors are used as mediators in the research model.
Chapter three examines the literature on the impact of finance on firms’ innovation activities. The influence of access to finance on firms’ innovation performance is broadly investigated from both the supply and demand perspectives, and importantly includes the government’s role in this process. The government’s role in fuelling innovation is critically considered, spanning both direct and indirect public funding. Regarding the role of financial institutions, debt and equity finance are considered. Given that firms also fund innovation from internal sources, this aspect of the funding mix is also discussed.
Chapter four examines the institutional context of Uzbekistan including the country’s geological and geographic profile, financial institutions, industrial and national innovation policies, and the key characteristics of the two primary industries namely; the machine building and chemical industries. Under, the Sectoral Innovation Systems (SIS) framework the machine building and chemical industries are explored as they are critical to the Uzbek economy. The rationale for their choice is also given in this chapter.
Chapters five and six present the methodological aspects of the project. Chapter five analyses the first phase of the research which took a qualitative exploratory approach. In addition, the research objectives and hypotheses are explained. Outcomes of the interviews are also discussed. Chapter six explains the second phase of research where
17 the macro-level innovation financing framework is developed and tested. It also presents descriptive statistical analysis of the quantitative data.
Chapters seven and eight explore Structural Equation Modelling (SEM). Chapter seven explains the SEM approach adopted and its associated terminology. Reliability and validity are detailed including composite reliability (CR) and average variance extracted
(AVE). Chapter eight provides the main statistical analysis of the macro-level innovation financing framework. Mplus and SPSS were used to analyse the survey data. Descriptive analysis employed SPSS. Mplus was used as the primary tool for SEM and scale evaluation using confirmatory factor analysis. The proposed hypotheses were tested and analysed.
Finally, chapter nine concludes with a summary of the main contributions to research regarding the affect that access to finance has on firm innovation and financial performance, considering the role of a government in this context. Also, this chapter discusses the limitations of the study and offers suggestions for future research. The chapter concludes with a discussion of the implications of the research for Uzbek policymakers in shaping the country’s National Innovation System policy.
18 FIGURE 1.2: THESIS STRUCTURE
The next chapter entails a critical analysis of the literature surrounding Innovation and
Systems of Innovation.
19
CHAPTER TWO:
Innovation and Innovation Systems
20
2.1 Introduction ...... 22 2.2 The Concept of Innovation ...... 23 Defining Innovation ...... 24 Dynamic Evolutionary Innovation ...... 25 Discontinuous Innovation ...... 26 2.3 Theoretical Foundations ...... 29 2.4 Innovation Systems ...... 30 2.5 National Systems of Innovation ...... 36 National Innovation System (NIS) ...... 38 National Systems of Entrepreneurship (NSE) ...... 41 Regional Innovation Systems (RIS) ...... 43 Sectoral Innovation System (SIS) ...... 47 Technological Innovation Systems (TIS) ...... 51 2.6 The Role of Firms in Innovation Systems ...... 53 2.7 Factors Affecting Firm Innovation Performance ...... 55 Absorptive Capacity (ACAP) ...... 56 International Growth Orientation (IGO) ...... 57 Investment in In-House R&D ...... 59 Barriers to Innovation ...... 61 2.8 Conclusion ...... 62
21 Chapter 2: Innovation and Innovation Systems
2.1 Introduction
This chapter presents a critical analysis of the literature on Innovation, Innovation
Systems and Systems of Innovation, drawing on the disciplinary domains of economics, entrepreneurship, business and management, technology, science and engineering. The opening section of the chapter defines innovation, grounding it in the context of the thesis.
While not seeking to develop an exhaustive taxonomy, several examples are offered in two broad categories: evolutionary and revolutionary innovation. Attributes are defined, and a definition of an innovative organisation is proposed. The second section of the chapter explains the concept of Innovation Systems at national, regional, sectoral and technological levels. Following this, the third section considers the concept of National
Systems of Entrepreneurship (NSE) as developed by Acs at al. (2016). The NSE framework focuses on system of entrepreneurship and innovation. With the integration of these two concepts, firm level performance will reflect sectoral or country performance as a whole (Acs et al., 2016; 2016a; 2016b; Acs, Estrin, Mickiewicz, & Szerb, 2018), this focal relationship is consistent with the central purpose of this thesis.
Innovation Systems consider unique national contexts and how innovation processes and organisational conditions are measured. The final sections of this chapter distinguish between different characteristics of innovation systems, starting with National Systems of Innovation as a macroeconomic concept embedded in market processes. The chapter concludes with an in-depth overview of Regional Innovation Systems (RIS), Sectoral
Innovation Systems (SIS) and Technological Innovation Systems (TIS). Conceptually
SIS provides a multidimensional, integrated and dynamic view of sectors. SIS is the underpinning framework supporting the analysis of innovation funding in this thesis.
22 2.2 The Concept of Innovation
Following the seminal work of Schumpeter in the 1930s, research on innovation proliferated in the early 1960s and continued to grow into the twenty first century. The research focus during the 1960s and 1970s was both conceptual and theory-building
(Arrow, 1962; Becker, Whisler, Becker, & Whisler, 1967; Fliegel & Kivlin, 1966).
Studies in the 1980s and 1990s expanded the theory of innovation into the arena of organisational development (Damanpour, 1991; Freeman, 1987). Organisations that have the necessary resources, motivation and culture are more likely to conceive and implement innovative ideas successfully (Hewitt-Dundas, 2006). The capacity to innovate is rooted in the ability to continually introduce knowledge, ideas, new products, processes and systems in the interests of both the organisation, shareholders and stakeholders (Cepeda-Carrion, Leal-Millán, Martelo-Landroguez, & Leal-Rodriguez,
2016; Santos, Basso, & Kimura, 2018).
Schumpeter (1934) argued that organisations must innovate to update the value of their assets. While the term innovation may not have been widely used prior to that, the processes associated with innovation, such as economic and technological change, were known to be important (Becker, Knudsen, & Swedberg, 2012; Lorenzi, Mantel, & Riley,
1990; Schumpeter, 1934). Zahra and Covin (1995, p. 183) attest that “innovation is considered as the lifeblood of corporate survival and growth,” by playing a central role in creating value and sustaining competitive advantage. By extension, Bessant (2005, p.1378), emphasises that “innovation represents the core renewal process in any organisation. Unless it changes what it offers the world and the way in which it creates and delivers those offerings it risks its survival and growth prospects.”
23 Defining Innovation
The term "innovation" comes from the Latin innovato and/or innovare, which means renovation or improvement or “to make something new.” Innovation is the core process concerned with renewing what the organisation offers and optimising the way it generates and delivers its output (Wagner, 2015). Essentially, innovation is a process of turning opportunity into new ideas and of putting these ideas into widely used practice
(Henderson, Avis, & Tsui, 2018). Variations in definition derive from different disciplinary perspectives. For example, in the area of knowledge management, the main focus is on what knowledge is vital for innovation. Plessis (2007, p.21), defined innovation, in this context as, “the creation of new knowledge and ideas to facilitate new business outcomes, aimed at improving internal business processes and structures and to create market-driven products and services.”
The ability to develop new ideas and commercialise innovations is a priority for many organisations. Intensive global competition and technological development render innovation a key source of competitive advantage (Schot & Steinmueller, 2018). Much of the research reflects the complex and dynamic nature of innovation (Michailova &
Zhan, 2015; Prange & Schlegelmilch, 2018). Theorists and practitioners employ a range of perspectives, including incremental, disruptive and radical changes to products, processes, business models and markets.
There no single, clear and authoritative definition of innovation (Baregheh, Rowley, &
Sambrook, 2009; Gault, 2018; Ravichandran, 1999) and most lack conceptual validity as there is no link between the conceptual meaning and the operational procedure (Baregheh et al., 2009; Schwab, 1980). As early as 1984, Ettlie et al. (1984) commented on the problems for research and practice of innovation arising from these disciplines. Both Zairi
24 (1994) and Cooper (1998) suggest that one of the challenges of innovation is the lack of a standard definition, which undermines understanding of the nature of innovation.
To establish a clear understanding of innovation for this research, several examples of organisational innovation are offered, they are typically divided into two categories.
According to Ravichandran (1999): innovation is firstly described as evolutionary
(incremental, continuous or dynamic evolutionary innovation) brought about by many incremental advances in technology or processes. Secondly it is described as revolutionary (also called discontinuous or radical innovation) which is often disruptive and new to the world. The next two sections discuss these approaches.
Dynamic Evolutionary Innovation
Proponents of the evolutionary approach present innovation as a process of introducing new products, components, methods, and principles. A considerable portion of the literature on dynamic evolutionary innovation emphasises various aspects of innovation including processes and the propensity to adopt (Becker et al., 1967; Hitt, Hoskisson,
Johnson, & Moesel, 1996; Rejeb, Morel-Guimarães, Boly, & Assiélou, 2008; Van de Ven
& Poole, 1990). Santo (1993) considers innovation as a socio-technical process, whereby inventions and concepts result in the creation of valuable new goods and technologies.
Innovation involves the deliberate use of information, imagination, and initiative to obtain increased or variant value from resources. This includes all of the processes by which new ideas are generated and converted into useful products (Varis & Littunen, 2010).
Van de Ven et al. (1986) posit that an innovation which is not suitable for sale or commercialisation, cannot be conceived as innovation, regardless of the degree of departure from a previous product, process, method, or service. In that vein, Roberts
(1988) defines innovation as the summation of invention and exploitation. Invention,
25 therefore, cannot be considered an innovation if it is not implemented or used. Van de
Ven et al. (1986, p.596) also emphasise the degree of newness: “As long as the idea is perceived as new to the people involved, it is an ‘innovation’ even though it may appear to others to be an ‘imitation’ of something that exists elsewhere.”
Becker and Whistler (1967) consider innovation as an organisational or social process which leads to a nascent product or process. An invention is basically considered a creative act, while innovation is the first or the early adoption of a concept by one organisation or set of organisations with similar goals. In business, innovation often occurs when ideas are applied by a company to meet the needs and expectations of customers (Björk & Magnusson, 2009). Revolutionary innovation is considered next.
Discontinuous Innovation
The revolutionary or discontinuous approach interprets innovation as the result of a creative process. This may be a new product, technology, or method. Scholars in this domain focus on innovation in relation to newness or invention (Damanpour & Schneider,
2008; Drucker, 2002; Medinskiy & Sharshukova, 1997; Niosi, 2000; Ravichandran,
1999; Zavlina, Baryutin, & Valdaysev, 2000). Zavlina et al. (2000) consider innovation as being the result of a creative process which establishes new consumer values and use.
This normally requires a change in the stereotypes of activities and skills in the organisation. A critical feature of this type is that it should provide novelty in its consumer characteristics, while technical novelty plays a secondary role (Wagner, 2015).
Damanpour (1984, p. 694) also associated newness with change and provides an, often- quoted definition: “Innovation is conceived as a means of changing an organisation, either as a response to changes in the external environment or as a pre-emptive action to influence the environment.” Thus, innovation here is defined as a new product or service,
26 process technology, organisational structure or administrative system or nascent plans or programs regarding the members of the organisation (Damanpour, 1984).
Kimberly (1981, p. 108) provides an overarching definition that encompasses innovation in its various forms: “There are three stages of innovation: innovation as a process, innovation as a discrete item including, products, programs or services; and innovation as an attribute of organisations.” “Innovation mitigates climate change, advances sustainable development, and promotes social cohesion. To support these claims, to inform policy development, and to monitor and evaluate policy, innovation must be measured. For innovation to be measured, it must be defined” (Gault, 2018, p.1). In other words, it is crucially important to choose a definition and therefore derive measures of firm-level innovation. A table of the various definitions of innovation is given in
Appendix I. The third edition of the Oslo Manual (OECD, 2005) definition of innovation is used for this research:
“Innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations” (p.46).
This implicitly identifies the following four types:
“Product innovation: the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics”
“Process innovation: the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software”.
27
“Marketing innovation: the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing”.
“Organisational innovation: the implementation of a new organisational method in the firm’s business practices, workplace organisation or external relations”.
In conclusion, innovation is a key driver and strategic issue for firms seeking growth. The role of innovation in economic progress is crucial. Organisations and economies must innovate by promoting innovation to both sustain their competitive position and to strengthen it (Baregheh et al., 2009). Consensus on the definition of innovation offers a way to identify it in organisations and countries (Acs et al., 2016). Innovation as a multi- stage process is the essence of the well-cited study by Van De Ven et al. (1990). This study included a wide variety of innovations (concerning technology, product, process and administration) from different perspectives (individual, group, organisational, industrial and national), and in different settings (private and public sector and non-profit organisations). The study is useful in understanding how and why innovations develop over time from concept to implementation. It explores the processes which lead to successful and unsuccessful outcomes. Finally, it shows the extent to which knowledge influences the innovation process. This may be generalised from one situation to another as innovation systems are the most commonly used approach to understanding the complex relationships which make up the innovation process at the national level
(Carlsson, Jacobsson, Holmén, & Rickne, 2002). Innovation Systems in particular, are considered to be a unique form of national capital. Therefore, measuring innovation processes in the context of organisational conditions is essential to understanding the nature of innovation. The concept of an Innovation System is examined in section 2.4 but before that, the theoretical underpinnings of the domain are discussed next.
28 2.3 Theoretical Foundations
This section addresses the three theoretical foundations of innovation systems: New growth theory; Evolutionary and Industrial Economics; and Institutional Economics.
New growth theory: This theory challenges some of the main hypotheses underlying the neoclassical view of the contribution of technological change to economic development
(Aghion, Howitt, & García-Peñalosa, 1998; Niosi, 2011b; Romer, 1990). Neoclassical theory emphasises the importance of increasing returns to knowledge accumulation from investment in new technologies and human capital (Martin, 2012; OECD, 1999). One of the fundamental assumptions of neoclassical economic theory is perfect information: That is, all commercial agents can maximize their profits because they have perfect information about the different options available to them (Bolívar-Ramos, García-
Morales, & Martín-Rojas, 2013; Chaminade & Edquist, 2006). Knowledge is equal to information. That is, it is codified, generic, accessible at no cost, and easily adaptable to the firm’s specific conditions. As argued by Smith and Mytelka (2002), the neoclassical approach, despite its many shortcomings, can be useful for understanding basic science however, it is insufficient when trying to explain innovation activities, especially those with close links to the market (Kamal, Yusof, & Iranmanesh, 2016).
Evolutionary and industrial economics: The Innovation Systems approach has its roots in evolutionary theory (Nelson & Winter, 1982). Theory demonstrates that the accumulation process is path-dependent (following “technological trajectories” which show some inertia), non-linear (involving interactions between the different stages of research and innovation), and shaped by the interplay of market/non-market organisations and by various institutions (Freeman, 1997; Lundvall, 2010, 2011; Meeus, Oerlemans, & van Dijck, 1999). As argued by Chaminade and Edquist (2006, p. 9):
29 The Innovation System approach shifts the focus away from actions at the level of individual and isolated units within the economy (firms, consumers) towards that of the collective underpinnings of innovation. It addresses the overall system that creates and distributes knowledge, rather than its components, and innovations are seen as the outcome of evolutionary processes within these systems.
Also, it is important to mention that firms are made up of a mix of different capabilities and resources (Eisenhardt & Martin, 2000; Grant, 1996; Naidoo, 2010) which they use to maximize profit. Knowledge can be specific to the firm or the industry (Smith, 2000).
Tacit knowledge plays a critical role in innovation and firm performance. This can be either general or specific, and it is always expensive.
Institutional economics: this theoretical approach addresses issues related to the design and coordination of institutions. Institutional economics highlights institutional quality in a given country and differentiates between formal and informal institutions, their importance and role in economy (North, 1991). This theory is a core pillar of this study as it brings into focus the disparate streams of economic thinking which provide the theoretical foundations of systemic analysis of technological development and innovation in a country (Angelucci, Missikoff, & Taglino, 2011; Dolfsma & Seo, 2013; OECD,
1999). Considering the role of government as a key player in this study, institutional economics broadens our understanding of the parallel role of the evolutionary process and the institutions in shaping economic behaviour in support of firm-level innovation.
Indeed, this theory emphasizes a broader study of institutions while also viewing markets as the complex result of interactions between various institutions.
2.4 Innovation Systems
The literature on the innovation system approach originated over a quarter of a century ago. It was first theorised in Christopher Freeman’s seminal book on the Japanese national
30 innovation system (NIS) (Freeman, 1987). Contributions to the systems of innovation approach at a national, sectoral and regional level have grown (Acs, Audretsch, Lehmann,
& Licht, 2017; Aguirre-Bastos & Weber, 2018; Lundvall, 1992, 2010; Lundvall, Johnson,
& Edquist, 2004; Malerba, 2005; Rakas & Hain, 2019; Asheim, Cooke, & Martin, 2008;
Breschi, Malerba, & Orsenigo, 2000; Chaminade & Edquist, 2006; Chen, Yin, & Mei,
2018; Edquist, 2011, 1997; Gregersen & Johnson, 1997) over recent decades.
The academic debate on innovation systems originated in the 1990s accelerated by the
Organization of Economic Co-operation and Development (OECD). The organisation played a prominent role in promoting the use of the innovation system approach in the design and implementation of innovation policy in OECD countries (Godin, 2004). The
OECD has significant influence on its member countries, leading several governments to adopt the Innovation Systems approach in their national innovation policy. However, as argued by Mytelka & Smith (2002), the Innovation Systems approach has not been entirely successful in the task of designing systems and proposing policy instruments. By breaking down the operation of the innovation system into its ‘activities,’ coupled with the role of the relevant government, and the interplay between private and public actors,
Chaminade & Edquist (2006) were able to provide specific recommendations that capture the operation of an innovation system, and elaborate on how and when public actors should intervene.
Innovation systems and its sub-systems take several forms: They can be national, regional, sectoral, or technological (Carlsson et al., 2002). They all involve the creation, diffusion, and use of knowledge. Systems consist of components, the relationships among them, and their characteristics or attributes. Furthermore, an innovation system should primarily be considered a social system, since learning is the most central activity in the innovation process because it involves interaction between people (Lundvall, Andersen,
31 Dalum, & Johnson, 2002; Lundvall, 2010). As Meeus at al. (1999, p. 234) put it, “… markets do not accumulate knowledge, they connect knowledgeable actors”. The following points are foundational to the concept of an Innovation System (De la Mothe
& Paquet, 1998, p. 105):
i. It emphasises that firms must be viewed as part of a network consisting of
public and private organisations, whose activities and interactions initiate,
import, modify and diffuse new technologies;
ii. It emphasises the linkages (both formal and informal) between
organisations;
iii. It emphasises the flows of intellectual resources that exist between
organisations;
iv. It emphasises learning as a key economic resource.
Organisations and institutions are often considered to be the main components of an
Innovation System, although it is not always entirely clear what is meant by these terms
(Chaminade & Edquist, 2006). The determination and specification of organisations and institutions are described as follows in the literature. Organisations are “formal structures that are consciously created and have an explicit purpose,” (Edquist, 1997, p. 47). They are characterised in theory as “players or actors”. Chaminade and Edquist (2006, p. 4) stressed that “important organisations in IS [Innovation Systems] are firms (normally considered to be the most important), universities, venture capital providers and public agencies responsible for innovation policy, competition policy or drug regulation”.
Institutions are “sets of common habits, norms, routines, established practices, rules or laws that regulate the relations and interactions between individuals, groups and organisations” (Edquist, 1997, p. 46). They are the “rules of the game.” Examples of
“important institutions in IS [Innovation Systems] are patent laws, as well as rules and
32 norms influencing the relations between universities and firms.” (Chaminade & Edquist,
2006, p. 4). These definitions help to discriminate between the rules of the game and the players in the game (Edquist, 2011).
There is general agreement that ‘organisations’ and ‘institutions’ are the main components in Innovation Systems; however, the literature indicates a variety of interpretations (Edquist, 2001). Lundvall (2010) distinguishes between narrow and broad definitions of Innovation Systems. Core definitions in the context of the broad view include:
“… a system of innovation is constituted by the elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge ...” (Lundvall, 2010, p. 2)
“... a set of institutional actors that, together, plays the major role in influencing innovative performance” (Nelson & Rosenberg, 1993, p. 4)
“… a system of actors (firms, organisations and government agencies) who interact in ways which influence the innovation performance ...” (Gregersen & Johnson, 1997, p. 484)
Innovation Systems include all organisations and institutions that contribute to innovation
(Lundvall, 1992). This perspective is based on the OECD’s Oslo Manual (1993) in which innovation is defined as an improvement in the process or product, articulating more clearly the distinction between science-led R&D and customer driven innovation. Nelson
(1993) suggests that organisations that conduct R&D, and institutions, such as science, technology and innovation policies that support R&D, form the core of the innovation system. The basic idea in both approaches (science-led R&D and customer driven innovation) is the same: OECD countries innovate differently, regarding the stage of development, Chung (2002) highlights the case of South Korea. Innovative organisations
33 function differently and while approaches are divergent, innovation occurs just as successfully. After 1990, the literature on national innovation systems grew exponentially, and the concept was adopted in several countries where innovation policies were seen in a new and systemic light (Niosi, 2011).
The Innovation Systems concept is based on an interactive model of innovation
(Andersson & Karlsson, 2006). The key feature of the concept is that an economy’s ability to generate innovations not only depends on how individual actors (firms, universities, organisations, research institutes and governmental institutions) perform, but also on how they interact as parts of a system (Gregersen & Johnson, 1997). Several Innovation
Systems theorists posit, as per Niosi (2012, p.1639) that: “Governments have a key role in orienting and funding technical innovation, at least at the national level, and particularly in the areas of innovation policy, academic and technological research, and higher education”. Innovation funding is at the core of this thesis and will be addressed in chapter 3.
Much of the Innovation Systems literature is focused on developed economies, where efficiency and transparency in the public sector is somewhat taken for granted (Niosi,
2011a). However, innovation systems cannot be built with poor quality, corrupt and/or politicised and/or permanently changing bureaucracy based on loyalty (rather than efficiency) (Chowdhury, Audretsch, & Belitski, 2019; Ruziev & Webber, 2019). Those who have studied developing countries believe that the creation of a meritocratic bureaucracy is the main condition for the development of new national, regional and sectoral innovation systems (Bellows, 1995; Rauch & Evans, 2000).
Each Innovation System requires a specific approach given that different systems serve distinct purposes. Carlsson, Jacobsson, Holmén, and Rickne (2002) articulate systems of
34 innovation in two distinct dimensions. One is the physical or geographical dimension. An innovation system focuses on a particular country or region, which then determines the geographic boundaries of the system. The other dimension uses a specific sector or technology as the point of reference. Another important dimension is that of time
(Lundvall, 2010) and the stage of development referenced earlier. In a system with built- in feedback mechanisms, the configuration of components, attributes, and relationships is constantly changing. Thus, a snapshot of the system at a certain point can differ substantially from a snapshot of the same system at another time (Niosi, 2011b).
Early research largely focused on explaining the role of Innovation Systems in supporting radical or incremental technological innovation (Lundvall et al., 2007). In contrast, more recent studies have found that organisational innovation, which can be described as new organisational structures, or processes and practices, are highly relevant for the innovative activities of firms (Ács et al., 2014; Autio, Kenney, Mustar, Siegel, & Wright,
2014; Evangelista & Vezzani, 2010; Tether & Tajar, 2008; Walker, 2014). This has resulted in the reduction of focus on the historical "technological imperative”
(Damanpour & Aravind, 2012, p. 2) in favour of a broadened scope which includes organisational innovation (Meuer et al., 2015). However, criticism of the technological imperative appears to interpret technology in the physical dimension, whereas,
“technology refers to the theoretical and practical knowledge, skills and artefacts that can be used to develop products and services as well as their production and delivery systems.
Technology can be embedded in people, materials, cognitive and physical processes, plant, equipment and tools” (Burgelman et al., 2009, p.2).
In summary, it is necessary to identify the factors within the scope of Innovation Systems and then take steps to incorporate only those critical to their effective functioning
(Edquist, 2013). Identifying the necessary and sufficient requirements for Innovation
35 Systems to function is the central question, not least, to be able to formulate a sectoral innovation policy to support firm-level innovation (Andersson & Karlsson, 2006). In the context of debates about the replication of Innovation Systems, Niosi (2011a, p.1641) posits that: “the simple copying and pasting of institutions and policies from one context to another will not produce economic development or innovation”. A deeper understanding of the institutional conditions under which policies produce results is needed to design and create Innovation Systems in developing countries and to inform emerging national policy. This is important in order to design a roadmap-type system of policies, such as macro-level financial support mechanisms capable of boosting firm- level innovation. The variety of Innovation Systems concepts discussed in the literature are considered next.
2.5 National Systems of Innovation
The literature surrounding National Systems of Innovation (NSI) according to Edquist
(1997, p. 157) “has been handicapped in its attempts to grasp phenomena such as globalisation and European integration. Because the sovereignty of existing nation-states has not been questioned, we have been prevented from taking seriously enough the role of technology in the creation and destruction of sovereign states”. In this context, it is imperative to note the work of Friedrich List, author of ‘The National System of Political
Economy’ (1841), as a vital source of inspiration for the theoretical underpinnings of national systems of innovation (Freeman, 1987, 1995; Lundvall, 1992).
In the NSI literature, thinking regarding interaction and knowledge accumulation, there is a shift in emphasis from individually performed R&D, towards the institutional structures within which those procedures are engaged (Ács et al., 2014; 2016). The key message is that this structure (instead of individual R&D actions), ultimately determines national innovation output. Most innovation systems research is considered on either a
36 national, regional, technological or sectoral level following a “technological imperative” depicted in Figure 2.1.
FIGURE 2.1: NATIONAL SYSTEMS OF INNOVATION (NSI)
Source: Developed by the author.
NSI can, in principle, be described as the system in which the relevant factors (i.e. actors and institutions) in the innovation process interact (Andersson & Karlsson, 2006).
Innovation systems have been conceptualised on different analytical levels (Meuer et al.,
2015). A number of scholars have proposed different approaches to conceptualising innovation systems, and four major types can be found in the literature (Acs et al., 2016;
Bjørn Asheim & Isaksen, 2002; Freeman, 1987, 1995; Lundvall, 1992; Lundvall et al.,
2004; Malerba, 2002). These are: (i) National Innovation Systems (NIS); (ii) Regional
Innovation Systems (RIS); (iii) Sectoral Innovation Systems (SIS); and (iv)
Technological Systems (TS). Also, Fischer, Revilla-Diez and Snickars (2001) reference
Metropolitan Innovation Systems and Malecki and Oinas (2002) note the existence of
Spatial Innovation Systems. The latter two are more specialised and therefore only the four main types are discussed next.
37 National Innovation System (NIS)
The concept of National Innovation Systems (NIS) emerged in the 1980s to describe the varying innovative performance of industrialised countries (Freeman, 1995). NIS aim to confront the problems hampering development and boost firm competitiveness (Lundvall et al., 2002). The concept of NIS has been used as the basis for a growing body of literature that deals with the process of innovation. Niosi at al. (1993, p. 210) posit that
“a national system of innovation is the system of interacting private and public firms
(either large or small), universities, and government agencies aiming at the production of science and technology within national borders”. The authors also claim that the relationship among these units can be technical, commercial, legal, social, or financial, as the purpose of the interaction is the development, protection, financing or regulation of new science and technology. This definition aligns closely with the idea of innovation systems having a part to play in the production of scientific and technological knowledge.
NIS emphasises that the understanding of the relationships among the actors involved in the innovation process is key to improving the innovative performance of a country (Acs et al., 2016; Kim & Nelson, 2000; Lundvall et al., 2002). The concept of NIS highlights the importance of cooperation in the innovation process demonstrating the rich diversity of participating institutions and organisations and their networks of relationships
(Lundvall, 1992; Nelson, 1993).
NIS can also be described as a “set of institutions that jointly and individually contribute to the development and dissemination of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process” (Metcalfe, 1995, p. 421). From this point of view, the innovation performance of an economy depends not only on how individual institutions operate in isolation, but how they interact with each other as elements of a collective system of
38 knowledge creation and use (Rycroft & Kash, 2004), which is also subject to dynamic processes (Smith, 2001). NIS may assume complex systems that Samara at al. (2012, p.
626) describe as “…systems that share the common feature to exhibit a great variety of behaviour”. Innovation systems are social, made up of social actors, institutions, and organisations (Gregersen & Johnson, 1997).
Successful economies, it has been argued, are characterised as having mastered a complex, integrated system for translating new knowledge and innovation into productivity (Metcalfe & Ramlogan, 2008). Successful economic development is consequently, closely connected with a country's ability to acquire, absorb, distribute, and use modern technology, embodied in the context of the NIS. While the earlier literature focused mainly on developed countries, there is growing interest in applying the NIS concept in developing countries (Artikov, 2009). This growing body of empirical research has analysed innovations in industrial economies such as Korea and Taiwan, which leverage more intense technological knowledge and have made significant progress in closing the performance gap with developed countries (Kim & Nelson, 2000; Lee & von
Tunzelmann, 2005) or contrasted the Asian and Latin American experiences, directly or indirectly (Alcorta & Peres, 1998; Khaemasunun & Wonglimpiyarat, 2017).
Levels of National Innovation analysis
Innovation systems also exist at other levels. For example, there are worldwide (macro), regional or local (meso) networks of firms and clusters of industries. The concept of NIS allows for country specific analysis of the innovation process in a globalised economy, as well as providing a guide for policy formulation (Lundvall, 1992). At the micro level,
NIS focuses on the internal capabilities of the firm and the links between one or more firms (Aguirre-Bastos & Weber, 2018; Lundvall, 2010). Therefore, NIS concentrates on knowledge/interaction among firms, as well as non-market institutions in the innovation
39 system, to identify links in the value chain (Rakas & Hain, 2019). This can also enrich the understanding of decision-makers when outcomes are related to broader issues
(OECD, 1999).
At the meso level, systems of innovation examine knowledge links among interacting firms with common characteristics using three main clustering approaches: Sectoral, spatial, and functional (Breschi & Malerba, 1996; Jensen et al., 2007; Niosi, 2012). A sectoral (or industrial) cluster includes research and training institutes, suppliers, transportation, markets, and specialised government agencies such as finance or insurance which are organised around a shared knowledge base. Analysis of regional clusters emphasises any local factors behind competitive geographic agglomerations of knowledge-intensive activities (Asheim & Isaksen, 2002). Functional cluster analysis uses statistical techniques to identify groups of firms that share specific characteristics.
At the macro level, two approaches are used: Macro-clustering and functional analysis of knowledge flows (OECD, 1999). Macro-clustering sees the economy as a network of interlinked sectoral clusters (Lundvall, 2007). Functional analysis sees the economy as networks of institutions and maps knowledge interactions among and between them
(OECD, 1999). It involves the measurement of five types of knowledge flows: (i)
Interactions among enterprises; (ii) Interactions among enterprises, universities and public research institutes, including joint research, co-patenting, co-publications and more informal linkages; (iii) Other innovation supporting institutional interactions, such as innovation funding, technical training, research and engineering facilities, and market services; (iv) Technology diffusion, including industry adoption rates for new technologies and diffusion through machinery and equipment; and (v) Personnel mobility, focusing on the movement of technical personnel within and between the public
40 and private sectors (Asheim, Oughton, & Smith, 2011; Freeman, 1995; Malerba &
Nelson, 2011).
In conclusion, NIS is a macroeconomic concept which is embedded in market processes.
The consistent allocation of funds generates resources and defines how experimental, in a sense, firms, industries or economies can be. A fundamental question in respect of innovation systems is the degree of openness of the current economic structure to support innovation. If politics and economic power combine to suppress the enterprise (basically sabotaging it), then little can be expected of innovative experiments. Indeed, to further develop the NIS concept, a novel model namely - National Systems of Entrepreneurship was advanced by Acs et al. (2014). This well cited concept is considered next.
National Systems of Entrepreneurship (NSE)
Since the emergence of Schumpeter's seminal work, the concepts of "entrepreneurship" and "innovation" have been closely related. Following Schumpeter's ideas, entrepreneurship and innovation are closely linked in popular thinking. Baumol (2004) argued that entrepreneurial innovation was the true source of national competitive advantage. Schumpeter famously spoke of the "gales of creative destruction," which entrepreneurs unleash by introducing products, services, and processes to the market.
Most industry giants wish to preserve the status quo as incumbents whereas entrepreneurs introduce novel ventures which break the established modes of development and undermine established competencies (Baumol, 2004).
With specific regard to entrepreneurial growth, recent calls for research have been made regarding the undifferentiated notion of "total growth" (Autio et al., 2014; Autio &
Rannikko, 2016; Naldi & Davidsson, 2014) This means growth through expansion into new geographic markets and/or via the introduction of new products and services. Ács,
41 Autio, & Szerb (2014, p. 476) introduced the NSE concept which, in contrast to NIS, identifies individuals as the main drivers of the system:
“National Systems of Entrepreneurship are fundamentally resource allocation systems that are driven by individual-level opportunity pursuit, through the creation of new ventures, with this activity and its outcomes regulated by country-specific institutional characteristics. In contrast with the institutional emphasis of the National Systems of Innovation frameworks, where institutions engender and regulate action, National Systems of Entrepreneurship are driven by individuals, with institutions regulating who acts and the outcomes of individual action.”
Ács et al. (2014) thus focus on the individual and pay less regard the regulatory effects of context on individual actions. Most of the trade-offs and costs faced by entrepreneurs are governed by their context which includes national policies, allocation of resources, access to markets, and social norms. Acs at al. (2016a) examined three critical points which were overlooked in their initial work, as it is ‘context’ which: (a) regulates who decides to start a new firm; (b) controls what kind of firm they will start, and (c) how aggressively the firm will pursue growth and with what outcomes. These critical issues emerged from research on the NSE concept based on: (i) why an individual chooses to become an entrepreneur, while others do not; and (ii) why entrepreneurial activities differ systematically across countries. This research considers integration of the two approaches. The first level of investigation concentrates on individual firms, and the second on institutions. The next level combines both and this leads to firm performance while at the same time reflecting on sectoral or whole-country performance (Acs et al.,
2016; 2016a; 2016b; Acs, Estrin, Mickiewicz, & Szerb, 2018). Beyond that, the government's role is central in designing macro-level financial support mechanisms and
42 both entrepreneurship and innovation combine to affect firm-level performance within their SIS context.
Regional Innovation Systems (RIS)
Experts argue that the current age is knowledge-based (Borrás & Laatsit, 2019; Chung,
2002; Wang & Zhou, 2011) characterised by the active generation, diffusion, and appropriation of new technologies (Asheim, Smith, & Oughton, 2011). Since the articulation and development of NIS in the 1980s and its extension to the regional level, research on regional innovation systems (RIS) grew significantly. Notably, from a baseline of zero articles in the Social Science Citation Index (SSCI) in 1980–1989, the volume increased to sixty-five articles in 2000–2009 (Asheim et al., 2011).
It is important to highlight the processes which are concerned with the dimensions of a
RIS that are in principle the same as for a NIS. Beyond knowledge orientation, experts also argue that this century will be one of regionalisation (Asheim et al., 2011). Meeus et al. (1999) define a RIS as: “…the innovating firms surrounded by a number of actors who are all in one way or another linked to the innovation process of a focal firm and to each actor”. The idea of the nation-state has been losing importance in economic, R&D, and innovation activities due to globalisation (Chung, 2002) however, this is not universally true, especially for small economies. Instead, Chung (2002) posits that a region-state gains momentum as it is expected to more effectively develop regional policies regarding systematic promotion of innovation activities. While the NIS concept can be related to local institutions and actors, it must at the same time recognize that regional uniqueness may differ from the national standards (Asheim & Isaksen, 2002; Asheim, 2007; Chung,
2002). These studies have gone some way towards enhancing the understanding of the features of RIS as Niosi (2000, p. 8) states: “…any definition of RIS should start by defining regions”. Indeed, Andersson and Karlsson (2006) argue that it is hard to find any
43 explicit definition of the term region in the RIS literature. However, an attempt is made by Cooke et al. (1998, p. 480), who defined a region as:
“…a territory less than its sovereign state, possessing distinctive supralocal administrative, cultural, political, or economic power and cohesiveness, differentiating it from its state and other regions”.
RIS have differing characteristics in distinct regions depending on the level of industrial specialisation (Chung, 2002; Ranga & Temel, 2018). Innovation systems in highly technological areas are most likely different from the innovation systems in traditional areas. RIS can also be very different between regions with similar industrial structures
(Andersson & Karlsson, 2006; Chang, 2009; Høyvarde Clausen, 2013; Yang, Lee, & Lin,
2012). The substantial differences in the structure and functioning of RIS between both large regions with many different economic activities and in small and medium-sized regions with less diversified economic activity has been highlighted (Andersson and
Karlsson, 2006). Furthermore, recognising that innovations stem from co-operation between many different actors, it is reasonable to question the generative ability of smaller regions. Small and medium-sized regions are often dominated by a limited number of industries and do not host actors such as universities and research institutes and therefore tend to be naturally disadvantaged (Andersson & Karlsson, 2006; Chung,
2002). Andersson and Karlsson (2006) conducted a review and a critical examination of the RIS concept and theories, particularly in small and medium-sized regions. They presented different types of RIS and discussed the role of regional policy and how it can and should work for the creation and development of RIS.
RIS as regional clusters are supported by key actors which include surrounding organisations. From this point of view, in the literature, two features of RIS are accounted for: “(1) firms in the regional core cluster; and (2) institutional infrastructure,” (Asheim
44 & Isaksen, 2002, p. 10). The focus on clusters is generally attributed to the key aspects of the systems approach, namely learning through interaction and geographical proximity.
However, Wiig (1996) stresses that a RIS should be looked upon as analogous to NIS, but that they should not be considered only to be “micro-national systems.” The NIS and
RIS approach are similar in the sense that they do not focus on any particular industry or technology insofar as a whole range of sectors in a country or a region with surrounding institutions are considered simultaneously (Breschi, Malerba, & Orsenigo, 2000). These are the only types of innovation systems in which, to some extent, geographic boundaries are defined (Kashani & Roshani, 2019). Sectoral innovation systems (SIS) and technological innovation systems (TIS) may or may not be spatially bounded. In the TIS approach, the focus is on specific techno-industrial areas (Carlsson & Stankiewicz, 1991).
The main difference between TIS and SIS is that the latter focuses on the competitive elements between firms while the former emphasise the networks among firms (Breschi
& Malerba, 1996) in contrast to SIS, Chung (2002) stresses that adopting a regional approach is better to formulate and implement a competent NIS than a sectoral approach.
The term ‘regional innovation system’ is widely attributed to Cooke (1992) who provides a typology of different types of RIS which he further developed in Cooke (1998). The subsequent development of the RIS literature has highlighted the role of regional learning processes and institutions in an evolutionary framework (Asheim & Isaksen, 2002;
Baptista & Swann, 1998; Cooke & Heidenreich, 1998; Howells & Bessant, 2012;
Landabaso et al., 2001).
According to Asheim and Isaksen (2002, p.2), there are three broad groups of RIS; “(i) territorially embedded regional innovation networks; (ii) regionally networked innovation systems; and (iii) regionalised national innovation systems”. These differ
45 mainly in their connection to knowledge-providers and actors outside the region as well as the form of co-operation in the innovation process.
The first type of RIS, territorially embedded regional innovation networks, is the main stimulus for firms’ innovative activities (Asheim & Isaksen, 2002; Howells & Bessant,
2012). Interaction with knowledge providers and their presence tends to be very modest.
Probably the best examples of this kind of system are “networking SMEs in industrial districts, which build their competitive advantage on localized learning processes”
(Asheim & Isaksen, 1997, p. 14). As a rule, companies in territorially embedded regional innovation networks rely on locally developed knowledge and trade interdependencies, to be strong. It seems reasonable to assume that learning by experience and training in the use of knowledge are the key mechanisms that embed these systems and that the innovations achieved are largely complementary. Table 2.1 lists the characteristics of each type of RIS in Asheim & Isaksen (2002). The second type of RIS, regional networked innovation systems, can be seen as an extension of the first type but in this case, the networking is better planned and more systemic (Andersson & Karlsson, 2006).
The third type of RIS, recognised as regional, national innovation systems, is different from the other two in many aspects. Outside actors are involved in the firms’ innovative activities and the regional industry as a whole (Asheim et al., 2008). The institutional infrastructure is also partly integrated with the national or even international innovation system. Therefore, it is closest to a “micro-national system”. Regional clusters in which the knowledge providers are first and foremost located outside the region are good examples (Enache & Morozan, 2013). Examples include R&D institutes and science parks with only some degree of linkage to local industry (Asheim & Isaksen, 2002;
Chaminade & Vang, 2008). Indeed, the co-operation between firms and knowledge organisations in regionalised innovation systems are often related to specific projects with
46 the aim of developing more radical innovations (Bessant, 2001; Colombo, Grilli, & Piva,
2006).
TABLE 2.1: SOME CHARACTERISTIC OF THREE MAIN TYPES OF RIS Main type of RIS The location of Knowledge Important stimulus of knowledge flow co-operation organisations Territorially Locally, however, few Interactive Geographical, social embedded regional relevant knowledge and cultural proximity innovation organisations networks
Regional Locally, a strengthening Interactive Planned systemic networked of (the co-cooperation networking innovation systems with) knowledge providers
Regionalized Mainly outside the More linear Individuals with the national innovation region same education and systems common experience
Source: Asheim & Isaksen (2002, p.11)
Next, the focal concept of Sectoral Innovation Systems is analysed.
Sectoral Innovation System (SIS)
The concept of the Sectoral Innovation System (SIS) is characterised as a multidimensional, integrated and dynamic representation of institutions and industries.
“A sectoral system is a set of products and the set of agents carrying out the market and non-market interactions for the creation, production and sale of those products” (Malerba,
2002, p. 876). A sectoral system has a specific knowledge base, technologies, inputs and demand. Agents are individuals and organisations at various levels of aggregation. They interact through processes of communication, exchange, co-operation, competition and command, and these interactions are shaped by institutions (Jenson, Leith, Doyle, West,
& Miles, 2016b; Malerba & Nelson, 2011). A sectoral system undergoes changes and
47 transformations through the co-evolution of its various elements. In a knowledge-based economy, identifying the factors that determine the ability of firms within the SIS to generate and commercialize innovation is the main task for business owners, academics and policymakers (McBride, 2014). The SIS provides an analytical lens for economists, technologists and economic historians in the examination of innovative and production activities. There are three main traditional approaches.
The first tradition relates to the industrial economics literature. The structure–conduct– performance tradition, the transaction cost approach, sunk cost models, game theoretic models of strategic interaction and co-operation, and econometric industry studies have emphasized differences across industries in the contexts in which economic agents act
(Bessant, 2001; Rumelt, 1997; Sutton, 1991; Tirole, 1988). Most of these approaches have considered the sectoral boundaries to be static and delimited regarding similarity in techniques or in demand.
The second tradition is defined by links, interdependencies and sectoral boundaries. It stresses that “the boundaries and sectors should include interdependencies and links among related industries and services, and these boundaries are not fixed, but change over time” (Malerba, 2002, p. 249). Within this tradition, the dynamic complementarities among artefacts and activities, provide the force and trigger mechanisms for growth and innovation. For example, investments are often closely associated and span completely different technologies or activities: They promote tensions and virtuous cycles among related products within the process of economic development.
The third tradition is the innovation system approach which considers innovation as an interactive process among a wide variety of actors. Studies in the industrial economics tradition have examined the structure of sectors in terms of such aspects as concentration,
48 vertical integration, and diversification. The dynamics of sectors has been described in terms of technical progress, entry, and firm growth while the interaction among firms is couched in terms of strategic behaviour (Bain, 1979; Phillips & Scherer, 2006; Sutton,
1996; Tirole, 1988).
The evolutionary literature proposes that sectors and technologies differ greatly regarding the knowledge base and learning processes for innovation (Andersson & Karlsson, 2006).
Knowledge varies across sectoral domains. The knowledge domain refers to the specific scientific and technological fields underpinning innovative activities in an industry
(Nelson & Rosenberg, 1993). The second area regards applications, users and demand for sectoral products as a focal point. Also, other dimensions of knowledge may be relevant to innovative activities in a sector (Malerba & Nelson, 2011).
Empirical evidence also suggests differences across sectoral systems in the patterns of innovative activities and, for each sectoral system, of similarities across countries
(Malerba & Orsenigo, 1997). This supports the appropriateness of technological regimes in determining sectoral invariances in innovation models across nations. The ability to generate and use input conditions seems less similar across countries. This is due to the presence of system features that are conducive to such activity including the level and range of university research, the availability and effectiveness of bridging mechanisms of scientific and industry vertical and horizontal linkages between local firms, and user interaction, manufacturer type and level of firms' innovation efforts (Nelson &
Rosenberg, 1993).
Breschi & Malerba (1996) point out that both the speed and direction of innovation and technological change regarding knowledge in different sectors have different characteristics. They emphasise that technical knowledge can be characterised depending
49 on the degree of specificity, tacitness, complexity, and independence. The authors further provide examples of different sectors in which the knowledge is of a different character, constituting what they call different SIS (Andersson & Karlsson, 2006). They argue that the innovation knowledge base in traditional (less knowledge-intensive) sectors is of low complexity and is easily codified and transmitted. They identified two other sectors: the computer (hardware) and software industry (microelectronics, biotechnology) where knowledge is very complex in both sectors, and they are considered to be knowledge intensive. Knowledge boundaries are both local and global since they have both tacit and codified properties meaning that geographical proximity is not important for actors, and there is likely to be a high degree of geographic dispersion of innovators (Niosi, 2011).
Malerba (2002) points out that there are two significant types of agents in a sectoral system. The first is firms which are the key actors in a sectoral system. They are involved in the innovation, production and sale of sectoral products, and in the generation, adoption and use of new technologies. The previous discussion on evolutionary theory emphasises that they are characterised by specific beliefs, expectations, competencies and organisations and participate in learning processes and accumulation of knowledge
(Breschi & Malerba, 1996; Dosi, 1997; Metcalfe, 1998). The other types of agents in a sectoral system are non-firm organisations (Edquist, 1999; Kubeczko, Rametsteiner, &
Weiss, 2006) such as universities, financial institutions, government agencies, and local authorities. In various ways, they support innovation and technological diffusion and production by firms, but their role differs significantly within the sectoral system.
In conclusion, sectoral systems have a knowledge base of technologies and inputs. The agents comprising a sectoral system are individuals and organisations, characterised by specific learning processes, competencies, beliefs, objectives, organisational structure and behaviours, and they interact through methods of communication, co-operation,
50 exchange, command processes and competition which are shaped by institutions
(Malerba & Nelson, 2011; Malerba, 2002; Niosi, 2011). The final of the four most prominently referenced systems is discussed next.
Technological Innovation Systems (TIS)
Technological Innovation Systems (TIS) consist of concepts such as ‘technological regimes’ and ‘niches’ (Al-Saleh, 2010; Baba, Takai, & Mizuta, 1995; Markard & Truffer,
2008; Martin, 2012). This appears to be a primary case where the development in the neighbouring field of ‘science and technology studies’ (STS) has impacted on science policy and innovation studies (SPIS) (Martin, Nightingale, & Yegros-Yegros, 2012).
The economic growth of states reflects their development potential which, in turn, is a function of the technological systems within which numerous economic agents participate
(Carlsson & Stankiewicz, 1991; George, McGahan, & Prabhu, 2012). Since the 1960s it is commonly accepted that technological change is a significant determinant of economic growth. A promising approach, rooted in the work of Joseph Schumpeter and building on evolutionary economics, is to start out by specialising in the method of technological and economic change at the micro level, aligned with the role of the entrepreneur. In some instances, “micro” refers to firms or perhaps units within firms, whereas in different cases it was understood as referring to clusters of firms and technologies, what Erik Dahmén has called ‘development blocks’ (Dahmén, 1988).
A technological system may be defined as a “network of agents interacting in a specific economic/industrial area under a particular institutional infrastructure or set of infrastructures and involved in the generation, diffusion and utilization of technology”
(Carlsson & Stankiewicz, 1991, p. 111). Furthermore, Carlsson & Stankiewicz (1991) defined technological systems in relation to knowledge/competence flow rather than
51 flows of ordinary goods or services. They argued that the system consists of dynamic knowledge and competence networks. Indeed, the definition of a technological system, regarding the regional dimension is captured in “… the presence of an entrepreneur and sufficient critical mass, such networks can be transformed into development blocks, i.e. synergetic clusters of firms and technologies within an industry or a group of industries”
(Carlsson & Stankiewicz, 1991, p. 111). Furthermore, in most cases, the constituent elements are correlated. The nation-state constitutes a natural boundary of many technological systems. The boundaries are dependent on circumstances including technological and market requirements, the capabilities of various agents, and the degree of independence among agents (Carlsson & Stankiewicz, 1991; Mowery & Nelson,
1999). Technological systems, as defined here, have much in common with the concept of National Systems of Innovation, as developed by Freeman (1987) and Nelson (1993).
Nelson and Rosenberg (1993) deal primarily with the composition and characteristics of the national system of industrial R&D, emphasizing institutional factors such as property rights through which firms appropriate returns on their investments in innovation and the set of institutions and government policies influencing industrial R&D (Sun & Cao, 2018;
Zhao, Xu, & Zhang, 2018), noting particularly the role of universities (Wang, 2018).
Freeman’s (1987) analysis of the Japanese system of innovation focuses on three main elements of technology: (i) the role of central government; (ii) technology sharing among firms in Japan, especially within clusters of firms in the Keiretsu system; and (iii) the role of social and educational innovations. Carlsson and Stankiewicz (1991, p. 112) differentiate their concept of TIS from National Systems of Innovation in three ways.
Firstly, TIS refers to specific areas of the technology industry, while NIS refers to the national system as a whole. Secondly, TIS makes more explicit, and puts greater emphasis on microeconomic aspects. Carlsson and Stankiewicz (1991) divide the third aspect into the role of economic competence and knowledge networks and development blocks rather
52 than institutional infrastructure. As a result, they bring into focus the challenge of adoption and utilisation of technology in contrast with that of generating and distributing knowledge.
To conclude, the analysis of Innovation Systems is not focused on its constituents but on what happens in the systems. This is fundamental to Innovation Systems theory – the components and the connections between them, hence ‘system’. At a general level, the overall function of a system is to pursue innovation processes: that is, to develop and diffuse innovations. Therefore, it is important to move beyond describing components of the systems and the relations between them. An obvious method is to deal with the
‘activities’ or the ‘functions’ of the systems. Next the role of firms is considered.
2.6 The Role of Firms in Innovation Systems
Firms are the primary locus of technological accumulation (Carlsson & Stankiewicz,
1991). Technological learning depends on firm-specific abilities. For example, if a firm finds that their core product is vulnerable to a new entrant, they may have no choice but to adapt their product to a new technology (Edquist. 1997).
Microeconomics has highlighted inter-sectoral variety within the processes of innovation, the sources of technical advance, and the impact which innovation exerts on industrial structure (Corradini & De Propris, 2017; Dosi, 1982; Freeman, 1987; Kline & Rosenberg,
1986; Nelson & Rosenberg, 1993). A critical point is that, “national patterns of technological accumulation can be traced back to the strategies and performances of few or many business firms. These strategies, business historians suggest, are obviously influenced by the environment and incentives which firms face but do retain a certain amount of discretionality” (Dosi, Freeman, & Fabiani, 1994, p. 25).
53 Explanatory factors of success and failure are often sought at firm level (Høyvarde
Clausen, 2013) however, the firm tends to be absent in the context of analysis at the system level (Edquist, 1997). Chang (2009, p. 1208) claims that “…firms having regional inter-organisational cooperation tend to increase their possibility of introducing technological innovation, regardless whether the sector has strong support from national innovation systems”.
The innovation process is interactive within the firm and among the different actors in the innovation system (Chaminade & Edquist, 2006) likewise, innovation can take place in any part of the firm. Kline & Rosenberg (1986) argue that the process of mission-oriented research will be initiated only if the firm determines an appropriate technical solution in their existing pools of knowledge.
The Innovation Systems approach emphasises that firms do not innovate in isolation. A firm has continuous interactions with other firms in the competitive environment at all levels; regional, sectoral, national, and supra-national (Edquist, 2011; 2013). In a competitive environment, firms are sensitive to the market and the related demand for new products with the aim of profit maximisation. However, the size and maturity of a firm in this process can also have an effect. These characteristics can be decisive in attracting finance, which is a central driver of innovation and performance. Factors such as firm internal capabilities, namely; absorptive capacity, growth orientation, and investment in in-house R&D, can vary across firm types and ownership. The market in which they operate can also play a critical role in innovation and performance.
Furthermore, there may be additional barriers to innovation in a market where a firm operates which curtail innovation activities. These four factors are considered next.
54 2.7 Factors Affecting Firm Innovation Performance
Many authors have studied the relationships between firm characteristics, innovation behaviour, and business performance. The first reference to the econometric analysis of
R&D activities is Griliches’ technical knowledge production function (1979). Griliches’ function includes the typical productive factors while incorporating “technological capital,” depending on firms’ R&D expenditure, University R&D, and Technological
Centre activities (Vieites & Calvo, 2011). This production function has been used in several studies (Griliches & Mairesse, 1990; Porter & Stern, 2000). Griliches’ function does not consider all ‘activities’ included in the innovation process, which is multidimensional and interactive (Landau & Rosenberg, 1986). Numerous models have been proposed to study the relationship between innovation behaviour and firm performance (Bessant, 2001; Simachev, Kuzyk, & Feygina, 2015), whether evolutionary or revolutionary. The research undertaken here considers macro-level financial mechanisms for innovation support in the Republic of Uzbekistan.
In regard to macro-level financial mechanisms, the main factors considered are: Firms’ absorptive capacity (ACAP) which is the ability to assimilate external-knowledge flows, international growth orientation (IGO), investing in in-house R&D (IRD) and barriers to innovation (BI) in the region/industry in which firm operates. Based on an extensive review of the literature, these factors are considered key to innovation performance. The first three factors describe the firm’s internal capabilities to innovate, growth being focal.
ACAP is the key determinant of firm competitiveness, which is considered to be the ability to assimilate, integrate and implement external knowledge flows (Escribano et al.,
2009; Lane et al., 2006). Recognised as having a positive influence on performance, empirical studies have found that ACAP has a significant positive effect on firm innovation and performance (Limaj & Bernroider, 2019; Sánchez-Sellero et al., 2014).
Similar results have been found in regard to the importance of international growth
55 orientation (IGO) (He, Brouthers, & Filatotchev, 2018; Krammer, Strange, & Lashitew,
2018) and investment in-house R&D (IRD) (Hall et al., 2016; Zhang & Guo, 2019). A fourth factor, barriers to innovation (BI) (García-Quevedo et al., 2018; Maldonado-
Guzmán et al., 2017) can be characterised as the relationship between available sources of finance, institutional restrictions, human resources, information flows, organisational culture, and government policies (Amara, D’Este, Landry, & Doloreux, 2016; Baldwin
& Lin, 2002; Madrid-Guijarro et al., 2009; Mohnen et al., 2008).
Since the literature is lacking a macro-level research model capable of considering the effect of both external and internal factors on firms’ innovation and subsequent performance, a macro-level model of innovation finance is developed in order to assess the effects of the firms’ internal capabilities on performance. This mediates the macro- level financial mechanisms and their direct influence on firm innovation and financial performance. The three internal factors are examined in detail in the following paragraphs, the last paragraph deals with barriers to innovation.
Absorptive Capacity (ACAP)
In knowledge-intensive environments, firms are increasingly dependent on external sources of information to stimulate innovation and increase effectiveness (Escribano,
Fosfuri, & Tribó, 2009; Morgan & Berthon, 2008; Lau & Lo, 2019). Many are faced with difficulties in accessing the benefits of external flows of knowledge and information
(Cassiman & Veugelers, 2006; Escribano et al., 2009). A firm's ACAP is not a goal in itself, but it can generate critical organisational outcomes (Kostopoulos, Papalexandris,
Papachroni, & Ioannou, 2011). ACAP promotes the speed, frequency, and magnitude of innovation, which in turn can produce knowledge that becomes part of the company's future absorptive capacity (Limaj & Bernroider, 2019; Zahra & George, 2002). High levels of ACAP enable businesses to achieve superior innovation, combined with the
56 advantage of the rapid responsiveness to customers, and the avoidance of lock-out effects, and competency traps (Hamel, 1991; Limaj & Bernroider, 2019; Zahra & George, 2002).
Firms that consistently invest in the development of new external knowledge are more likely to take advantage of changing environmental conditions, thereby creating innovative products and meeting the needs of emerging markets (Chen & Huang, 2009;
Distel. 2019; Jansen, Van Den Bosch, & Volberda, 2006; Naldi & Davidsson, 2014).
Studies further suggest that ACAP enables firms to successfully perform in foreign markets and consequently achieve superior international performance (Flatten, Engelen,
Zahra, & Brettel, 2011; Lane, Koka, & Pathak, 2006). Both the traditional internationalisation process theory and international entrepreneurship theory affirm that knowledge is indispensable for successful international expansion (D’Angelo & Presutti,
2018; Mathews & Zander, 2007; Mcdougall & Oviatt, 1993; Vahlne & Johanson, 2006,
2017). International growth orientation is considered next.
International Growth Orientation (IGO)
As a result of globalization, entrepreneurship is embedded in the world economy, with exports being the most common form of international business integration (He, Brouthers,
& Filatotchev, 2018). In this regard, competitive strategies, entrepreneurial orientation, and internationalisation are a consistent focus for both academic and business interests
(Cavusgil & Knight, 2015; Mathews & Zander, 2007). Several studies have analysed the impact of IGO on the overall performance of firms (Hernández, Moreno, & Yañez, 2016;
Krammer, Strange, & Lashitew, 2018; Moen et al., 2016). As a response to increasing interest in the internationalisation of knowledge-intensive firms, and the intensity with which firms are connected, a measure for analysing IGO was developed.
IGO, in this research, is a measure of the intensity with which an enterprise derives growth and knowledge from international markets. IGO, articulated in this research as a local
57 firms' concentration to grow internationally and become export oriented. The driving motive for an enterprise behind international market-oriented growth is expanding the radius of its market share. Such a vector of growth perhaps fuelled via a firm's internal capabilities, including entrepreneurship and innovation, and public NIS policies targeted to support export-oriented firms. Furthermore, it is believed that international expansion translates to subsequent growth through new products and services, thus providing a more nuanced understanding of the conditions under which knowledge is acquired (Naldi &
Davidsson, 2014).
IGO, identified as a factor which is critical to firm performance across many industries, provides the opportunity to acquire knowledge from international markets (Deligianni,
Voudouris, & Lioukas, 2015; Naldi & Davidsson, 2014). Hernández, et al. (2016) found a significantly positive correlation between a firm’s IGO and overall performance. Indeed many business entities look for international growth opportunities in order to increase profit and competitiveness (Autio & Rannikko, 2016), in turn reducing their dependence on domestic or national markets (Michailova & Zhan, 2015). Many economies support export-oriented firms, not only for the acquisition of knowledge to sustain their local business, but also to stimulate domestic firms to export and thus attract foreign currency.
In short, export-growth orientation has proven relevant not only in terms of national prosperity but also for the growth of individual firms (Cadogan, Diamantopoulos, &
Siguaw, 2002; D’Angelo & Presutti, 2018).
In the context of developing economies, export-oriented firms perform a crucial role in accumulating foreign currency. However, firms grow in different ways for different reasons and with mixed results (McKelvie & Wiklund, 2010), which in turn pushes national governments to fix market failures and create favourable conditions. It is generally accepted that firms which have entrepreneurial tendencies perform better than
58 those that are more conservative (Najafi-Tavani, Najafi-Tavani, Naudé, Oghazi, &
Zeynaloo, 2018). Naldi & Davidsson (2014) find a significant positive effect of the acquisition of knowledge from international markets on entrepreneurial growth. Market orientation is essential for the development of marketing concepts, and typically refers to a firm's ability to generate market information relevant to current and future customer needs. They then absorb that intelligence and respond to the knowledge accordingly
(Jaworski & Kohli, 1993).
Investment in In-House R&D
Along with the above-mentioned internal capabilities, ACAP and IGO, investment in in- house R&D is vitally important for both innovative performance and financial stability
(Hall et al., 2016; Zhang & Guo, 2019). In-house investment in R&D represents a specific capability which leads to both incremental innovation and discontinuous innovation.
Broadly speaking, firms can achieve higher levels of performance if they allocate capital annually to advance innovation, potentially increasing the volume of seed and venture capital to boost new innovative projects (Bergek et al., 2008; Kerr & Nanda, 2015). Firms investing in in-house R&D can more easily identify, assimilate, and commercialise new information and knowledge (Phelps et al., 2007). Financial markets play a key role in allocating resources to firms with the greatest potential for introducing new processes and commercialising new technologies (Kerr & Nanda, 2015). Berger et al. (1998) find that both banking system maturity and stock market liquidity are positively associated with the growth of firms through investment in in-house R&D. For instance, access to equity funding is associated with R&D intensive innovation, while debt financing is more often used for incremental projects (Shalley, Hitt & Zhou, 2015).
The extant research stresses that external finance is more expensive than internal sources due to higher risk and asymmetric information (Brown and Petersen, 2011; Himmelberg
59 and Petersen, 1994; Shin and Kim, 2011) which causes R&D investment to be sensitive to shocks and to fluctuate (Kang et al., 2017), particularly in transition economies (Wang
& Thornhill, 2010). In this regard, the Pecking Order Theory (POT) of capital structure
(Myers and Majluf, 1984) postulates that the cost of financing increases with asymmetric information, it explains why equity finance is the costliest source and should be used as a last resort.
According to the POT, companies follow a hierarchy when considering sources, internal financing is usually preferred when it is available, and debt is preferred over new equity if external finance is required. Investment in innovation implies information asymmetry, often relegating growth prospects to the retained earnings trap (Walsh, Niosi & Mustar,
1995). In countries without a well-functioning financial system, the role of government is particularly crucial, as public investment can exert a leveraged effect on private investment, especially when access to bank credit is limited (Erden & Holcombe, 2005).
In this case, capital market imperfections may lead public policy to develop compensatory instruments in support of firm-level innovation. Government support programmes represent direct or indirect transfers of resources to firms whether the support is financial or in-kind (OECD, 2018). This support may come directly from government in the form of grants or subsidies etc. or indirectly, via tax exemptions if a firm’s activities fall under governments’ mission-oriented industrial policies. Firms can benefit from public support that targets business activities (for instance expenditure on research and experimental development or the acquisition of new machinery) or the outcomes of business activities
(for instance revenue streams arising from past innovation activities or reduced emissions) (OECD, 2018).
60 Barriers to Innovation
Innovation is widely recognised as a key driver in the competitiveness of nations and firms, however firms encounter a myriad of constraints and barriers (Madrid-Guijarro et al., 2009). Market demand, finance, knowledge and context are the most common factors which reduce innovation and the overall amount invested in innovation activities (Cincera
& Santos, 2015). Furthermore, institutional factors hamper innovation. As a result, investment in equipment and in-house R&D, along with intangible activities, are affected.
The body of research on barriers to innovation (e.g. Amara et al., 2016; Baldwin & Lin,
2002; Madrid-Guijarro et al., 2009; Mohnen et al., 2008) has established a close link with access to finance, institutional restrictions, human resource constraints, information flows, organisational culture, and government policies.
Maldonado-Guzman (2017) investigated the effects of the external environment, financial resources, and human capital barriers, particularly within the context of innovation in service-based SMEs. Their results show that external barriers are the most significant of the three. Another example from a survey on Access to Finance among Enterprises in the
Euro area (European Central Bank, 2015b), illustrated that access became the least important concern for European area enterprises, finding customers remained the dominant concern in the survey period.
In both developed and developing economies, firms including SMEs and larger industrial/state-owned firms provide important services such as job creation, innovation, and economic dynamism (Acs & Audretsch, 1988; Acs et al., 2014; Ranasinghe, 2017).
Given these advantages, governments intervene to address market failures and shape new markets to ease economic turbulence (Mazzucato, 2014). The main focus falls on increasing the ‘productivity’ of entrepreneurial firms by lowering barriers to entry and reducing the hazard of exit (Acharya & Xu, 2017; Autio & Rannikko, 2016). This
61 promotes an approach which supports firms of all kinds, in the hope that if a more significant number of enterprises survive, this will result in a higher level of job creation
(Shane, 2009). With regard to firm-level innovation activities, policymakers worldwide have established and implemented public policies aimed at enhancing innovation (Crespi
& Dutrénit, 2014). However, while much attention has been paid to the determinants of firm innovation, along with the impact of policy promoting innovation, the analysis of factors impeding engagement has received less attention. Exploring the factors hampering innovation is relevant when designing policy interventions within NSI (Woolthius,
Lankhuizen, & Gilsing, 2005). Identification of obstacles that affect the innovation process could encourage targeted interventions which in turn may become a driver of economic growth and development in the long run.
2.8 Conclusion
In summary, this chapter discusses how innovation systems intersect within and across different levels. It does this by analysing how innovation is conceptualised and implemented at both incremental and radical levels. The chapter discussed in detail the various dimensions of the NSI framework focussing on NIS, RIS, SIS and TIS.
At the core of chapter is the point that the firm is a focal element of the Innovation System.
In contrast with the institutional emphasis of the Systems of Innovation frameworks, the concept of National Systems of Entrepreneurship (NSE) is outlined, underpinning the pursuit of opportunity at the individual-level. This chapter discusses three important internal capabilities that firms need to drive innovation and performance: absorptive capacity, international growth orientation, and investment in in-house R&D. A focal issue is the nature of barriers to innovation that the firm faces from an external perspective.
One of the foundational aspects of firm-level innovation within the Innovation Systems framework is access to funding. The role of government is a critical actor in the system
62 both as a provider of finance but also as an agent to ensure the development of a robust financial system at country-level. Legislation in respect of financial mechanisms and property rights is also key to supporting firm-level innovation. The following chapter focuses on the central importance of finance for firm-level innovation.
63
CHAPTER THREE Financing Innovation
64
3.1 Introduction ...... 66 3.2 Finance and Innovation ...... 67 3.3 Financial Constraint ...... 69 3.4 Theoretical Foundations ...... 72 3.5 Types of Finance for Support Firm-Level Innovation ...... 76 3.6 Internal Finance ...... 78 3.7 External Market Sources ...... 80 Equity Finance ...... 80 Debt Finance ...... 81 3.8 Role of Government ...... 86 Direct Public Funding ...... 92 Indirect Public Funding ...... 95 State Programs for Innovation Support ...... 98 3.9 Conclusion ...... 101
65 Chapter 3: Financing Innovation
3.1 Introduction
The impact of financial constraints on innovation has been the subject of much debate in economic theory. Access to both internal and external funding is important to innovative activities (Brown et al., 2009). Firms engaged in innovation encounter a variety of obstacles in accessing external finance, especially when they have few if any, tangible assets to pledge as collateral (Fleisig & Safavian, 2006; Hall, Moncada-Paternò-Castello,
Montresor, & Vezzani, 2016). The World Bank Enterprise Survey (2014), which examined more than 130,000 companies in 135 countries, found that 27% of firms reported insufficient access to capital as a major obstacle to growth. In the context of this research, firms in emerging economies report greater funding limitations (Pérez, Geldes,
Kunc, & Flores, 2018).
This chapter provides a critical review of the literature on financing innovation and, in particular, the role that government plays in supporting firm-level innovation, where performance outcomes are known to be closely related to both funding needs and availability (Brown, Fazzari, & Petersen, 2009b; Chowdhury et al., 2019). Funding enables organisations to conduct R&D, which supports the introduction of technology needed for innovations and their development and commercialisation (Bharadwaj, 2015).
The objectives of this chapter are twofold: Firstly, to establish the rationale for including
'finance for innovation' as a key driver of firm-level innovation, addressing both internal and external sources of funding. Secondly, to elaborate on the role of government through direct funding schemes and indirect supports (Mertzanis, 2017; Pinto, Ferreira, Falaster,
Fleury, & Fleury, 2017).
66 3.2 Finance and Innovation
R&D and innovation activities are difficult to finance in competitive markets (Hall &
Lerner, 2009; Mateut, 2018). Economic modelling supports this view as reflected in the classic works of Nelson (1959) and Arrow (1962), although Schumpeter (1942) alluded to the challenge much earlier. Schumpeter highlighted the interaction of innovation and resource allocation, especially the allocation of financial sources. He downplayed the role of publicly funded interventions to promote innovation and economic development, emphasising the self-funding nature of innovation by enterprise (O'Sullivan, 2006).
The challenge of financing innovation is unequally distributed. This can be explained through the lens of Sectoral Innovation Systems (SIS) allied to the Resource Based View
(RBV), which suggests that firm specific factors dominate the effects which drive performance within industry sectors (McBride, 2014). This is supported by research which indicates greater variation within industries than between them (Rumelt, 1997).
Entrepreneurial start-ups may not have access to independent venture capital (IVC), nor to pools of corporate venture capital (CVC). Private Sector funding is often limited in emerging economies as exit markets for Initial Public Offerings (IPO) and Mergers &
Acquisitions (M&A) are underdeveloped (Armanios, et al., 2017).
From the early 1970s, theories surrounding corporate finance, including the Pecking order theory (POT), emerged and shifted the focus from resource allocation to the economics of information (Conner, 1991). Alternative sources of finance for innovation were a focus for financial economists, inspired by the seminal work of Modigliani and Miller (1958).
These theories analysed the 'cost of capital' to the firm. Such knowledge is critical in a global economy where funds are designated to assets whose yields are potentially high but uncertain. Institutions provide access to capital through different mediums ranging
67 from debt instruments to equity tools. This represents fixed claims which give the holders the right to obtain a pro-rata share in a venture which may be considered uncertain.
These developments stimulated fresh treatment of old distinctions among alternative financing sources, including literature on venture capital (Allen & Douglas, 2000;
Cusmano, 2015). This highlighted the gap between theoretical economists, for example, economists of innovation, evolutionary economists, and those who concentrate on empirical work such as financial economists. The latter group is primarily focused on financial and material resources coupled with the capability to provide funding as a crucial component of development (Alexander & Magipervas, 2015; Casanova,
Cornelius, & Dutta, 2018). Indeed, the relationship between financial and economic development has attracted substantial interest since Schumpeter's (1911) "Theory of
Economic Development" was first published. McKinnon (1973) and Shaw (1973) described two ways in which underdeveloped financial systems would hamper growth.
Firstly, the amount of savings that investors can mobilise may be limited. Secondly, the potential failure of financial intermediaries to direct resources into the most productive activities. Subsequent contributions to the literature on finance and growth have focused on the financial system's various functions and identified additional sources. Apart from mobilising, pooling savings, and allocating capital to productive uses, finance is considered to influence growth by: Producing information, monitoring investments, exerting corporate control, facilitating trade, diversification, and management of risk; and easing the exchange of goods and services (Hall, 2002; Hall & Lerner, 2009; Levine,
1997).
Financial systems play a critical role in innovation. The regulation of financial systems promotes both the development of financial intermediaries and the regulation of financial institutions. This in turn may affect both the quality and sources of innovation (Jugend &
68 Jose, 2018). Under the investment theory framework, investment in innovation,
(including R&D and related activities), has a particular significance which distinguishes it from traditional investment in tangible assets (Dewangan & Godse, 2014; Savignac,
2008). This creates difficulties for financing innovation resulting in challenges beyond those encountered in traditional investment (Hall & Lerner, 2009; Himmelberg &
Petersen, 1994; Mohnen, Palm, Van der Loeff, & Tiwari, 2008). These challenges are closely linked with financial constraints across a firm's lifecycle stage and can be described as circumstances under which a firm may not have access to external funding due to high cost or unavailability. This potentially results in underinvestment or funding solely through retained earnings (Brown et al., 2012; Guariglia & Liu, 2014; Lahr &
Mina, 2013). Such financial constraints have been cited across a range of innovation systems over the last three decades (Bhagat & Welch, 1995; Bond, Elston, Mairesse, &
Mulkay, 2003; Hall, 2002; Hall & Maffioli, 2008; Hall, 1992). The next section sheds further light on this concept.
3.3 Financial Constraints
The empirical literature on constraints to innovation investment has advanced substantially in recent years. Given that innovation outcomes cannot be forecasted ex- ante, innovation investment is subject to more significant financial constraints than investment in tangible assets. Theoretical and empirical investigations highlight the consequences of financial constraints on both innovative activity and firm performance
(García-Quevedo, Segarra-Blasco, & Teruel, 2018a; Hall, Castello, Montresor, &
Vezzani, 2016). Financial constraints are described as a condition when firms fail to receive funding for their operations. Financial constraints arise when firms do not have access to external funding due to the cost of loans or unavailability of capital. As innovation projects involve long-term, idiosyncratic, and unpredictable activities, they have a high likelihood of failure (Sharma, 2007; Verdier et al., 2010).
69 Hsu et al. (2014) argue promoting innovative practices requires well-functioning financial institutions, which makes a substantial contribution to allocating scarce financial resources, managing risk, assessing advanced technological projects and, of course, reducing funding costs. Likewise, Verdier et al. (2010) argue that innovation costs drive the need for a mature financial system in order not to restrain production in the absence of necessary funding. However, firm access to financial resources is not uniform across countries and this is intensified by underdeveloped financial markets in transition economies (Wellalage & Fernandez, 2019). Ullah (2019), analyzing SMEs in emerging market economies, finds that small firms in these economies rely heavily on internal funds and relationship-based informal sources due to the inefficient banking sector, which is unable to meet the capital needs of innovative small firms. As previously mentioned, self- funding has been widely examined in the context of a potentially dampening effect on product development and process innovation (Agénor & Canuto, 2017; Al Mamun et al.
2018; Amara et al., 2016).
Analysis of different firms and their levels of financial constraint demonstrates various impacts on innovation activity (Ali Haider et al., 2017; Mohnen et al., 2008; Savignac,
2008). Nunes, Gonçalves and Serrasqueiro (2013) report that innovative small firms are considered the most informationally opaque; they face many challenges in getting access to external finance. This finding is consistent with Mina, Lahr and Hughesy (2013), who provide evidence that financial institutions often exclude the firms engaged in innovative activities due to asymmetric information problems. While innovation projects frequently fail because of intrinsic uncertainty and information asymmetries (García-Quevedo et al.,
2018), evidence shows that financial restraints are a significant factor impeding growth
(Poncet, Steingress, & Vandenbussche, 2010; Savignac, 2008).
70 However, it is important to make the distinction between the lack of access to finance and lack of available funds (de la Torre et al., 2017). Firstly, the term "lack of access" is linked with low availability of funds. Beyond that, there may be a number of factors affecting an organisation's access to finance. National financial or economic regulation may prevent firms from using internal sources to boost innovation. Also, the phrase "lack of available funds" may imply that the financial market is not well developed.
The amount a firm can invest in innovation is affected by the availability of retained earnings which is a constraint on growth. Further the lack of availability of retained earnings may also affect the ability of the firm to access external sources of finance (Hall,
2005; Hall & Lerner, 2009). The cyclicality of the economic system can also affect the level of retained earnings (Gu, 2005).
The following measures can characterise a favourable ecosystem; firstly, a well- developed financial system capable of providing the necessary funds and instruments for firms and equal access for qualifying actors within the system. Secondly, a government attuned to diverse functions and responsibilities in overseeing the national market, including economic regulations, usually linked to its capability and development stage
(Porter, 1985).
In sum, the extant research shows that with regard to accessing financial sources, credit services are the most challenging from both an analytical and policymaking perspective
(Casanova, Cornelius, & Dutta, 2018; Guan & Yam, 2015). The provision of credit services entails complexities that often mean providers will classify certain firm-level innovation projects as ineligible (de la Torre et al., 2017). There are several factors that shape firm-level decisions to allocate financial resources for innovation. However, financial constraints or availability of-and-access-to internal and external financial
71 resources can vary significantly depending on a firm's development stage and related age, size and ownership structure. In addition, access to finance for firm-level innovation is not uniform across economies (Wellalage, Locke, & Samujh, 2020; Sameen, & Cowling,
2015) and the type of finance options available to firms in the market where they operate, may vary according to their lifecycle (Berger & Udell, 2006). The main theoretical foundations of finance for innovation are analysed next.
3.4 Theoretical Foundations
The Resource-based View (RBV). The RBV is closely aligned with the work of Penrose
(1959) and Wernerfelt (1984), who contend that a firm is a collection of productive resources through which they compete. The theory examines the resources and capabilities which enable a firm to achieve superior financial performance while maintaining a sustainable competitive advantage (Barney, 2001). This stems from its grounding in what firms are and how they function. The RBV sees firms as a historically determined collection of static and dynamic resources, which allows a firm to overcome financial constraints and barriers in achieving sustainable competitive advantage or performance (Kamboj, Goyal, & Rahman, 2015).
The theory concentrates on firms' internal resources to explain why firms in the same industry perform differently (Kang & Park, 2012), and why relative sectoral difference and firm attributes impact on firm performance (Zawawi et al., 2016). The theory suggests that combining a firm's internal capabilities, such as absorptive capacity, international growth orientation and investment in R&D, among others, can create competitive advantage and overcome barriers to enable sustained superior innovation and financial performance (Barney, 2001; Ojha, Patel, & Sridharan, 2020; Zhou, Zhou, Feng, & Jiang,
2019). The RBV is a critical theory within this research as it exposes internal capabilities as the basis for innovation and financial performance.
72 Pecking Order Theory (POT). POT was popularised by Myers and Majluf (1984), who argue that equity is the least preferred means for raising capital. The POT of capital structure is one of the most influential theories in corporate finance. The theory suggests that firms have a particular preference in the order of capital they use to finance their endeavours, following a hierarchy of sources. Internal financing is usually preferred when available, and debt is preferred over equity if external finance is required (equity requires issuing shares 'bringing external ownership' into the company). The stream of research in the field (Park, 2019; Shyam-Sunder & Myers, 1999; Zhang & Kanazaki, 2007) concludes that the pecking order offers a good approximation to firms' financing behaviour. In line with the hierarchy, the theory postulates that the cost of financing increases with asymmetric information and explains why equity financing is the costliest source and should be used as a last resort (Allini, Rakha, Mcmillan, & Caldarelli, 2018;
Bharath, Pasquariello, & Wu, 2009) as it exposes firms to potential value dilution.
Recent studies find conflicting evidence concerning external finance through the POT lens. For instance, Park (2019) found equity financing was more attractive when the firm already has some debt and such debt commitments are linked with capital market development when it comes to raising more capital. These complications are consistent with the findings of Allini et al. (2018) and Faff (2016) as they argue that external financing sources are not consistent during firms' lifecycle due to availability and access.
The industry the firm is located within may also have an effect on debt ratios (Harris &
Raviv, 1991; Kumar et al., 2017; Vo, 2017).
Despite such inconsistencies, POT is a central theory in this research. The optimal order of capital selection impacts a firm's innovation and financial performance outside of other factors impacting choice during the lifecycle stage. Considering this, the financial growth lifecycle theory is examined next.
73 The Financial Growth Lifecycle Theory. The financial growth lifecycle model was developed by Berger and Udell (1998). The authors conceptualise the model as sequencing funding over the firm's life cycle on information opacity and following a financial pecking order. The theory incorporates elements of trade-off, agency (Jensen &
Meckling, 1976), and pecking order theories (Myers & Majuf, 1984), and describes sources of finance as a progression of the firm as a linear sequential process through several stages (Cincera & Santos, 2015; Mac an Bhaird & Lucey, 2011). In other words, the theory outlines that sources of finance typically available at various growth stages of the firm, along with potential financing problems that may arise at each stage.
The financial growth lifecycle theory of a firm may profoundly impact the level of access it has to internal and external finance (Berger & Udell, 2006; Fernandez, 2017). In particular, Berger & Udell (2006) consider age to understand SMEs' financial behaviour, but little is known of firm-level innovation mechanism. Empirical studies confirm that access to finance is essential for all firms as it exerts a positive influence on innovation fuelling economic growth (Brown, Fazzari, & Petersen, 2009; Wang & Zhou, 2011). This is true regardless of firms' age and size (Kim, Lin and Chen, 2016). The former study finds that access to different sources of finance depends on the risk level investment project, the firm size, age, and information availability (Berger and Udell, 1998) and also on growth goals, the nature of the ownership and the activity sector (Riding et al., 2012).
Figure 3.1 overleaf depicts the type of availability of internal and external sources of finance across a firm's lifecycle stage.
74
Cole & Cole , (2014)
OMPANY C
A Divakaran, McGinnis, & Shariff Divakaran, McGinnis, & Shariff , ) INANCING F F O TAGES S YPICAL T
: 1 . 3
IGURE (2018) F and Caselli Authors own elaborations based on Berger &(1998 elaborationson Berger Udell own based Authors
Source: Sokolyk (2017)
75 Empirical evidence for the financial growth life cycle model is limited, with a couple of notable exceptions (Fluck et al., 1998; Gregory et al., 2005; Dickinson et., 2018).
Researchers find that external finance exceeds internal sources for the youngest firms, contrary to the financial growth lifecycle model predictions. The initial increase in insid financing is explained by firm owners employing retained earnings for investment because of potential difficulties in raising external finance explained by the monopoly- lender theory (Rajan, 1992; Mac an Bhaird & Lucey, 2011). The subsequent decrease in internal sources' use is explained by older firms sourcing increasing amounts of external debt due to reputation effects (Diamond, 1989; Allini et al., 2018). It can be inferred that access to sources of finance not only depends on the risk level of the project, the firm size, age, and information availability but also on a firm's growth orientation, the nature of ownership, internal capabilities and the industry type. Types of finance, both internal and external, and governments’ role in supporting firm-level innovation, is analysed next.
3.5 Types of Finance for Support Firm-Level Innovation
Finance plays a significant role in innovation by enabling organisations to conduct R&D as well as introducing technologies needed for development and commercialisation
(Bharadwaj, 2015). In line with the POT, the firm's choice is traditionally consistent with using a capital structure hierarchy when financing their endeavours, especially innovation
- firms use internal or external sources of finance (debt and equity) or a hybrid of both
(see Figure 3.2). Internal financial sources have been demonstrated to influence firms' activities such as investment in fixed capital (Fazzari et al., 1988) and employment
(Nickell and Nicolitsas, 1999), which are core factor inputs for production. A significant body of literature addresses the effects of funding solely through retained earnings and cash from operations (Bhattacharya & Londhe, 2014; Guariglia, Liu, & Song, 2011;
Husain, 2015). On the other hand, external market sources are considered a source of competitive advantage for financing firm-level innovation (Barney, 1991; Beck &
76 Demirguc-Kunt, 2006). According to the financial growth lifecycle theory, firms choose both, or indeed a hybrid of, debt and equity financing depending on their strategic development (Kang, Baek, & Lee, 2017; O'Brien, 2003). Evidence shows that firms who adopt hybrid sources grow faster than the rate set by those using internal sources alone
(Rahaman, 2011). Hybrid funding is positively associated with stock market liquidity, the size of the banking system, and the legal system (Casanova et al., 2018; Venanzi, 2017).
Availability and access to finance have been a significant factor in influencing firm activities and promoting aggregate growth. Financial markets and institutions are traditionally reluctant to invest in innovation activities as they bear a higher uncertainty/risk, compared to more traditional business projects (Cincera & Santos,
2015). On top of that, if a firm operates in an insufficiently developed financial market, region or economy, access to external finance becomes more challenging. Without a functioning financial system, the market cannot efficiently boost firm-level innovation or lead to sustainable economic growth for a particular country. In addition, to obtain external market funding such as debt and equity finance (amongst others), firms face varying regulations, significantly depending on firm-level characteristics. To address this gap, the government can play an essential role through the provision of direct public funding and indirect schemes to support firm innovation and by using policy instruments such as debt and equity guarantee schemes, public grants, direct investments, tax reliefs, incubators, investments via venture capital funds, or funds of funds (Cumming & Groh,
2018).
The next sections examine the sources of internal and external finance and the government's role in supporting firm-level innovation in depth.
77 3.6 Internal Finance
The primary internal sources of finance are cash balances, capacity utilisation, divestment, and the cash from profits accumulated over time, which have not been returned to shareholders. As illustrated by POT, firms typically prefer internal over external financing due to costs. A number of studies (Bah & Dumontier, 2001; Carpenter
& Petersen, 2002) have found a strong reliance on internal funds for financing innovation while others have identified the negative incidence of leverage, reflecting the challenge associated with debt finance (Singh & Faircloth, 2005). Several factors shape firms’ decisions to allocate resources to innovation. Availability of-and-access-to internal finance can vary significantly depending on a firm's age, size and ownership structure.
Large firms, in contrast to start-ups, can leverage external finance if their internal sources are insufficient. SMEs usually have limited financial track records and tangible assets to use as collateral for debt finance. Established firms, through positive cash flow and resource allocation mechanisms, can invest in R&D, unlike newly established start-ups
(Kerr & Nanda, 2015).
R&D investment helps build strategic, firm-specific resources and capabilities (Helfat,
1994, 1997), leading to superior performance (Phillips & Scherer, 2006; Zahra & Covin,
1995). A firm capable of investment in in-house R&D can more easily identify, assimilate, and commercialise new information and knowledge (Phelps et al., 2007).
Therefore, firms mobilise their internal financial resources to finance expansion. High growth firms that draw on their internal financial resources are more likely to use a hybrid of internal and external finance for R&D (Brown & Lee, 2014). However, in contrast to large firms, newly established firms can recoup the fixed costs of investing in innovation, mainly by pricing higher than the marginal cost of production. Firms employ different strategies to sustain mark-ups, such as using intellectual property (e.g., patenting), first- mover advantage (market share advantage), or secrecy (Reed, Storrud‐Barnes, & Jessup,
78 2012). However, these strategies are not always successful, and it can be challenging to sustain mark-up to cover the costs of innovation in competitive markets. While informal sources may provide affordable funding for a nascent company, financing from family and friends is often unreliable and can be associated with lower growth rates compared to formal funding sources (Chavis et al., 2012).
External finance is more expensive than internal sources due to higher risk and asymmetric information, which causes R&D investment to be sensitive to shocks and to fluctuate (Kang et al., 2017). Firms need to maximise internal capacity by controlling their working capital and divesting to obtain funds. However, access and eligibility usually depend on the firms' stakeholders, industry policy and the relevant market. Banks are usually reluctant to lend to firms with few, if any, tangible assets, negative cash flows, and short repayment history. In short, access to internal finance can vary significantly based on firm development stage, characteristics (such as age and size) and ownership structure. The different characteristics of firms can cause systemic barriers that dampen growth levels (Heredia Pérez, Geldes, Kunc, & Flores, 2018; Mohan, 2012). Internal finance remains the primary financial driver of innovation within the firm, it copes better with risks related to knowledge leakage (Acharya & Xu, 2017; Chen & Guariglia, 2011).
As a result, entrepreneurial firms' success often depends on their internal financial resources or their ability to find private investors willing to fund their projects. However, private sources are not always sufficient, which leads new firms to look for external funds, one source of which is independent venture capital, but very few start-ups are backed by
VC funding (Casanova et al., 2018; Block et al., 2018).
As described above, both internal and external financial resources (equity and debt) are essential for firms’ competitive advantage, in particular, raising funds for innovation, and these are considered next.
79 3.7 External Market Sources
External Market sources include equity and debt finance (incorporating hybrid forms, see
Figure 3.2) provided by individual investors (such as business angels), banks, capital markets, and both direct and indirect public funds (Cumming & Groh, 2018). External finance is a primary source of funding for innovation for those firms that meet the eligibility criteria (Cusmano, 2015; Rahaman, 2011).
Equity Finance
Financial development significantly impacts firm-level economic performance and, ultimately national economic growth and sustainability. A well-developed financial system plays a crucial role in fuelling process innovation in developed countries through stock markets and venture capital funds. With limited public or private equity availability, bond finance is dominant (EBRD, 2014; Wonglimpiyarat, 2013). It is assumed that financial markets play this role by allocating financial resources to firms with the greatest potential for introducing new processes and commercialising new technologies (Kerr &
Nanda, 2015). Equity finance is an important financial instrument for firm innovation activities when government grants are unsuitable or unavailable (Zhang & Guo, 2019).
Equity is the most common source of external finance (Brown et al., 2009a, 2012;
Jackson, Keune, & Salzsieder, 2013) for start-ups and large companies. However, larger firms tend to have more options (see Figure 3.2). The financing of equity is the process of raising capital by selling shares of an enterprise. As companies mature and become profitable, financing alternatives change. A stronger position in the capital markets should improve access to sources of financing, pricing and conditions. A poorly designed capital structure has the potential to dilute the wealth of shareholders, or in the worst-case scenario, cause liquidation. Therefore, financing a company through various lifecycle stages is one of the critical management challenges faced by entrepreneurs.
80 The market timing hypothesis predicts that equity issuers earn lower future stock returns than debt issuers (Lewis & Tan, 2016; Wonglimpiyarat, 2013b). According to some investment-based theories, the predictable stock returns following financing activities reflect rationally expected discount rates associated with real investments. Many disruptive capital-intensive technologies and business models are not bankable given business uncertainties and lack of collateral. However, not all start-ups are built on disruptive innovations, and research points to the importance of debt financing for entrepreneurial firms (Beck & Demirguc-Kunt, 2006; Berger & Udell, 2006). Indeed, concerning equity finance, the literature (e.g. Berger & Black, 2011; Casanova,
Cornelius, & Dutta, 2018; de Bettignies & Brander, 2007; Fernandez, 2017) emphasises certain limits to equity markets for financing innovations - especially radical forms due to short-term pressures, imperfect monitoring, and stakeholder issues.
Debt Finance
Debt financing occurs when a firm raises working or investment capital through borrowing. This is often more challenging for investment in innovation than for other types of financing (Lewis & Tan, 2016). Access refers to firms' ability to obtain any of the desired types of debt finance (see Figure 3.2). The level of access significantly varies across firm characteristics, as has been underlined by the theories analysed in this research. Debt finance tends to be the least favoured source of finance for R&D investment compared to other sources (Hall and Lerner, 2009). The main reason is that credit rationing disproportionally affects SMEs and those most engaged in innovative activities, as they lack the collateral and track record of traditional businesses as well as having more uncertain investment outcomes (Aurswald, 2007).
A variety of institutions and private investors provide debt financing. Bank loans are the most common type, based on credit risk (World Bank Group, 2017a). The determinants
81 of credit risk rest equally on macroeconomic and microeconomic dimensions (Louzis et al., 2012; Chaibi & Ftiti, 2015). Exchange rates, interest rates, inflation, public debt and unemployment rates are the key variables that influence the level of risk at the macro level. At the micro-level, size and ownership structure are the main factors determining firms' financial performance (such as return on equity, solvency ratio and leverage).
Inevitably, as firm size matters, SMEs encounter more barriers in the credit market (Beck
& Demirgürç-Kunt, 2006) and this is more pronounced for innovative firms (Lee et al.,
2015). In short, a bank's decision to lend is mainly based on a company's financial situation and less on the viability of the business proposal. An OECD study (2010) on the financing of innovative firms confirmed debt financing is the main funding source. Hall et al. (2016) find that innovative and faster-growing firms are less successful than their traditional and slower-growing counterparts in obtaining loans.
Firms which are relatively small and new are not only more likely to report higher obstacles than larger and older enterprises (Beck & Demirguc-Kunt, 2006), but they also suffer greater consequences. One European Central Bank survey (2015a) illustrates that the use of external finance increases with firm size. Banks use secured debt schemes that give lenders rights to collateral in the event of debtor default (Berk and DeMarzo, 2007;
Copeland and Weston, 1988). Collateral may take the form of bank deposits, securities, receivables, inventory, commercial and residential real estate, tools, equipment and vehicles, among other assets (Berger & Black, 2011). Berger and Black (2011) indicate that debt secured by fixed assets provides an incredibly strong incentive to make scheduled debt payments. However, banks are not the only lenders from which entrepreneurial firms may obtain loans. Start-ups can also access venture debt funds to finance capital expenses and working capital (de la Torre et al., 2017). These providers typically combine their loans with warrants to compensate for the higher risk of default.
82 However, venture debt funds usually provide funding to start-ups backed by VC equity
(Block, Colombo, Cumming, & Vismara, 2018).
In sum, SMEs experience greater constraints in accessing finance as they tend to have riskier projects and business models (Lee, Sameen, & Cowling, 2015a). In parallel, large manufacturing companies also face financial constraints in the context of technology modernisation. Investment can be crucial to large industrial organisations as they may require process innovation to maintain market share through operational efficiencies
(Santos, Cincera, & Neto, 2016).
According to the financial growth lifecycle theory, external finance's importance varies with a firm's current level of development (European Central Bank, 2015b). Where available, debt finance is generally preferred to equity, since debt is typically a cheaper source (Svensson, 2006). Research demonstrates the positive impact of access to varied finance sources boost firm-level innovation and ultimately leads to the economic growth of a country (Méndez, Galindo, & Sastre, 2014), but investment outcomes are contingent on a range of variables. To maintain and accelerate economic growth, governments take risks by investing in innovation. Compared to private investors, governments often invest in more radically innovative projects (Grilli, Mazzucato, Meoli, & Scellato, 2018).
In developing countries, open access to financial markets is a determinant of firm growth and survival (Ruziev & Webber, 2019). Financial constraints arise from a variety of sources. The literature identifies information asymmetries and agency problems as critical factors that influence the allocation of financial resources (Cincera & Santos, 2015). To overcome market failure, government intervenes in the economy. Governments intervene through direct and indirect macro-level financial mechanisms to lower or remove obstacles to innovation in order to improve the entrepreneurial ecosystem (Goldberg,
83 1962; Intarakumnerd & Goto, 2018). Government intervention has grown through public investment schemes, which have a leveraged effect on private investment, especially where access to external market sources is limited (Erden & Holcombe, 2005). In particular, the government can play a part through the provision of direct public funding schemes to support newly established and small ventures, and by using policy instruments including debt and equity guarantee schemes, public grants, direct investments, tax reliefs, incubators, investments via venture capital funds, or funds of funds (Cumming &
Groh, 2018). These schemes are widespread globally to such an extent that public activity can overcrowd private investment where programs are poorly designed (Cumming &
MacIntosh, 2006; Ranasinghe, 2017). Some regions have achieved a superior track record with public support programs, such as Europe (Kedaitis & Kedaitiene, 2014; Leleux &
Surlemont, 2003) and the US (Howell, 2017).
In the following section, the role of government in financial support are critically reviewed.
84
NNOVATION I INANCE FOR F OURCES OF S YPES AND T
: 2 . 3 IGURE F
85 3.8 Role of Government
Innovation is a key driver of long-term economic growth, which increases per capita income in both advanced and emerging economies, and it has also been shown to support economic and social goals (Casanova, Cornelius, & Dutta, 2018). Wonglimpiyarat (2012) and Mazzucato (2016) stress that well-developed financial institutions play a crucial role in supporting innovation at the firm-level. The outcome of such support has a positive impact on firms’ overall performance and ultimately results in a country having a more sustainable level of economic development. In developed economies, along with healthy functioning financial institutions, business angels play a key role in funding innovation.
In emerging markets, the state boosts large firm growth as they usually impact substantially on countries' overall growth (Jung, 1986; Levine, 2010). Institutional theory emphasizes the importance of a well-designed business ecosystem that can influence firms at all levels to boost their innovation activities. One aspect of such a business ecosystem is the role of government in designing healthy functioning financial institutions, considering that markets generally provide less finance for firm-level innovation (de la Torre et al., 2017). Governments worldwide have engaged in various forms of market intervention to increase finance available for innovation activities.
Government intervention has been justified on several grounds, including adjusting the national market and dismantling system failures for market creation (Mazzucato, 2015).
These interventions are typically considered to address inefficiencies.
As the level of access to finance increases, well-developed financial systems backed by legislative acts underpin macro-economic and socio-economic factors. Optimally efficient markets can be characterized as being absent of bureaucracy and bribes when accessing external market financial resources. These are then allocated across firms regardless of size, age and ownership when investment in innovation activities is needed
(Krammer, 2019; Mazzucato, 2017; Tsoukas, 2011). In inefficient markets, it may be the
86 case that some firms have surplus access to financial resources while others do not have enough (Aikins, 2009; Chowdhury et al. 2019). Inefficiency can take different forms; for instance, in an unregulated market, some firms can wield monopolistic power, raise entry costs, and limit infrastructure development (Aikins, 2009; Busch, Jorgens, & Tews,
2005). Most governments in developed and developing economies try to combat these inequities through regulation, taxation and subsidies (Bhalla, 2001; Wellalage et al.
2020). By addressing market failure and shaping new markets, governments can significantly alter a national economy to create fertile business ecosystems.
In developed countries, functioning financial institutions provide adequate financial sources for firm innovation, unlike in transition economies, where underdeveloped financial markets fail to meet the capital needs of innovative firms (Schnitzer &
Gorodnichenko, 2010). Recent literature in the field, using the data from developing countries, shows that the firms involved in innovation activities suffer from a lack of funds in implementing technological projects (Kapidani & Luci, 2019; Ullah, 2019;
Wellalage & Fernandez, 2019). In the case of developing economies, bank financing is considered dominant for firm innovation because of the absence of functioning equity markets (Ayyagari et al., 2011).
Policymakers employ a range of instruments to increase the availability of finance for innovation. For example, governmental policies for technological development within an innovation-driven economy are crucial for development (Grobéty, 2018;
Wonglimpiyarat, 2017b). In order to ease firm-level financial constraints, both developed and developing countries have implemented financing measures. These include credit guarantee schemes and soft loans, coupled with other policy instruments such as tax breaks, subsidies and customs duties (Klochikhin, 2012; Mazzucato, 2014). There is much to be learned from developed countries' experience, not simply due to firms facing
87 similar constraints, but many developed countries implemented these measures as they were developing (Abe et al., 2015).
In addition, governments may act as an investor or donor. This in turn can support growth within a particular sector or economic system by amending market failures and shaping new markets (Grilli et al., 2018). While banks and capital markets are the main sources of external finance, they do not always meet firms' needs or the needs of the financial system. Most policies in the area of debt financing seek to address failures in credit markets, especially the information asymmetries between capital supply and demand
(Grilli et al., 2018). Governments worldwide have established programs that provide debt financing to predominantly technology-based firms (Cumming, 2007). Governments provide subsidised loans, supplementing the bank sector and deploying alternative sources of debt financing. Generally, this lending is additive, as it provides finance to firms that would not be available from other sources. In the context of economic development, governments administer debt finance using a national development bank as an intermediary. Subsidised loans are often geared toward specific objectives, such as export promotion, import substitution or the acquisition of new equipment (Yan & Li,
2017). Government banking reforms reduce discrimination in credit markets, especially towards innovative entrepreneurs (Al Mamun et al., 2018). Through alternative debt financing, such as convertible and subordinated loans, policymakers can provide financial incentives to lenders and/or partial coverage of losses in case of bankruptcy. Many countries offer some form of government-backed guarantee covering loans to entrepreneurial firms (Cowling et al., 2018). Under such programs, the government guarantees a share of a qualified loan made by a financial institution. By providing a floor on losses, government loan guarantees serve as a substitute for collateral.
88 Mazzucato (2014), in her book, "The Entrepreneurial State", challenges the widespread idea that governments cannot pick winners in respect of industrial policy. However,
Diercks et al. (2019) posit that the idea of a state "picking winners," for their national innovation framework, is defunct. This is due to the common belief that the market selects more effectively. This provides less room in the state's agenda for strategic priorities, national prestige or engagement in broader societal issues. Mazzucato (2014, p.14) depicts the role of the state as "not limited to interventions into the macroeconomy as a
'market fixer' or as a passive financier of public R&D. The State is also seen as an entrepreneur, risk-taker and market creator." Mazzucato (2014) focuses on the need for the state to take on the role of risk-taker in regard to funding nascent technologies in various sectors, from communications to pharmaceuticals. For example, the information revolution such as Apple, Compaq and Intel among others, received early-stage financing through government funded programmes such as the Small Business Innovation Research program (SBIR) (Link & Scott, 2010).
State investment in R&D can be used as a platform for breakthrough products. Mazzucato
(2015) argues that private investors or market forces could not create these products with solely internal investment, she further argues that venture capital is dependent on legislation for more expensive and uncertain research domains. Similar to the information technology revolution, government finance mechanisms in support of innovation are posited to be a primary force for the next revolution (Gramkow & Anger-Kraavi, 2018).
The medium to long term direction of this technological revolution will be driven by
'green' technologies. Grilli and Mazzucato (2018) posit that the 'green revolution' will depend on proactive governments. As an example, the government of Uzbekistan's industrial energy efficiency assistance programme is supported by the Korean Green
Growth Trust Fund (KGGTF) and the World Bank. After the successful implementation of this programme, Uzbekistan's government reinvested their savings from general energy
89 consumption to green technology projects focussing on renewable energy projects using wind and solar energy.
Not all economies are in a position to provide equal levels of financial support. Therefore, the impact of government in some instances may vary regarding their national capabilities and stage of development (Porter, 1985). In the context of national economic development, technological progress and capabilities are crucial factors in supporting firm-level innovation. Considerable research has been published on the role of government as a key driver of technological progress. Porter (1990) advocates a broader conception of innovation in order to understand how emerging economies operating at a distance from the global technology frontier can narrow their income gap against advanced economies. He also emphasised the three main development phases of an economy, each of which exhibits different competitiveness drivers. In the initial phase, economic growth is based on a country's 'factor endowments' that are considered either natural resources (factor-driven stage) and/or unskilled labour primarily. In this phase, as wages rise, organisations must begin to develop more efficient production methods and increase product quality. In the second stage, sustaining economic growth increasingly hinges on a country's technological readiness. That is firms' ability to harness the benefits of existing technologies, then innovate by adopting nascent technologies and building on them (efficiency-driven stage). In the final technology-driven stage, higher wages and the associated standard of living can be sustained only if companies can compete through innovation, by producing both a variety of new and diverse goods through more sophisticated production processes.
In the early phases of a country's development, banks are usually the only option for external capital (Porter, 1990). Other forms of financial intermediation generally emerge in more sophisticated economies. As a country progresses through the different
90 development stages and their financial systems deepen, companies may gain access to a broader set of external funding sources, including equity and bond markets. Equity and bond market sources are generally inaccessible to start-ups. Start-ups usually rely on informal funding from friends and family. Although these challenges also apply to start- ups in advanced economies, they tend to be more significant in emerging economies
(Casanova et al., 2018; Klochikhin, 2012).
As a country progresses through development stages, firms are likely to incorporate technical and design specifications as well as performance features into their products and services, closer to those in the global market (Gershman, Gokhberg, Kuznetsova, &
Roud, 2018). This eventually brings their products to or near the international technology frontier (Bell and Figueiredo, 2013). Thus, companies based in developing countries improve their ability to navigate change through the use of technology, moving from technology types where they are imitating, to modest forms of innovation, and potentially engaging directly in innovation activities at the frontier. Finally, companies may grow their innovation capabilities to create unique competitive positions in low-income markets through new products, which are less technologically complex than equivalent products. This is in line with the interventionist view and the laissez-faire view (de La
Torre, et al. 2017; Wang, 2018), both of which are expanded upon later in this chapter. It presents further evidence that governmental intervention in entrepreneurship can create favourable business ecosystems in the form of financial support.
It can be inferred that governments' role in promoting entrepreneurship and facilitating the funding of technological start-ups is a critical driver of innovation, job creation, and economic growth. Governments of both developed and developing economies create ecosystems that provide funds to support innovation by providing direct and indirect public funding access. In other words, governments intervene through direct and indirect
91 macro-level financial mechanisms to lower or remove obstacles to innovation to improve the entrepreneurial ecosystem (Goldberg, 1962; Intarakumnerd & Goto, 2018). This can occur by reducing regulatory barriers, developing existing markets, shaping new ones, providing fiscal incentives, licensing technology derived from government-sponsored research, and implementing a legal environment conducive to private risk-taking
(Goldberg, 1962). Governments utilise various policies to overcome market issues and system failures. These policies create and shape nascent markets that boost firm-level innovation (Chowdhury, Audretsch, & Belitski, 2019; Mazzucato, 2015). For instance,
Singapore and Thailand use tax policies to drive economic growth (Wonglimpiyarat,
2017). Similarly, direct state aids that support the manufacturing sector positively impact export performance and, consequently, on EU states' economic growth (Santos et al.,
2016). Recent research finds that not only firm and industry-specific determinants influence a firm's capital structure, but country-specific factors do as well (Venanzi,
2017). The unique macroeconomic context of a country affects the choice of capital structure within their institutional frameworks and financial systems (Fan, Titman, &
Twite, 2012; Rajan & Zingales, 1998).
Considering the role of government macro-level financial mechanisms for support firm- level innovation is vital for both developed and developing economies, direct public funding, indirect public funding mechanisms and state programmes for innovation support across various countries are critically reviewed next.
Direct Public Funding
The extant literature on direct public funding, or the interventionist approach, dates back to the 1950s and dominated financial development policy thinking until the late 1970s.
The view, as articulated in the research, relating to problems in accessing finance results from widespread market failures, which cannot be overcome by market forces alone (La
92 Porta et al., 2002), applies in both developed and developing economies (Martin & Scott,
2000). Expanding access to finance beyond a narrow range of preferred borrowers, mostly large companies and wealthy households, requires active state intervention (Wang, 2018).
This emphasises the importance of a government's role in addressing market failures, calling for direct state involvement in mobilising and allocating financial resources.
Therefore, the state is becoming a substitute for, rather than a complement to, private intermediaries and markets (Mazzucato, 2015). The interventionist view, which originated in the 1960s, stresses state intervention required to stimulate capital accumulation and technological progress (Freeman, 1987). During this period, most developing countries' growth strategies were focused on accelerating the accumulation of capital and technological modernisation through direct intervention. The state's role was
"to take command" of the economy and allocate resources for those economic sectors believed to be conducive to long-term growth (de la Torre et al., 2017). This led to import substitution policies, government ownership of firms, subsidies for emerging industries, central planning, as well as a wide range of government measures and price controls.
The interventionist theory has led to widespread government influence in the allocation of loans in many countries, not only directly by lending through state-owned banks, but indirectly through rules such as directed credit requirements and interest rate controls
(Brandao-Marques, Correa, & Sapriza, 2020; La Porta et al., 2002). Hyytinen and
Toivanen (2005) find that firms within industries that are more dependent on external financing, tend to invest more in R&D. They tend to be more internationally growth- oriented when they have government funding (Wu & Ma, 2018). Knowing that firms which are export orientated are often a primary driver of economic growth in a given country, and these firms usually face additional financial constraints in contrast to local market-oriented firms, due to higher competition in the global market (Nuruzzaman,
Singh, & Pattnaik, 2018), a government within direct public funding mechanisms can
93 support these firms. Wu et al. (2018) provide empirical support for the role of government direct public funding policies, explaining that exposure to international growth in diverse markets can significantly facilitate the new product performance of emerging market firms.
Evidence from multiple studies suggests that widespread state intervention in financial markets underperforms economic efficiency and growth and tends to stifle, rather than promote, financial development (Casanova et al., 2018; de la Torre et al., 2017). It was assumed that state ownership of financial institutions would help overcome market failures in financial markets, activate savings, mobilise funds for projects with high social returns and make financial services affordable for all layers of society (Li, Meng, Wang,
& Zhou, 2007; Mazzucato, 2014). For some firms, government funding may be a more affordable finance source than funding from capital markets (Lach, 2000). The decision made by the state to intervene, regardless of the rationale for intervention, requires weighing both benefits and risks, since there are several government failures which can make direct public intervention impractical or even counterproductive (Innovation Policy
Platform, 2018).
Many countries offer grant aid in order to support innovation at national level (Wallsten,
2000), and are often focussed on R&D spending (Cannone & Ughetto, 2014). It is recognised that this source of finance is finite (Oakey, 2003). A key concern with government grants is the ‘crowding out’ hypothesis whereby grants can substitute for the private banking system (Hong et al., 2015) though this is less of an issue in a developing country context where the financial system is less developed.
The empirical and theoretical literature shows that along with direct public intervention, creating a favourable business ecosystem is equally important, as innovation is
94 fundamental to individual firms and a country's overall economic growth and stability.
Governments need to act to support entrepreneurship both with direct public funding and indirectly through leveraged instruments as financial and investment policies are vital operational priorities not only in transition regions but also in advanced economies, providing support for SMEs and large firms (Grilli et al., 2018). Indirect public funding mechanisms for supporting firm-level innovation is considered next.
Indirect Public Funding
To counter the problems of government banks and direct government intervention, the laissez-faire view (Schot & Steinmueller, 2018) emerged. According to this view, financial market failures are not as extensive as suggested by supporters of the interventionist view. In other words, private entities, given clear ownership rights and suitable contractual arrangements, can solve most of these problems (Ayyagari et al.,
2016; Love & Martínez Pería, 2015; Rajan & Zingales, 1998). Also, the costs of government failures are likely to exceed the costs of market failures, making direct interventions ineffective and in many cases, counterproductive (de la Torre et al., 2017;
Honohan, 2008). This viewpoint recommends that governments exit the banks sphere of activity and remove restrictions on credit allocation.
The argument is that government efforts should be aimed at creating favourable business ecosystems. This involves providing a stable macroeconomic framework, enhancing creditor and shareholder rights and their enforceability, upgrading prudential regulation, modernizing accounting practices, promoting the expansion of reliable debtor information systems and standardising laws on intellectual property rights (Caprio,
Gerard, & Honohan, 2001; Rajan & Zingales, 2001; World Bank Group, 2016, 2017b).
95 The laissez-faire view is consistent with the general shift in thinking regarding the government's role in the national economic development process in recent decades (Coad,
Pellegrino, & Savona, 2016). State intervention through trade restrictions, state ownership of firms, price controls, and foreign exchange rationing in the 1970s and 1980s showed that such intervention resulted in a waste of resources and impeded rather than promoted, economic growth (Casanova, Cornelius, & Dutta, 2018; de la Torre et al., 2017). More positively, recent studies provide evidence that when the level of access to direct or indirect public funding is high, there are positive ramifications for firm growth and innovation (Mertzanis, 2017; Wang, 2018; Zhang & Mayes, 2018).
This result has led economists and policymakers to the conclusion that restraining the role of the state in the economy and eliminating distortions related to protectionism, subsidies and state ownership are essential for stimulating growth (Rodrik, 2012). This laissez-faire view led to the liberalisation of financial systems and the privatisation of state-owned banks in many countries during the 1990s. Countries eliminated or, reduced in scale, lending programs (Levitsky, 1997), deregulated interest rates (Painter & Wong, 2005), lifted restrictions on foreign borrowing, and dismantled control over operations with foreign currency and capital transactions (Chaney, 2016). Several countries also embarked on large-scale bank privatisation programmes (Li, Cui, & Lu, 2014).
Taken together, government reforms on indirect public funding aimed to create effective institutions and infrastructure for financial markets. Reforms of bankruptcy laws and other improvements in the legal protection of minority shareholder and creditor rights, the establishment of credit bureaus and collateral registries, and improvements in the infrastructure for securities market operations, such as clearance and settlement systems and trading platforms, all came to prominence (Matei & Bujac, 2016). Despite the intense reform efforts in many developing countries, the observed outcomes regarding financial
96 development and access to finance have failed to match initial expectations of reform
(Matei & Bujac, 2016). Although financial systems in many developing countries have deepened over the past decades, in most cases there has been little progress toward the levels of financial development observed in more developed countries. Several developing countries experienced substantial growth in deposit volumes over the 1990s, but this growth failed to translate to an increase of similar magnitude in credit for the private sector, with corporate finance in particular lagging behind (Hanson 2003; de la
Torre, Ize, and Schmukler 2012). Similarly, although domestic securities markets in many emerging economies have expanded in recent decades, their performance has been disappointing in respect of increased access to finance (Dübel, 2011; Ruziev & Webber,
2019). The general perception of a lack of results from the reform process has led to reform fatigue, increasing pressure for governments to take a more active role (Love &
Martínez Pería, 2015; World Bank Group, 2016).
In conclusion, it is evident that governments play a crucial role in supporting firm-level innovation through direct public funding and within well-developed ecosystems for all business levels. The presence of capital market imperfections may lead public policy to develop compensatory instruments to support firm-level innovation. (Hyytinen &
Toivanen, 2005; Owen, Brennan, & Lyon, 2018; Zhao, Xu, & Zhang, 2018). Therefore, firstly, the government acts as an entrepreneur by accepting innovation-related risks, in circumstances where the private sector would be less likely to take the entrepreneurial lead even though it may be socially beneficial (Link & Scott, 2010; A. Santos et al., 2016).
Secondly, governments can take a leading role by providing supportive institutional arrangements as well as programmes and policies to support the process of bringing R&D to commercialisation (Mazzucato, 2015; Owen, Brennan, & Lyon, 2018). Thirdly, governments can set up a vector of development for critical strategic sectors, potentially focusing on the knowledge-based economic development of a country overall (Cooke,
97 2005; CER, 2010). Finally, countries in the period of transition to a market economy may need to rely heavily on foreign multinationals to drive technological development and innovative activities (Gunadarma, 2017). There is no template for such transition: Tsarist
Russia and Argentina in the two decades leading up to 1914 and ex-colonies, such as in
Africa and modern China, offer very different transition pictures.
The next section describes state programmes for innovation support in general and then across a range of countries in order to illustrate the diversity of approaches.
State Programs for Innovation Support
Several governments in advanced economies have developed public programmes to provide equity finance for early-stage entrepreneurial firms to address the risk of market failure. Many such programmes target technology start-ups whose risk profile requires them to seek equity financing (Lerner, Schoar, Sokolinski, & Wilson, 2015). One of the longest running government initiatives is the Small Business Innovation Research (SBIR) program in the United States. Established in 1982, the SBIR remains the most significant
US public Venture Capital initiative. Its basic premise is the investment of seed capital in high-technology start-ups in order to foster R&D, which in turn spurs economic development. Governments in other advanced economies have adopted this model by enacting similar programmes, such as Australia's Industry Investment Fund, Germany's
High-Tech Gründerfonds, Israel's Yozma program, and New Zealand's Venture
Investment Fund.
Governments tend to employ two different channels when providing venture capital (VC).
Some set up government-owned VC funds (GOVCs) which invest directly in start-ups, while others commit capital to privately managed VC funds which also rely on private investors (GSVCs). In Europe, governmental agencies, including national institutions as
98 well as multilateral organisations such as the European Investment Fund (EIF) and the
European Bank for Reconstruction and Development (EBRD), invested almost €10 billion between 2007 and 2015 (Invest Europe, 2015). With the total amount committed to VC of €45.1 billion, government agencies were by far the most important investors in the European VC market, dwarfing the aggregate value of commitments from pension funds, insurance companies, endowments, and family offices (Invest Europe, 2015).
Beck et al. (2008) examine partial credit guarantee programmes around the world with
76 funds in 46 countries on five continents and find shortfalls in their risk management efforts and inadequate use of risk-based pricing. The study also states that default rates positively correlate with fund age, which the authors suggest may be due to the lags associated with loan issuance and subsequent default (Beck et al., 2008). Levitsky (1997) conducted a world-wide meta-analysis of various credit guarantee schemes, both full and partial. This study included 23 developed countries, six in Eastern Europe, 15 in Latin
America, 11 in Asia and six in Africa. The author concluded that a programme has a higher likelihood of succeeding in countries with sound banking institutions with dedicated SME portfolio staff as well as a financial sector where there is considerable competition for clients among banks (Levitsky, 1997). Bennett et al. (2005) investigated credit guarantee programmes in Chile, Egypt, India, and Poland, analysing the impact of loan guarantees on the behaviour of creditors, and found that such programmes had a positive, sustaining effect on SME financing (Bennett et al., 2005).
The Republic of Korea experimented with various programs attempting to alleviate
SMEs' financial problems, and the government shifted its attention from sector-specific subsidisation to promoting R&D aimed at technological innovation in the early to mid-
1980s (Doh & Kim, 2014a). This was part of its industrial policy, which many scholars see as influential in promoting Korea's rapid economic growth (Ahn and Mah 2007; Kim,
99 2016). In 1990, the country introduced a credit guarantee fund simultaneously with a requirement that financial institutions allocate a minimum portion of their portfolio to
SMEs (Abe et al., 2015). Since the late 1990s, the government's R&D expenditure has steadily risen by as much as 10.6% each year, and investment in the private sector has risen accordingly. The measures were effective and significantly increasing firms' access to external finance. There was an increase of 1,500% participation in the guaranteed loan program between 1990 and 1998, although it is challenging to evaluate which of the measures played a more significant role (Doh & Kim, 2014b; Jeffrey & Seung-Jae, 2002).
Later in the early 2000s, the Republic of Korea reintroduced the credit guarantee program, which was also found to have positively impacted SMEs in the country (Kang &
Heshmati, 2008; Turguttopbas, 2013). South Korea has persisted in boosting its national innovation system's novelty to maintain productivity and become a technology leader.
The government has actively encouraged companies to become drivers in the innovation process, rather than simply adopters or imitators.
The Republic of Uzbekistan, the context of this study, has the largest Korean diaspora
(over 200,000) in the former Soviet Union and the fourth largest in the world, after China,
Japan and the US (Rakhimov & Ki, 2016). South Korea is among the largest investors in
Uzbekistan's economy, and cooperation is growing in education, tourism, cultural exchanges, and security. South Korea has emerged as one of Uzbekistan's most important political and economic partners. The value of South Korean investments in Uzbekistan's economy exceeds US$ 7 billion and encompasses trade, communications, energy, light industry, pharmaceuticals, mining, production of petrochemicals, electronic products, and building materials. As Uzbekistan was developing its auto industry from scratch, it received support from a Korean automobile company, Daewoo Motors, at the start of car production (Islamov, 1998; Popov & Chowdhury, 2016). UzDaewooAuto, a car assembly plant, was established as a joint venture by the government of Uzbekistan and Daewoo
100 Motors and started its operation in 1996. Since then, Korea has a multilevel collaboration with Uzbekistan (Peyrouse, 2010).
The Korean government has collaborated with the Uzbek government by offering policy guidance for developing the manufacturing sector and export promotion in Uzbekistan.
To design the Uzbek development strategy building on the Korean experience, several projects were conducted. The main projects are "Industrial Development and Export
Promotion Policy of Uzbekistan" (2005) and "Strengthening Uzbekistan's National
Innovation System" (2011) (Korean Development Institute, 2005) (Chung et al., 2012).
The 2005 policy focused on National Science and Technology Policy, Science and
Technology Human Resource Development, Technology Transfer and
Commercialization, Regional Innovation System, and Export-oriented SMEs. Uzbek small and medium-size businesses annually work and receive training in Korean enterprises and companies. Currently, around 100,000 Uzbek citizens are working or studying within the Korean economic and education systems (Rakhimov & Ki, 2020).
3.9 Conclusion
The theoretical and empirical literature underlines the importance of access to finance to innovation nexus in creating competitive advantage and providing sustainable long-term growth (Mazzucato, 2016; Wonglimpiyarat, 2012). Considering that access to finance is a key driver of survival and growth (Rahaman, 2011; Ullah, 2019), innovation funding is critical for firm success in competitive markets (Cincera & Santos, 2015; Rajapathirana
& Hui, 2018). Firms use various funding instruments provided by financial intermediaries and investors to finance their activities. As highlighted earlier, funding sources can be divided into two sources: internal and external. The primary internal source of finance is retained earnings, whereas external sources involve funds from debt and equity provided by banks, venture capital funds, capital markets, individual investors (Ullah, 2019).
101 Getting access to external finance for innovation is a persistent problem for firms. It is especially challenging in the early stages of business development when firms face barriers in accessing funds, mainly due to the lack of credit history (Graham & Harvey,
2009). There is much uncertainty about what it will produce in the early phases of innovation. This in turn, makes access to funds challenging. Research in the field underlines the importance of access to external sources of finance for all firms’ innovation activities. In addition, innovation is seen as a channel through which well-developed financial systems influence firm performance, and ultimately national economic growth
(Verdier et al., 2010; Al Mamun et al. 2018). The market requires functioning financial institutions to operate.
Not all potential failures in innovation systems render State intervention necessary or even desirable (Ascher, 2015). Public policy cannot address all market failures, indeed for some firms, government funding may just be a cheaper source of finance than the capital market (Lach, 2000). Governments should concentrate on boosting innovation and entrepreneurship creating a favourable business ecosystem and encouraging firms to reach high performance levels. Governments shape their NIS framework emphasising an interactive system of institutions, private, and public firms along with government agencies to support innovation (Aguirre-Bastos & Weber, 2018).
Economists generally concur that the state can play a significant role in fostering financial development (Květoň & Horák, 2018; OPSI, 2018) however, the specific nature of state intervention in broadening access to finance has been a matter of much debate (de la Torre et al., 2017). Research on government intervention tends to polarize around two contrasting but well-established views, which have been discussed in-depth earlier. These are the direct public funding (interventionist) and indirect public funding (laissez-faire) views. The interventionist view argues that broadening access to finance requires direct
102 state involvement in mobilising and allocating financial resources (La Porta, Lopez-De-
Silanes, & Shleifer, 2002; Wilson, 2015), because private markets fail to expand access
(Mazzucato, 2014; A. Wu, 2017), or to guarantee access (Cowling, Ughetto, & Lee, 2018;
Uesugi, Sakai, & Yamashiro, 2010). In contrast, the laissez-faire view contends that governments can do more harm than good in the allocation of financial resources (King
& Lenox, 2000), arguing that government efforts should instead focus on creating an enabling environment (Aoki, Kim, & Okuno-Fujiwara, 1996) to help reduce agency problems and transaction costs while mitigating problems of access (de la Torre et al.,
2017).
Capital market imperfections force public policy to complement capital markets
(Hyytinen & Toivanen, 2005; Santos et al., 2016). Governments boost firm-level innovation through direct funding and indirect public schemes, often reflecting prior policy and market failures to provide financial resources to support development goals
(Bigliardi, 2013). It is worth highlighting that the market and the state are not alternatives for supporting firm-level innovation, but to the contrary, are mutually dependent. The proper functioning of the market depends on the effective functioning of the state.
Conversely, a defective state can neither contribute to the market's efficiency nor offer alternatives to it.
The context of this research, the Republic of Uzbekistan, is examined in the next chapter, including assessing the financial mechanisms to support innovation.
103
CHAPTER FOUR The Republic of Uzbekistan Country Profile
104
4.1 Introduction ...... 106 4.2 Geographic Structure of Uzbekistan ...... 106 4.3 Geographic Advantages ...... 107 4.4 Geological Advantages ...... 108 4.5 Politics and Economy Uzbekistan ...... 109 4.6 Macroeconomic Environment ...... 110 4.7 Intellectual Potential and Unemployment Rate of Uzbekistan ...... 111 4.8 Foreign Investment and Privatisation Policy of Uzbekistan ...... 112 FDI policy ...... 114 Privatisation Policy ...... 115 Progressive Legislation ...... 117 4.9 Financial Institutions of Uzbekistan ...... 119 Banking System ...... 119 Specialised Financial Institutions ...... 120 4.10 National Innovation System of Uzbekistan ...... 122 SME Sources of Finance ...... 123 Innovative Technopark in Uzbekistan ...... 126 4.11 National Industrial Policy of Uzbekistan ...... 127 Fiscal Support Across Sectors ...... 135 Taxation ...... 137 Localisation Programs ...... 139 Free Industrial Economic Zones ...... 140 4.12 Focus on Particular Industries ...... 142 Uzbekistan Machine-Building Industry (auto industry included) ...... 142 Uzbekistan Chemical Industry Sector...... 144 4.13 Conclusion ...... 147
105 Chapter 4: The Republic of Uzbekistan Country Profile
4.1 Introduction
This chapter discusses the industrial policy of the Republic of Uzbekistan. The fieldwork for this thesis was conducted between 2013 and 2015. During that time the President was
Islam Karimov. In 2016 a new President, Shavkat Mirziyoyev, was elected. As legislation has altered significantly under the new president’s direction, this chapter is primarily focused on the legislation in force during the data collection phase. Updates are noted where relevant. This chapter explains Uzbekistan’s financial system and how it functions in support of firm-level innovation. The National Innovation System (NIS) and the
National Industrial Policy (NIP) are also considered in the context of support for indigenous and innovative enterprises. The chapter opens with an overview of the country and concludes by discussing the machine building and chemical industries, which are the focus of the thesis.
4.2 Geographic Structure of Uzbekistan
The Republic of Uzbekistan covers an area of 447,400 square kilometres. It is the 56th- largest country in the world by area and the 42nd by population (33 million) (Wordatlas,
2019). Among the Commonwealth of Independent States (CIS) the country is the 5th largest by area and the 3rd largest by population. Uzbekistan borders Tajikistan and
Kyrgyzstan to the south and east, Kazakhstan and the Aral Sea to the north, and
Turkmenistan to the southwest (see Figure 4.1). As one of only two countries in the world which is doubly landlocked, Uzbekistan is divided into 12 provinces (called vilayat), one autonomous republic (Karakalpakstan), and one independent city (Tashkent). The south of Uzbekistan also shares a short border (144 km) with Afghanistan. Less than 10% of the country’s territory is cultivated, the remainder is desert and mountain.
106 FIGURE 4.1: MAP OF UZBEKISTAN
Source: https://www.un.int/uzbekistan/uzbekistan/country-facts
4.3 Geographic Advantages
Uzbekistan, including its capital Tashkent and its pre-1932 capital Samarkand, is recognised as the centre of the Great Silk Road. Located where the east-west Silk Road crosses the north-south route from southern to northern Asia between the Pamir and Tien- shan mountains to the east and the deserts to the west, it has always been a trade hub. As well as being a state, it is a hub for regional cooperation, and transnational projects, including transport development. It is part of a free trade zone with the CIS countries but not of the Eurasian Economic Union (EAEU).
Due to its proximity to large consumer markets and the development of Uzbekistan's transport infrastructure, which has been integrated into the multimodal communication system of Eurasia, the country’s prospects for investment, trade, and economic cooperation is determined by these factors. Foreign companies investing in Uzbekistan, have access to five large developing markets: the CIS with a consumer market of more
107 than 300 million people, Central and Eastern Europe, South and South-East Asia, and the
Middle East (MFERIT, 2017). Key infrastructure projects in Uzbekistan include: a new main railway line and motorway, modernised international airports, a specialised international transport terminal and an updated legal framework. Uzbekistan has most- favoured-nation (MFN) status in trade deals with 45 countries including Japan, China, the
UK, Germany, USA, Korea, the EU, and the Free Trade Zone established among the CIS signatory states which improves the competitiveness of Uzbek products in foreign markets. Economic potential based on natural resources, and energy self-sufficiency are outlined below.
4.4 Geological Advantages
Uzbekistan boasts significant potential natural, energy, and mineral resources. The
Republic has reserves of gold, zinc, tungsten, rare metals, uranium, copper, silver, natural gas, oil, coal, and fossil fuels (MFERIT, 2017). More than 2,800 deposits have been identified with the total mineral stock of the country estimated to be worth about US$ 3.5 trillion (Uzbek embassy, 2017). In many categories, including non-ore/metallic minerals, and agricultural commodities, Uzbekistan is one of the leading countries in the world. In particular, according to world rankings, copper reserves are the 11th largest, gold production seventh, uranium seventh and production of cotton fibres seventh.
Uzbekistan is one of a small group of countries, which is self-sufficient in energy
(Salikhov, 2006). The state is among the top ten countries globally in respect of reserves of uranium, coal, and gas with significant export levels. The aggregate reserves of energy providers in Uzbekistan are sufficient to meet the needs of the economy for at least 100 years (MFERIT, 2017).
108 4.5 Politics and Economy Uzbekistan
Despite many negative shocks in the 1990s, Uzbekistan’s policy models have served it reasonably well as demonstrated by the gradual transformation of the economy (Raupova,
Kamahara, & Goto, 2014). The government adopted reforms in order to transition to a socially oriented market-based economy, employing a model developed by the first
President of Uzbekistan, Islam Karimov, when the state achieved independence from the former Soviet Union in 1991. The model consists of five fundamental principles: (i) The priority of economics over politics; (ii) The state as the main reformer; (iii) The rule of law in all areas of society; (iv) Strong social policy; and (v) Step-by-step transition to market relations (Narzullaeva, Khidirov, Khasanov, & Foziljonov, 2015).
Despite the slowdown in global economic growth, president Karimov noted that,
“Uzbekistan in 2013 has been able to sustain higher economic growth rates and secure a macroeconomic balance,” as a result of the implementation of strategic reforms and development projects (Karimov, 2014). The successful implementation of the Uzbek model of development has been widely acknowledged, while its economic crisis management approach has been recognised by prominent economists and international financial institutions (Bakhtiyor & Doniyor, 2013). For example, the GDP growth rate in
2008 was 9%, in 2009 – 8.1%, and in 2010 - 8.5%. According to the Asian Development
Bank (ADB), the country’s economic performance was among the strongest worldwide
(stat.uz, 2017). The Republic of Uzbekistan is ranked among the second-fastest-growing economies in the world, with projected growth of 7.6% in 2017 (World Economic Forum,
2017). The GDP growth rate is depicted in figure 4.2.
109 FIGURE 4.2: GDP GROWTH RATE
10 9.5 9 9 8.1 8.3 8.2 8.1 8.03 8 8 7.8 8 7.3 7 7 6.4
6 5.3 5
Percentage 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 years
Source: Created by the author based on Chamber.uz (2019)
The country’s GDP has increased 5.5 times throughout the years of independence;
Industrial output has increased fourfold with rates of economic growth at or above 8% annually in recent years (Chamber.uz, 2017a). However, the president of the Republic of
Uzbekistan, Shavkat Mirziyoyev, in his annual report, noted serious damage to the economy from a 2.8 times reduction in automotive industry output in the last three years
(Mirziyoyev, 2016), influenced by deteriorating relations with Russia. The Asia
Development Bank forecast a 7.3% GDP growth rate for 2019 (ADB, 2019).
4.6 Macroeconomic Environment
Macroeconomic performance was strong during 2013 – 2015 resulting in a positive trade balance. The real GDP growth was high, (see Figure 4.2), and official reserves continued to rise. Inflation was 9.8% on average during these years. In order to combat inflation, the government exercised strict currency controls, causing periodic shortages of cash. For instance, the government implemented salary caps in an attempt to prevent firms from circumventing restrictions on the withdrawal of cash from banks. Some firms have tried to evade these limits on withdrawals by inflating salaries of employees, allowing firms to
110 withdraw more money. These salary caps prevent many foreign firms from paying their workers as much as they would like. In response to the weakening of the Dollar against the Euro, the government switched to the Euro for accounting and financial management, with the hospitality sector the following suit.
The economy is based primarily on agriculture and natural resource extraction. The government operates a strict import substitution policy to control foreign trade and prevent capital outflow. The highly regulated trade regime has led to both import and export declines since 1996, although imports have declined to a greater extent as the government squeezed imports to maintain hard currency reserves. Draconian tariffs and sporadic border closures and crossing "fees" have had a dampening effect on legal imports of both consumer products and capital equipment. However, the new president embarked on a wide-ranging reform starting to open Uzbekistan up to its neighbours. These reforms include currency liberalization, eliminating forced labour and abolishing exit visas. The new government is immersed in the more challenging and substantive development phase through break up monopolies and capital market development reforms, which believed can foster an entrepreneurial environment in the country.
4.7 Intellectual Potential and Unemployment Rate of Uzbekistan
Literacy in Uzbekistan is almost universal, and workers are generally well-educated and well-trained. The literacy of the population, coupled with modern international educational standards, represents significant intellectual potential. The National Program for Human Resource Development provides for continuing education and renewal of general education coupled with professional training (MFERIT, 2017). Around two- thirds of the population are under thirty (World Bank Group, 2018). Uzbekistan has 77 higher educational institutions, 1368 vocational colleges and 139 academic lyceums which educate more than 300,000 students in 850 disciplines (edu.uz, 2019).
111 Labour market regulations in Uzbekistan are similar to those once used in the Soviet
Union, with all rights guaranteed while some are unobserved. Unemployment and underemployment are persistent, and a significant number of people continue to seek employment in Russia, Kazakhstan, the Middle East, and Southeast Asia. Unemployment rates for 2013 and 2015 were 4. 9% and 5.15% respectively (Batsaikhan & Dabrowski,
2017). Estimates for Uzbek citizens working abroad range from lows of 3 million to highs of 5 million. Uzbekistan signed a labour agreement with Russia in 2007 to facilitate the temporary migration of Uzbek workers and the taxation of their income.
4.8 Foreign Investment and Privatisation Policy of Uzbekistan
Since independence, Uzbekistan has created a wide range of legal guarantees and supports for foreign investors. An integrated system of measures is in use to stimulate the activity of enterprises with foreign investment (UzReport.uz, 2016). The government guarantees and protects the rights of foreign investors. By way of example, in the event that legislation renders the investment climate less favourable, within a ten-year time span, foreign investors can apply the legislation that was in force at the date of investment. The foreign investor also has the right to apply the provisions of the new laws which make the investment climate more favourable (Chamber.uz, 2019). In respect of investments in priority sectors and projects, foreign investors can avail of additional guarantees and protections in order to support sustainable economic growth and expand export potential.
Tax benefits are granted to enterprises which carry out production activities within the
Free Industrial Economic Zone (FIZ) Navoi and two new Special Economic Zones (SIZ) in Angren and Djizzak (as described in subsection 4.11.4). These incentives include exemption from the majority of taxes and customs duties, which makes it one of the most liberal and attractive free economic zones worldwide (National, 2017). The measures
112 introduced have fostered a significant increase in FDI (MFERIT, 2017). See Figure 4.3 for an overview.
FIGURE 4.3: FOREIGN INVESTMENT GROWTH IN UZBEKISTAN (IN MILLION USD)
3518.3 3526.7 5200 3770.6 2967.5 2872.4 2469 2682.4 1423 1014 751 893.3 980.4 1057 272 459 446 386.4 464 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
LOANS FDI
Source: created by the author based on Republic of Uzbekistan Chamber of Commerce and Industry data. Note: in 2016, Loans and FDI are not split - no accessible data is available.
Foreign investment is heavily utilised in industrial construction and modernisation. For instance, in 2015 investments were drawn down to the equivalent of USD 15.8 billion.
Over 21%, or more than USD 3.3 billion of all investments in Uzbekistan are foreign owned. Over two-thirds of all investments are channelled towards industrial construction
(MFERIT, 2017). In 2015, 158 large industrial companies completed construction projects at a total value of USD 7.4 billion. New facilities have been commissioned, among them, the Ustyurt Gas Chemical Complex on Surgil field, which was built in cooperation with South Korean investment partners. This complex cost over USD4 billion and is one of the largest, high-tech gas chemical plants in the world. It provides 83,000 tonnes of polypropylene annually which had previously been imported. However, the
113 focus is mainly on value added production (hongkongbusiness.hk, 2016). In the context of Uzbekistan’s objectives for independent development and regime stability, its foreign policy is considered a success (Spechler & Spechler, 2009).
FDI policy
Uzbekistan established the Development Bank and the Fund for Reconstruction and
Development (FRD) in 2006, which finances or co-finances most large-scale projects in strategically important sectors such as energy and chemicals (US Department of State,
2011). This investment led to technology modernisation and facilitated structural reforms in channelling domestic investment and FDI into the high-priority sectors. In the meantime, the government has not engaged actively in attracting FDI (Bendini, 2013).
Despite this, FDI inflows increased from US$9 million in 1992 to over US$0.6 billion per year during 2007–2014. Figures in 2010 and 2011, when FDI inflows amounted to
US$1.6 billion in both years. The average value FDI for Uzbekistan during that period was 1.34 percent with a minimum of -0.18 percent in 1995 and a maximum of 4.16 percent in 2010. Since then, FDI inflows have returned to around 1% each year during the period 2012–2014. The ratio of FDI stock in relation to GDP in Uzbekistan is the lowest among all Central Asian transition economies. In 2018, Uzbekistan’s ratio was
14.5%, whereas volumes for Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan and
Turkmenistan exceeded 70%. In other Central Asian transition economies with traditionally low levels of FDI – namely, Belarus and Tajikistan – FDI was 23.7% and
33.8% respectively - significantly higher than Uzbekistan (UNCTAD, 2017). Total FDI stock stood at USD 9.6 billion (23.4% of GDP) in 2018. Uzbekistan has not succeeded in increasing FDI inflows for the past 25 years. Inward investments focus on the energy sector, including alternative/renewable energy, the chemical and automotive sectors. FDI traditionally originates in Russia, South Korea, China and Germany, but Canada increased its financial presence in 2018. The government prioritises FDI in sectors
114 including mining, cotton processing, oil and gas refining, and transportation equipment
(Bae & Mah, 2018). However, since there is no clear screening system, FDI is often attracted to promoting certain industries without a legal framework that provides measures to protect the domestic business.
Privatisation Policy
After the collapse of the Soviet Union, industrial plants located in Uzbekistan ceased operating at full capacity (Popov, 2014). The collapse caused a drop in demand for products across all sectors, as well as the emigration of many highly skilled workers. In the early stages of Uzbekistan’s development, the ownership of factories gradually transitioned from government monopoly to joint-stock status. Initially, employees were given a 10% share. Now factories can be 100% privately owned (Davronov &
Khidoyatov, 2016). The privatisation process has ushered in favourable foreign investment conditions including changes to the regulatory framework and the adoption of amendments to existing standards, coupled with a flexible approach to transferring the ownership of public enterprises to the private sector. Business conditions have been adapted in line with the process of privatisation and in the operation of enterprises with foreign investments (World Bank Group, 2018).
Uzbekistan created a program to expand the private sector’s share of the economy by attracting foreign investment. The government applied a gradual approach to reform, driving foreign and local investment. In April 2015, the president of Uzbekistan approved a program which transferred 1,247 enterprises and facilities into private ownership
(Davronov & Khidoyatov, 2016), see Table 4.1 for an overview.
115 TABLE 4.1: STATE-OWNED ENTERPRISES AND FACILITIES AND THEIR TRANSFER TO PRIVATE OWNERSHIP FROM 2015 68 enterprises Offered to foreign investors.
Subject to be put on sales for purchase 343 enterprises by foreign and domestic investors.
23 commercial banks (+local owned) and Offered to foreign investors. insurance companies State-owned Offered to foreign and domestic investors at a “Zero” purchase price if 512 facilities they undertake the investment obligations.
Offered to scale through public auctions 324 facilities to foreign and domestic investors.
Source: created by the author based on Republic of Uzbekistan Chamber of Commerce and Industry data.
The state is heavily represented in key sectors of the economy. According to official estimates, the state sector accounted for about 19 percent of GDP, 6 percent of industrial output, 20 percent of external trade and 18 percent of total employment in 2016. Under the privatisation policy for the 68 enterprises offered to foreign investors, four of these plants are in the chemical industry and two are in the machine building industry. These industries are largely a legacy from the dissolution of the USSR. They are typically large, and state owned. For instance, Joint Stock Company (JSC) “Navoiazot'' is the leading manufacturer of mineral fertilisers in Uzbekistan and Central Asia (Davronov &
Khidoyatov, 2016). The Government is extending the list of enterprises offered at no cost, in return for investment commitment. For instance, 512 facilities were offered to foreign and domestic investors at a “Zero” purchase price if they honour associated investment
116 obligations. For investors bringing significant FDI funds to locations outside the major cities, there is tax break for three to seven years. The Uzbek government has strongly indicated its willingness to reduce the degree of state presence in the economy (EBRD,
2018). The state divested 609 state-owned enterprises (SOEs) in 2016 (including 343 enterprises in figure 4.4) and 848 in 2015, according to Statistics Committee data
(Shukurov, Maitah, & Smutka, 2016). The number of SOEs with 100 per cent state ownership fell to 39,082 by 2016 from the peak of 39,530 in 2014. Furthermore, the government offered 49 percent of firm stock to potential investors. More broadly, the government is engaged in privatising selected industries, but in leading industrial sectors, it retains majority ownership with 51 percent or more of the stock held.
Progressive Legislation
Investment-related legislation in Uzbekistan is said to be among the most progressive in the CIS countries. The Republic has signed 70 bilateral agreements mutually encouraging and protecting investments, as well as ratifying related multilateral instruments
(Chamber.uz, 2017b). These norms regulate the stimulation and protection of investments, while providing compensation for investment losses caused by the free transfer of investment abroad, as well as procedures for resolving investment disputes.
The system granting privileges to foreign investors making direct investments through
FDI was detailed earlier. The following laws are in operation in Uzbekistan
(Investuzbekistan.uz, 2013), see Table 4.2.
117 TABLE 4.2: LIST OF LEGISLATION SUPPORTING FOREIGN INVESTMENT IN UZBEKISTAN Law “On Foreign Investment,” 1998
Law “On Investment Activity,” 1998
Law “On Guarantees and Measures to Protect the Rights of Foreign Investors,” 1998
Law “On Free Economic Zones,” 1996
Over 50 normative legal documents on regulating investment activity
6 legal documents on regulating investment and business activity adopted in Uzbekistan in 2012
The Ministry for Foreign Trade annually recommends a list of prospective investment proposals to attract FDI. Indeed, the Chamber of Commerce and Industry’s website lists the investment offers available from the industrial sector. For instance, in the chemical industry, JSC “Samarkandkimyo,” JSC “Fargonaazot,” JSC “Jizzax Plastmassa,” and JSC
“Navoiyazot,” were offered to strategic investors (Chamber.uz, 2017b).The list of state property, including construction in progress, is also listed to be sold on a competitive basis according to the "zero" redemption value. These have investment obligations attached. The primary purpose of this policy is not only to attract foreign investment, but to use this infrastructure in order to create economic value for social development. This policy constitutes a win-win for both actors. It attracts foreign investors who benefit from free buildings and infrastructure and they in turn create jobs for locals, bring new technology-based knowledge, while producing goods which are export-oriented and substitute imports.
118 4.9 Financial Institutions of Uzbekistan
Banking System
The outlook for the Uzbekistan banking system is stable (Moody’s Corporation; Fitch rating; S&P in 2017). The success of reforms and the liberalisation of the banking system is reflected in the World Bank’s annual evaluation along with the International Finance
Corporation’s publication “Doing Business 2018” (World Bank Group, 2018). Regarding credit conditions, the report indicates that Uzbekistan moved from 154th place to 42nd worldwide in 2016, making significant progress in the following areas: (i) Facilitating trade – import and export operations; (ii) Business-friendly environment; and (iii)
Protecting investors.
The banking system is regulated by the Central Bank. This is a non-profit, state-owned entity authorized to legislate monetary policy, regulate settlements between business entities, and oversee the activities of commercial banks. It also supervises the country's gold and currency resources, while managing bank licensing and credit activities (cbu.uz,
2017). The Central Bank is accountable to the Senate. The banking system is closely monitored by the state through a set of complex regulatory decisions, decrees and practices. Most of the central bank’s assets remain in state-controlled banks, and most loans are directed by the state to develop the machine building, automotive, chemical, petrochemical, leather processing and textile industries (export.gov, 2017).
The banking sector can be divided into three pillars: (i) State-controlled banks, (ii) banks with foreign investment, and (iii) medium to smaller sized private banks. Table 4.3 provides an overview:
119 TABLE 4.3: UZBEKISTAN BANKING SYSTEM I The Central Bank of Uzbekistan
State-owned banks
Commercial banks – 30 13 joint stock banks II (Over 4600 branches and retail offices) 5 banks with foreign capital
9 private banks
110 credit union III Nonbank Financial Institutions: 82 microfinance entities
Fund for Reconstruction and IV Development
Source: Central Bank of Uzbekistan (cbu.uz, 2017)
Specialised Financial Institutions
Uzbekistan is a member of the IMF, the World Bank, the Asian Development Bank, the
Islamic Development Bank, and the European Bank for Reconstruction and
Development. In regard to SME financing, International Financial Institutions (IFIs) such as the Asian Development Bank (ADB), the European Bank for Reconstruction and
Development (EBRD), the World Bank, International Finance Corporation (IFC), and
KfW (German bank), all play a key a role in actively providing credit lines. Given the high interest rate environment, significant unmet demand for SME financing, and limited government subsidy programs, funding from the international financial institutions is vital to the economy of Uzbekistan (See Table 4.4)
120 TABLE 4.4: INTERNATIONAL FINANCIAL INSTITUTIONS CREDIT LINES TO SME
Source: Asian Development Bank Institute (ADBI, 2019)
Among multilateral donor institutions, ADB is the most active in financing SMEs through its two partner commercial banks—”Hamkorbank” and “Ipak Yuli Bank.” The participating financial institutions (PFIs) provide funds for SMEs’ working capital and fixed asset financing to develop agriculture, production of domestic goods and services in rural areas in order to create jobs. The capacity of PFIs in credit underwriting and analysis has also improved so that more than 6,000 micro and small enterprises are trained in financial literacy. The European Bank of Reconstruction and Development (EBRD) is one of the IFIs actively lending to SMEs through commercial banks. The EBRD currently provides five credit lines for SMEs totalling around $140 million and large-scale technical assistance to strengthen the institutional capacity of the partner banks on SME lending.
The European Investment Bank (EIB) has recently entered the Uzbek market
(UzReport.uz, 2017a). The EIB has allocated funds for projects in energy, environmental protection, the social sphere and infrastructure; while also overseeing the development of
121 entrepreneurship and innovation through improved corporate governance, development of a transparent and competitive public procurement regime, Public Private Partnerships
(PPPs) and SME frameworks.
4.10 National Innovation System of Uzbekistan
Enterprise reforms require not only the upgrade of production technologies and technological processes but also an innovative approach to management and accounting.
In this context, Uzbekistan significantly reflects the growth stages of the Republic of
Korea. Uzbek and Korean experts jointly prepared the NIS frameworks of Uzbekistan, which reflects the Korean NIS objectives for sustainable growth through creating a favourable business ecosystem for entrepreneurship (Chung et al., 2012). In 2017,
President Shavkat Mirziyoyev signed a decree creating the “Ministry of Innovative
Development”. The decree defined the main vectors of innovation development. From
January 2018, the Uzbek National Innovation Agency has become the “Ministry of
Innovative Development,” which is in charge of the innovative development of the entire country. The presidential decree emphasises that the use of worldwide science and innovations has enabled certain countries to achieve both a dynamic and sustainable path to development. The decree acknowledges that the obstacles to innovative development are rooted in a number of systemic problems, as well as inadequate use of existing capacity and potential.
The following data represents the country’s innovative development. It is important to reiterate that the data for this research was collected during the period 2013-2015.
Therefore, the data represents innovation policy and access to finance during that period, prior to the current innovation policy of Uzbekistan2. Figure 4.4 exposes the dynamics
2 From December 2016 economic reforms accelerated access to finance for enterprises. 122 of both enterprises and organisations in producing innovative goods and services in recent years.
FIGURE 4.4: NUMBER OF ENTERPRISES AND ORGANISATIONS PRODUCING INNOVATIVE PRODUCT AND SERVICES (2010-2016)
Source: The State Committee of the Republic of Uzbekistan on Statistics (2017).
The number of enterprises and organisations producing innovative goods and services grew eight-fold between 2010-2016 - from 289 units to 2374 units. Enterprises which first mastered the production of innovative products and services increased by 696 units.
SME Sources of Finance
Sources of finance for SMEs in Uzbekistan are classified as informal and formal. Informal sources of financing include personal savings, friends, relatives, business partners and unregistered moneylenders. Formal sources of finance are self-financing, such as profits, reserve financing and capital investment through founder’s contributions.
According to a World Bank/International Finance Corporation Survey conducted in 2018,
64% of surveyed in Uzbekistan reported using bank financing and 8% used funding from family and friends to finance their innovation (Wellalage & Fernandez, 2019). A large
123 proportion of Uzbek SMEs finance their growth internally with 64% reporting self- financing. Banks are almost exclusively the formal source of financing in Uzbekistan.
SME finance is principally arranged through two types of financial institutions which are channelled through 28 commercial banks (including the specialized Mikrocreditbank), and 37 microcredit organisations. Table 4.5 illustrates the main sources of funding for innovation.
TABLE 4.5: COSTS OF TECHNOLOGICAL, MARKETING AND ORGANISATIONAL INNOVATIONS BY SOURCES OF FINANCING, BILLION UZS (2010-2016) 2010 2011 2012 2013 2014 2015 2016
Total Cost 264.4 372.6 311.9 4634.2 3757.4 5528.3 2571.4
By Source of Financing
Organisation’s 184.3 263.2 213.4 2501.5 1381.5 1251.8 1180.0 own funds
Foreign 48.3 24.9 39.9 1228.7 32.3 156.6 314.9 investment
Commercial 30.0 63.7 26.8 533.5 262.5 280.1 157.3 bank credits
Other funds 1.8 20.9 31.7 370.6 2081.0 3839.7 919.1
Source: The State Committee of the Republic of Uzbekistan on Statistics (2017).
In 2010, innovations were financed mainly through retained earnings of around 69.7 percent. Since 2014, the share in other funds has increased to around 55.4 percent. In
2016, self-financing increased 6.4-fold compared to 2010. Expenditure on technology, marketing, and organisational innovation, by sources of financing in 2016, are shown in
Figure 4.5 (stat.uz, 2017).
124 FIGURE 4.5: SOURCES OF FINANCE FOR INNOVATION
36% 46% organisation's own funds foreign investments commercial bank credits 6% other funds 12%
Source: State Committee of the Republic of Uzbekistan on Statistics (2017).
In 2016, the costs incurred through technology, marketing, and organisational innovations were financed as follows: Retained earnings at around 45.9 percent (365.16 million
USD), foreign capital at around 12.2 percent (97.06 million USD), commercial bank credits at around 6.1 percent (48.53 million USD), and other funds at around 35.7 percent
(284.01 million USD) (as per Figure 4.5). The banking sector’s limited capacity for financial intermediation remains a key barrier to the development of the private sector, in particular for SMEs (Xiao & Zhao, 2012). Banking continues to be dominated by a handful of state-owned institutions (86% of the assets) and lacks competition and transparency (Ruziev & Midmore, 2014). Government-controlled banks support the state’s economic priorities through subsidised loans which are offered to specific sectors for investment purposes. Indeed, more than 75% of total sector loans are offered by state- owned banks, focusing on state-owned corporations and strategic industries (Ruziev &
Dow, 2020). These banks are controlled and regulated by the state, mainly through the
Ministry of Finance, the Central Bank of Uzbekistan (CBU) and the Uzbekistan Fund for
Reconstruction and Development (UFRD). The legislative basis of the Uzbek NIS is depicted in Table 4.6.
125 TABLE 4.6: LEGISLATIVE BASIS OF THE NIS President’s Decree No 436 (07.08.2006) “Measures to improve the coordination and management of S&T development.”
President’s Decree No 916 (15.07.2008) “Additional measures to stimulate innovative projects and technologies into production.”
President’s Decree No 1631 (26.10.2011) “Creation of High Technology Center in Tashkent with participation by Cambridge University of Great Britain.”
Decree of Cabinet of Ministers No 33 (07.02.2012) “Measures for further optimization and improvement of activities of the Academy of Sciences.”
Resolution of the President of the Republic of Uzbekistan dated 20.02.2017, № PP-2769 “Additional measures for the development of basic and applied research and innovative work in the field of genomics and bioinformatics.”
Decree of the President of the Republic of Uzbekistan (19.06.2017) “Measures to radically improve the system of state protection of business legitimate interests and further development of business activity” (uza.uz, 2017)
In 2017, The Government of Uzbekistan established a new State Commission on Science and Technology, to develop and implement unified state policy in the field. It follows the Resolution of the Cabinet of Ministers "Implementation of measures to improve the organisation, management, and financing of research activities." The tasks of the commission will also include the approval of state scientific and technical programs of fundamental, applied and innovative research on grant aid (ut.uz, 2017) .
Innovative Technopark in Uzbekistan
Wide-ranging programs and initiatives have been developed to support the innovation activities of business entities. On June 5th, 2017, the President signed a decree creating an innovative Technopark titled "Yashnabad." Following this a further presidential decree was signed on June 19th, 2017 which provides: "Measures to radically improve the system of state protection of business legitimate interests and further development of business activity". Based on this law, the country is building Technoparks in the Yashnobod and
Olmazor districts. Business incubators are already in operation to support start-up businesses.
126 The companies in Technopark in the Olmazor district will engage in research relating to metal processing technologies, development of energy-saving programs, R&D of alternative energy sources, electronic measurement instruments and, robotics, engineering, and electronics (Orozov, 2017). "Yashnabod" will also specialise in scientific R&D, pilot-industrial tests and the development of product samples. These products will be produced from various fields including chemical technology, biotechnology, pharmaceuticals and medical biotechnology, plant protection and related areas.
The Technoparks provide for substantial investment in companies, subject to scientific, technical, and economic feasibility (Ranga & Temel, 2018). The activities of scientific, educational, and industrial organisations will be integrated into society in order to reap the benefits from the full chain of production of technological products. The implementation of innovation projects in the Technoparks territory will be financed by the state and commercial banks, business entities, loans, grants from international financial institutions, scientific and educational institutions, donor countries, and venture funds (tashkenttimes.uz, 2018). The companies established within the Technoparks are exempt from all taxes, as well as mandatory contributions, for the entire period of operation.
4.11 National Industrial Policy of Uzbekistan
Uzbekistan has an active industrial policy aimed at providing sustainable economic growth, by shifting its focus from the production of raw materials, to finished products with high value-add. The state recognised that structural change, from a raw-material- based monoculture economy to an export-oriented economy which consists of multiple sectors and produces finished products of competitive quality, was an important step to achieve rapid economic growth (Saidova, 1998). Uzbekistan had been a large producer
127 of cotton, similar to agriculture however, it owned a significant industrial base which could be further developed (Spoor et al., 2005).
After the mid-1990s the government adopted a long-term strategy to transform the economy from its heavy dependence on agriculture and natural resources to a modernised industrial economy. Figure 4.6 shows the growth of the economy from 1991 to 2015.
Uzbekistan’s economic growth model has leveraged a “picking winners” industrial policy
(Mazzucato, 2015; Tidd & Bessant, 2011) involving the selection of priority sectors whose development can generate not only a direct effect of increasing production and creating jobs, but also a multiplier effect (CER, 2013b). The latter flows from the fact that products are used in other sectors or that the sector increases the demand for products in other industries. Simply stated, priority is given to sectors which are able to create and expand the multiplier effect in the economy as a whole (MERU, 2014). Based on these previously stated criteria, the priority sectors in Uzbekistan are electric power, the chemical and petrochemical industries, oil refinery, machine-building and metalworking
(including the auto industry), transport services, oil production, nonferrous metallurgy, and construction.
128 FIGURE 4.6: EXPORT GROWTH IN BILLIONS USD (1991-2015)
Source: Created by the author based on State Committee of the Republic of Uzbekistan on Statistics (2017)
With the aim of achieving sustainable economic development, the government decided to promote industries providing finished products, which are less prone to the volatility of international markets and offer the potential to yield additional added value. In order to actively mediate industrial restructuring, the state maintained and continues to maintain a government share in the ownership of large corporations which dominate each industry sector (Trushin & Trushin, 2005, p. 351). The approach proved positive since
Uzbekistan’s high GDP growth rate was achieved not only through the traditional commodities sector but also through accelerated growth in high-tech industries (IMF,
2008, p. 16).
Mazzucato (2014) states that challenges for innovation in the future should be less focused on concerns about ‘picking winners’ and ‘crowding out’. Instead, governments must open up the discussion towards four key questions: i) Direction; ii) Evaluation; iii)
Organisational change; and iv) Risks and rewards. Beyond that, in theory, rather than
“picking winners” to drive development, researchers consider the efficacy of “buying
129 losers”. For instance, Ciuriak and Bienen (2014) cite examples of the successful deployment of this model while discussing its potential use as a strategic approach to accelerate technological upgrading and industrial diversification in the developing world.
Early critics of the state's attempts to pick winners and losers often point to the failed import substitution policies of the 1970s (Howell, 2017; Rodrik, 2004). They argue that strategies involving ‘picking winners' often fail and in reality, become strategies in
‘saving losers' which prevent inefficient firms from exiting the market (Howell, 2017).
However, the rapid growth of Asia's tigers (Hong Kong SAR, Singapore, South Korea and Taiwan), and more recently China, has given rise to optimism about state-led innovation and industrial policies. These policies, if correctly executed, can make a major contribution to economic growth (Stiglitz, Lin, & Monga, 2013).
As mentioned previously, the country is gradually transitioning to a market economy. The
Uzbek government made efforts to protect its population against risks caused by the transition, owing to the rapid liberalisation process. Since the early stages of the transition, the country has achieved a positive economic growth rate. In the new millennium, the average economic growth rate exceeded 6% (CER, 2010). As noted in
Figure 4.7, the sharp increase in exports from the early stage of independence has significantly affected the country’s social and economic life. Industry restructuring was accompanied by the government’s policy of protecting imports and promoting exports to ensure food and fuel self-sufficiency and stimulating industrialisation (Bae & Mah,
2018). Trade policies which protect and promote specific industries were feasible as
Uzbekistan was not a WTO member (Bendini, 2013, pp. 7, 18). The government could therefore concentrate resources and channel revenues from exports of gold and cotton to priority industries in line with its policy (Bendini, 2013; CER, 2011).
130 The auto industry, within the industrial machine sector, has grown 12-fold in recent decades by exporting light vehicles and heavy trucks to CIS countries. The export of chemical industry products increased 11.3-fold and textiles 4.4-fold. These industries are in the yellow quadrant above and to the right of the medians in Figure 4.7.
FIGURE 4.7: GENERAL INDUSTRY OVERVIEW
Source: What are the priority industries for Uzbekistan economy? (CER, 2013b)
In summary, during the first 25 years of independence, the country implemented four main industrial policies (see figure 4.8 and 4.9). During 2016 to 2020 the government’s main focus is to develop processing industries such as: (i) Attraction of high technology and growing the share of high-tech industries in production and export; and (ii) Creating favourable conditions for the expansion of private funding for modernisation processes
(United Nations, 2015).
The president Shavkat Mirziyoyev signed a decree in 2017: “Uzbekistan’s Development
Strategy” (Uzbekistan, 2017b) ... The parliament approved the proposed Five-Area
Development Strategy 2017-2021, which was developed following a comprehensive analysis of current legislation, law enforcement practices, best international practice and public discussion. The World Bank was enlisted as a partner in laying out the project. The 131 partnerships aim to support Uzbekistan in improving the business and investment climate, international competitiveness and job creation (Mori, 2017).
132
2012
–
(mineconomy.uz, 2019). (mineconomy.uz, 1991 OLICY IN P NDUSTRIAL I ATIONAL ATIONAL N ZBEKISTAN ZBEKISTAN U
: Ministry of Economy of the of Uzbekistan RepublicMinistry Economy of of 8
. 4 Source: IGURE F
133
2030
–
2012 (mineconomy.uz, 2019). (mineconomy.uz, OLICY IN P NDUSTRY I ATIONAL ATIONAL N ZBEKISTAN ZBEKISTAN U
: 9 . 4 IGURE Ministry of Economy of the of Uzbekistan RepublicMinistry Economy of of F
Source:
134 Fiscal Support Across Sectors
The Government provides a broad range of fiscal (tax and customs duties) incentives for modernisation, reconstruction, technical upgrades, and renewal of production equipment for all sectors. Notably, the special decree of the President of Uzbekistan on the 15th July
2008 includes a message: “Additional measures to stimulate modernisation, technical and technological re-equipment of production.” This Degree (no. 916) was issued with the objective of boosting continuous modernisation to increase production of high-quality, competitive, export-oriented products and services. Under this decree, tax and customs benefits in 2011 amounted to 847.9 billion UZB Soums (or USD $495 million) amounting to 1.1% of GDP (CER, 2013a). Financial and investment policies play a crucial role in developing countries and transition economies (Wonglimpiyarat, 2017b; World Bank
Group, 2017b). In practical terms, various financial tools were developed to support innovation. The sources of finance in the context of Uzbekistan’s NIS are outlined in table
4.7 below:
TABLE 4.7: THE SOURCES OF FINANCE NIS, UZBEKISTAN Instruments Key features. State funded S&T programs for State program for fundamental (basic) research innovative development – exclusively from the state budget (24% of the SSTP budget) – 5 years. Foundation for the financing of State program for applied researchers – co- innovative S&T activities funding up to 20% by stakeholder companies, firms, etc. (54% out of the SSTP budget) – 3 years. Funds for new technologies and Program of innovation activities – co-funding modernisation up to 50% and free provision of equipment, materials, consumables by interested companies, firms, etc. (17% out of the budget of national S&T programs) – up to two years. Grants for innovations Program supporting young scientists – exclusively from the state budget (2 bln sums per year) – up to 2 years. Foreign credit line, which, operates China Development Bank mainly via State-controlled banks Dutch FMO
135 Private business owners can apply Export-Import Bank of Korea for international credit lines International Development Association "to through local banks. support agricultural enterprises (Phase II of the http://www.chamber.uz/uz/page/49 project) 07 International Bank for Reconstruction and Development Commerzbank Landesbank Berlin AG Landesbank Baden-Wurttemberg International Fund for Agricultural Development and the Spanish Trust Fund of Uzbekistan to support the development of a network of meva-sabzavotchilik (Fruit and vegetable suppliers). The International Development Association project to improve energy efficiency European Investment Bank (from late 2017) credit lines to commercial banks for financing small business projects and entrepreneurship Local credit line (banks) Asaka Bank http://www.chamber.uz/en/page/49 Xalq Ban. 11 Ipoteka Bank Mikrokreditbank Qishloq Qurilish Bank Agrobank Turon bank Sate Joint-Stock Companies Sectoral Funding Mechanisms The Resolution of the Cabinet of In operation from 2017. Ministers "On creation of the fund that will deal with the preparation of project documentation for investment projects at the Association of Banks of Uzbekistan." Export promotion fund for small Resolution of the President No. PP-2022 dated business and private August 8, 2013 "Additional Measures to entrepreneurship Support the Export of Small Business and http://www.nbu-export.uz/ru/ Private Entrepreneurs," the National Bank for Foreign Economic Activity of the Republic of Uzbekistan established the fund providing the necessary legal, financial and organisational assistance in increasing. Self-funding Finance at enterprise level.
136 Taxation
Reduced statistical reporting, taxation, financial reporting and licensing procedures are employed as a tool to support SME growth. For instance, the tax burden has decreased more than three times during the years since independence. In 2016, 160 licensing procedures and 19 licensing activities were cancelled (PwC, 2016). The frequency of statistical, tax, and financial reporting have been reduced by half since 2015. Figure 4.10 depicts the steady decrease of government revenues from taxation.
FIGURE 4.10: STEADY DECREASE OF TAX BURDEN (% GDP)
50 45 45 41 40 37.7
35 30.2 30
25 23.2 20.2 20 18.9
Percentages 20
15
10
5
0 1991 1995 2000 2005 2010 2015 2016 2017
Source: Created by the author based on data from the Ministry of Finance of the Republic of Uzbekistan (mf.uz, 2018).
Small businesses and entrepreneurs were afforded some advantages in the areas of taxation and credit statistics during the period 1996-2016. Tax rates for small businesses and private enterprises were reduced from 38% to 5%, i.e. 7.6 times (MFERIT, 2017). In compliance with the tax code, micro-firms and small enterprises can choose a simplified system of taxation, which entitles them to pay a unified tax instead of a range of established taxes and other mandatory charges.
137 Tax legislation for the stimulation of scientific research and innovation activities is insufficient. The gradual reduction of the tax burden, simplification of the taxation system, and the introduction of tax incentives served to create a favourable business environment (World Bank Group, 2018). However, there is limited evidence of the stimulation of economic activity. Firm finances which accumulate over time through reduced tax rates and tax incentives (tax credits) can be used for equipment upgrades or raising working capital. Such measures are effective in increasing investment activity, but they do not always stimulate innovation (Orzibekov, 2013). One of the primary positive outcomes achieved in stimulating innovative activity through tax reform is evidenced by the fact that firms’ intangible assets are not subject to property tax since January 1st 2013.
There are additional tax breaks and preferential treatment aimed at stimulating innovation per Table 4.8.
TABLE 4.8: THE TAX CODE OF THE REPUBLIC OF UZBEKISTAN AIMED AT STIMULATING INNOVATION ACTIVITIES, INFORMATION ON PRIVILEGES Tax types Related tax privileges
Income tax for legal Tax deductions on equipment upgrades but not more than entities 30 percent of the taxable income (art. 159, para. 3).
Tax on personal income Allocated funds, grants from research collaborations with international organisations are not taxable (Article 179, paragraph 18).
VAT Income from government-funded research and innovation activities are not taxable (Article 208, paragraph 9).
Land Tax Land used for scientific and educational purposes are exempt from tax (Article 282, paragraph 26).
Source: Tax Code of the Republic of Uzbekistan
138 Table 4.8 can be characterized as tax legislation aimed at stimulating innovation and scientific research. However, there is a lack of permanent tax incentives and tax mechanisms designed to stimulate the innovation activity of small businesses. In many developed countries, the cost of R&D is deducted from total revenue. However, the discount rates in Finland (Ejermo & Toivanen, 2018), Japan (Bryce Campodonico,
Bonfatti, & Pisano, 2016), and other advanced countries (Doyle & O’Connor, 2013), which apply to income earned from innovation activities, does not apply in Uzbekistan
(Simachev, Kuzyk, & Feygina, 2015).
In summary, advanced economies have implemented taxation mechanisms to stimulate the growth of innovation activities with a direct impact on firm performance and national economic performance. Examples include South Korea and Singapore (Kang & Park,
2012; Wang, 2018). In the case of Uzbekistan, it is clear that taxation mechanisms are not sufficiently developed to boost firm-level innovation. Heretofore, the taxation system was not effectively designed in support of either its citizens or business owners' innovation activities (Orzibekov, 2015). One of the main reasons for this is poorly crafted bankruptcy regulation which was designed to encourage businesses to invest in innovation. However, under the new president, the country dramatically changed its vector of development, at least in terms of legal reforms. The new Ministry of Innovation and Development was launched in early 2018. Both the tax and financial systems face reform in order to meet the needs of all levels of business in Uzbekistan.
Localisation Programs
In 2010, the government adopted a policy, of import substitution including the facilitation of production of goods not produced in Uzbekistan, but for which there is strong demand in the domestic market but also in the regional markets of Central Asia and the CIS
(norma.uz, 2019). This policy is carried out within the framework of the Localization
139 Program for the production of finished products, components, and materials by industrial cooperation for which the Ministry of Economy, MFERIT, and the State Committee for
Competition are responsible. The localisation program is approved annually by the
Government and the program includes investment projects in support of the further development of industrial production based on local raw materials and components
(chamber.uz, 2017).
Due to the implementation of systemic measures for the development of the automotive industry in 2010-2016, about 2000 localisation projects were realised through which the accumulated annual import substitution effect amounted to more than US$7.5 billion
(uzdaily.uz, 2017). The President of the Republic of Uzbekistan on December 26th, 2016 decreed that: "Measures for the further implementation of prospective localisation projects for the production of finished products, components and materials for 2017-
2019," would be approved for the next localization program. Within the framework of the
Program, 1,146 localization projects with a total production volume of USD 3.4 billion are planned for the production of competitive import-substituting products
(mineconomy.uz, 2017).
Free Industrial Economic Zones
The government of Uzbekistan, as previously mentioned, is transitioning to a market economy based on the experience of previously advanced countries and has launched a free economic zone to attract FDI. It is believed that foreign investment and technologically strong multinational companies will spur the assimilation of new knowledge and advanced technologies in the market (Khasanovna & Ostonokulov, 2013;
Zakhidov, 2012). To date, the following industrial zones have been launched:
140 Free Industrial Economic Zone "Navoi," 2008;
A special industrial zone "Angren," 2012;
A special industrial zone "Djizak," 2013.
As reported by the Ministry of the Economy, 23 investment projects equating to more than US$123 million were implemented with the involvement of foreign companies
(UzReport.uz, 2014). The free economic zones have become one of the main drivers of modernisation, leading to the transformation of industrial production in related industries.
Results from the creation of the initial free economic zones has encouraged the government to create an additional four zones. New zones are to be established in order to provide favourable conditions for foreign and domestic investments. The purpose of creating modern facilities, processing mineral resources and agricultural products, ensures the production of high value-added products, which will be in demand in foreign markets, as well as the integrated and efficient use of the production resources of the
Samarkand, Bukhara, Fergana and Khorezm regions. In May 2017, President Shavkat
Mirziyoyev signed into law a Presidential decree creating free economic zones. These are
Nukus-pharm, Zomin-pharm, Kosonsoy-pharm, Sirdaryo-pharm, Boysun-pharm,
Bustonlik-pharm, and Parkent-Pharm. They were created to encourage investment in the pharmaceutical industry to produce high-quality medicine. In parallel, this boosts
Karakalpakstan, Djizzak, Namangan, Sirdarya, Surkhandarya and Tashkent’s industrial capacities, while creating new jobs (UzReport.uz, 2017b). There is a high reliance on drug imports in Uzbekistan as around 45% of all medicinal products are imported. It is the intention of the Uzbek government to drive import substitution within its third decade of independence.
141 In sum, a company launched in the Free Industrial Economic Zones (FIEZ) is exempt from land tax, property tax, profit tax and unified3 tax (Akramov, 2011). Creation of free economic zones offers investors additional conditions and financial benefits to expand their investment activities, as well as promoting the development of domestic producers.
This boosts the production of competitive goods for the domestic and foreign market in such fields as; telecommunication, oil and gas equipment, chemical, automotive and electrical industries, modern building materials and consumer products.
4.12 Focus on Particular Industries
This research employs two distinct industries as its population. Both industries are key to the development of the Uzbek economy and have attracted a range of foreign investors.
As a result, the machine building (including automotive) and chemical industries were chosen. The following arguments validate the rationale choice of these industries.
Firstly, the Uzbek government prioritises these two industries, as these industries have a strong output in import substitution, which prevents the cash outflow from the economy.
Finally, both chemical and machine building industries have a strong positive multiplier effect on other industries, ultimately impacting overall countries' economic performance and stability. The Centre for Economic Research (CER, 2013) also confirms this choice, as in its findings, these industries are indicated above the median (see Figure 4.8).
Uzbekistan Machine-Building Industry (auto industry included)
Machine building is the leading industry in Uzbekistan. Machine building industries have a rather quite complex structure consisting of over 50 branches. The most important are the auto industry, agriculture machinery, electronics, instrument building, railway cars
3 The gross revenue of micro-firms and small businesses are subject to a simple, unified form of taxation. This replaces profit tax, VAT (value added tax), property tax, land tax, social infrastructure development tax, and national road tax. It also replaces school development and pension fund contributions.
142 manufacture and aircraft building, among others (stat.uz, 2020). Uzbekistan is currently actively implementing a policy of raising the country's level of competitiveness based on technical and technological breakthroughs in the real economic sectors. The machine- building industry (auto industry included in this classification), a symbol of the country’s industrial progress and plays a leading role in this process. From the machine-building industries since the first days of independence, the automotive industry has been actively developing in Uzbekistan. Before 1992, Uzbekistan had definitely no automotive industry, being part of the Soviet Union (Popov and Chowdhury, 2016). In post-Soviet occasions, UzDaewooAuto, SamKochAvto, MAN and GM Uzbekistan's new auto- producing plants were built as a joint venture with South Korean, Germany and the USA.
Since creation is more than 200 thousand every year, Uzbekistan trades vehicles to Russia and different CIS nations. The Republic of Uzbekistan is the biggest vehicle producer in
Central Asia and takes the second place among the CIS nations with a high portion of localization (around 45-55%) in passenger vehicles and around 15-30% of trucks and buses (invest.gov.uz, 2019).
The auto industry is best suited for the role of the "engine" of the priority sectors. This stems from a number of factors. Despite the fact that each of the industrial sectors shown in Figure 4.8 has goods in which Uzbekistan has a comparative advantage, among all these goods, automobiles demonstrate the highest level of technological sophistication.
This suggests that all other factors being equal, this industry makes a more significant contribution to the process of structural transformation than others (CER, 2013b).
Importantly, the share of automobile exports to total exports is much larger than the share of goods from the chemical or engineering industries in which Uzbekistan has a comparative advantage. Having established its niche in export markets, the industry creates a sub-supply market. Accordingly, the growth of the industry leads to an increase in the industrial goods markets within the country (CER, 2013b).
143 The auto industry acts as an effective stimulus for the growth of the overall sector (CER,
2013b) including industries such as oil refinery, chemicals, energy, engineering, metalworking, construction, transport and non-ferrous metallurgy. The strategic importance of the automotive industry is based not so much on direct as indirect multiplier effects which contribute to economic growth and structural reforms (CER, 2013b). The automobile industry contributed about one-third of the total added value of Uzbekistan’s machinery-building sector (Trushin, 2013).
The other key sub-sector of the machine-building industry is agricultural machinery production for the Republic of Uzbekistan. The sector has strategic characteristics when considering the total land area of the republic is 44.9 million hectares, of which 20.2 million ha (45%) are agricultural land (ygk.uz, 2020). The volume of agricultural machinery production was about 8000 units in 2017, with a total stock of approximately
150,000 units (invest.gov.uz, 2020).
Besides, the machine building industry has a positive multiplier effect on other sectors and substantially impacts the countries' total economic growth and stability. This industry is important to acquiring external knowledge from advanced economies in the field, as employees are regularly trained by top professionals abroad to ensure proper production and assembly of the vehicles and increase the workforce's theoretical knowledge.
Uzbekistan Chemical Industry Sector
The chemical industry includes enterprises producing mineral fertilisers, chemical plant protection agents, chemical fibres and threads, synthetic resins, polymeric items and other products. Most large chemical enterprises are structured like the State Joint Stock
Company “Uzkimyosanoat” (holding company for the chemical industry), which unites
12 large industrial enterprises and 13 regional distribution entities. These companies sell
144 chemical products to the agricultural sector and to design and scientific-research institutions. The main activity of Uzkimyosanoat SJSC consists of managing the states’ share of chemical enterprises (Uzkimyosanoat.uz, 2017).
The chemical sector is one of the most important segments of the country's economy, representing a keystone of its long-term, sustainable development. The history of the modern chemical industry dates back to the launch of the Shursu sulphur mine in 1932.
Uzkimyosanoat, for example, produces more than 170 types of chemical products and exports them to 21 countries (Uzkimyosanoat.uz, 2017). The main outputs are depicted in Figures 4.11 and 4.12.
FIGURE 4.11: MAIN TYPES OF UZBEK CHEMICAL INDUSTRY PRODUCTS
Source: The Chemical Industry Uzbekistan (Uzkimyosanoat.uz, 2017).
145 FIGURE 4.12: STRUCTURE OF MANUFACTURED PRODUCTS
Source: The State Committee of the Republic of Uzbekistan on Statistics (stat.uz, 2017).
The Chemical Industry, with its significant production, access to raw materials, and scientific and technical potential, is one of the leading basic industries of Uzbekistan and contributes significantly to the economic development of the country (Mirzaev, 2013). In particular, the products of the chemical industry in 2009 accounted for almost 5% of the country's industrial production, with the industry growing by 111% in 2009 alone
(UzReport.uz, 2013). The chemical industry has significant multiplier effects spanning the service sector, light industry and heavy industry.
The sector holds significant potential for the development and production of new products for use in industrial applications, production, treatment processes and consumer use. As the majority of detergents, speciality coatings, chemicals, catalysts, textile chemicals and tyres are currently imported, the Uzbek chemical sector offers opportunities for localisation and import substitution in line with national policy. Traditionally known for its production of chemical products, mainly fertilisers, the National Company
“Uzkimyosanoat” (Uzbekistan Chemical Industry) is the primary supplier of fertilisers to agriculture while being the sole exporter of fertilisers. It has 12 chemical plants producing over 1 million tons of fertiliser per annum (Uzkimyosanoat.uz, 2017). To realize the
146 potential of the sector and enhance competitiveness in the long term, it is necessary to diversify the range of output.
4.13 Conclusion
Economies at different stages of development vary in their capacity to create and use knowledge (EBRD, 2014). Countries embracing knowledge-based economic growth are increasingly dependent on innovation, where access to finance is considered crucial
(Freeman, 1997; Pissarides, 1999; Wonglimpiyarat, 2007). The Uzbek industrial policy for 2020 – 2030 promotes global integration and foreign trade, while the country transitions to an innovative knowledge-based economy. Current public policy in the transition economy focuses on removing obstacles to industrial development and fostering entrepreneurship (Khodjaeva, 2012). Uzbekistan has pursued a dual policy of direct government support to indigenous firms and intervention through FDI. It can be said that the Uzbek government defines the rules of the game and the agents/institutions responsibilities and decides which sector to grow to first based on strategic importance and multiplier effect. The sate fixes market failures with the dominant power over the market. As the consequences, state funding appears to neglect enterprise-level innovation at the early stage of development across sectors, as this might be due to current focus on export-oriented sectors; and/or a higher probability of turning into non-performing loans.
However, an insufficient developed financial market puts pressure on the Uzbek government to intervene in the market through SIS measures. This shows that the market and the state are not alternatives but, on the contrary, are mutually dependent on shaping hormonal ecosystem where all firm can get a benefit. As the private sector in developed countries plays a key role in fostering firm-level innovation, using VC and CVC schemes which presents a practical means of linking research to marketable innovation. Given the dominance of major state-owned enterprises engaged in resource-intensive industries, the need for an early transition to a resource-saving economic growth model presents a
147 significant challenge to the long-term sustainability of economic growth (Nazarova,
2013; Sho’azamiy, 2013). This requires measures which will encourage resource efficiency. A Resource-intensive model for economic growth inhibits the advance of competitiveness of the economy in the country.
The following chapter outlines the Research Methodology (Phase I), along with the objectives of this research and key findings from exploratory interviews.
148
CHAPTER FIVE Research Methodology Phase 1: An Exploratory Approach
149
5.1 Introduction ...... 151 5.2 Research Question ...... 152 5.3 Research Objectives ...... 152 Objective 1 ...... 152 Objective 2 ...... 153 Objective 3 ...... 154 5.4 Research Design ...... 158 Research Philosophy ...... 159 Justification for Using a Positivist Research Philosophy ...... 159 Research Approach ...... 160 Impact of Positivist Research Philosophy on Research Design ...... 161 5.5 Phase 1: Qualitative Interviews ...... 162 Sampling Strategy ...... 163 Choice of Interview Type ...... 166 Approaching and Conducting the Semi-Structured Interviews ...... 169 Analysing the Data ...... 171 5.6 Key Findings ...... 171 Phase One Informing Phase Two ...... 177 5.7 Conclusion ...... 179
150 Chapter 5: Research Methodology Phase 1: An Exploratory Approach
5.1 Introduction
The impact of access to finance on firm-level innovation, combined with the role played by government, has generated significant research interest in the past decade (e.g.
Armanios et al., 2017; Ayyagari et al., 2011; Mateut, 2018). Despite this, we know little about the extent to which this performance is affected by access to finance in understudied emerging economies (Dutt et al., 2016; Knack & Xu, 2017). This research develops a model based on factors derived from the literature. The model is tested using data from the Uzbek machine building and chemical sectors. The data collection process proceeded in two phases.
This chapter discusses phase one which consisted of semi-structured interviews with the owners and senior managers of SMEs in the target sectors. Government representatives and academic experts were also interviewed to better inform the model. The objective was to gain a solid understanding of innovation funding from the interviewee’s perspective (Hahn, 2019; Madrid-Guijarro, Garcia, Auken, & Van Auken, 2009; Mainela,
Puhakka, & Sipola, 2018). Semi-structured interviews are generally used in cases where fresh data is required to refine ideas related to the scope of the research problem (Flick,
2002; Myers & Newman, 2007), these formed the basis of exploratory research for the theoretical model and the subsequent survey.
The conceptual model for this research is based on access to finance and its effect on innovation and financial performance. The study stands at the crossroads of two themes:
(I) Innovation and innovation systems; and (II) Macro-level financial mechanisms which support innovation. This chapter is divided into four main sections. The first introduces the research question. The second section details the research objectives. The third sets
151 out the research design employed. The final section explains the research method adopted and the outcomes from phase 1 of this study.
5.2 Research Question
The research problem at the heart of this study informs the need for a model which assesses the extent to which financial mechanisms, within a country’s Sectoral Innovation
System support firm-level innovation. According to Bryman (2007), a research question is designed to define the research problem and to serve as a guide to solving that research problem. The research question is outlined below:
“How do macro-level financial support mechanisms, affect firm-level innovation
and performance within a SIS context?”
5.3 Research Objectives
The objectives break down the research question and specifically identify the goals underlying each one. This research aims to assess the factors which have a significant influence on firm innovation and financial performance from an institutional perspective in order to optimise financial flows between participants in the Uzbek innovation system.
The three objectives and the associated sub-objectives of this study are as follows:
Objective 1
“Understanding the current financial mechanisms for firm-level innovation support in two industrial sectors of Uzbekistan.”
The first objective focuses on understanding the prevailing financial mechanisms in
Uzbekistan. The views of companies within both sectors were sought in support of this objective. Government and academic experts were also interviewed. In order to ascertain the level of access to finance, and the impact on firm performance, two issues were taken
152 into consideration. Firstly the internal capability of the firm and secondly the barriers to innovation they experience in the market where they operate. The internal capabilities are; absorptive capacity, international growth orientation and in-house R&D. Several studies have identified access to finance as a key driver for innovation (Agénor & Canuto,
2017; Hewitt-Dundas, 2006; Lee et al., 2015a). However, theory regarding the impact of macro-level finance on firms’ innovation activities is scarce, creating a gap for the development of a conceptual framework to assess a firm’s absorptive capacity, international growth orientation, investment in in-house R&D and barriers to innovation.
These issues mediate the relationship between external and internal finance and firm innovation and performance. This objective will be addressed through the first phase of the research: the semi-structured interviews.
Objective 2
“Assess the level of innovation across the Uzbek machine building and chemical SIS.”
To minimise content and validity issues in the development of the conceptual model, an adapted version of the Community Innovation Survey (CIS) derived from the literature and the exploratory interviews is used. The CIS is described as the main source of guidance in the collection and use of data to address the nature and impact of innovation activities in the industry (Mortensen & Bloch, 2005). The CIS aims to describe the innovation process through data collection on the financing of innovation, innovation output (measured by the share of new or improved sales vis-a-vis total sales), and data on the technological environment of firms (Gault, 2018; Gault, Arundel, & Smith, 2014).
Since the focus of this research is on the machine building and chemical industries, the
SIS is deemed to be the relevant framework as it allows the mapping of actors and innovation capabilities at the sectoral level. Indeed, innovation and technological change
153 are largely dependent on the industries in which they occur (Malerba, 2005). In this regard, the OECD (2005) state that:
“Innovation processes differ greatly from sector to sector regarding development, the rate of technological change, linkages and access to knowledge, as well as organisational structures and institutional factors. Rapid change and radical innovations characterise some sectors, others by smaller, incremental changes. In high-technology sectors, R&D plays a central role in innovation activities, while other sectors rely to a greater degree on the adoption of knowledge and technology…” (p.37).
According to Malerba and Nelson (2011), there is a need for an empirical explanation of factors which affect the innovative performance of countries. In this case, the focus is the innovative performance of the Republic of Uzbekistan from an SIS perspective. This objective is firstly addressed through the findings from semi-structured interviews.
Secondly, a more precise picture of the entrepreneurial ecosystem’s macro-level financial mechanisms is analysed. This will be achieved through: (I) CIS - descriptive statistics in
Chapter 6; and (II) the findings in Chapter 8.
Objective 3
“Assess the impact of access to financial mechanisms on firm-level innovation and performance.”
Identifying the factors which have the highest and lowest level of influence on innovation and financial performance allows the prioritisation of those factors based on the extent of their influence on practical implementation. Thus, the third objective of this study is to examine the impact of the level of access to government and external market sources, and internal finance on firm-level innovation and financial performance. Access to finance and its effect on firm innovative performance is tested in the literature. The focus of this
154 research is largely limited to the micro/meso level (Agénor & Canuto, 2017; Avnimelech
& Teubal, 2008; Bostan & Spatareanu, 2018; Bruton, Su, & Filatotchev, 2018).
Prior studies have focused on equity financing (Bostan & Spatareanu, 2018; Brown et al.,
2009), debt financing (Isin, 2018; Kerr & Nanda, 2015) and a combination of the two
(Lewis & Tan, 2016; Martellini, Milhau, & Tarelli, 2018). Others have focused solely on public funding through public venture capital (PVC) supporting innovation in indigenous and high-tech companies (Radas, Anić, Tafro, & Wagner, 2015; Zhang & Mayes, 2018).
The purpose of this research objective is therefore to identify the factors which have the highest level of influence on firm innovation, while at the same time, testing the impact of radical and incremental innovation on financial performance. It is possible that the issue of access to finance may not have a direct effect on innovation performance but instead may be partially or fully mediated through other firm level factors. This objective and its sub-objectives will be addressed through findings generated through structural equation modelling (SEM) analysis in Chapter 8. It sheds a light on the issues and on the impact of access to finance from all lenders on firm-level innovation and performance.
To further develop this point, as discussed in chapter 3, four mediating variables and their unique influences are discussed next.
Objective 3.1: To assess the impact of access to financial mechanisms on firm-level innovation and performance as mediated by absorptive capacity.
The purpose of the first sub-objective is to understand the influence of absorptive capacity
(ACAP) as a mediator in the relationship between access to finance, firm innovation and financial performance. ACAP enables businesses to achieve superior innovation, combined with the advantages of rapid responsiveness to customers while avoiding lock- out effects and competency traps (Hamel, 1991; Zahra & George, 2002). Absorptive
155 capacity allows firms to identify, absorb, and implement external knowledge (Flatten,
Engelen, Zahra, & Brettel, 2011). In knowledge-intensive business environments, firms are increasingly dependent on external sources of information to stimulate innovation and increase effectiveness (Escribano, Fosfuri, & Tribó, 2009; Morgan & Berthon, 2008).
Thus, the exposure to external knowledge is a precursor to absorptive capacity (Ben Arfi,
Hikkerova, & Sahut, 2018; Distel, 2019). External knowledge can take various forms, such as knowledge gained through contractual agreements, inter-organizational relations, alliances and joint ventures (Najafi-Tavani, Najafi-Tavani, Naudé, Oghazi, & Zeynaloo,
2018). This sub-objective examines how absorptive capacity mediates the relationship between firm access to external and internal sources of finance, and levels of innovation and performance.
Objective 3.2: To assess the impact of access to financial mechanisms on firm-level innovation and performance as mediated by international growth orientation.
The purpose of sub-objective 3.2 is to understand the influence of international growth orientation (IGO) as a factor which mediates the relationship of a firm’s access to finance and its innovation performance. In connection with the previous sub-objective, recent studies have found that capability in assimilating external knowledge has a significantly positive effect on firms entrepreneurial growth both internationally and domestically
(Deligianni, Voudouris, & Lioukas, 2015; Naldi & Davidsson, 2014). International growth orientation is identified as a factor critical to performance across many business entities, this phenomenon was recently analysed by Hernández, et al. (2016). They found a significantly positive effect on international growth orientation and overall performance. In order to increase profit and competitiveness, many business entities seek international growth opportunities (Autio & Rannikko, 2016), in turn reducing their dependence on domestic or national markets (Michailova & Zhan, 2015). Many
156 economies support export-oriented firms not only for the acquisition of knowledge to sustain their local business, but also to stimulate domestic firms to export, thus attracting foreign currency. Therefore, this sub-objective sets out to examine how IGO mediates the relationship between firm access to external and internal sources of finance and its level of innovation and performance.
Objective 3.3: To assess the impact of access to financial mechanisms on firm-level innovation and performance as mediated by investment-in house R& D.
The purpose of sub-objective 3.3 is to understand the influence of investment in in-house
R&D as a mediating variable. Innovativeness is one of the main drivers of growth strategies to enter new markets and increase market share, therefore giving competitive advantage (Gunday, Ulusoy, Kilic, & Alpkan, 2011). Firms participate in deepening and expanding their innovative capabilities, which are crucial for long-term survival and growth (Faems, Van Looy, & Debackere, 2005). Measures such as investing resources in
R&D to speed up innovation and looking for alternatives to in-house R&D are usually undertaken.
Silva et al. (2014), based on an empirical study covering 1306 services firms in Portugal, identified that those who invest in acquisition of machinery, internal R&D, equipment and software, marketing, acquisition of external knowledge and other procedures, have a greater propensity than other firms to innovate. According to Gunday et al. (2011) having a high percentage of investment in organisational processes, products, and marketing innovations, had a significantly positive effect on firm performance. Thus, this sub- objective examines how firm investment in in-house R&D, may act as a mediating factor in relation to access to external and internal sources of finance on firm-level innovation and performance.
157 Objective 3.4: To assess the impact of access to financial mechanisms on firm-level innovation and performance as mediated by barriers to innovation.
The purpose of sub-objective 3.4 is to understand the influence of barriers to innovation which occur due to various factors in the market. There is a growing empirical literature on the financial constraints to investment in R&D and innovation outcomes at the firm level. Much of the research on barriers to innovation is closely linked with access to finance, institutional constraints, bureaucracy, human resources, information flow, organizational culture, and public policy (Amara, D’Este, Landry, & Doloreux, 2016;
Baldwin & Lin, 2002; Madrid-Guijarro et al., 2009; Mohnen, Palm, Van der Loeff, &
Tiwari, 2008). This literature suggests that different profiles of firms, result in differing financial constraints which in turn have different impacts on innovation activity (Ali
Haider, Liu, Wang, & Zhang, 2017; Mohnen et al., 2008; Savignac, 2008). Maldonado-
Guzman (2017) found a significantly negative effect of obstacles on a firm’s innovation performance. Their results show that the external environmental barriers are the most significant factor for SMEs. Governments intervene in order to fix market and system failures through direct and indirect public funding schemes, lowering barriers for new or already well-established firms in order to increase their innovativeness (Acharya & Xu,
2017; Autio & Rannikko, 2016). Thus, this sub-objective sets out to examine how barriers to innovation, in relation to a firm’s level of access to external and internal sources of finance, affect its innovation and financial performance.
5.4 Research Design
The research design ensures that the evidence obtained throughout the research process effectively addresses the research problem. This encompasses the appropriate research philosophy, research approach, and methods which are discussed below along with how the positivist philosophy influenced the design of the study.
158 Research Philosophy
The research philosophy adopted contains important assumptions based on the researcher’s view of the world. In the positivistic approach, the view of the world is external and objective. For this research, a positivist research philosophy was chosen. A positivist philosophy is defined as a research approach which employs empirical methods, makes extensive use of quantitative analysis, or develops logical calculi to build a formal explanatory theory (Crossan, 2003). Positivism provides an appropriate way of investigating human and social behaviour (George, 2013). The positivist philosophy allows certain laws to develop through a highly structured methodology which facilitates replication (Gill & Johnson, 2013). Considering that the aim of this study is to develop a model assessing access to macro-level finance in support of firm-level innovation, a positivist philosophy was deemed appropriate. Within a positivistic philosophy, human behaviour is considered passive, controlled, and determined by the external environment.
Therefore, knowledge is considered objective and quantifiable (Thomas & Hodges,
2010). The association and impact of the independent variables namely; direct and indirect public funding, debt finance, equity finance, and internal finance factors on firms’ innovation performance, can be best understood through a positivist lens. In positivism, quantitative methods such as surveys are used to collect data, and relationships between variables are determined using mathematical and statistical calculations (Buddharaksa,
2010).
Justification for Using a Positivist Research Philosophy
The positivist paradigm is the leading research philosophy within the disciplines of finance, economics, and accounting. It provides reliable and empirically sustainable answers to questions, espeically in regard to research surrounding access to finance on innovation performance. Much of the research conducted on access to finance has utilised this philosophy, Lagoarde-Segot (2015) argues that in entrepreneurial growth research,
159 which aims to leverage access to finance and create additional value, a positivistic research philosophy is appropriate. The rigid structure and design associated with the positivist perspective, ensures the reliability of research results (Davidsson, 2016).
Reliability refers to a sequence of results over time, and their generalisability; while validity refers to the extent to which the research measures the problems the research addressed (Golofshani, 2003). Accordingly, adoption of a positivist research philosophy in this study can enhance the reliability and validity of the model developed.
Positivist and interpretivist research philosophies focus on different aspects of science. A positivist research philosophy focuses on facts, the interpretivist philosophy by contrast, focuses on values (Creswell, 2007). An interpretivist view emphasises the meaning people attach to their actions, which in turn regulates their actions (Blank, 2013). The objective of the interpretivist is to understand human action in depth, rather than explaining it (Packard, 2017). Furthermore, interpretivist research structure posits that there are no universal laws, and facts need to be reached through subjective understandings which vary in each social context (Creswell, 2007). The primary purpose of this research is to create a new framework to assess the current macro-level financial mechanisms for innovation support at firm level, within a SIS context. The model should be capable of assessing the country’s financial mechanisms in supporting firm-level innovation considering a range of named mediators. The development of a generalisable theory is not part of the philosophical tradition of interpretivism. Accordingly, this renders that particular philosophy unsuitable for this study.
Research Approach
To generate credible data, the researcher uses existing theories to develop hypotheses which are then tested and confirmed (Nardi, 2018). Accordingly, the research approach for the study is deductive (McCusker & Gunaydin, 2015; Woiceshyn & Daellenbach,
160 2018). A rigorous empirical examination is carried out on each hypothesis before rejecting, revising, or accepting it. This contributes towards the development of a theory which can be tested through additional research (Woiceshyn & Daellenbach, 2018). The most widely used theories regarding firm-level innovation performance include:
Neoclassic theory (new growth theory), Evolutionary and Industrial Economics theory,
Institutional Economics theory, National Innovation System (NIS), Sectoral Innovation
System (SIS), National Systems of Enterpreneurship (NSE), The Resource-based view
(RBV), The Pecking Order theory (POT) and A Financial Growth Lifecycle theory.
These have been employed in the development of the conceptual framework for this study. The influence of direct public funding, indirect public funding, debt finance, equity finance, and internal finance factors, on innovation and financial performance, is tested in the context of machine building and chemical industries of Uzbekistan.
Impact of Positivist Research Philosophy on Research Design
Although a positivist research philosophy is largely associated with quantitative research methods, in this research, a qualitative exploratory research method was employed initially. This was to ensure that the model developed was relevant for innovation support in Uzbekistan. Interviews were considered as the most appropriate avenue to provide perspectives from key informants. This in turn would enable the research to include relevant information in the conceptual framework development phase. Accordingly, interviews were performed before the survey phase, as a sense checking exercise. This ensured the model was developed as comprehensively as possible. A significant weakness acknowledged in this research is that a positivist research philosophy relies extensively on quantitative surveys, which although they allow for the identification of key variables, do not enable the researcher to obtain more profound insights (Nardi, 2018). The methods approach allowed the researcher to obtain a more comprehensive understanding of the
161 relationship between access to internal and external finance on innovation performance.
Accordingly, Figure 5.1 shows the Financing Innovation conceptual framework.
FIGURE 5.1: FINANCING INNOVATION CONCEPTUAL FRAMEWORK
Source: Author’s own
5.5 Phase 1: Qualitative Interviews
Phase 1 employed qualitative interviews. The central objective of this study was established by the development of the proposed theoretical model, which itself was derived from the literature on drivers of firm-level innovation. Accordingly, the purpose of the interview phase was to confirm the relevance of the factors examined by the model, and to ensure that other relevant factors had not been overlooked. In regard to senior level managers within SMEs, governmental organisations and academia the following issues were examined: (I) Governmental sources, (II) External market sources, and (III) Internal financial sources.
New information from the qualitative phase was in turn used to develop and modify the proposed conceptual model. Many projects employ the semi-structured method of interviewing in related research, to measure the role of government intervention, financial
162 market development, firm’s internal capabilities including the effect of entrepreneurial and growth orientation on performance (Ács, Autio, & Szerb, 2014; Doh & Kim, 2014;
Jin, Zhao, & Kumbhakar, 2019; Mainela et al., 2018; Wonglimpiyarat, 2018, 2011, 2013,
2017a, 2017b). For instance, Wonglimpyarat (2013) analysed the role of equity financing to support firm-level innovation in Asia. This study is well cited, and the author used semi-structured interviews with major stakeholders including government officials, managers of financial institutions, academics, and management executives of selected recipient firms engaged in innovation financing programs in Singapore and Thailand.
Similarly, Filatotchev (2008) used semi-structured methods when analysing the effect of firm ownership and control of firm export intensity. Mainela (2018) prior to analysing her conceptual model, interviewed entrepreneurs, venture capitalists, start-up CEOs, and public officials in order to measure the effect of individual activity on international entrepreneurship orientation.
Qualitative interviews provide the researcher with the opportunity to test the validity of the theories developed (Huan-Niemi, Rikkonen, Niemi, Wuori, & Niemi, 2016).
Additionally, interviews allow participants to express their perceptions regarding the research topic, their attitudes and meanings underlying these perceptions (Myers &
Newman, 2007). The next section explains the process involved in determining the sampling strategy, choosing the interview type, approaching the interviewees, conducting the interviews, and ultimately analysing the data.
Sampling Strategy
The sample selection for this study consisted of business owners and managers from the selected industries, gvernment policymakers and academics. Sampling is defined as the selection of a group of participants from the population for inclusion in a research study
(Ivankova, Creswell, & Stick, 2006. The method used for the qualitative research phase
163 was purposive sampling. Purposive sampling is the most suitable method for conducting qualitative interviews if participants are required to be from an expert group (Creswell,
2007). This method of sampling involves the selection of the most appropriate participants who will enable the research question to be answered (Ivankova et al., 2006).
Purposive enabled the researcher to select participants capable of sharing optimum information for this research. In qualitative research, purposive sampling represents a widely used method given that the participants are selected based on their ability to provide information which is necessary to gain a rich understanding of the subject matter at the heart of the research (Klenke, 2016).
Once the sampling method was selected, the next step was to select a suitable sample size.
According to Marshall (1999), an adequate sample size in qualitative research allows the researcher to address the objective of the research effectively. Unlike quantitative analysis, a large sample size is not considered necessary since the sample is not used to generalise for the entire population (Klenke 2008). Indeed, there are numerous suggestions and recommendations in the literature regarding the appropriate sample size for qualitative analysis. For example, Creswell (2017) notes that acceptable sample sizes for qualitative analysis can range from 5 to 25 interviews, while Guest et al. (2006) argue that there should be at least 15 interviews. The selection of an appropriate sample size in qualitative analysis is based on the concept of informational redundancy or saturation
(Blank, 2013; Eisenhardt et al., 2007). Informational redundancy is when the additional participants do not add any new information over prior participants. Atran, Medin, and
Ross (2005) suggest that a sample size of 10 is sufficient to establish consensus on the subject in question. Since the qualitative phase in this study was conducted solely to ensure that the conceptual model under development was comprehensive, the minimum sample size necessary to achieve saturation was considered satisfactory. Accordingly, contact details for 14 professionals working in academia, government organisations, and
164 business owners and managers from the machine building and chemical industries in
Uzbekistan were obtained through network contacts. An official letter from Samarkand
Institute of Economics and Services (SIES) was utilised to contact these individuals.
During the exploratory research phase (2015-2016) the country was closed and foreign institutions were not permitted to collect data without an official agreement, hence the researcher’s contacts at SIES were utilised. The new Uzbek administration (since 2018) legally allowed official use of industrial data for collaborative research projects. All 14 participants were were phoned and sent an official letter from SIES to ascertain their interest in participating. 12 informants agreed to participate. Since the sample size of 12 was within the recommended sample size range of 10 to 15 (Atran et al., 2005; Guest et al., 2006), this was considered sufficient (Eisenhardt et al., 2007).
Of the 12 participants involved, six were from academia, three from the selected industries, and three from government organisations. The interviewees were from the main five regions of Uzbekistan, namely Tashkent, Samarkand, Fergana, Navoi and
Andijon (see Table 5.1). Four interviewees were from the capital Tashkent, three of them were working in central government. Three interviewees were from the machine building and chemical industries located in Andijan, Fergana and Navoi. The other five participants were academic professors based in Samarkand working in the economics, finance and accounting disciplines. Their research was primarily in the entrepreneurial domain. The interviewees were from different disciplines and all were familiar with the entrepreneurship domain and innovation ecosystem. Wang et al. (2011) note that different hierarchical levels have different perceptions of organisational change. Since this study focuses on access to finance and its effects on firm-level innovation performance, the perceptions of various institutions at different hierarchical levels is considered. Table 5.1 provides profile information for the 12 interviewees.
165 TABLE 5.1: PROFILE OF INTERVIEW PARTICIPANTS Highest Experience N Organisation Job Title Age Gender Academic Location (in years) Qualification (s) 1 Public Body/ Chief 30 Male 7 Master in Tashkent Government specialist Business Department 2 Public Body/ Chief 31 Male 8 Bachelor in Tashkent Government specialist Finance Department 3 Public Body/ Head of 40 Female 15 Not Available Tashkent Government Department Department 4 Academic President of 58 Male 34 Professor in Samarkand University Physics 5 Academic Vice- 60 Female 36 PhD in Samarkand President Economics R&D 6 Academic Head of 65 Male 40 Professor in Fergana School of Finance Finance 7 Academic Head of 66 Male 40 Professor in Tashkent Innovation Economics and Integration Department 8 Academic Head of 59 Male 30 Professor in Samarkand School of Accounting Accounting and Auditing 9 Academic Head of 35 Male 12 PhD in Finance Samarkand School of Finance and Insurance 10 Industry Director 40 Male 10 Bachelor in Samarkand Economics 11 Industry Director 38 Male 13 PhD in Navoi Economics 12 Industry Head of 63 Male 40 Bachelor in Andijon Investment Accounting Department
The next sub-section defines and justifies the choice of interview type selected.
Choice of Interview Type
The interview is the most common research method used when researchers need to
understand the experience of the interviewees and the underlying meaning of their
experience (Knapik, 2006). There are three main interview sub-types; structured, semi-
structured and unstructured interviews (Gill, Stewart, Treasure, & Chadwick, 2008). In
166 structured interviews, the questions are predetermined and asked in a predefined order.
Unstructured interviews are open-ended and free-flowing to facilitate an understanding of the interviewee’s experience and perspective. This also motivates the respondents to communicate in rich detail (Craig, 2005). Unstructured interviews use an evolving set of questions which are adapted based on the responses of earlier participants (Bailey, 2014).
Unstructured interviews are regarded as somewhat unreliable (Craig, 2005) due to the wide variation in the questions asked of each participant which results in a lack of clarity during the analysis and interpretation stages.
In contrast, structured interviews produce more reliable results as they follow well- defined rules (Craig, 2005). Structured interviews consist predominantly of closed-ended questions which give the interview participants a uniform experience. However, a major weakness of structured interviews is that they neglect the individual perspective of the respondent which can add to the richness of the interview (Craig, 2005).
The semi-structured interview is a hybrid of structured and unstructured interviews.
While there is a set of predetermined questions, the interviewer has the opportunity to pose additional queries (Kallio et al. 2016). This method of qualitative research allows the interactional exchange of dialogue between the participant and the researcher, while ensuring that the main issues of the research are addressed (Edwards & Holland, 2013).
Semi-structured interviews were considered most appropriate for this phase of the study as they allowed the researcher to ask predetermined questions while having the capacity to ask to follow up questions to obtain further information or clarification (Barriball &
While, 1994). Accordingly, semi-structured interviews were used to obtain an in-depth understanding of macro-level innovation support mechanisms in Uzbekistan. In order to understand current financial mechanisms from the company’s point of view, experts within the two sectors were engaged.
167 Rationale for Interview Questions
The initial interview questions were based on the “picking winners” (Mazzucato, 2015;
Tidd & Bessant, 2011) industrial policy of the country and respondents were asked about the most promising sectors with regards to innovation. Following on from this questions were asked (Q2 – Q5) about respondents’ views about the role of government in financing innovation. The issue of international growth orientation (Naldi & Davidsson, 2014) was also explored by these questions in terms of the thrust of government supports for domestic or international expansion. These questions were also focused on the import substitution policy pursued by the Uzbek government at that time. Question 6 focussed on the external financial mechanisms available to Uzbek firms to support innovation. It specifically asked about the stock market and the banking system. It is also asked, as a sub-question, the role of the government in the external financial system. Question 7 was specifically about the issue of Barriers to innovation. Research on barriers to innovation
(Amara et al., 2016; Madrid-Guijarro et al., 2009; Mohnen et al., 2008) has noted that there may be location specific barriers and this question aimed to gather information on these for the questionnaire in Phase 2. Question 8 was designed to elicit further information about firm level capacities such as absorptive capacity in terms of innovation performance.
The semi-structured interviews designed for this research study used a protocol based on the proposed theoretical model, however it remained flexible to query the interviewees in order to obtain further detail. According to Barriball and While (1994), semi-structured interviews permit the exploration of the perceptions and opinions of the interview participants on areas that are complex and sensitive. From the perspective of this study, semi-structured interviews enabled the researcher to confirm the model proposed, but also to gather information about access to finance and sector-based funds.
168 Approaching and Conducting the Semi-Structured Interviews
Objectivity and openess is key to sucessful interviews (Hader, Hader, and Kuhne. 2012).
On the one hand, the respondents were offered a level of autonomy, so that the answers they provided would represent true experiences in practice. On the other hand, the researcher wanted to confine the answers to some level of specificity. The interview questions were constructed while taking this into account. There were two main steps involved in undertaking semi-structured interviews for this phase. The first step was to issue a letter to the participants detailing the purpose of the research and assuring them of confidentiality and anonymity. The second step involved phoning the twelve participants to confirm their interest in participating and to agree the location and time of the interview.
Face-to-face interviews were considered superior to telephone interviews and other forms of electronic interviewing. Apart from overcoming the inherent limitations of technology including connectivity issues, or a lack of clarity; face-to-face interviews can enhance the relationship between the researcher and interviewee (Hader, Hader and Kuhne, 2012).
According to Hague, Hague, and Morgan (2004), face-to-face interviews can ensure that interview participants remain focused and interested in the research for longer.
Furthermore, the chances of misunderstanding or mishearing can be reduced, and responses can be probed further (Hague et al., 2004). Even so, face-to-face interviews can be challenging since the participants may feel reluctant to share details about their experiences with a complete stranger (Marlow, 2010). In face-to-face interviews, both the researcher and participant have access to verbal and non-verbal cues which can be useful in building rapport, thereby establishing trust and openness to enable participants to talk more freely (Jaber & Holstein, 2001).
169 The location in which the interview is conducted plays a crucial role in enhancing the interview responses (Elwood & Martin, 2000). A convenient location for the participant enhances their feeling of safety and comfort, which not only increases participation rates, it also results in higher quality responses (Magnusson & Marecek, 2015). The strength of the relationship created during the interview process can significantly increase the research validity (Kuzmanić 2009).
Appropriate interviewing techniques must be employed to engage interview participants
(Tollefson et al. 2001). According to Tollefson et al. (2001), the techniques used to engage a quieter participant are different to those required in the case of a very active participant. For quieter participants, the researcher must use gentle prompts to maintain the flow of the conversation, while for more articulate participants it may be necessary to ensure that the conversation remains on topic (Qu & Dumay, 2011). The researcher took the stance of listening to the participants and probing when necessary, to ensure that the participants were free to share their knowledge and understanding of the influence of government intervention through both direct and indirect public funding, debt financing, equity financing and internal finance on firm innovation performance in their respective organisations. Each interview commenced by asking the interviewee to complete the interview consent form. Demographic and background information was collected including name, age, education, years of experience and employing organisation. The interview guide was in Uzbek. The interview guide was approved by the Technological
University Dublin (DIT) Ethics Committee. The exploratory interview questions are given in Appendix II.
The average duration of the interviews was 40 minutes. Although permission was sought from all participants to record the interviews, only five gave permission to do so. Those interviews were transcribed shortly after they took place. The remaining seven
170 interviewees requested that their interview was not recorded, but they allowed the researcher to take detailed notes of their responses. An independent Uzbek and English speaker examined the transcripts to ensure correct tranlsation. In this study, the interview participants and the researcher were from the same cultural and professional background.
This can have a positive effect on the interview relationship since it can significantly reduce miscommunication (Opdenakker, 2006).
Analysing the Data
The primary objective of qualitative data analysis is to interpret the data collected to discover meaningful patterns within it (Auerbach and Silverstein 2003). Once the interviews were transcribed, the next step involved organising the data into themes and sub-themes (Marshall et al. 2013). Accordingly, the main arguments emerging from the interview transcripts were coded to specific themes taken from the literature. Since the central focus of the research was determined before undertaking the interviews, managing the data based on the participants’ perceptions, attitudes and feelings was not onerous.
Furthermore, both the transcripts, and notes taken during interviews where recording was not possible, were carefully reviewed to ensure that any new themes or sub-themes were not overlooked.
5.6 Key Findings
The interviews revealed that most of the participants favour the Uzbek government having a role in the support of firm-level innovation. Financial constraints are the main factor which prohibits firm-level innovation. As one participant stated:
The Uzbek government launched free industrial zones (FIZ) in different regions of Uzbekistan to support firm growth and attract FDI. The state provides subsidised loans directly through Commercial banks as long as the main activity if these companies is under government mission
171 development program, such as export-orientation for attracting hard foreign currency and for firms who are involved in the production of import substitution products (Public organisation 1, Chief specialist).
Another participant echoed this:
All industrial sectors of Uzbekistan are important to the country. The Uzbek government gives preference and privileges to support businesses. However, in terms of the necessity of particular sectors for the country’s development, some get preference over others (Public organisation 2, Chief specialist).
Both of these participants represent government organisations, they stressed that the government understands the future economic security of the country is through innovation. However, at this stage of economic development, the state budget is mostly oriented to the social sphere, which prioritises education, health, water supply and so on.
These findings are consistent with existing studies which show that government plays a significant role in boosting industries both through direct public funding and indirectly by creating a favourable business ecosystem and building infrastructure for both domestic firms and for foreign investors (Rios-Morales & Brennan, 2009; Wang, 2018;
Wonglimpiyarat, 2017b).
Accordingly, an academic informant shared a similar view on building economic security, but with an alternative perspective on leveraging the government budget through a focus on innovative businesses:
The Uzbek government is launching different programs for accelerating economic growth. The government supports large companies which are not working at full capacity. These firms have strategic characteristics in terms of economic contribution; therefore the government subsidises them. Currently, they operate only under government grants. Part of
172 these funds could also be oriented to support new innovative business (Academic 9, Head of School of Finance).
In my view, the main problem is related to the unforeseen allocation of the state budget to funding industrial enterprises' innovative projects. (Academic 7, Head of Innovation and Integration Department).
The key findings illustrate how governments in transition periods often fail to provide financial support to new technology-based firms (NTBF) due to the lack of collateral
(Link & Scott, 2010). The Uzbek government have a policy whereby they ‘pick winners’, simply picking firms which appear to offer the potential to boost the economic growth of the country. By contrast, governments can attract industries which their country lacks.
For example in Ireland, government policy successfully attracted high-tech FDI
(Chaminade. 2010). Porter (1990) noted that at various levels of a country’s development, the government acts to boost sectors which later might have a multiplier effect on new or related sectors (Campodonico et al., 2016; Mazzucato & Perez, 2014; Zhao et al., 2018).
Two participants from industry explained the situation as follows:
The Uzbek government does not provide credit guarantee policies for all local business owners. We have innovative projects ready but these need to be funded. (Industry 10, Director).
We could increase our internal funds spent on R&D. However, if projects fail, or as usually happens return on investment takes time. In this situation, if we cannot pay our tax or other government fees on time, then they could easily credit our bank account (Industry 12, Head of Investment Department).
Some of these points are echoed by one of the Chief Specialist participants:
173 We give the State Guarantees for preferential loans. State guarantees are given only to specific projects such as health and education. For commercial projects, we are not providing the State guarantees (Public organisation 1, Chief specialist).
Regarding the level of access to public financial resources or government attention to specific sectors based on firm characteristics – one chief specialist recognised that:
All sectors are under government attention, however, some of them are a key driver for the whole country, and these sectors have a multiplier effect on other sectors; There is no discrimination in terms of access to public sources across firms however, firms who are export-oriented or involved in industrial policy projects such as localisation for import substitution, have more privileges and fiscal incentives (Public organisation 1, Chief specialist).
This quote is broadly representative of the views expressed by interviewees 2, 3, 6, 8 and
11.
The current study found that the Uzbek government supports export growth-oriented firms, similar to programmes internationally (Hou, Hu, & Yuan, 2017; Moen, Heggeseth,
& Lome, 2016; Nishimura & Okamuro, 2011) as they lead to more innovation and sustainable growth. Governments commonly offer tax and other financial incentives for export-oriented firms (Simachev, Kuzyk, & Feygina, 2015) as well as those involved in the production of goods for import substitution (CER, 2013).
In response to questions about external financial market sources for firm innovation activities, one participant stated:
I think the development of financial institutions is essential for firms that need external funding to invest in innovation, in Uzbekistan new
174 technology-based firms struggle most when it comes to access to finance (Academia 5, Vice-President R&D).
Two informants reflected negatively on the system:
We found foreign investors who are interested in investing in our company, however, while the government will not open conversion of Uzbek SUM for our company, they will not invest (Industry 12, Head of Investment Department).
One of the main obstacles is the inconvertibility of Uzbek SUM which prevents foreign investors from legalising their income and bringing it out of the country (Academia 6, Head of School of Finance).
An important finding to emerge from the analysis shows that the available financial mechanisms are not sufficiently developed to support firm-level innovation at least, during the reference period 2013 - 2015. This is not surprising as the country is at an early stage of development. The findings are consistent with studies in emerging economies which show that insufficiently developed local financial markets, volatility and inconvertibility of currency, negatively affect firm-level innovation and performance
(Ayyagari et al., 2011; Pérez, 2013) and FDI (Anwar & Nguyen, 2010; Kiyota & Urata,
2004; Munemo, 2017).
Regarding government programs to support business, one interviewee suggested that:
Through the localisation program – the Uzbek government aims to increase the volume of import substitution. However, there are a lot of regulations and bureaucracy and we do not have freedom in the use of our income. I mean, under the localisation program you have to increase the level of localised products by 30% in the first three years. If we cannot reach the target, we have to compensate – payback, all taxes (Industry 11, Director).
175 We are exporting 35% of our output, and we have benefited from tax and customs duties, but it is not enough. In other words, the government is pulling us up with the right hand, at the same time, pushing us down with the left. When we want to withdraw our profit gained in a foreign currency, we have to give 25% of it to the bank, whereas, on the black market the USD price is doubly expensive (Industry 11, Director).
Investment in in-house R&D has well established effects on firm innovation and performance, as confirmed by a body of empirical research (e.g. Hall & Maffioli, 2008;
Lewis & Tan, 2016; Aihua Wu, 2017). In the Uzbek context, firms struggling with in- house R&D investment, through both internal and external market sources, provide evidence of an insufficiently developed financial market.
Another academic participant explained that there is a lesser opportunity in some regions than in the capital Tashkent regarding patenting of research output.
Intellectual property rights law exists but the patent registration procedure requires a massive effort from innovators. There are no territorial subdivisions of the Intellectual Property Agency for obtaining patents and copyrights (Academia 4, President of University).
In terms of the collective role of universities, industry and public agencies, it was observed that:
One of the main problems of innovative development from the university’s perspective in our country, is the low level of commercialisation of scientific developments. From firms’ perspective, the lack of development of their absorptive capacity stops them innovating. (Public organisation 3, Head of Department).
176 In my opinion, the weak collaboration among Universities, Industry and Government organisations isolate science from real-life businesses in most cases in Uzbekistan (Academia 5, Vice-President R&D).
An important finding to emerge from the analysis is that firm absorptive capacity is a crucial factor for assimilation of external knowledge, which appears poorly developed across Uzbek firms. In the majority of cases, empirical research indicated that when absorptive capacity was well-developed, there was a significantly positive effect on firm- level innovation and overall performance (Ben Arfi et al., 2018; Kostopoulos,
Papalexandris, Papachroni, & Ioannou, 2011; Najafi-Tavani et al., 2018).
Phase One Informing Phase Two
Phase one, comprising of semi-structured face-to-face interviews, enabled investigation of the entrepreneurial ecosystem in the country. The sources of finance available to firms and barriers to innovation in the region and the industrial sector were examined in detail.
The purpose of the qualitative phase was to confirm the relevance of the factors which are examined in the theoretical model and to identify if any pertinent factors were overlooked. During this phase, in-person, semi-structured interviews validated certain inputs for consideration in the development of the questionnaire for phase two. Firstly, considering the insufficiently developed financial market, (in particular the equity market), it was decided unnecessary to ask questions related to start-ups and venture capital. Secondly, the specific characteristics of the country’s industrial policy for innovation support have to be addressed. In particular, during the development of constructs related to direct, indirect public funding and barriers to innovation, the following indicators should also be used:
• Access to Funding for new technologies and modernisation • Access to Localisation program • Access to Free industrial economic zone
177 • Republic Fair of Innovative Ideas, Technologies and Projects • Lack of tax incentives • Lack of intellectual property protection • Bureaucracy • Exchange rate fluctuations
Finally, the main findings from the semi-structured interviews draw significant parallels between the literature on financial constraints and firm innovation in Uzbekistan (Barney,
1991; Cole & Sokolyk, 2017; Knack & Xu, 2017; Nuruzzaman, Singh, & Pattnaik, 2018;
Wonglimpiyarat, 2011). Phase one, sheds a light on the current macro-financial mechanisms for innovation support, which is limited, however there is a general willingness to support innovation. The findings from the qualitative phase support the
Financing Innovation (FI) model. In this stage, all the variables in the models were identified to be important and relevant in determining financing firm-level innovation, and no additional factors were identified from the interviews to inform the second phase.
Two connected phases were used to implement this study’s methods in an exploratory methods design. As depicted in Figure 5.2, the design began with qualitative data collection and analysis to explore a phenomenon. Interview results informed the second phase and in combination with the literature review, the field the questionnaire was developed. This instrument was used to collect quantitative data in phase two (the next two boxes in the diagram) followed by structural equation modelling analysis. Finally, each decision regarding the research methodology is illustrated in Figure 5.2
178 FIGURE 5.2: THE RESEARCH PROCESS FOR THE STUDY
5.7 Conclusion
This chapter articulated the research question at the heart of this study and outlined the key objectives. A positivist philosophy employing a deductive approach was adopted as this is the most suitable means for developing a generalisable theoretical model. The primary objective of this research was to develop a theoretical model to measure the level of access to external and internal sources of finance, through mediators such as absorptive capacity, international growth orientation and barriers to innovation on innovative and financial performance. To achieve these objectives, this study was divided into two distinct phases. The exploratory research methodology adopted for phase one of this study was explained in this chapter.
Phase one consisted of qualitative interviews with professionals from academia, business owners/managers of related industrial sectors as well as with policy makers working within Uzbek government organisations. A total of twelve interview participants took part in the semi-structured interviews. All the interview data collected was thematically analysed. The purpose of the qualitative phase was to confirm the relevance of the factors
179 that are examined in the Financing Innovation theoretical model and to identify any pertinent factors which may have been overlooked.
The research method including details regarding the sampling strategy and interview mode adopted were explained and justified. Thereafter, the approach employed in analysing the data was outlined. Finally, the key findings from the qualitative phase were discussed and analysed. The primary finding from Phase 1, implies that macro-level financial mechanisms for innovation support are not sufficiently developed in
Uzbekistan. However, the issue is under consideration by the Uzbek administration as it plans the development of the country as a knowledge-based economy. Indeed, it is recognised that innovation is fundamental to not only individual firms but ultimately to a country's economic growth and stability. The next chapter explains the research approach adopted for Phase two; the quantitative survey.
180
CHAPTER SIX Research Methodology Phase 2: Quantitative Survey
181
6.1 Introduction ...... 183 6.2 Justification for Survey Strategy ...... 183 6.3 Hypotheses Development ...... 187 6.4 Survey Instrument Design ...... 205 Demographic Information ...... 205 Community Innovation Survey ...... 206 Financing Innovation Survey ...... 207 Access to Government Sources ...... 208 Access to External Market Sources ...... 209 Access to Internal Sources ...... 210 Mediator Variables ...... 211 Performance ...... 214 Pilot Test of Survey Instrument ...... 217 6.5 Data Collection ...... 219 Mail Survey ...... 221 6.6 Quantitative Data Analysis ...... 222 6.7 Questionnaire Findings ...... 223 6.8 Respondent Demographics ...... 224 Respondent Job Profile ...... 224 Organisational Characteristics ...... 226 Ownership Types ...... 233 6.9 Community Innovation Survey ...... 237 Chemical Industry ...... 238 Machine-Building Industry ...... 246 6.10 Key Findings ...... 253 6.11 Conclusion ...... 256
182 Chapter 6: Research Methodology Phase 2: Quantitative Survey
6.1 Introduction
The previous chapter described the qualitative phase of the data collection and findings from semi-structured interviews with twelve interviewees who were a mixture of professionals from Uzbekistan’s public sector organisations, academia and industry.
Stage one facilitated the identification of the main factors which influence firm innovation and financial performance. The findings from semi-structured interviews validate the inclusion of specific variables of interest which are considered in the development of a questionnaire for phase two. The insights gained from the interviews were particularly important for the development of factors related to direct and indirect public funding, and barriers to innovation. A quantitative research methodology was adopted for the second stage. The survey instrument is designed to operationalise and test the empirical model underlying this study. The quantitative survey is the method of choice when the objective is to generate numerical data to support or refute the hypotheses developed in the research
(Creswell & Clark, 2017). Survey research is a widely adopted method for the collection of data relating to access to finance (European Central Bank, 2015b; Ryan, Scapens, &
Theobold, 2002). The primary data collection method therefore was a large-scale survey.
This chapter explains the process involved in order to conduct the survey, including the sampling method applied, the process involved in instrument development, data collection and hypothesis development. The chapter concludes with the initial findings of the survey.
6.2 Justification for Survey Strategy
Collection of data from a large sample was necessary in order to test the theoretical model based on independent variables such as governmental, external market and internal
183 sources of finance, which drive, via selected mediators, firm innovation and financial performance. The survey strategy is the most suitable here as it allows the collection and analysis of the large quantity of data required to form valid and reasonable conclusions in a cost-efficient and timely manner (Anderson & Gerbing, 1988; Mathers et al. 2009).
Quantitative research entails moving from the theoretical world, to the real world we live in and observe (Atieno, 2009). Quantitative data collected utilising a survey can examine the relationship between variables and enhance the development of models by examining these relationships (McCusker & Gunaydin, 2015). However, the survey strategy also has inherent limitations, mainly arising from the lack of direct communication between the researcher and respondent (Mackety, 2007). These difficulties include the response rate, obtaining a real impression of the respondents (Berndtsson et al. 2002) and the lack of motivation to complete the questions.
This thesis focusses on the relationship between three different sources of finance (i) government sources; (ii) external market sources; and (iii) internal sources of finance, and firm innovation and performance as mediated by four distinct concepts as follows: absorptive capacity (ACAP), international growth orientation (IGO), investment in in- house R&D (IRD) and barriers to innovation (BI). These four factors have been categorised as mediators. These factors are the primary elements of the conceptual framework which has been developed. The first three factors represent a firm’s internal capabilities including: absorptive capacity (Escribano, Fosfuri, & Tribó, 2009; Lane,
Koka, & Pathak, 2006), international growth orientation (Autio & Rannikko, 2016; Moen,
Heggeseth, & Lome, 2016), and investment in in-house R&D (Bergek, Jacobsson,
Carlsson, Lindmark, & Rickne, 2008; Gunday, Ulusoy, Kilic, & Alpkan, 2011). The fourth and final factor addresses barriers to innovation (Cincera & Santos, 2015; Madrid-
Guijarro, Garcia, Auken, & Van Auken, 2009) in the market or region where a firm
184 operates. The detail of the proposed macro-level model of finance innovation with all hypotheses combine to form the research model presented in Figure 6.1
185
YPOTHESES H ROPOSED P ODEL ANDODEL M
: 1 . 6 IGURE F
186 These factors in turn illuminate the relationships between government sources, external market and internal financial sources to firm-level outcomes, as measured by both innovation performance and financial performance. The next section explains the process surrounding hypothesis development. Each hypothesis will be discussed in order.
6.3 Hypothesis Development
A firm’s absorptive capacity is one of the critical factors which significantly affects innovation performance (Ben Arfi, Hikkerova, & Sahut, 2018; Chen & Hsiao, 2016;
Kostopoulos, Papalexandris, Papachroni, & Ioannou, 2011; Najafi-Tavani, Najafi-
Tavani, Naudé, Oghazi, & Zeynaloo, 2018), and in order to have absorptive capacity, a source of funds is required (Santos, Basso, & Kimura, 2018; Wonglimpiyarat, 2011).
However, it is apparent that firms face financial constraints. These constraints result from a lack of development, poor infrastructure, or difficulty acquiring existing knowledge from other enterprises or institutions. The role of government in this process is crucial in supporting both public and private sector firm-level innovation activities through direct and indirect public funding mechanisms when firms have difficulties in accessing finance
(Cincera & Santos, 2015; Goldberg, 1962). Government policies play an essential role in guiding science and technological capability development as part of the national economic development strategy (Intarakumnerd & Goto, 2018; Wonglimpiyarat, 2013), which creates external knowledge and infrastructure for firms. Through enabling SMEs to engage in R&D and innovation, public instruments can facilitate the build-up of absorptive capacity (Radas, Anić, Tafro, & Wagner, 2015). An effective governmental policy shapes the innovation capacity of a country. This in turn reflects on a firm’s ability to assimilate external knowledge for their innovation development (unless the level of access to these sources are limited from firm to firm). Hypothesis 1a (H1a) and
Hypothesis 1b (H1b) address the first objective of this research which was outlined in chapter 5.
187 Hypothesis 1a: The higher the level of access to direct public funding, the higher the level of absorptive capacity.
Hypothesis 1b: The higher the level of access to indirect public funding, the higher the level of absorptive capacity.
Governments support internationally growth-oriented firms, especially in transition economies, in order to attract hard currency for the sustainable economic growth of the country (Karabag, 2018). Companies which are export orientated are often a primary driver of economic growth in their given country. These companies usually face additional financial constraints in contrast to local market-oriented firms, due to higher competition in the global market (Nuruzzaman, Singh, & Pattnaik, 2018). Hyytinen and
Toivanen (2005) argue that firms within industries which are more dependent on external financing, tend to invest more in R&D. They tend to be more internationally growth- oriented when they have government funding available (Wu & Ma, 2018). International growth orientation is seen as a channel for firms to access complementary assets, innovative ideas and technologies developed by foreign counterparts in world markets, as they are exposed to new and diverse ideas from a variety of market and cultural perspectives (Wu, Chen, & Jiao, 2016; Wu, Ma, & Liu, 2018; Rose & Shoham, 2002;
Zahra & George, 2002). Wu et al. (2018) provide empirical support for the role of government policies by explaining that exposure to international growth in diverse markets can significantly facilitate new product performance of emerging market firms.
Government intervention can take place through direct public funding or through providing indirect funding through subsidies and grants to businesses. These are typically given to remove financial burdens, are considered to be in the public interest and are often linked to employment provision. These funds are provided to promote the economy of the country. They support firms via a range of fiscal (tax and custom duties) incentives
188 for modernisation, reconstruction, technical and technological renovation of production for all sectors of the economy (Watkins, Papaioannou, Mugwagwa, & Kale, 2015;
Wonglimpiyarat, 2011; Yu, 1997). Many countries have used tax policies to support firm- level innovation activities. For instance, Singapore and Thailand use tax policies to drive economic growth (Wonglimpiyarat, 2017). Similarly, direct state aids which support the manufacturing sector have a positive impact on export performance and consequently on the economic growth of EU states (Santos et al., 2016). Accordingly, the following hypotheses are developed:
Hypothesis 2a: The higher the level of access to direct public funding, the higher the level of international growth orientation.
Hypothesis 2b: The higher the level of access to indirect public funding, the higher the level of international growth orientation.
Public investment can have a leveraged effect on private investment, especially when access to bank credit is limited (Erden & Holcombe, 2005). Some firms, usually small and innovative ones, have more constraints and difficulties in accessing finance since they tend to have riskier projects and business models (Lee, Sameen, & Cowling, 2015b). On the other hand, large manufacturing companies are also facing financial constraints when they require technological modernisation or the facility to add new production lines to retain market share. Financial innovation is a critical element of firm sustainability in competitive markets. In other words, firms can have a higher level of innovation performance if they can raise both the volume of capital annually for the advancement of all four types of innovation and increase the volume of seed and venture capital to boost new innovative projects (Bergek et al., 2008; Kerr & Nanda, 2015). However, the presence of capital market imperfections may lead public policy to develop compensatory
189 instruments to support firm-level innovation. (Hyytinen & Toivanen, 2005; Owen,
Brennan, & Lyon, 2018; Zhao, Xu, & Zhang, 2018). Accordingly, the hypotheses developed in relation to this condition are as follows:
Hypothesis 3a: The higher the level of access to direct public funding, the higher the level of investment in in-house R&D.
Hypothesis 3b: The higher the level of access to indirect public funding, the higher the level of investment in in-house R&D.
The role that governments play in promoting entrepreneurship and facilitating the funding of technological start-ups is a critical driver of innovation, job creation, and economic growth. Governments intervene through direct and indirect macro-level financial mechanisms to lower or remove obstacles to innovation in order to improve the entrepreneurial ecosystem (Goldberg, 1962; Intarakumnerd & Goto, 2018). This can occur by reducing regulatory barriers; developing existing markets and shaping new ones; providing fiscal incentives; licensing technology derived from government-sponsored research; and implementing a legal environment conducive to private risk-taking
(Goldberg, 1962). Governments utilise various policies to overcome market issues and system failures. These policies create and shape nascent markets which boost firm-level innovation (Chowdhury, Audretsch, & Belitski, 2019; Mazzucato, 2015). However this all depends on a well-functioning financial market and the economic development stage of the country (Demirgu-kunt & Maksimovic, 2000). There are several instruments which policymakers can employ to increase the availability of finance in support of traditional innovation activity (Brandao-Marques, Correa, & Sapriza, 2020). However, a high level of access to finance does not guarantee higher firm-level innovation performance or positive financial outcomes if there are obstacles to innovation in the sector, region or in
190 a particular host country (Intarakumnerd & Goto, 2018). For instance, according to the
Community Innovation Survey (CIS) and the Survey on Access to Finance of Enterprises
(SAFE), ‘access to finance’ is one of the top five obstacles to innovation for EU enterprises (Cincera & Santos, 2015). Accordingly, the following hypotheses are proposed:
Hypothesis 4a: The higher the level of access to direct public funding, the lower the level of barriers to innovation.
Hypothesis 4b: The higher the level of access to indirect public funding, the lower the level of barriers to innovation.
Strategic investments often require substantial capital expenditure beyond firms’ normal operating cash flows (Wang & Thornhill, 2010). Access to external market sources may be a source of competitive advantage (Barney, 1991; Beck & Demirguc-Kunt, 2006).
Firms choose both, or indeed a hybrid of, debt and equity financing depending on their strategic development (Kang, Baek, & Lee, 2017; O’Brien, 2003) and one of the primary strategic development factors is R&D investment (Caggese & Cuñat, 2013; O’Brien,
2003). R&D investment helps build firm-specific resources and capabilities (Helfat,
1994, 1997), which are strategies which can lead to greater performance (Phillips &
Scherer, 2006; Zahra & Covin, 1995). The foundation of a firm’s subsequent performance lies in its ability to generate, combine, recombine and exploit knowledge (Grant, 1996), which also depends on the availability and the level of access to external financial sources
(Carpenter & Petersen, 2002; Pellegrino & Savona, 2017; Pissarides, 1999). Absorptive capacity is crucial for value creation within the firm (Xie, Zou, & Qi, 2018) as it helps to identify, assimilate, and commercialise new information and knowledge (Phelps, Adams,
& Bessant, 2007). Firms with a high level of access to external market sources invest in
191 the development of absorptive capacity, are more efficient and effective in further innovation, resulting in superior performance (Božič & Dimovski, 2019; Knight &
Cavusgil, 2004). Accordingly, the hypotheses proposed in relation to facilitating conditions are followed:
Hypothesis 5a: The higher the level of access to debt finance, the higher the level of absorptive capacity.
Hypothesis 5b: The higher the level of access to equity finance, the higher the level of absorptive capacity.
International growth orientation is typically adopted to allow an organisation to offer a broader and more adaptable range of products and services ( Wu & Voss, 2015; Zahra &
George, 2002). Diverse cultural perspectives can inspire creativity and drive innovation thereby impacting growth and business performance. Therefore, along with access to governmental financial sources, access to external market sources plays an essential role in supporting international growth-oriented firms. Wu et al. (2018) demonstrate empirical support for the view that a well-developed business ecosystem, including availability and access to external market sources and exposure to growth in diverse international markets, can significantly facilitate emerging market firm’s innovation and performance. Previous studies suggest larger firms benefit from economies of scale and scope in terms of production, managerial talent, finance and marketing resources, while older firms acquire market knowledge and export capabilities to venture abroad (Krammer, Strange, &
Lashitew, 2018). However, the literature on born-globals suggests that age is no longer a necessary precondition for successful overseas expansion (Knight & Cavusgil, 2004).
Thus, a high level of access to external market facilities such as bank loans and equity markets, creates equal chances for SMEs to survive in competitive conditions. This is
192 through improving firm liquidity and giving them further ability to export (Chaney, 2016;
Kim, 2016). However if the exports are more likely to have a monopolistic structure this will create an anti-competitive environment. (Knack & Xu, 2017). Accordingly, the following hypotheses are proposed:
Hypothesis 6a: The higher the level of access to debt finance, the higher the level of international growth orientation.
Hypothesis 6b: The higher the level of access to equity finance, the higher the level of international growth orientation.
A well-developed financial market plays a crucial role in fuelling process innovation both in developed countries through stock markets and venture capital funds, and in transition regions. With little public or private equity availability, bond finance is dominant (EBRD,
2014; Wonglimpiyarat, 2013). It is assumed that financial markets play this role by allocating financial resources to firms with the greatest potential for introducing new processes and commercialising new technologies (Kerr & Nanda, 2015). Therefore, external market sources are a key financial instrument for firm innovation activities when government grants are not suitable or available for specific projects (Zhang & Guo, 2019).
Berger et al. (1998) find that both banking system development and stock market liquidity are positively associated with the growth of firms through innovative development. For instance, access to equity funding is also associated with R&D intensive innovation, while debt financing is more often used for incremental innovation (Shalley, Hitt & Zhou,
2015). Kerr and Nanda (2015) describe how the settings in which debt finance is used for innovation are more prevalent than anticipated. With regard to equity finance, the literature (e.g. Berger & Black, 2011; Casanova, Cornelius, & Dutta, 2018; de Bettignies
& Brander, 2007; Fernandez, 2017) emphasises certain limits to equity markets for
193 financing innovations - especially radical forms due to short-term pressures, imperfect monitoring, and stakeholder issues. Accordingly, the hypotheses developed in relation to this condition are follows:
Hypothesis 7a: The higher the level of access to debt finance, the higher the level of investment in in-house R&D
Hypothesis 7a: The higher the level of access equity finance, the higher the level of investment in in-house R&D
A well-functioning financial market plays a central role in driving firm level innovation performance through the ability to spur technological innovation (Hsu, Tian, & Xu, 2014;
Levine, 1997). However, without proper institutional reforms, financial markets cannot operate efficiently to boost firm-level innovation or lead to sustainable economic growth for a particular country. In order to obtain external market funding such as debt and equity finance (amongst others), firms are faced with varying regulations and these significantly depend on firm level characteristics. Furthermore, the level of R&D investment funding choices (Wang & Thornhill, 2010) depends on the degree of barriers, discrepancy of capital and the firm’s level of innovation. Evidence suggests that small or newer firms are not only more likely to report greater obstacles than larger and older enterprises (Beck
& Demirguc-Kunt, 2006), but also to suffer more from these obstacles. Financial barriers have double the effect on the growth of small business, vis-avis large companies (Beck,
Demirgüç-Kunt, Laeven, & Maksimovic, 2006). According to Lee et al. (2015) innovative SMEs also have a higher probability of application than other firms, but they are also more likely have access to finance. From this, the following hypotheses were developed.
194 Hypothesis 8a: The higher the level of access to debt finance, the lower the level of barriers to innovation.
Hypothesis 8b: The higher the level of access to equity finance, the lower the level of barriers to innovation.
There are several factors which shape a firm’s decisions to allocate their own resources to financing innovation. Large firms in contrast to start-ups have opportunities to attract external finance if internal resources are insufficient. Firms with greater abortive capacity have a developed technology base which allows them to both produce new knowledge and better evaluate the knowledge offered by the external environment. Empirical evidence confirms this argument (Božič & Dimovski, 2019; Spithoven & Teirlinck, 2015) insofar as firms better utilise R&D cooperation when they have dedicated investment and internal R&D personnel (Cassiman & Veugelers, 2006). Focusing on involuntary knowledge flows, Escribano et al. (2009) found that higher levels of investment in in- house R&D allows firms to more effectively use external sources of knowledge and, in turn, to stimulate innovative output. Firms which invest in the creation of in-house R&D are better able to recognise and evaluate external sources and, in turn, integrate and use their knowledge (Cohen and Levinthal, 1990). Thus, in the age of the knowledge-based economy, knowledge is understood as a strategic resource which is crucial to a firm’s ability to innovate and compete (Wang, 2013; Xie et al., 2018). Similarly, expansion of the technological capabilities of the company increases the chances of developing and implementing new products (Becker & Dietz, 2004). Firms engaged in both internal and external R&D, who do not invest in the internal stock of knowledge, may experience relatively higher search costs (Berchicci, 2013). From this, the following hypothesis is proposed.
195 Hypothesis 9: The higher the level of access to internal finance, the higher the level of absorptive capacity.
Access to finance has been found to be significant factor in influencing firm activities and in promoting aggregate growth. Productivity enhancing R&D activities commonly bear high risk and uncertainty, and therefore require large investments. Firms undertaking innovative activities typically hold relatively large R&D related intangible assets such as patents and knowledge (D’Angelo & Presutti, 2019), which cannot be used as collateral
(Chen & Guariglia, 2013). Hence, these firms typically find it hard to obtain loans from banks to finance their activities (Brown et al., 2009). International growth orientation is constrained by the availability of internal finance (Chen & Guariglia, 2013) especially for illiquid foreign and private firms. Chen et al. (2013) explain that when differentiating firms by ownership, both private and foreign firm productivity is affected by cash flow, while state-owned and corporate firms, which are more likely to benefit from soft budget constraints, are not. Furthermore, Chen et al. (2013) show that both liquidity and export behaviour are essential determinants of the link between the availability of internal finance and productivity in the Chinese context. As pointed out by Lu and Beamish
(2001), international growth orientation strategy through market diversification is an important strategic option for small firms as it broadens the customer base and enables the firm to achieve economies of scope and scale. Accordingly, the following hypothesis is proposed:
Hypothesis 10: The higher the level of access to internal finance, the higher the level of international growth orientation.
Financing innovation is a critical element of firm success in competitive markets (Cincera
& Santos, 2015). Internal financial sources have been demonstrated to influence firms’
196 real activities such as investment in fixed capital (Fazzari et al., 1988) and employment
(Nickell and Nicolitsas, 1999), which are core factor inputs for production. Investment in in-house R&D is a primary strategic development factor (Caggese & Cuñat, 2013;
O’Brien, 2003). R&D investment helps build strategic, firm-specific resources and capabilities (Helfat, 1994, 1997), and thus can lead to superior performance (Phillips &
Scherer, 2006; Zahra & Covin, 1995). A firm capable of investment in in-house R&D can more easily identify, assimilate, and commercialise new information and knowledge
(Phelps et al., 2007). Financial markets and financial institutions are traditionally reluctant to invest in firm innovation activities (R&D projects) as they bear a higher uncertainty/risk, compared to more traditional business projects (Cincera & Santos,
2015). Therefore, firms mobilise their internal financial resources in order to finance their expansion. High growth firms who draw on their internal financial resources are more likely to use a ‘mixed cocktail’ of internal and external finance for R&D (Brown & Lee,
2014). Informed by this, the following hypothesis is developed:
Hypothesis 11: The higher the level of access to internal finance, the higher the level of investment in in-house R&D.
In order to minimise adjustment and sunk costs, firms attempt to maintain consistent levels of R&D investment over time (Brown et al. 2012; Himmelberg and Petersen, 1994;
Hall et al., 2016). External financing is more expensive than internal sources due to their higher risk and the presence of asymmetric information, which causes R&D investment to be sensitive to shocks and to fluctuate (Kang et al., 2017). Firms need to maximise internal capacity by controlling their working capital and by divesting, in order to obtain funds. However, the question of access and eligibility usually depends on the firms’ stakeholders, industry policy and the relevant market. In short, access to internal finance can vary significantly based on firm development stage, characteristics (such as age and
197 size) and ownership structure. The different characteristics of firms cause systemic barriers which dampen growth levels (Heredia Pérez, Geldes, Kunc, & Flores, 2018;
Mohan, 2012). Indeed, internal finance remains the primary financial driver of innovation within the firm, and it copes better with risks related to knowledge leakage (Acharya &
Xu, 2017; Chen & Guariglia, 2013). Accordingly, the hypothesis developed is as follows:
Hypothesis 12: The higher the level of access to internal finance, the lower the level of barriers to innovation.
In a modern knowledge-intensive business environment, firms are increasingly dependent on external sources of information to stimulate innovation and increase output (Escribano et al., 2009; Lau & Lo, 2019; Morgan & Berthon, 2008). Many of them, however, are faced with difficulties in reaping the substantial benefits of external flows of knowledge, even with ease of access to information (Cassiman & Veugelers, 2006; Escribano et al.,
2009). A firm's absorptive capacity is not a goal in itself but can generate critical organisational outcomes (Kostopoulos et al., 2011). The core rationale is that absorptive capacity promotes the speed, frequency, and magnitude of innovation, which, in turn, can produce knowledge which becomes part of the company's future absorptive capacity
(Yang & Tsai, 2019; Zahra & George, 2002). High levels of absorptive capacity enable businesses to achieve higher innovation output combined with the advantages of rapid responsiveness to customers and avoidance of “lock-out effects” and “competency traps”
(Hamel, 1991; Zahra & George, 2002). Firms which consistently invest in the development and use of new external knowledge are more likely to take advantage of changing environmental conditions, create innovative products and meet the needs of emerging markets (Chen & Huang, 2009; Jansen, Van Den Bosch, & Volberda, 2006).
Thus, the following hypotheses are developed.
198 Hypothesis 13a: The higher the level of absorptive capacity, the higher the level of incremental innovation performance.
Hypothesis 13b: The higher the level of absorptive capacity, the higher the level of radical innovation performance.
Many companies seek international growth opportunities to maintain and increase profitability and competitiveness (Autio & Rannikko, 2016). International growth orientation is considered a channel for firms to access the complementary assets, innovative ideas and technology developed by foreign counterparts in global markets because they are exposed to new and diverse opinions from territorial and cultural perspectives (Rose & Shoham, 2002; Lu et al., 2014; Zahra & George, 2002). Moen et al.
(2016) found a positive connection between international growth orientation, revenue and exports. According to Knight (2001), international entrepreneurial orientation actively contributes to performance. As pointed out by Lu and Beamish (2001), growth through international diversification is an important strategic option for small firms as it broadens the customer base and enables the firm to achieve economies of scope and scale. The resource-based view argues that international diversification provides firms with incentives and resources to invest in innovation (Hitt, Hoskisson, Johnson, & Moesel,
1996). Internationally diversified firms can use a broader range of resources available globally, and which are often inaccessible or unavailable to domestic firms (Kafouros,
Wang, Piperopoulos, & Zhang, 2015). Also, as firms operating in international markets face more competitive pressures than in the domestic market, they tend to intensify the search for innovative resources and invest more to enhance their innovative capacity
(Moen et al., 2016; Wu & Voss, 2015). According to this, the following hypotheses are proposed:
199 Hypothesis 14a: The higher the level of international growth orientation, the higher the level of incremental innovation performance.
Hypothesis 14b: The higher the level of international growth orientation, the higher the level of radical innovation performance.
The accelerating pace of technological change and the shortening of product life cycles has led many firms to create and commercialize knowledge in a more timely and cost effective way (Lin, Wu, Chang, Wang, & Lee, 2012). Firms, therefore, participate in deepening and expanding their innovative capabilities, which are crucial for their long- term survival and growth (Faems, Van Looy, & Debackere, 2005), by measures such as investing resources in R&D to speed up innovation and looking for alternatives to in- house R&D. According to Silva et al. (2014) the greater the financial investment in the acquisition of machinery, internal R&D, equipment and software, marketing activities, and acquisition of external knowledge and other procedures, the greater the propensity for firms to innovate. Based on an empirical study covering 184 manufacturing firms in
Turkey, Gunday et al. (2011) identified that investment in organizational, process, product and marketing innovations had a significant positive effect on diverse aspects of firm performance. Accordingly, the following hypothesis is proposed:
Hypothesis 15a: The higher the level of investment in in-house R&D, the higher the level of incremental innovation performance.
Hypothesis 15b: The higher the level of investment in in-house R&D, the higher the level of radical innovation performance.
Innovation is widely recognised as a critical factor in the competitiveness of nations and firms (Madrid-Guijarro et al., 2009). Firms are facing obstacles in boosting their financial
200 performance based on innovation activities. Obstacles to innovation limit a firm’s ability to remain competitive and profitable. Previous research has highlighted the innovation barriers which firms have traditionally encountered. The majority of research on obstacles to innovation are closely linked to costs, institutional restrictions and bureaucracy, human resources, asymmetries of information, organisational culture and government policies
(Baldwin & Lin, 2002; Madrid-Guijarro et al., 2009; Mohnen, Palm, Van der Loeff, &
Tiwari, 2008) as well as limitations in resources and capacity (Hadjimanolis, 1999;
Hewitt-Dundas, 2006). For example, a study on access to finance for enterprises in the euro area (European Central Bank, 2015b) shows that access to finance has become the least important task for the eurozone enterprises, while customer search remained the main problem for SMEs. The results show that the external environmental barrier is the most significant of the three. Informed by this, the following hypotheses are developed:
Hypothesis 16a: The higher the level of barriers to innovation, the lower the level of incremental innovation performance.
Hypothesis 16b: The higher the level of barriers to innovation, the lower the level of radical innovation performance.
Just as the success of innovation is not guaranteed, higher investment in innovation does not always positively affect financial performance. For example, it is always uncertain that customers will accept new products and services introduced to the market, or whether such innovations will provide the desired level of return for the company (Baker &
Sinkula, 2005). Such problems can explain several contradictory empirical findings concerning the relationship between innovation and financial performance indicators
(Gatignon, Tushman, Smith, & Anderson, 2002; Morgan & Berthon, 2008; Walker,
2004). Despite the debate in the literature, recent data shows a positive relationship
201 between innovation and financial performance (Laforet, 2013). Jansen et al. (2006) demonstrate that under different environmental conditions, prospecting and exploiting innovations can contribute to profitability based performance indicators. Others report similar positive effects between disruptive types of innovation and total sales and gross profit margin (Govindarajan & Kopalle, 2006), or between innovation and cash flows and future profitability (Bigliardi, 2013; Sorescu, Chandy, & Prabhu, 2007). Through continuous innovation, firms can create a set of dynamic capabilities (Eisenhardt &
Martin, 2000; Teece;, Pisano;, & Shuen, 1997) which allows them to reconfigure their competence in line with changing market conditions, thereby increasing the prospect of future innovation activity (Damanpour, Walker, & Avellaneda, 2009; Roberts & Amit,
2003). Such advantages can, over time, create economic advantages which competitors will find very difficult to achieve (Bayus, Erickson, & Jacobson, 2003). Informed by this, the following hypothesis was developed:
Hypothesis 17a: The higher the level of incremental innovation performance, the higher the level of financial performance.
Hypothesis 17b: The higher the level of radical innovation performance, the higher the level of financial performance.
A summary of all hypotheses is given in Table 6.1.
202 TABLE 6.1: LIST OF HYPOTHESES H1a The higher the level of access to direct public funding, the higher the level of absorptive capacity H1b The higher the level of access to indirect public funding, the higher the level of absorptive capacity H2a The higher the level of access to direct public funding, the higher the level of international growth orientation H2b The higher the level of access to indirect public funding, the higher the level of international growth orientation H3a The higher the level of access to direct public funding, the higher the level of investment in in-house R&D H3b The higher the level of access to indirect public funding, the higher the level of investment in in-house R&D H4a The higher the level of access to direct public funding, the lower the level of barriers to innovation H4b The higher the level of access to indirect public funding, the lower the level of barriers to innovation H5a The higher the level of access to debt finance, the higher the level of absorptive capacity H5b The higher the level of access to equity finance, the higher the level of absorptive capacity H6a The higher the level of access to debt finance, the higher the level of international growth orientation H6b The higher the level of access to equity finance, the higher the level of international growth orientation H7a The higher the level of access to debt finance, the higher the level of investment in in-house R&D H7b The higher the level of access equity finance, the higher the level of investment in in-house R&D H8a The higher the level of access to debt finance, the lower the level of barriers to innovation H8b The higher the level of access to equity finance, the lower the level of barriers to innovation
203 H9 The higher the level of access to internal finance, the higher the level of absorptive capacity H10 The higher the level of access to internal finance, the higher the level of international growth orientation H11 The higher the level of access to internal finance, the higher the level of investing in in-house R&D H12 The higher the level of access to internal finance, the lower the level of barriers to innovation H13a The higher the level of absorptive capacity, the higher the level of incremental innovation performance H13b The higher the level of absorptive capacity, the higher the level of radical innovation performance H14a The higher the level of international growth orientation, the higher the level of incremental innovation performance H14b The higher the level of international growth orientation, the higher the level of radical innovation performance H15a The higher the level of investment in in-house R&D, the higher the level of incremental innovation performance H15b The higher the level of investment in in-house R&D, the higher the level of radical innovation performance H16a The higher the level of barriers to innovation, the lower the level of incremental innovation performance H16b The higher the level of barriers to innovation, the lower the level of radical innovation performance H17a The higher the level of incremental innovation performance, the higher the level of financial performance H17b The higher the level of radical innovation performance, the higher the level of financial performance
The next sections explain the methods used to conduct the quantitative survey, including the sampling method applied, and the process involved in instrument development.
204 6.4 Survey Instrument Design
The opening section of the questionnaire aims to collect general background information on the respondent firms in the selected primary industries of chemical and machine- building. Section two and three examine product, process, organisational and marketing innovation, as well as access to and importance of the government sources. These sources include external market sources and internal sources of finance for the firm’s performance during the period 2013-2015 inclusive. The questions were derived from the literature review, the Community Innovation Survey (Ireland Central Statistics Office, 2014) and the European Central Bank survey: Access to finance (European Central Bank, 2015a).
Questions in section three were rated on a Likert scale from one to seven, where one stood for “Not at all important” and seven stood for “Extremely important”. Following this, the items on financial sources and firm internal capabilities were rated where one indicated
“Strongly Disagree” and seven indicated “Strongly Agree”. A seven-point rating scale was used for the semantic differential items. Research demonstrates that the higher the number of points on a rating scale, the higher the sensitivity of measurement and extraction of variables (Vannette & Kosnick, 2018). Rating techniques such as the Likert are recommended due to their simplicity and symmetry, as they are more manageable for respondents to answer, thus increasing the response rate (Clark & Watson, 1995). The items for each construct were taken from recent studies to ensure that they had been tested, and hence, that their validity and reliability was assessed previously. The following section focuses on the different components of the questionnaire as well as the items, and why these specific scales were chosen for this research.
Demographic Information
Section one of the questionnaire addressed general background and participant profile information. The objective of this section is to collect an overview of the demographic profile of the respondents, such as age and gender, job title, work experience and the
205 primary activity of their company. This section also includes the general information of the company, namely: ownership type, size, age, the percentage of employees in R&D, percentage of export sales, percentage of revenue generated from product/service development, and main characteristics of the enterprises. Information in this section supports understanding of the distribution of participants who took part in the study and allows examination of the demographic factors that may influence the level of access to financial sources for innovation in Uzbekistan’s chemical and machine-building sectors.
Community Innovation Survey
The Community Innovation Surveys (CIS) are a series of surveys executed by national statistical offices throughout the European Union, Norway and Iceland. The CIS was developed by the European Commission which complies with the framework of the
Lisbon strategy in order to provide a comparative assessment of the innovation performance of EU Member States (Hollanders & Cruysen, 2008). The Organisation for
Economic Co-operation and Development (OECD) provided guidelines in their document: "The Measurement of Scientific and Technological Activities, Proposed
Guidelines for Collecting and Interpreting Technological Innovation Data", also known as the Oslo Manual. This document contains guidelines for the collection and use of data on industrial innovation. The third edition of the Oslo Manual (OECD, 2005) is usually described as the primary source of guidance for the collection and use of data which address the nature and impact of innovation activities in industry.
Data from surveys conducted under these guidelines are used in the annual European
Innovation Scoreboard and for academic research on innovation. The CIS aims to describe the innovation process by collecting data on innovation inputs, outputs
(measured by the share of new or improved sales in total sales), and other data types, in order to describe the technological environment of firms (Lahr & Mina, 2013; Leeuwen,
206 2002). Compiling CIS data is voluntary, which means that each year different countries are involved. In this research, the adapted version of Ireland’s CIS is used (Ireland Central
Statistics Office, 2014). The CIS (currently known as Innovation in Irish Enterprises), measures the level of innovation activity among enterprises in Ireland. The survey covers manufacturing and selected services sector enterprises.
The Irish CIS was adapted to conform to the specific context of this study. This research utilised this method in order to collect relative data on firm-level innovation activities. In conjunction with the main aim of this research, which was to assess the macro-level financial mechanism for innovation support, questions related to government support across sectors were also included. These were specifically included to overcome the weakness of the statistical data from Uzbekistan on innovation supports during the data collection period 2013-2015. The CIS includes information on product innovation, turnover from new to market / new to firm product innovations, process innovation, ongoing and abandoned innovation, innovation expenditure, innovation co-operation, innovation competitiveness, organisational Innovation, marketing innovation, employee educational qualifications, factors hampering innovation activities, intellectual property rights, turnover & employment (CSO, 2014). It also takes into account that most innovation in developing countries involves a dissemination mechanism and some incremental change.
Financing Innovation Survey
The third section of the questionnaire contains a set of questions examining the level of access to government, market and internal sources of finance. These sources of finance support firm innovation and financial performance based on the effect of the four mediator variables posited by this research study namely: Absorptive capacity (ACAP), international growth orientation (IGO), investment in in-house R&D (IRD) and barriers
207 to innovation (BI). As previously mentioned, the questions were developed from extant sources combined with the key findings of the semi-structured interviews. Next, the constructs are explained along with items used to measure these constructs.
Access to Government Sources
This section examines access to government sources through direct and indirect public funding mechanisms in support of firm-level innovation.
Construct: Access to Direct Public Funding
Six items were used to measure the level of access to direct public funding construct. Two items were adapted from Radas et al. (2015), one item from Guan & Yam (2015), one item from Nishimura & Okamuro (2011), and two items sourced directly from the interviews. The first four items capture the role of government direct intervention through various public financial schemes at international level. The next two items determine the level of direct public intervention in the Uzbek context. Accordingly, this construct was used to examine perceptions of access to finance in the respective industry sectors. Table
6.2 outlines the items used for the direct public funding construct.
TABLE 6.2: ITEMS FOR THE CONSTRUCT DIRECT PUBLIC FUNDING (DPF) Items Literature sources Access to Payment for work on public contracts Nishimura & Okamuro (2011)
Access to Public grants (Radas et al., 2015) Access to Investment in equity Access to Public credit (Direct Earmarks) Guan & Yam, (2015)
Access to Funding for new technologies and modernisation Access to Funding for Reconstruction and Development of Semi-structured interview Uzbekistan
208 Construct: Access to Indirect Public Funding
Indirect public funding was measured using six items. Two items were adapted from
Leonid et al. (2014), one item from Guan & Yam (2015), one item from Nishimura &
Okamuro (2011), and two items from the Phase 1 interviews. The items used to measure indirect public intervention to support firm-level innovation and are shown in Table 6.3.
TABLE 6.3: ITEMS FOR THE CONSTRUCT INDIRECT PUBLIC FUNDING (INDPF) Items Literature sources Guan & Yam (2015) Access to Tax exemptions/credits holidays
Access to Custom duties Leonid, et al. (2014) Access to Capital Allowances (depreciation) Nishimura & Okamuro (2011) Access to Interest rate subsidies on loans
Access to Localization program Semi-structured interview Access to Free industrial economic zone Republic Fair of Innovative Ideas, Technologies and Projects
Access to External Market Sources
In this section of the questionnaire, access to external market sources is examined through the influence of two factors, namely debt finance and equity finance. The constructs are explained along with the items used to measure them.
Construct: Access to Debt Finance
Seven items measured access to Debt Financing. A scale developed and validated by the
European Central Bank (2015a) survey on Access to Finance of Enterprises in the euro area was used. As noted, bank-related products remained the most relevant source of finance for SMEs vis-à- vis market-based products and other sources of finance. The survey items were adapted for use in this research. All items were scored on a seven-point scale, ranging from “not at all important” to “extremely important”, and are shown in
Table 6.4.
209
TABLE 6.4: ITEMS FOR THE CONSTRUCT ACCESS TO DEBT FINANCE (ACDF) Items Literature sources Access to Corporate Bonds Access to Factoring/Invoice Discounting Access to Trade Credit Access to HP & Leasing European Central Bank (2015a) Access to Bank loan Access to credit line/syndicated line of credit loan Access to overdraft
Construct: Access to Equity Finance
Three items measured access to Equity financing. Two items were adapted from the
European Central Bank (2015a) and one from Nguyen & Rugman (2015) that measures the level of access to equity financing for a firm’s innovation performance. It was deemed that the chosen measurement scale was the most appropriate for this study on the basis of relevance, parsimony, reliability and validity. Items are shown in Table 6.5.
TABLE 6.5: ITEMS FOR THE CONSTRUCT ACCESS TO EQUITY FINANCE (ACEF)
Items Literature sources Access to Venture Finance European Central Bank (2015a) Access to Equity Markets Access to the reinvestment of dividends Nguyen & Rugman (2015)
Access to Internal Sources
Construct: Access to Internal Finance
Five items were used to measure the level of access to internal finance. Two items, namely access to capacity utilisation and access to divesting, are shaped from the key findings of the semi-structured interviews. Access to cash and personal savings items were adapted from Bakar et al. (2010), one item was adapted from European Central Bank (2015a).
The final scale was used to measure the level of access to internal sources of finance based on a seven-point scale, where one = “not at all important” to seven = “extremely important”. Items are shown in Table 6.6.
210 TABLE 6.6: ITEMS FOR THE CONSTRUCT ACCESS TO INTERNAL FINANCE (ACIF)
Items Literature sources Access to Cash Bakar et al. (2010) Access to Capacity Utilisation (e.g. If a company is running at a 70% capacity utilisation rate, it has room to increase production up to a 100% utilisation without incurring the costs of building a Semi-structured interview new plant or facility) Access to Divesting (e.g. to sell a business that is not closely related to your firm’s core businesses to obtain funds) Access to Working Capital Management European Central Bank (2015a) Access to Personal Savings Bakar et al. (2010)
Mediator Variables
This section of the questionnaire measures the four mediator variables namely; ACAP,
IGO, IRD and BI. The items used to measure these constructs are developed below.
Construct: Absorptive Capacity
Research shows that a high level of absorptive capacity enables businesses to achieve superior innovative performance (Hamel, 1991; Kostopoulos et al., 2011; Zahra &
George, 2002). Studies suggest that absorptive capacity enables firms to successfully learn in foreign markets and consequently achieve superior international performance
(Flatten, Engelen, Zahra, & Brettel, 2011). Four items were used to measure this construct. The items were adapted from Lane et al. (2006) and Escribano et al., (2009).
The entire coordination scale from Lane et al. (2006) was used in addition to one item from the Escribano et al. (2009) scale. It was deemed that the chosen measurement scale was the most appropriate for this study in terms of relevance, parsimony, reliability and validity. Final scales used to evaluate a firm’s absorptive capacity on a seven-point scale, where 1= very low and 7=very high. Items are shown in Table 6.7.
211 TABLE 6.7: ITEMS FOR THE CONSTRUCT ABSORPTIVE CAPACITY (ACAP)
Items Literature sources Recognizing and understanding potentially valuable new Lane, et al. (2006) knowledge outside the firm through exploratory learning
Assimilating valuable new knowledge through transformative learning Using the assimilated knowledge to create new knowledge and commercial outputs through exploitative learning
The ability of your firm to provide training for R&D personnel Escribano, et al. (2009)
Construct: International Growth Orientation
International growth orientation has gained relevance for individual firms (Cadogan,
Diamantopoulos, & Siguaw, 2002). Several studies have analysed the impact of international growth orientation on the overall performance of firms (Hernández, Moreno,
& Yañez, 2016). Many companies seek international growth opportunities to maintain and increase profitability and competitiveness (Autio & Rannikko, 2016), thereby reducing their dependence on domestic or national markets (Ciravegna, Majano, & Zhan,
2014). The five items for this construct were adopted from Autio and Ranniko (2016).
Autio and Ranniko (2016) analysed 12,000 Finnish technology-based new firms (TBNF).
They collected comprehensive longitudinal data from both the treatment and control groups based on a seven-point scale, ranging from “strongly disagree” to “strongly agree”. Items are shown in Table 6.8.
TABLE 6.8: ITEMS FOR THE CONSTRUCT INTERNATIONAL GROWTH ORIENTATION (IGO)
Items Literature sources It makes more sense for us to grow internationally than domestically Our marketing competence is better applied internationally Autio and Ranniko (2016) Our personnel is better utilised in international markets Our reputation and brands support internationalisation better Our current customer relations support international growth
212 Construct: Investment in in-house R&D
Investment in in-house R&D was measured using six items; the last two were adapted from Bergek et al. (2008) based on their financial resource mobilisation constructs. Four items were developed based on adapted questions in the CIS and using Gunday et al.
(2011). The annual volume of capital raised from external and internal funds on firm's innovation activities ultimately leads to innovation and performance, and it is based on seven-point scale, ranging from “strongly disagree” to “strongly agree”. Items are shown in Table 6.9.
TABLE 6.9: ITEMS FOR THE CONSTRUCT INVESTMENT IN IN-HOUSE R&D (IRD)
Items Literature sources The annual volume of capital raised for product innovation in our firm Community Innovation Survey The annual volume of capital raised for process innovation in our (CIS) firm The annual volume of capital raised for marketing innovation in our firm Gunday, et al. (2011) The annual volume of capital raised for organisational innovation in our firm We are annually increasing the volume of seed capital Bergek, et al. (2008) We are annually increasing the volume of venture capital
Construct: Barriers to Innovation
As highlighted in the literature, innovation constraints constitute barriers that firms traditionally encounter. Much of the research on obstacles to innovation is closely linked to access to finance and its availability, institutional restrictions and bureaucracy, human resources, availability of information, organisational culture and government policy
(Amara, D’Este, Landry, & Doloreux, 2016; Baldwin & Lin, 2002; Madrid-Guijarro et al., 2009; Mohnen et al., 2008). Madrid-Guijarro, Garcia, and Auken (2009) examined barriers to innovation among a sample of 294 managers of small and medium-sized enterprises (SMEs) in Spain. Their findings show that barriers have a differential impact on the various types of innovation; product, process, and management. The survey on
Access to Finance for Enterprises in the euro area (European Central Bank, 2015b) used 213 six items representing the main obstacles for firm-level innovation performance.
However, this research also developed a scale with items adapted from various research articles including twelve items from the scale devised by Madrid-Guijarro, Garcia, and
Auken (2009), five items from Cincera and Santos (2015) and four items drawn from the interviews. The scale was adapted to conform to the specific context of this study. Items are shown in Table 6.10.
TABLE 6.10: ITEMS FOR THE CONSTRUCTS BARRIERS TO INNOVATION (BI) Items Literature sources Lack of engineering/technical talent Lack of sales/marketing talent Lack of managerial/leadership talent Economic Turbulence High Cost and Risk Lack of External Partners Opportunities Madrid-Guijarro, Garcia, and Difficulty in finding co-operation partners Auken (2009) Lack of Information Lack of Government Support Lack of Regional Infrastructure Inadequate/costly infrastructure Lack of customer responsiveness to new products and processes Lack of tax incentives Lack of intellectual property protection Semi-structured Interview Bureaucracy Exchange rate fluctuations Lack of appropriate source of finance Access to Finance Cash Barriers (Cincera & Santos, 2015) Competition Cost labour
Performance
This section of the questionnaire examined three performance factors namely; incremental innovation, radical innovation performance and financial performance. The constructs are explained below along with the items used to measure them.
214 Construct: Incremental Innovation Performance
Six items measured incremental innovation performance including items from a scale developed and validated by Fores and Camison (2016) measuring incremental innovation performance among a sample of 952 firms across 14 Spanish industrial sectors. It achieves an acceptable reliability and validity metric. In their research a five-point scale was used to evaluate the introduction of improvements and incremental changes for each item in relation to direct industry competitors' average on a scale of 1 to 5 where 1 is
“much worse than our competitors”, 3 is “on a par with competitors”, and 5 is “much better than our competitors”. In this research, all items were scored on a seven-point scale, ranging 1 “much worse than our competitors”, four is “on a par with competitors”, and seven “much better than our competitors”, and are shown in Table 6.11.
TABLE 6.11: ITEMS FOR THE CONSTRUCT INCREMENTAL INNOVATION PERFORMANCE (INCIP) Items Literature sources Incremental innovation in products Incremental innovation in process Incremental innovation in technologies Fores and Camison (2016) Incremental innovation in organisational structures Incremental innovation in strategic orientation Incremental innovation in management methods
Construct: Radical Innovation Performance
Four items were used to measure radical innovation performance. Adapted from Fores and Camison (2016), they capture the firm's introduction of new products, processes, technologies and organisational structures, strategic orientation and management methods. Fores and Camison (2016) used a five-point scale, in this research all items were scored on a seven-point scale, ranging from one “much worse than our competitors”, to four “on a par with competitors”, to seven “much better than our competitors”. Items are shown in Table 6.12.
215 TABLE 6.12: ITEMS FOR THE CONSTRUCT RADICAL INNOVATION PERFORMANCE (RADIP) Items Literature sources Radical innovation in products Radical innovation in process Fores and Camison (2016) Radical innovation in technologies The radical innovation of organisational structures, strategic orientation and management methods
Constructs: Financial Performance
Financial performance was measured using six items. The first four items were taken from Gunday et al., (2011) and the following two from Bigliardi (2013). This scale measures the organisation’s profitability, sales growth, operating costs, market share, productivity and ROA compared to their competitors. This scale was initially developed by Conant et al. (1990), Narver and Slater (1990) and Conant, et al. (1993). After comparison with other relevant scales (Gunday et al., 2011; Kostopoulos et al., 2011), it was considered that the chosen measurement scale was the most appropriate for this study based on relevance, parsimony, reliability and validity. The scale was adapted to conform to the specific context of this study. The rationale to develop this scale was to illuminate the relationship between innovation performance and financial performance. As was expected not all respondent firms will answer the CIS questions related to the amount of money a firm invested for its innovation activities. This was also justified during the pilot, as the respondents were not always confident in sharing exact information related to their innovation activity investments. Therefore, the ‘developed financial performance construct’, allowed the researcher to gain more insight and information in order to evaluate a firm’s financial performance, where items were assessed on a seven-point
Likert scale, where one is equal to much worse and, seven is equal to much better. Items are shown in Table 6.13.
216 TABLE 6.13: ITEMS FOR THE CONSTRUCT FINANCIAL PERFORMANCE (FPR) Items Literature sources your organisation's return on investment (ROI) relative to your competitors Gunday et al., (2011) your organisation's sales growth relative to your competitors
your organisation’s total operating costs relative to your competitors
your organisation's market share relative to your competitors your organisation's productivity relative to your competitors your organisation's return on assets (ROA) relative to your competitors Bigliardi (2013)
The next section explains the methods and techniques used for the pilot test.
Pilot Test of Survey Instrument
The pilot study was undertaken soon after the survey instrument was finalised in June
2016. The respondents for the pilot study were selected using purposive sampling.
Purposive sampling is widely used in pilot studies, as the method of collecting data from information-rich samples is effective in examining the feasibility of the research design for a large-scale project (Van Teijlingen & Hundley, 2001). Similarly, Palinkas et al.
(2015) argue that purposive sampling allows for the selection of information-rich cases which is necessary for a pilot as the aim of the pilot study is to test the reliability of the research instrument. Five firms from each industrial sector with varying ownership types were selected. In total, 10 respondents participated in the pilot using face-to-face interviews to ensure that the wording, format and sequencing of questions was appropriate. These responses were excluded from the final sample.
The quality of the questionnaire was assessed for the presence of ambiguous questions.
Ambiguous questions are defined as difficult to understand or unclear (Van Teijlingen &
Hundley, 2001). The respondents were asked to report their views on the questionnaire, including interpretation and completeness of questions, difficulties experienced in answering the questions, and any other views they had concerning the structure. After obtaining feedback from the respondents and academics, the wording of twelve items was slightly changed as was the order of four constructs. Specifically, the barriers to
217 innovation were moved to the end of the section. This was done as the respondents suggested the items were relatively long and thus potentially problematic at the start of the survey. See pilot questionnaire in Appendix IV. Moreover, two key issues were identified: The questionnaire was long and time consuming; the other central element was the risk of the questionnaire being ignored or simply not being completed. As incomplete and unreturned questionnaires increase non-response bias (Sivo et al. 2006), steps were taken to address this issue including issuing reminders to respondents by phone.
According to Lodico, Spaulding and Voegtle, (2010), a pilot study allows the researcher to conduct a test run to ensure that weaknesses in surveys are identified and addressed.
In particular, the pilot study allows the researcher to determine factors including the adequacy of the instructions in the survey. The adequacy of the research instrument, the feasibility of a full-scale survey, the effectiveness of the questionnaire distribution technique, the extent of resources needed for the full-scale survey, the sensitivity of participants to different questions, and the average time required to complete the survey were all assessed (Hertzog, 2008; Thomas, Nelson and Silverman, 2011; van Teijlingen and Hundley, 2001). Sensitive questions encompass those that trigger concerns regarding social desirability, personal, invasive questions, or questions that make respondents feel uneasy and raise concerns on their part concerning the possible consequences of disclosing information which in turn may result in them giving biased responses, more so than their actual personal opinions (Tourangeau and Yan 2007). Sensitivity reduction techniques used for this research included guaranteeing respondent anonymity and the use of self-administered questionnaires (Nanes & Haim, 2020; Sudman, Greeley and
Pinto 1965). The questionnaire was prepared in English (Appendix V) and translated into
Russian (Appendix VI). Then a third party back translated the Russian version into
English. The two versions were analysed and indicated no substantial difference in meanings. The next section explains the data collection methods used for this research.
218 6.5 Data Collection
This research required a unique data set obtained from the machine-building and chemical industries of the Republic of Uzbekistan. It was focused on a single transition economy using the SIS framework to ensure that cultural differences which exist between nations would not impact the results. The context of the research was chosen for three reasons.
First, Uzbekistan shares many characteristics of other transition economies and provides an interesting setting to refine and test existing theories for Industrial Policy (Popov &
Chowdhury, 2016; World Bank Group, 2018). Second, this research helps shed light on other transition economies, particularly in the Commonwealth of Independent States
(CIS), as they view Uzbekistan as a model for economic development. For instance,
Uzbekistan created an auto industry from the ground up. The industry produces more than
200,000 cars, half of which are exported. It is an undisputable success of industrial policy
(Popov, 2014; Popov & Chowdhury, 2016). Thirdly, it is the researcher’s home country, and the role of government in the nation’s economic life is very prominent, making it an ideal laboratory for testing the theoretical framework.
A purposive sampling method was also adopted for the main quantitative survey. To develop the sample, support was gained from a local higher education institution (original university of researcher) Samarkand Institute of Economics and Services (SIES). First, an official letter was sent from SIES to the Central Statistical Office (CSO) of the
Republic of Uzbekistan, Samarkand Region to get the list of companies operating in the machine-building and chemical industries. The CSO provided a list with a total of more than 4000 manufacturing firms from different sectors. The sample was reduced to the chemical and machine-building industries to avoid the potential confounding effects of different industries. A total of 1051 manufacturing firms remained, 405 of them in the chemical industry and 746 in the machine-building industry respectively. To increase the response rate, a telephone inquiry was conducted on a random selection of 300 firms in
219 both sectors, before the formal survey, and 120 of them agreed to participate. After that, it was decided to print 1000 questionnaires as the total response rate was expected to be around 30%.
The survey was conducted between July and November 2016, the 1000 questionnaires were mailed to the firms in both sectors. Uzbekistan is a low-trust society which discourages participation in surveys, especially when the data is being collected by a foreign entity. To build trust within the process, following Dillman et al. (2010), an official letter was prepared by Samarkand Institute of Economics and Services (SIES) asking firms from both industries to complete the survey (See Appendix III for a copy of the letter).
The SIES letter was in the Uzbek language. It was generally encouraging of firms to participate as the research would have a practical contribution to policy in the context of financing innovation in the sector. The letter suggested that the questionnaire should be completed by firm owners or executives from finance, accounting and other related departments. It is common in Uzbekistan, as it is in similar settings, that secretaries or assistants complete survey instruments for their supervisors by providing answers they believe their supervisors would like to hear (Roy, Walters, and Luk 2001). The respondents were given one month to complete and return their questionnaires.
Periodically after one week, the researcher called on selected firms to remind them to fill out the questionnaire. A web survey alternative was also given. The reminder also stated the number of days remaining to close the survey. The next section explains the mail and web survey method employed in this research.
220 Mail Survey
The mail survey is among the oldest and most widely used research instruments (Bryman,
2007; Dillman, Smyth, & Christian, 2008). It is recommended where the target sample shows an interest in the research-topic (Raziano, Jayadevappa, Valenzula, Weiner, &
Lavizzo-Mourey, 2001). In the context of this study, the cover letter clearly stated that the research objective was to better understand the financial mechanisms available to support firm innovation and to build a framework that would help to advance innovation performance outcomes. Considering that all respondents were directly responsible for their firms’ finance, a mail survey was deemed appropriate.
Mail surveys have many strengths (Dillman, 2014). The primary strength is that they are relatively low-cost (Pickering, 2003), which can be of considerable importance if the researcher has limited resources. Secondly, the procedures for mail surveys are often simple enough for individuals and organisations to conduct independently rather than rely upon survey research organisations (Dillman, 2014). It also allows more time for respondents to reflect and think before completing the survey thus drawing well thought- out responses (Bryman, 2007). This was relevant in this study as a significant portion of the respondents were senior personnel with busy schedules. Thirdly, unlike interviews, surveys minimize/eliminate interviewer bias due to a lack of direct contact. Fourthly, data analysis and interpretation are comparatively simple and clear-cut. Finally, a large geographical area can be covered relatively easily as the postal service does the majority of the work (Dillman et al., 2008).
Having discussed a range of advantages, there are some obvious disadvantages of employing mail surveys. The primary disadvantage is the response rate which generally averages between 15% and 25%, which can be a major issue if the sample size is low
(Bryman, 2007; Nardi, 2018). For this study, several measures were taken to maximise
221 the response rate. One of the most important issues, that of trust (Dillman, 2014), was addressed through the letter from SIES as described earlier. It is noteworthy that the mail survey has developed from being the lowest response rate mode for many survey designs to now having response rates which are significantly higher than telephone surveys, they are also more cost effective than in-person surveys (Dillman. 2014).
The second disadvantage of employing a mail survey is that the researcher can never be sure as to who responded (Dillman, 2014; McMahon et al., 2003). Although necessary measures were taken to ensure distribution to the most relevant candidates, there was no way to make sure that the right person has completed it. Thirdly, although lack of contact with the interviewer reduces bias, it might also prove to be an issue if the respondent encounters any difficulties in completing the questionnaire. Finally, survey length is an important consideration (Mackety, 2007). To ensure optimal survey length and minimise chances of incomplete responses, the survey was pretested to make it as clear, straight- forward and interesting as possible (Bryman, 2007).
6.6 Quantitative Data Analysis
The data analysis phase commenced with descriptive statistical analysis. Descriptive statistics provide an understanding of basic distribution by summarising the data collected from the participants including the measure of central tendency and the measure of dispersion of the variables ((Goodwin & Wright, 2010). A measure of central tendency determines the midpoint of distribution which includes mean, median and mode (Chyung et al. 2017). Central tendency alone cannot explain a sample or population of study, as it is only an aggregate number, and the variation in the data is not given. A measure of dispersion refers to the variation in the data, and this includes measures such as range and standard deviation (McCusker & Gunaydin, 2015). Following the descriptive statistical analysis phase, the structural part of the model whereby the relationship between the
222 various constructs are examined is discussed in chapter 7. In this research the data analysis was undertaken using Mplus and SPSS. The greater part of the analysis was conducted using Mplus (given its text-based interface that is useful for analysing large models),
SPSS was utilised to perform the preliminary descriptive analysis, given its tailor-made interface and ease of use. While the function of descriptive statistics is to summarise, organise, and display the data, inferential statistics allow one to analyse the data, test the hypotheses and draw conclusions from the data (Asadoorian and Kantarelis 2005).
Inferential statistical analysis allows the testing of hypotheses by examining relationships between variables. The next subsection outlines the results of the descriptive statistical analysis.
6.7 Questionnaire Findings
The questionnaire had a total two hundred nineteen variables including the variables of the different constructs of the model proposed in this thesis, descriptive variables about the sample respondents, essential characteristics of firms and finally, control variables.
Characteristics of the sample
A total 405 valid responses were returned, yielding a response rate of 38.6%. However,
54 incomplete responses were identified and excluded from the total sample. Overall, 351 completed responses are left with total a response rate of 33%. 135 out of 351 respondent firms operate in the chemical industry and 216 (over 60%) respondent firms were in machine-building industry, see table 6.14. There were no differences in the response patterns between early or late responses using the standard tests proposed by Armstrong and Overton (1977). Compared with other studies in this field using this method, a 33% response rate is excellent. For instance, Freel (2003) analysed a sample of 597 SME manufacturing firms in the UK with a response rate of 11.5%. Bigliardi (2013) investigated the effect of innovation on financial performance relying on data collected
223 from a survey of a sample of 98 SMEs belonging to the food machinery industry. Another example is provided recently by Wadho and Choudhry (2018) where authors relied on a
15% response rate from textile and apparel manufacturers in Pakistan.
TABLE 6.14: SUMMARY OF RESPONSES ACROSS TWO SECTORS Total Number of Incomplete Final Chemical Machine Sample Responses responses Sample Industry Building Industry 1051 405 (38.6%) 54 351 (33%) 135 216
The next section discusses key characteristics of the respondent firms in detail.
6.8 Respondent Demographics
This section introduces the respondent demographics, as well as general information about the chemical and machine-building industries including age, size and ownership type. Respondents were asked to provide information regarding their job profile and experience (measured by the number of years in the current sector and their current position in the firm). Respondents were also asked about their main activity. The approved Classification of Branches of the National Economy (CBNE) of the Republic of Uzbekistan in regard to Standard Industrial Classification (SIC) determined the main activity of respondent entities. This information enabled the identification of firm level factors that may affect access to finance and innovation performance in the respective industries.
Respondent Job Profile
To establish relevance, respondents were asked about their roles. The respondent profiles include their job titles and the number of years work experience in the industry and the company itself, see table 6.15. Around 30% of the respondents were in senior management roles, i.e. owner, CEO or president, with direct responsibilities in managing
224 the business. 31% of respondents account or financial directors, and around 40% were managers in various departments.
Respondent Experience
Experience is an important determinant in understanding the knowledge level of the respondent. As depicted in table 6.15, age is also an indicator of experience and more than half (62%) fall between the ages of 35–54, 29% fall between 18-34, and the remaining 8% are over 55. The respondents had relatively high levels of experience. On average, respondents had been working for about five years in their company, with an average of ten years’ experience in the same industrial sector. Indeed, in the traditional manufacturing sector, the high number of respondents in the middle age bracket and their high level of experience suggests a high quality of responses due to appropriate levels of work experience.
Respondent Gender
Of the 351 completed questionnaires, 267 (76.1%) of the respondents were male, and 84
(23.9%) were female. The higher proportion of males can be partially explained by women’s’ limited access to higher education. For instance, in the 2014/15 academic year, only 37.5 percent of students enrolled in Uzbek universities were female (World Bank,
2016). Futhermore, within the cultural context, early marriage is common for Uzbeks
(UNDP in Saidazimova, 2014). This limits the access of females to the workforce and in particular to more senior positions in technical industries. Next, the detailed information on the job profile of respondents is shown in Table 6.15.
225 TABLE 6.15: RESPONDENT DEMOGRAPHICS Characteristics Category N Percentage Job title 1.Owner, CEO and President 104 29.6 2. Head of Accounts 109 31.1 3. Head of other departments 139 39.6 Namely: 1. Economist 7 2.0 2. Engineer Technologist 12 3.4 3. Head of Innovation department 12 3.4 4. Head of Marketing Department 29 8.3 5. Head of Planning Division 14 4 6. Head of Production Department 19 5.4 7. Investment Planning Department 5 1.4 8. Operation Engineer 4 2 9. Process Manager 17 4.8 10. R&D manager 16 4.6 Gender Male 267 76.1 Female 84 23.9 Age Group 18 – 34 103 29.3 35 – 54 219 62.4 Over 55 29 8.3
Work In the industry 9.96 mean Experience In the company 5.19 mean
Organisational Characteristics
Table 6.17 presents the main organisational characteristics of the 351 respondent firms.
The key features identified are: Firm size and age, main business activity (per the SIC codes section), ownership type, income generation, percentage of employees in R&D, level of tertiary degree qualified employees, firm export rates and the type of legal entity of the organisation. These characteristics are discussed next, starting with respondent firms' age and size.
226 Respondent Firms Age and Size
The Uzbek Economy Ministry and the State Statistics Committee defines whether a firm is micro, small or medium based on the number of employees. There is no single definition as the definition vary across sectors and the firm’s primary activity. For instance, within the same subsector of the economy, there can be a different definition of small and medium depending on the characteristics of the individual firm. Table 6.16 below gives an indication of the issue.
TABLE 6.16: FIRM EMPLOYEE-BASED CLASSIFICATION Employees Classification Uzbekistan CBNE classification EU Classification Less than 20 Micro firm Less than 50 Small firm 20-50 SME 50-249 Medium firm 50+ Large firm 250+ Large firm
For this research study, the EU definition was adopted due to its widespread usage. The
EU categorises an SME as a firm with less than 250 employees (Eurostat, 2016). Firms with a turnover of less than €50m also fall under SME. Due to the difference in identification of small firms in Uzbekistan and other developed countries it is difficult to find an appropriate parameter. The primary issues arise as Uzbek firms tend to have a much larger workforce with a comparatively smaller turnover per employee. Figure 6.2 depicts the respondent firms ages and size. The detailed description of the samples ages and size are presented later, cross-tabulated with respondent ownership types and their industries. Figure 6.2 depicts the respondent firm age and size.
227 FIGURE 6.2: RESPONDENT FIRM AGE AND FIRM SIZE
Standard Industrial Classification (SIC) codes
The classification of an industry in the Republic of Uzbekistan is determined by the approved Classification of Branches of the National Economy (CBNE) (stat.uz, 2017).
From January 1st, 2017, the limits on the number of employees in small businesses are determined by the newly introduced Classification of Organisations, improved by the
National Classifier of Economic Activities - NCEA (PKM No. 275 of August 24, 20164).
The classifier of the CBNE is no longer in use. Corresponding changes are included in some existing provisions, instructions and rules, as well as in tax and financial statements.
In this thesis, NCEA codes are used instead of CBNE codes. The NCEA was developed on the basis of the universally recognised statistical classification of economic activities within the European Union. The main goal of their implementation is to improve the systems of statistical, tax and financial reporting. The data collection process for this research was conducted in July – September 2016 when the CBNE classifier was in use.
Moreover, the methodology for determining the main type of business has changed as the
4 August 24, 2016 Resolution of the Cabinet of Ministers № 275 "On measures for the transition to the international system of classification of economic activities". 228 Uzbek economy has changed regulations. The enterprise, which in 2016 was considered small, in 2017, under the same conditions, may not be.
As depicted in table 6.17, firms across both chemical and machine building sectors generated 25% (mode 15%) of their revenue from the development and realisation of new products and services during the 2013 to 2015 period. The proportion of revenue generated by export sales in 2015 was 4% per firm. However, 272 or 77.3% of respondent firms do not export. Unsurprisingly, 212 of non-exporter firms are 100% locally owned.
The Uzbek government afforded significant privileges to foreign investors via tax and customs duty exemptions, resulting in around 23% of respondent firms having a high proportion of export sales (PwC, 2016).
229 TABLE 6.17: RESPONDENT FIRM PROFILE Characteristics Category N Percentage
Partially Government 72 20.5 owned Partially Foreign owned 71 20.2 Ownership5 Partially Local owned 51 15 Foreign 100% owned 8 2.3 Local 100% owned 252 72
Income generation of the 3 Across sectors mean firm6 (increased)
1 - 3 years 41 11.7 4 – 10 years 133 37.9 Firm age 11 – 18 years 119 33.9 Over 19 years 58 16.5
Less than 50 employees 185 52.7 51 – 150 employees 74 21.1 Firm size 151 – 249 employees 45 12.8 Over 250 employees 47 13.4
Firm size (no. of employees) Firm Age x Size Less Over Cross-tabulation 51 - 150 151-249 Total than 50 250 1 - 3 34 5 2 0 41 Firm age 4 - 10 76 30 16 11 133 (years) 11 - 18 59 25 15 20 119 19 + 16 14 12 16 58 Total 185 74 45 47 351
< 5% 266 75.8 % of employees in R&D 5 – 10% 32 9.1 <10% 53 15.1
The proportion of current In science or engineering 17.73 employees who hold a In other subject areas 21.36 degree non-graduates 61.83
5The ‘Ownership’ category is not mutually exclusive. For example, a firm can be ‘partially government owned’ (meaning that the Uzbek government is a shareholder) and also be ‘partially locally owned’. More detailed information is provided in the respondent ownerships type section.
6 Income generation of the firms across both chemical and machine-building industries measured with eight indicators (e.g. turnover, labour cost and profitability, see Appendices IV), whereas (1) indicated decrease, (2) unchanged and (3) increase and the results show that the mean is (3) increased. Further analyses show that these results were mainly generated via the revenue from product/services developed in the last three years with a mean of 24.79 with a standard deviation of 0.902, and a mode of 15. 230
% Export Sales 4.05
A subsidiary of another 4 1.1 enterprise Characteristics of A branch of another 7 2.0 enterprise enterprise An autonomous profit- 340 96.9 oriented enterprise
231 Respondent CBNE
Table 6.18 represents the respondent firms classified under the CBNE of the Republic of
Uzbekistan. Of the sample, over 60 percent are classified under CBNE code 14000
(machine-building), the remainder are in the chemical industry. Within the machine-
building industry, over 50 percent of the 216 firms are focused in the sector of metal
production and work. It is not surprising given that Uzbekistan is in a period of major construction projects which require metal structures and products. The official representative statistics based on the 2017 country report state that this is a significant element of the machine-building industry. This industry is critical in Uzbekistan in the
context of import substitution for products used daily and in construction materials. This
study exposed that in Uzbek economy, the plastic industry is also important. Respondent firm ownership types, ages and sizes will be analysed in more detail next.
TABLE 6.18: CBNE
Classification of Branches of the National Economy CBNE Total in Total % in Industrial Sector Mode Mode N Mode % CBNE Subsector Subsector A 13000 Chemical and petrochemical industry (without chemical and pharmaceutical industry) 1 13110-13139 Basic chemicals or "commodity chemicals" 19 13116 11 3.1 5.4 The industry of plastic products, fiberglass materials, 13141 28 8 2 13140-13198 86 24.5 fiberglass and their products 13142 34 9.7 13363 21 6 3 13300-13364 Petrochemical industry 30 8.5 13361 7 2 Total 135 38.5
B 14000 Machine building and metalworking (without medical equipment industry) industry 1 14100-14179 Machine building and Electrical Engineering 13 14171 4 1.1 3.7 2 14180-14197 Chemical and petroleum Mechanical engineering 3 14181 2 0.6 0.9 3 14200-14254 Machine-tool and equipment industry 4 14210 2 0.6 1.1 4 14290-14329 Manufacture of inter branch industries 7 14292 7 2 2.0 5 14340-14350 Auto Industry 38 14340 29 8.3 10.8 6 14400-14430 Tractor and Agricultural machine industry 28 14420 25 7.1 8.0 7 14650-14652 Manufacture of household appliances and machines 7 14650 4 1.1 2.0 8 14710-14772 Production of sanitary and gas equipment and articles 5 14711 3 0.9 1.4 14812 27 7.7 9 14800-14843 Industry of metal structures and products 111 31.6 14831 36 10.3 Total 216 61.5
232 Ownership Types
Table 6.19 illustrates the ownership classification of the 351 respondent firms, in order to illustrate the shares which, the Uzbek government owns, relative to foreign and local ownership, on a scale beginning at 1-10% and ending at 100%. This scale varies across all three ownership categories. Interestingly, the majority of firms have government participation on their shareholder board. The Uzbek government controls shareholder portfolios of these companies mainly at either 50% or 51%+. In other words, the Uzbek government holds the majority of sizeable strategic company stock across both sectors by means of a controlling interest - 50% or 51% respectively. It allows for the Uzbek government to veto or overturn decisions made by board members. Also, it gives the
Uzbek government the ability to take ownership of the operational and strategic decision- making processes of the organisations.
In contrast, there are only four firms owned by foreign investors in the 51-99% categories.
The Uzbek government or local capitalists equally share company stock with foreign investors under 50/50 (29 firms are foreign owned under this category, also modal among the category), or 49/51 proportion scheme in favour of Uzbeks are in use (16 (4.8%) firms under this classification). These two industrial sectors are strategically important to the country so, the Uzbek government does not plan for high levels of privatisation compared to other sectors (CER, 2013; UzReport.uz, 2013). Indeed, the majority ownership among all three categories are the local ownership category with 86% (or 303) of respondent firms. Whereas, out of 303 firms 252 (72%) are 100% locally owned, but these firms are both small and young. This does not mean that they were initially government owned large plants. In other words, only 51 large plants, or 15% of total, are also owned by local
Uzbeks with either government and/or with foreign investors. Next, Table 6.19 represents the ownership types in 7 (seven) categories in more detail across surveyed industrial sectors.
233 TABLE 6.19: OWNERSHIP OF THE THREE CATEGORIES
Figure 6.19 shows the level of ownership accross the three types of respondent companies. The Uzbek government does not 100% own any of the responding firms . The state partially owns 72 firms with foreign and local businessess. Interestingly, when the state does have ownership, it is normally owns around 50% or 51% of the company. This indicates the strategic importance of these two sectors for the country. There are only eight firms who are wholly owned by foreign investors. However, 23% of the total of 351 respondent firms are partially owned by foreigners. Most responding firms (72%) are
100% owned by local owners.
Indeed, altogether there are six types of ownership observed among the 351 samples. In
Table 6.20 the six ownership types are divided across the chemical and machine-building industries. As above, 135 firms out of 351 operate in the chemical industry with 216 (over
60%) respondent firms in the machine-building industry. It is interesting to note that no companies are 100% owned by the Uzbek government. However, some of them are 100% foreign or locally owned across both sectors. There is a small percentage of chemical and machine-building firms which are locally owned. This is attributed to the privatisation model presented in Chapter 4. The Uzbek government is engaged in a staged transition to a market economy. It is apparent that this strategy significantly enriches the theories of market economy and became a model for other countries in a transition period (Khaki &
Sheikh, 2016; Ruziev, Ghosh, & Dow, 2007). Uzbekistan will celebrate the 30th
234 anniversary of its independence in 2021, and the country is gradually opening its market to foreign investors. Findings across the ownership types of 351 respondent firms are discussed next.
TABLE 6.20: OWNERSHIP TYPES OF 351 RESPONDENT FIRMS ACROSS TWO INDUSTRIES Machine-
Ownership types Chemical building
N All firms Industry industry
1 Local Uzbek ownership 252 71.8% 89 35.3% 163 64.7%
2 Foreign ownership 8 2.3% 6 75.0% 2 25.0%
3 Uzbek Government + Local Uzbek ownership 20 5.7% 6 30.0% 14 70.0%
4 Uzbek Government + Foreign ownership 40 11.4% 18 45.0% 20 55.0%
5 Foreign + Local ownership 19 5.4% 9 47.4% 10 52.6%
6 Uzbek Government + Foreign + Local ownership 12 3.4% 7 58.3% 5 41.7%
Partial government ownership
The key finding is that there is no significant difference in the level of government ownership across the two sectors. There are 40 (11.4%) State Joint-Stock Companies owned by the government and foreign investors. Interestingly over 50% of these firms are very large and not new. The level of partial government ownership across the two sectors is slightly different: 55% of firms operate in the machine-building industry. The chemical industry firms under this ownership classification are newer in contrast to the machine-building firms (see Table 6.19 and 6.20). There are 16 firms or around 52% out of the 100% partially government-owned chemical industry firms that are established during the last 11 to 18 years. Whereas, around 50% (or 20 firms) of machine-building firms are under 19 years. The Uzbek government with local businesspersons (residents) own 20 (5.7%) companies, and 70% (14) of these businesses operate in the machine- building industry. Curiously, 90% of the 20 companies that remained from the days of the USSR are large. Indeed, only 12 firms out of the 351 are partially owned by the three
235 shareholders categories. 50% of these companies have been established in the last decade, and they are large. In sum, the key findings with partial government ownership can be characterised as the government owned firms are 100% large and have been established before the 2012 fiscal year.
Foreign ownership
Foreign ownership across the sectors are slightly different with 34 and 37 firms in favour of machine-building industry. In fact, partial foreign ownership in the machine-building industry is newly established compared to the chemical industry in the same category, where 49% of firms were set up in the last decade. 8 firms are 100% owned by foreign investors, 6 (4.4%) and 2 (0.9%) in favour of machine-building industry respectively.
Under the foreign and local ownership category there are 19 firms, 35% of them are
SMEs, and 10 firms are newly established in the last decade. Overall, it can be concluded that firms with foreign ownership are new and not all of them are large.
Local ownership
Local Uzbek-owned firms are split into two sub-categories due to their ownership structure (Table 6.21). The majority (252) of the sample are locally owned. Of the 100% locally owned respondent firms, 40 of the firms are SMEs and newly set up by Uzbek enterprises. In general, over 60% of firms are established in the last decade. In other words, 185 or 73.4% of firms are small and have less than 50 employees. On top of that, these 185 Uzbek-owned firms are operating solely in the local market with 0% export sales. Unsurprisingly, small businesses are the norm in Uzbekistan. This result reflects the findings of the World Bank Group report (2011). However, both the size and the composition of the workforce differ across firms’ types. For instance, companies with government participation have on average close to five times as many permanent employees as firms that are completely privately owned (World Bank Group, 2011).
236 TABLE 6.21: FORMATION OF COMPANY’S OWNERSHIP IN FOUR AGE CATEGORIES Ownership 1-3 % 4-10 % 11-18 % 19≤ % Total % Partially 1 1.4 14 19.4 28 38.9 29 40.3 72 100.0 government owned Partially foreign 1 1.3 26 32.9 37 46.8 15 19.0 79 100.0 owned Local (UZB) owned 40 13.2 120 39.6 97 32.0 46 15.2 303 100.0
Local Uzbek-owned companies split into two Age categories for further determination Partially local 0 0.0 13 25.5 17 33.3 21 41.2 51 100.0 owned Totally local (UZB) 40 15.9 107 42.5 80 31.7 25 9.9 252 100.0 owned
Note: Terminology “Partial ownership” in this research means – the stockholder of a respondent company, which are defined in the corporation's charter and bylaws and receive a portion of any dividends the company declares. The shareholders of the 351 respondent firms can own both common and preferred shares, which is not observed via the survey for the current research.
Next, findings from the second section of the questionnaire are broadly discussed across both industries.
6.9 Community Innovation Survey
The second section of the questionnaire was adapted from Ireland’s Community
Innovation Survey (CIS) (2014). This section discusses the results of the CIS items based on the analyses of the two industries in this thesis. There is a focus on all types of innovation across firm size, age and ownership. First the chemical industry is considered.
Following that the machine-building industry is analysed. This section concludes with a comparative analysis of the two sectors.
237 Chemical Industry
Innovative and innovation-active firms
Around 93% of the enterprises surveyed in the chemical industry were innovative: 126 out of 135 respondent firms introduced at least one type of innovation in the period between 2013 and 2015. Nine firms in the sector did not report any innovations. All of these are privately owned. However, over 40% of all enterprises in the chemical industry were innovation-active firms. Enterprises classed as innovation active are those that have carried out a product, process, organisational or marketing innovation in the 2013-2015 period. The innovation-active firms employed more than half (57.6%) of total persons engaged in the chemical industry. See Figure 6.3.
FIGURE 6.3: INNOVATION ACTIVITY RATES OF CHEMICAL INDUSTRY ENTERPRISES, 2013-2015
70.0 57.6 60.0 47.8 50.0 40.7 40.0 35.6 30.0 20.0 10.0 0.0 Total enterprises with innovaiton Total persons engaged who work in PERCENTAGE OF ENTERPRISES OF PERCENTAGE activities enterprises with innovation activities
Chemical Industry Total Industry
Technological Innovated firms
Around two thirds (65.2%) of chemical industry firms were engaged in both process and product innovations and these enterprises are classed as technologically innovative firms.
Enterprises that are classed as innovation active are those that had carried out a product
238 or process innovation. These firms employed more than three-quarters of the employees of the chemical industry. See Figure 6.4.
FIGURE 6.4: TECHNOLOGICAL INNOVATION ACTIVITY RATES FOR CHEMICAL INDUSTRY ENTERPRISES, 2013-2015
100.0
90.0
80.0 75.5 76.6 69.2 70.0 65.2
60.0
50.0
40.0
30.0
20.0 PERCENTAGE OF ENTERPRISES OF PERCENTAGE
10.0
0.0 % of total enterprises with technological % of total persons engaged who work in innovation activities enterprises with technological innovation activities
Chemical Industry Total Industry
Product Innovation
Around two-thirds of enterprises in the chemical industry introduced a goods innovation, while one-fourth of respondents introduced new or significantly improved services in the period 2013-2015. Almost half of the enterprises introduced new products to their market.
Interestingly, most new products were introduced by large- and mixed-ownership companies. For instance, either 100% of foreign-owned or partially foreign-owned companies produced goods that are on average 90% new to the Uzbek market. In other words, out of the entire production, only one-tenth of goods or services are produced by locally owned firms. Key findings are as follows: (i) if a firm is partially or entirely owned either by the government or foreign investor that firms have networks in R&D
239 collaboration with other institutions and organisations; and (ii) the role of government and foreign ownership by interacting with local business owners are led to the production of significantly new goods or services in the Uzbek market. See Figure 6.5.
FIGURE 6.5: NEW PRODUCT DEVELOPMENT RATES - ACROSS FIRM OWNERSHIP TYPES IN CHEMICAL INDUSTRY 2013-2015
120.0
100.0 100.0 88.9 83.3 77.8 80.0
57.1 60.0
40.0
20.0 13.2
0.0
Percentage of products new to respondent market respondent to new products of Percentage Local Uzbek Foreign Uzbek Uzbek Foreign + Uzbek ownership ownership Government + Government + Local Government + Local Uzbek Foreign ownership Foreign + ownership ownership Local ownership
Process Innovation
Over 90% of enterprises in the chemical industry carried out a process innovation during
2013-2015. The new or significantly improved method of manufacturing (93%) and new or substantially improved methods of logistics, delivery or distribution methods (56%) were the most cited forms of process innovation. Process innovation was introduced by all large enterprises and within a significant proportion (around 95%) of medium enterprises over the reference period, compared to over half of small businesses.
Interestingly, there is a high level of process innovation among Uzbek government owned entities, either in conjunction with foreign or local businesspersons. A detailed picture of all three process innovation categories across firm ownership types is depicted next. See
Figure 6.6.
240 FIGURE 6.6: PROCESS INNOVATION CATEGORIES RATES ACROSS RESPONDENT FIRM OWNERSHIP TYPES IN CHEMICAL INDUSTRY 2013-2015 (% SCALE)
42.9 Uzbek Government + Foreign + Local ownership 71.4 100
55.6 Foreign + Local ownership 33 100
55.6 Uzbek Government + Foreign ownership 66.7 100
80 Uzbek Government + Local Uzbek ownership 66.7 94.5
66.7 Foreign ownership 50 100
24.7 Local Uzbek ownership 48.3 64
0 20 40 60 80 100 120
New or significantly improved supporting activities New or significantly improved logistics New or significantly improved method of manufacturing
Technological innovation co-operation
Nearly 56% of chemical industry enterprises engaged in technological innovation in co- operation with other enterprises and institutions. It is comprised of over 66% of large enterprises and 56% of medium enterprises between 2013 and 2015, while over half of small enterprises engaged in technologically-based innovation co-operation with partners. See Figure 6.7.
241 FIGURE 6.7: TECHNOLOGICALLY INNOVATIVE FIRMS’ CO-COOPERATION ACTIVITY RATES WITH OTHER ENTERPRISES AND INSTITUTIONS IN THE CHEMICAL INDUSTRY 2013-2015
Total Industry 41.5
Chemical Industry 55.6
Large (250+) 66.7
Medium (50-249) 55.6
Small (less than 50) 50.9
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0
based on 126 responndents
Activities and expenditures for product and process innovations
Over 94% of the chemical industry enterprises carried out In-House R&D in the period
2013-2015. Comparatively, around 66% of these firms did so on an occasional basis; engaging in expenditure when needed only. External R&D that enterprises have contracted out to other enterprises ran at over 40%. Acquisition of machinery, equipment, software, and buildings are the main category cited under the In-House R&D category, at over 72%. The least popular category among the group was the ‘all other innovation activities’ (36%) which included design, training, marketing, and other in-house or contracted out activities to implement new or significantly improved products and process. Macro level public support mechanisms for chemical industry enterprises is considered next.
242 Public financial support
Public financial support schemes are categorized on three levels. Public financial support could be received via tax credits or deductions, grants, subsidized loans and loan guarantees. It excludes research and other innovation activities conducted entirely for the public sector under contract. The detailed analyses are given next under these three public financial support categories.
Local or regional authorities
None of 100% foreign-owned firms received public support from local or regional authorities. However, regional authorities only supported 18 local Uzbek-owned firms in the chemical industry. Only one out of the 18 State Joint-Stock Companies received public funding from their regional authority.
Sectoral Funding Sources
Over 60% of large and newly established medium-sized chemical industry firms received financial support through sectoral funding sources. Over 40% of mixed foreign-local- government owned firms also used sectoral funding sources during 2013-2015, while only around one-third of small firms were able to attract sectoral funding for their business.
Central government (Including central government agencies or ministries)
No 100% foreign-owned firms received central government funding. Only two firms jointly owned by foreign and local business people attracted central government agencies or ministries funds to their business. However, two-thirds of State Joint-Stock Companies belonging to Uzbek government and foreign investors received funding from the referenced source. The same picture is observed in the three mixed ownership categories,
243 while, nearly 4% of privately owned enterprises were able to attract finance from this source.
Organisational Innovation
Over 40% of chemical industry enterprises undertook organisational innovation in 2013-
2015. An organisational innovation is a new organisational method in the enterprise’s business practices, workplace organisation or external relations that had not been previously employed. The introduction of new business practices are the most cited across medium-sized firms – 64.8%, and new methods of organising work responsibilities and decision-making was the second most cited type of organisational innovation across large-sized firms - 45.8%. Over 85% of large enterprises introduced an organisational innovation during the reference period. It is compared with 76% of medium-sized enterprises and 59.6% of small businesses owned by local entities. A detailed picture of the three-organisational innovation types across firm sizes is depicted next. See Figure
6.8.
FIGURE 6.8: ORGANISATIONAL INNOVATION RATES BY SIZE, 2013-2015
75.0 64.8 60.7 60.0 52.6 45.8 45.0 42.5 42.5 38.6 37.7
30.0 Percentage 17.5 15.0
0.0 New business practices New methods of organising New methods of organising work responsibilities and external relations decision-making
Small less than 50 Medium (50-249) Large (250+)
244 Marketing Innovation
Around three-quarters of all chemical industry enterprises carried out a marketing innovation in 2013-2015. The most common form of marketing innovation was the introduction of new media or techniques for product promotion, and over 80% of enterprises indicated that they engaged in this activity. The second most cited marketing innovation category was significant changes to the aesthetic design or packaging of a good or service at over 70%. Regarding firm-size marketing innovation was the most cited among small enterprises, but the least to large-sized enterprises in average 64% to
43% during 2013-2015 respectively. See Figure 6.9.
FIGURE 6.9: DETAILED MARKETING INNOVATION ACTIVITY RATES BY SIZE, 2013-2015
100.0
90.0 82.1 80.0 73.9 70.0 64.8 57.4 59.8 60.0 50.4 45.8 50.0 43.3 42.6 44.4 38.6
Percentage 40.0 33.3 30.0 20.0 10.0 0.0 Significant changes to New media or New methods of product New methods of pricing the aesthetic design and techniques for placement or sales goods and services packaging production promotion channels
Small less than 50 Medium (50-249) Large (250+)
The enterprises of the machine-building industry of the Republic of Uzbekistan considered next.
245 Machine-Building Industry
Innovative and innovation-active firms
Around 90% of the enterprises surveyed in the machine-building industry were innovative: 194 out of 216 respondents produced at least one type of innovation during the period from 2013-2015. Twenty-two firms did not engage in any innovation, and all of those firms are privately owned. Around one-third of all enterprises in the machine- building industry were innovation-active in contrast to whole industry (35.6% in the reference years). Enterprises classed as innovation active are those enterprises which have engaged in creating a product, process, organisational or marketing innovation between
2013-2015. Innovation-active firms employed around 40% of total persons engaged in the machine-building industry. See Figure 6.10.
FIGURE 6.10: INNOVATION ACTIVITY RATES OF MACHINE-BUILDING INDUSTRY ENTERPRISES, 2013-2015
70.0
60.0
50.0 47.8
39.6 40.0 35.6 32.4 30.0
20.0 PERCENTAGE OF ENTERPRISES OF PERCENTAGE 10.0
0.0 Total enterprises with innovaiton activities Total persons engaged who work in enterprises with innovation activities Machine Building Industry Total Industry
246 Technological Innovated firms
Over two third or 71.8% of firms in the machine-building industry firms were engaged in both process and product innovations. These enterprises are classed as technologically innovative firms. These technological innovation-active enterprises employed over 77% of employees in the chemical industry. See Figure 6.11.
FIGURE 6.11: TECHNOLOGICAL INNOVATION ACTIVITY RATES FOR MACHINE- BUILDING INDUSTRY ENTERPRISES, 2013-2015
100.0 90.0 77.4 80.0 76.6 71.8 69.2 70.0 60.0 50.0 40.0 30.0
percentageof enterprises 20.0 10.0 0.0 % of total enterprises with technological % of total persons engaged who work in innovation activities enterprises with technological innovation activities
Machine building industry Total Industry
Product Innovation
90% of enterprises in the machine-building industry introduced product innovations, while one-third of respondents introduced new or significantly improved services in the period 2013-2015. Around two-thirds of the enterprises introduced new products to the market. Large mixed-ownership companies introduced the most new products to market.
For instance, enterprises with foreign-ownership and partial foreign-ownership with either government or private businesses introduced 100% and 90% of goods innovation during the period 2013-2015 respectively. Whereas, only slightly over one-third of local-
247 owned firms introduced new goods or services to the market. The manufacture of new products and services across firm ownership types are depicted in Figure 6.12.
FIGURE 6.12: NEW PRODUCT DEVELOPMENT RATES - ACROSS FIRM OWNERSHIP TYPES -MACHINE-BUILDING INDUSTRY 2013-2015
120.0
100.0 100.0 95.5
80.0 80.0 80.0 69.2
60.0
40.0 34.9
20.0
Percentage of products new to respondent market respondent to new products of Percentage 0.0 Local Uzbek Foreign Uzbek Uzbek Foreign + Local Uzbek ownership ownership Government + Government + ownership Government + Local Uzbek Foreign Foreign + Local ownership ownership ownership
Process Innovation
Over three-quarters of enterprises in the machine-building industry engaged in a process innovation during 2013-2015. The new or significantly improved methods of manufacturing is at over 80% and new or substantially improved methods of logistics, delivery or distribution methods were at 57% and were the most cited forms of process innovation. Process innovation was introduced by all 90% of large enterprises and with a significant proportion around 85% of medium enterprises over the reference period. It is compared with over one-third of small business. The detailed picture of all three process innovation categories across ownership types is depicted in the following Figure 6.13.
248 FIGURE 6.13: PROCESS INNOVATION CATEGORIES RATES ACROSS RESPONDENT FIRMS OWNERSHIP TYPES IN MACHINE-BUILDING INDUSTRY 2013-2015
20 Uzbek Government + Foreign + Local ownership 60 100 50 Foreign + Local ownership 50 80 40.9 Uzbek Government + Foreign ownership 54.5 90.9 35.7 Uzbek Government + Local Uzbek ownership 71.4 78.6 63 Foreign ownership 65 100 8.6 Local Uzbek ownership 38 65.6 0 20 40 60 80 100 120
New or significantly improved supporting activities New or significantly improved logistics New or significantly improved method of manufacturing
Technological innovation co-operation
Around two-thirds of machine-building enterprises engaged in technological innovation in co-operation with other enterprises and institutions. This comprised of 77% of large enterprises and around 62% of small enterprises between 2013 and 2015, while around three-fifths of medium enterprises engaged in technological innovation co-operation with their partners,see Figure 6.14.
249 FIGURE 6.14: TECHNOLOGICALLY INNOVATIVE FIRMS’ CO-COOPERATION ACTIVITY RATES WITH OTHER ENTERPRISES AND INSTITUTIONS IN THE MACHINE-BUILDING INDUSTRY 2013-2015
Total Industry 58.2
Machine building industry 62
Large (250+) 73.9
Medium (50-249) 60
Small (less than 50) 61.7
0 10 20 30 40 50 60 70 80 BASED ON 194 ENTERPRISES
Activities and expenditures for product and process innovations
Over 75% of the machine-building industry enterprises carried out In-House R&D in the period 2013-2015. Comparatively, two-thirds of these firms did so on an occasional basis; they made expenditures when needed. Acquisition of machinery, equipment, software, and buildings are the main innovations cited after In-House R&D, at over 85%. The ‘all other innovation activities’ (in %), which included design, training, marketing, and other in-house or contracted activities to implement new or significantly improved products and processess, was at around 70%. The least selected category among the group was
External R&D in which enterprises contract out to other enterprises, and this was stilll over 35%. The macro level public support mechanisms for the machine-building industry enterprises are considered next.
Public financial support
Public financial support schemes are categorised into three levels. This support can be provided through direct public funding or indirect public funding mechanisms. These are,
250 for instance, via tax credits or deductions, grants, subsidised loans and loan guarantees.
It excludes research and other innovation activities conducted entirely for the public sector under contract. A detailed analysis is provided in the next section.
Local or regional authorities
None of the large or medium-sized firms received local or regional public support. Local authorities support just over 5% of new-small local businesses.
Sectoral Funding Sources
Over one-third of large to medium-sized firms in the machine-building industry were able to attract sectoral funding. Interestingly, over 65% of firms with government shareholding were able to attract sectoral sources of funding during 2013-2015. Around one-quarter of the small firms attracted sectoral funding sources.
Central government (Including agencies or ministries)
None of the 100% foreign-owned firms received central government funding. Only one firm jointly owned by foreign and local entities attracted central government agency or ministry funding. However, over half of State Joint-Stock Companies belonging to the
Uzbek government and foreign investors received funding. The same is observed of those in the three mixed ownership categories. Nearly 15% of privately owned enterprises were able to benefit from this funding source.
Organisational Innovation
Around one-third of machine-building enterprises surveyed undertook organisational innovation in 2013-2015. The new methods of organising work responsibilities, decision- making and the introduction of new business practices were the most cited types of innovation by medium-sized firms compared to other firm types (59.7% and 56.6% respectively). Over 75% of large enterprises introduced an organisational innovation
251 during the reference period. This, compared with two-thirds of medium-sized enterprises and less than one-third of small businesses. A detailed picture of the three-organisational innovations across firm sizes are depicted, see Figure 6.15.
FIGURE 6.15: ORGANISATIONAL INNOVATION RATES BY SIZE CLASS, 2013-2015
100.0 90.0 80.0 70.0 59.7 60.0 56.3 56.8 49.7 50.0 44.7 44.7 42.0 40.0 35.1 34.0 30.0 20.0
PERCENTAGE OF ENTERPRISES OF PERCENTAGE 10.0 0.0 New business practices New methods of organising New methods of organising work responsibilities and external relations decision-making
Small less than 50 Medium (50-249) Large (250+)
Marketing Innovation
Over two-thirds of all machine-building enterprises undertook marketing innovation in
2013-2015. The most common form of marketing innovation was the introduction of new media or techniques for product promotion, and over half of all enterprises indicated that they engaged in this activity. The second most cited marketing category was significant changes to the aesthetic design or packaging of a good or service, with54% of all firms implementing such innovations. A marketing innovation was introduced by 95% of large- sized enterprises and 90% of medium enterprises between 2013 and 2015, with a level of
83% for small enterprises. Small firms when compared to medium and larger firms were the most likely to invest in marketing innovation - 52.4%. See Figure 6.16.
252 FIGURE 6.16: DETAILED MARKETING INNOVATION ACTIVITY RATES BY SIZE CLASS, 2013-2015
Small (less than 50) Medium (50-249) Large (250+) 75.0
63.3
60.0 55.4 54.0 53.0 50.0 51.1 47.9 48.6 45.4 45.0 40.4
32.8 30.0 Percentage of of enterprises Percentage
15.0 12.8
0.0 Significant changes to New media techniques New methods for productNew methods of pricing the aesthetic design or for product promotion placement or sales goods or services packaging of a good or channels service
6.10 Key Findings
The Uzbek government implemented structural reform of the economy to increase the industry share from 33.5% to 40% of GDP and to increase the size of the manufacturing industry by 2.5 times (see chapter 4). One of the primary vectors of the Industrial Policy programs is to stimulate industrial cooperation to carry out a framework based on localisation programs and supporting export-oriented firms. This mechanism involves the implementation of import substitution, the strengthening of the country's industrial potential through the creation of additional value from local raw materials, and expansion of cooperation between enterprises in order to develop products for export. For instance, since the year 2000, due to localisation projects, import-substitution production has increased by more than 220 times, including trucks, cars, machinery, oil and gas and chemical equipment, electrical appliances and other items. However, despite significant
253 government support, there is room for improvement of both the chemical industry and machine-building industries as significant potential is not yet fully realised.
The key finding from the CIS across both industries and the comparative analyses shows that there is a significant difference in access to public finance across ownership types and a firm’s growth orientation, see Table 6.22. Access to all three, which are regional, sectoral and central government, public financial sources, does not differ across both sectors. However, there is a significant difference in the level of access to these sources across firms characteristics and growth orientation. To put another way, most of the firms who had the Uzbek government as part of their shareholder board, were able to access sectoral sources of finance. Indeed, preliminary findings show that a firm who was able to get the sectoral support responded that they also had access to other government direct sources. However, small firms usually faced a lack of access to financing unless they were involved in special industrial development projects.
Interestingly, one of the main findings from the semi-structured interviews noted that there is no difference in access to public finance across industry and firm characteristics such as ownership. However, the CIS results provide evidence to the contrary. A more detailed and clear picture of this issue will be obtained when controls (ownership, sector, age and size) are tested in the Financing Innovation (FI) model in chapter 8. These findings have policy implications, and are crucially important for further analysis when tested the proposed model. The FI model is capable of illuminating the factors which significantly affect firm-level innovation and performance.
254
ECTORS S NALYSIS OF TWO NALYSIS OF TWO A OMPARATIVE C INDINGS AND F EY K
CIS:
: 22 . 6 ABLE ABLE T
255 6.11 Conclusion
The second and the main phase of the primary research undertaken in this study consisted of a quantitative survey on the effects of access to finance on firm innovation performance in the Uzbek chemical and machine-building industries. The development of the hypotheses was discussed in this chapter in order to provide more testable detail for the research objectives specified in chapter 5. The survey strategy involved the use of self- administered questionnaires. All sections and sub-sections of the survey instrument were discussed in detail in this chapter. This chapter outlined the development of the questionnaire and explained how the topics used were developed from theory and previous research in the area. Once these were developed, the questionnaire was translated into the Russian language then pre-tested among a number of industry professionals and proof-read by academics in the field. This chapter also provided descriptive analysis of the quantitative data. This analysis provides a summary of the chemical and machine-building industry demographics, along with information concerning the sectors. Furthermore, it analyses the key findings from the Innovation
Financing (IF) survey (derived from the CIS) on the level of respondent firm innovation activity types across firm age, size and ownership categories.
The findings from CIS showed that access to public support depends on a firm’s characteristics such as growth orientation (in the export or local domestic market), sector, location and ownership type. Meanwhile, the main findings from CIS and the cooperation of both industries showed that the Uzbek government seeks to enhance the country’s development project portfolio. This could be boosted by the increased allocation of local budgets for sustainable regional projects in support of economic development in all regions. Today, one of the main instruments of funding for individual regional budgets in
Uzbekistan is based on local taxes and fees (Popov & Chowdhury, 2016). However, recent data from gov.uz illustrated that none of the regional authorities provided direct
256 public funding for firm innovation projects as their budget was allocated to administrative expenses and the social sphere of the region. Overall, the Uzbek government, stage by stage (as mentioned in the “Uzbek model” in chapter 4), is creating a favourable business ecosystem both for local entities and for foreign investors. This economic development process is also highlighted as the main priority of the country’s economic development vector by the new government in the policy document on “Uzbekistan’s Development
Strategy”. The next chapter discusses the analysis which was utilised.
257
CHAPTER SEVEN Structural Equation Modelling
258 7.1 Introduction ...... 260 7.2 Structural Equation Modelling (SEM) ...... 261 7.3 SEM steps ...... 263 Model Specification ...... 264 Model Identification ...... 265 Model Estimation ...... 266 Model Testing ...... 267 Model Modification ...... 269 7.4 Mplus ...... 269 7.5 Data Screening...... 270 Missing Data Analysis ...... 270 Outlier Analysis ...... 272 Reverse Coding ...... 272 Latent and Observed Variables ...... 273 7.6 Factor Analysis: EFA & CFA ...... 273 7.7 Reliability and Validity ...... 274 7.8 Measurement Concepts ...... 277 7.9 Conclusion ...... 278
259 Chapter 7: Structural Equation Modelling
7.1 Introduction
Structural Equation Modelling (SEM) is a statistical methodology, which takes a confirmatory (hypothesis testing) approach to multivariate analysis. One of the primary objectives of applying SEM to data analysis is to expand the explanatory ability and statistical efficiency of testing proposed hypotheses (Tabachnick & Fidell, 2013). In recent years SEM has become a popular method in social and behavioural sciences for specifying, estimating, and testing hypothesised relationships (Bagozzi & Yi, 2012;
Perry, Nicholls, Clough, & Crust, 2015). More specifically there has been an increase in its application to factors that are associated with internal, external, and human resources and their impacts on firm innovation and performance (Acs, Audretsch, Lehmann, &
Licht, 2017; Santos, Basso, & Kimura, 2018; Prajogo & Sohal, 2003). The main driver for applying SEM techniques is due to its applicability in a wide variety of research situations.
The aim of this study is to develop a model assessing access to macro-level financial tools in support of firm-level innovation. Or in technical terms, the primary focus to investigate the relationship between higher-order constructs including sources of finance with firm- level measures of innovation and performance with four mediating factors, in a SIS context. As multiple dependent and independent variables need to be examined, SEM is considered the most appropriate analytical tool to address multiple variables as it overcomes the limitations of other multivariate techniques (Bagozzi & Yi, 2012; Cadogan et al., 2002). A key advantage is that SEM can simultaneously assess and test the hypothesised theoretical relationships (Perry et al., 2015; Tabachnick & Fidell, 2013).
This chapter considers the background theory for the use of this statistical data analysis tool.
260 7.2 Structural Equation Modelling (SEM)
SEM has emerged as a powerful multivariate data analysis tool in social science research.
SEM, also known as causal modelling, is a collection of statistical models which have the ability to test a wide range of hypotheses concerning relationships among multiple variables (Kline, 2015). SEM is a modern statistical technique which refers to a family of related statistical procedures such as regression analysis, factor analysis and simultaneous equation modelling (Bagozzi and Yi, 2012). It is generally used where the complex relationships among many observed, as well as latent variables, need to be analysed
(Hooper, Coughlan, & Mullen, 2008; Perry et al., 2015; Rana Prashant Singh, 2018). The underlying approach behind SEM is to analyse two or more competing models and choose one which is not only a satisfactory fit with the empirical data, but fits with theory
(Bagozzi & Yi, 2012; Kline, 2015, 2016).
SEM Advantages
SEM is a set of statistical tools used to examine a set of relationships between independent and dependent variables (Henseler, Ringle, & Sarstedt, 2014; Kline, 2015; Perry et al.,
2015). A distinct advantage of SEM derives from its ability to examine relations among observed as well as latent variables (Bagozzi & Yi, 2012; Kline, 2016). This study has twelve latent variables as per Table 7.1.
261 TABLE 7.1: LIST OF LATENT VARIABLES 1 Access to direct public funding
2 Access to indirect public funding
3 Access to debt finance
4 Access to equity finance Access to Finance to Access 5 Access to internal finance
6 Absorptive capacity
7 International growth orientation
8 Investment in in-house R&D Mediators 9 Barriers to innovation
10 Incremental innovation performance
11 Radical innovation performance
12 Financial performance Performance
Since this study has twelve latent variables, SEM offers unique advantages over its alternatives (Bagozzi & Yi, 2012; Xiong, Skitmore, & Xia, 2015). Firstly, when a model which requires testing is complex and consists of many simultaneous relationships, (as is the case in this study), SEM offers a comprehensive approach to testing the relationships.
Secondly, it takes a confirmatory, rather than an exploratory, approach which provides stronger analysis of the variables (observed or latent) in the model (Bagozzi & Yi, 1988;
Perry et al., 2015; Sweeney, 2009). Thirdly, in contrast to the linear model techniques,
SEM enables a researcher to use dependent variables as predictor variables thus offering the potential of further insights (Byrne, 2012; Schumacker & Lomax, 2016; Tabachnick
& Fidell, 2013). Fourthly, relationships among factors are free of measurement error since this can be explicitly estimated and removed in the process (Byrne, 2012; Rana Prashant
Singh, 2018). Last but not least, SEM is a powerful technique which can be used by non-
262 statisticians with relative ease. Due to these advantages, SEM has been widely utilised in previous research studies undertaken in the context of finance and innovation performance (Santos et al., 2018; Lee, Sameen, & Cowling, 2015b; Morgan & Berthon,
2008).
SEM Challenges and Limitations
The primary disadvantage of SEM is that it generally requires a large amount of data. The minimum sample size has been suggested as 150 respondents with some authors stating it must be 200 and above (Bagozzi & Yi, 2012; Byrne, 2012; Schumacker & Lomax,
2016). The survey for this research yielded a final dataset of 351 responses which is well over the guideline parameters.
The second main issue with SEM relates to model identification. In SEM, many parameters such as variances and factors are simultaneously estimated. If the data does not provide enough information to estimate all the parameters, the proposed model may not be sufficiently identified (Kline, 2016; Xiong et al., 2015). Thirdly, SEM models are generally more complex than other competing multivariate techniques. A researcher with a limited quantitative and statistical background may find the learning curve quite steep
(Byrne, 2012; Hoyle, 1995). Finally, despite common beliefs, SEM does not establish directionality of relationships between various constructs in the model. In spite of the technique being quite complex, SEM does not offer support for causation (Henseler et al.,
2014; Kline, 2015; Schumacker & Lomax, 2016).
7.3 SEM steps
Following model conceptualisation, which involves definition and operationalisation of the constructs, drawing scales from previous research or developing new scales, and pretesting procedures have been completed, the research can move on to SEM
263 construction. The SEM analysis consists of six basic steps (see Figure 7.1) namely model specification, model identification, measure selection, data collection, model estimation, model testing and model modification (Kline, 2015, 2016; Schumacker & Lomax, 2016).
The following sections describe each step in more detail.1
FIGURE 7.1: SEM STEPS
Source: Adapted from Kline (2015)
Model Specification
Model specification is the first and most important step. This step includes the development of a theoretical model. The relation between variables must be clearly stated and a path diagram must be constructed or alternatively exemplify it via a series of equations to illustrate the relationships (Byrne, 2012; 2016). This representation of
264 hypotheses between various variables should be guided by extant theory and empirical results. Model specification is very important since the later steps assume that the model specified in this initial step is correct (Byrne, 2016; Kline, 2015). Chapter 5 and 6 developed the objectives and hypotheses from which the model to be tested in chapter 8 emerges.
Model Identification
After specifying the model, the next step is to identify the model. If it is theoretically possible to derive a unique estimate of every parameter present in the model then the model is said to be identified (Kline, 2015). Primarily there are three types of identification during this step: A model can be (i) under-identified (ii) just-identified or
(iii) over-identified (Byrne, 2016; Kline, 2015; Perry et al., 2015). In the first case one or more parameters cannot be solved uniquely based on the covariance matrix. Here there are more unknown parameters than equations and hence the degree of freedom is also negative. For example, infinite solutions can be obtained for the equation x + y = 30 since there are infinite combinations of values of x and y that satisfy the given equation. A model is said to be just-identified if there is just enough information in the covariance matrix to solve all the parameters in the model (Byrne, 2012). Here the degree of freedom is zero since there are the same numbers of parameters as there are observations (Kline,
2011). For example, let’s say we have two equations 3x + 5y = 30 and x + 2y = 11. Here we have two unknowns (x and y) and two equations. Hence a unique solution can be obtained. Finally, a model is said to be over-identified if there is more than one way to calculate the parameters of the model. Its degree of freedom is greater than zero since here the number of observations is greater than the number of parameters (Byrne, 2012;
Kline, 2015). For example, let’s say we have three equations 3x + 5y = 30, x + 2y = 11 and 2x + 3y =35. Here there is no exact solution since we have two unknowns but three equations, so there is a need to define a criterion and arrive at the most adequate solution
265 as an alternative. A model is said to be identified if it is just-identified or over-identified.
Otherwise it is said to be not-identified (Byrne, 2016; Kline, 2015; Muthén & Muthén,
2007; Schumacker & Lomax, 2016).
Model Estimation
The primary objective of the estimation process is to obtain the values of the unknown parameters. These values are obtained through the model parameters such that the theoretical covariance matrix ∑ and the empirical covariance matrix S are close to the maximum extent possible (Kline, 2011, Wang & Wang, 2019). Several differing methods may be used for estimating the model such as Maximum Likelihood (ML), Generalized
Least Squares (GLS) and Asymptotically Distribution Free (ADF) Estimator method
(Bagozzi & Yi, 2012; Kline, 2015; Tavassoli, 2014). Whereas the Maximum Likelihood
(ML) and Generalized Least Squares (GLS) methods are generally used for normally distributed data, the Asymptotically Distribution Free (ADF) Estimator method is used for non-normally distributed data. The Maximum Likelihood method is the most common and preferred method used by researchers (Anderson & Gerbing, 1988). There are several reasons for this. Firstly, estimation via maximum likelihood is simultaneous and most estimates are calculated at once. Secondly, ML has various optimal properties in estimation such as sufficiency, consistency, efficiency and parameterization invariance
(Myung, 2003). Sufficiency implies that the ML estimator provides complete information about the parameters of interest. Consistency refers to the fact that the true parameter value that generated the data can be recovered asymptotically. ML is efficient in that the lowest-possible variance of parameter estimates is achieved asymptotically (Anderson and Gerbing, 1988). Finally, parameterization invariance refers to the fact that the same
ML solution is obtained independent of the parameterization used (Myung, 2003).
266 Model Testing
After the model has been estimated, the next step is to ascertain how well the model fits the data (Hox, Moerbeek, & Schoot, 2017). There are several tests which can be used in testing how well the model fits the observed data. These tests or ‘fit-indices’ can be primarily categorized into three types namely: Absolute fit indices, relative fit indices and parsimony fit indices (Bagozzi & Yi, 2012; Hooper et al., 2008; Hoyle, 1995). An absolute fit index determines how well a given model fits the sample data (Hu & Bentler,
1999; Perry et al., 2015). Popular fit indices such as Chi-square (χ2), Root mean square error of approximation (RMSEA), Goodness-of-fit statistic (GFI) and the adjusted goodness-of-fit statistic (AGFI) come under this category. Unlike incremental fit indices, absolute fit indices do not use an alternative model for comparison of values. They are simply derived from the fit of the obtained and implied covariance matrices (Bentler,
1990; Hu & Bentler, 1999; Perry et al., 2015). The Chi-square (χ2) test of model fit has been the most widely used test statistic for measuring the validity or fit of a model and has been used by many previous studies on firm-level innovative capability, performance and financing constraints (Hottenrott & Peters, 2012; Jin et al., 2019; Mateut, 2018) as well as studies using the SEM technique (Jugend & Jose, 2018; Paladino, 2009; Saliba de
Oliveira, Cruz Basso, Kimura, & Sobreiro, 2019). The issue with the Chi-square (χ2) test is that it is fairly sensitive to large sample size, that is, the probability of rejecting a model increases as the sample size increases (Fornell & Larcker, 1981). To overcome this shortcoming researchers have developed a wide range of fit indices which are not sensitive to sample size. One such popular test is the root mean square error of approximation (RMSEA). Although there is no fixed cut-off value, a majority of researchers generally agree that an RMSEA value of less than 0.05 is considered an excellent fit with values between 0.05 and 0.08 considered reasonable and between 0.08 and 0.1 considered mediocre (Sweeney, 2009). An RMSEA value greater than 0.1 is
267 considered to be a poor fit. RMSEA is perhaps the most popular test-statistic measure and has been reported by many previous studies in the area (Rajapathirana & Hui, 2018;
Saliba de Oliveira et al., 2019). Relative fit indices (or comparative/incremental fit indices) differ from the previous category in that they compare the value of chi-square to a baseline model (also called null or independence model) rather than using an absolute value (Byrne, 2016; Hooper et al., 2008). In this category come indices such as Normed- fit index (NFI) and Comparative fit index (CFI). Their values are between 0 and 1.
There is another category like normed fit-indices called non-normed fit indices, for example the Tucker and Lewis Index (TLI) because on occasion they may be slightly larger than 1 or below 0 (Bagozzi & Yi, 2012; Perry et al., 2015). Whereas Chi-square
(χ2) and RMSEA are a “badness-of-fit” or “lack of fit” indices meaning smaller values indicate better fit (Hooper et al., 2008; Hoyle, 1995), other indices such as CFI and NFI are “goodness-of-fit” indices where larger values mean better fit (Bagozzi & Yi, 2012;
Kline, 2015). Finally, Parsimony fit indices such as the Parsimony Goodness-of-Fit Index
(PGFI) and the Parsimonious Normed Fit Index (PNFI) are basically adjustments to the fit indices mentioned above (Kline, 2016; Mulaik et al., 1989). Mulaik, et al. (1989) developed a number of these indices to basically penalize models that are less parsimonious in order to favour simpler theoretical processes over more complex ones.
Thus, the more complex the model the lower the parsimony fit index (Byrne, 2012; Kline,
2015). Bagozzi and Yi (2012) recommend reporting four key fit indices namely RMSEA,
TLI, CFI and SRMR (standardized root mean square residual), in addition to the chi- square value. This thesis follows this recommendation and reports these key statistics for the individual measurement and structural models analysed in the next chapter. As noted earlier, the TLI is a non-normed index and could go slightly above 1 for very good fitting models (Bagozzi & Yi, 2012). In addition, Mplus gives two useful goodness of fit statistic values namely AIC (Akaike Information Criterion) and BIC (Bayesian information
268 criterion). These are primarily used to compare two or more competing models with lower
AIC and BIC values suggesting better fitting models (Muthén & Muthén, 2017; Nylund,
Asparouhov & Muthen, 2007).
Model Modification
In a significant majority of the cases, the data will not fit the model on the first attempt.
If that is indeed the case the model needs to be modified and then tested again for determination of the fit. A model can be modified in a variety of ways. New paths can be added, or existing paths can be removed thus effectively changing the parameters from free to fixed and from fixed to free (Kline, 2016; Westland, 2015). The decision to re- specify a model should not be based only on statistical considerations, but primarily on the relevant theory (Anderson & Gerbing, 1988).
7.4 Mplus
Mplus is a powerful software application for conducting complex model estimations containing latent or unobserved (hypothetical) variables. Mplus is one of the many software programs available for conducting SEM among others such as LISREL, EQS,
AMOS (SPSS) and CALIS/TCALIS (Kline, 2015; Schumacker & Lomax, 2016). Mplus utilizes code-based path-centric specification and offers the researcher the capability to analyse both cross-sectional and longitudinal data, single-level and multilevel data and data that come from different populations with either observed or unobserved heterogeneity (Asparouhov, Hamaker, & Muthén, 2018; Byrne, 2016).
Mplus has many unique features which provide it with a slight edge compared to other statistical software programs. Firstly, is its ability to fit latent variable models to data which contains ordinal or dichotomous outcome variables (Heck, Thomas, & Studies,
2015). Secondly the range of options which the program offers in handling missing data
269 values is high. It offers full information maximum likelihood (FIML) estimation under
MCAR (missing completely at random), MAR (missing at random) and NMAR (not missing at random) for continuous, censored, binary, ordered categorical (ordinal), unordered categorical (nominal) or combination of all these variable types (Kline, 2015;
Muthén & Muthén, 2017). Thirdly, is its ability to fit multilevel as well as hierarchical
CFA and SEM models (Heck et al., 2015), while not useful for this research project is an advantage. Finally, are its wide-ranging capabilities to do Monte Carlo simulation studies generating data which can be analysed according to the many models included in the
Mplus programme (Henseler et al., 2014; Muthén & Muthén, 2017).
Mplus was chosen for the analysis of survey data for this study primarily due to the relative ease with which a large model can be specified in the code-based interface of the software. The questionnaire used in this research consists of a total of two hundred and nineteen items (appendix V). Considering the fairly large size of the model, Mplus was deemed a suitable programme to use. The next section discusses the data screening process.
7.5 Data Screening
Missing Data Analysis
Missing data is a reality of every data collection exercise. Data may be missing for a variety of reasons. It may be missing, for example, as the topic was tedious, the questionnaire was long, questions were unclear, the respondent had a very busy schedule or the data was not entered correctly (Bryman, Becker, & Sempik, 2008; Hair, Hult, &
Ringle, 2017). A complete set of data is a basic requirement for data analysis, and this is certainly true for structural equation modelling. To deal with the realities of missing dataset values there are many options available (Allison, 2003; Enders & Bandalos,
2001). The most simple and straightforward approach is to omit the responses which have
270 missing values. The second approach is to use a range of statistical procedures offered by a modern statistical software package. These include the simple and more traditional ones such as listwise deletion, pairwise deletion, hot deck imputation, mean substitution, regression substitution and the more modern ones such as maximum likelihood and multiple imputation methods (Creswell, 2007; Enders & Bandalos, 2001; Kline, 2016).
The listwise deletion method or the complete case analysis method is the most simple and straightforward technique which refers to the process of completely eliminating responses that have any missing values. Although this may entail a substantial decrease in the sample size available for the analysis (depending upon the number of incomplete responses) it offers unbiased parameter estimates. This procedure is normally followed where the number of incomplete responses is low (Bryman et al., 2008; Marcoulides,
Chin, & Saunders, 2009; Schlomer, Bauman, & Card, 2010).
Other traditional methods such as pairwise deletion and mean substitution methods are generally not engaged in modern research due to the availability of better statistical techniques such as maximum likelihood and multiple imputation methods (Hair, Hult, et al., 2017; Hoyle, 1995; Kline, 2016; Schumacker & Lomax, 2016). In this research, 64 responses were received that were only 10% to 50% were complete. Due to the size and format of the survey, up to 50% incompletion meant a large number of questions remained unanswered. Due to this, list-wise deletion was employed for these responses and the incomplete responses were completely removed from the survey analysis. Hence the analysis used 351 complete responses. Incomplete responses were not different from those retained in regard to their main activity, age and size. Some of respondents from the machine building industry did not fully complete the survey, and they were small firms. Some firms skipped the demographic portion of the questionnaire and therefore it was not clear who returned the incomplete survey.
271 Outlier Analysis
An outlier is an observation which appears to deviate markedly compared to other observations in the research sample (Hair, Hult, et al., 2017; Sekaran & Bougie, 2016).
Outliers can occur due purely by chance, due to measurement error or they may indicate some unexpected and surprising observations which may in turn be beneficial to the research. Too many outliers may indicate poor data, which may raise significant questions regarding the reliability and validity of the data (Saunders et al., 2009, Bryman, 2008).
Outliers need to be dealt with appropriately since they can dramatically alter the characterisation of data (that is standard deviation, skewness and kurtosis) (Hair, Hult, et al., 2017; Sekaran & Bougie, 2016). To detect outliers, Maholanabis distance (specifically its p-value) and Loglikelihood values of all the 351 observations were computed and there were no extreme values that could be considered outliers. Indeed, the two observations which had the top two values on both Maholanabis and Loglikelihood were temporarily deleted (one-by-one in descending order) from the analysis to detect any change in the model fit. It was observed that they did not affect model fit in any meaningful way and therefore all observations were included in analysis.
Reverse Coding
Following recommendations from extant literature (Hancock & Mueller, 2013; Newsom,
2015) various items in the survey were reverse (negatively) coded. One of the primary reasons why this is done is to reduce common method variance (Lindell & Whitney, 2001;
Podsakoff, Mackenzie, Lee, & Podsakoff, 2003). It was thus extremely important to align data in a single direction before the data can be analysed in a meaningful manner.
Additionally, Harman’s one factor test (Podsakoff et al., 2003; Podsakoff & Organ, 1986) was also conducted to test for common method variance (see chapter 6). This study used a 7-point Likert type scale to obtain responses.
272 Latent and Observed Variables
Many constructs or factors which researchers analyse are not directly observable. For example, constructs such as personality, behaviour, depression, satisfaction and intelligence are widely analysed in social sciences but are not directly observable (Hoyle,
1995; Klopack & Wickrama, 2019; Tabachnick & Fidell, 2013). In order to bypass this situation, researchers employ observable indicators. Indicators represent a set of survey items that collectively represent a construct also known as a latent variable (latent meaning present but not visible), as opposed to an observed variable or an item (Perry et al., 2015; Schumacker & Lomax, 2016). In order to effectively measure a latent variable, it is suggested that it has at least three indicators with four or more recommended. Five to seven items generally represent the upper limit (Muthén & Muthén, 2017; Tabachnick
& Fidell, 2013).
7.6 Factor Analysis: EFA & CFA
Factor analysis is a statistical technique to examine whether a group of observed variables are related linearly to a much smaller group of unobserved variables or factors (Chatfield,
2018; Ram & Grimm, 2009). Factors are then made by combining a set of correlated variables into one group or factor (Hair, Black, Babin, & Anderson, 2014; Thompson,
2007). Factor analysis is very useful in providing the researcher a much better understanding of the research data since factor analysis often reduces a large set of correlated variables to a smaller set of uncorrelated variables thus significantly reducing the complexity of the data without any significant loss of information present in the data
(Kline, 2016; Thompson, 2007; Wickrama, 2016).
Factor analysis can be conducted in two main ways, namely Exploratory Factor Analysis
(EFA) and Confirmatory Factor Analysis (CFA) (Bagozzi & Yi, 2012). EFA is performed when the researcher has no predefined notion of the number of dimensions underlying a
273 group of variables (Hayton, Allen, & Scarpello, 2004). On the other hand, a CFA is performed when the researcher already has a preconceived hypothesis regarding the number of dimensions present in the set of variables (Kline, 2016; Rana Prashant Singh,
2018; Thompson, 2007). The standard progression is to begin by specifying an EFA model to evaluate an initial pool of items. It is then customary to move onto a CFA framework to provide a more rigorous evaluation of how a theoretical model represents the observed data. This thesis employs CFA as measures were taken from literature and other existing sources. Through this process, the researcher was able to determine the number of latent variables which best represents the constructs of interest and the pattern of relationships (i.e. factor loadings), between the observed items and latent variables.
CFA is a powerful and flexible statistical technique which has become an increasingly popular tool in all areas of psychology including educational research. CFA is a special case of structural equation modelling (SEM) in which relationships among latent variables are modelled as covariances/correlations rather than as structural relationships
(i.e., regressions) (Hair, Babin, & Krey, 2017; Ram & Grimm, 2009). Thus, CFA help determine whether the focus should be on the total score of a measure or subscales comprised of specific items from that scale. CFA also provides superior methods of evaluating other psychometric properties (e.g. reliability) of a scale than traditional methods such as Cronbach’s alpha. Thus, CFA is a special form of factor analysis, is used in this research to examine how well the research data fits a predefined theoretical model based on the literature.
7.7 Reliability and Validity
Reliability and validity are at the core of scientific research. This is to ensure that a measure is not only determining what it is purporting to measure but also doing it accurately and efficiently (Garson, 2013; Govindarajan & Kopalle, 2006). Reliability is defined as the extent to which an instrument of measurement produces the same or similar
274 results on repeated trials. Synonyms of reliability include stability, dependability and lack of distortion (Kerlinger and Lee, 2000). Validity on the other hand is defined as the extent to which an instrument of measurement measures what it purports to measure. It is important to understand the difference between the two. The primary theme in reliability is the accuracy with which a scale measures whatever it measures (Csikszentmihalyi,
2014; Hinkin, 1998). The focus is on correct measurement. Validity, on the other hand, concerns itself with the concept/construct which is being measured rather than the measurement itself (Golofshani, 2003; Govindarajan & Kopalle, 2006).
There are three primary ways in which reliability of measurements can be computed
(Garson, 2013; Kerlinger & Lee, 2000). The first method measures the stability of the instrument by giving the same instrument to same group of people on two different occasions - thus generating two sets of scores. The correlation between these two sets of scores is called test-retest reliability. The second method measures the equivalence aspect of reliability. In this two (or more) similar but distinct instruments of the same measure are developed and administered to the same set of respondents. The correlation between the resulting set of scores would then determine the equivalence of the measure. The third method for computing reliability is known as internal consistency. This method basically determines the extent to which items are measuring the same concept. The idea is that items within a scale should be highly correlated with each other. Internal consistency can be measured in many ways including the split-half reliability index and the coefficient- alpha index (Govindarajan & Kopalle, 2006; Cronbach, 1951). Recently there has been a move away from coefficient-alpha due to issues associated with it. In this context,
Bagozzi and Yi (2012) recommend the use of composite reliability (CR) and average variance extracted (AVE) values for reporting scale-reliability.
275 Composite reliability is analogous to coefficient alpha that has traditionally been a primary measure of reliability and has been reported in numerous previous studies
(Bagozzi & Yi, 2012). According to Bagozzi and Yi (1988), composite reliabilities values greater than 0.6 are considered adequate. The composite reliability is calculated as given below.
( )
( ) + ( 2 ) 𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 2 𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 Average variance extracted basically computes the average variance explained by the construct in comparison to the average variance that is due to measurement error (Fornell
& Larcker, 1981). So if for instance the average variance extracted is 0.4 that signifies that the variance that is explained by the construct is actually less than that accounted for by the measurement error. According to Bagozzi and Yi (1988), an average variance extracted value greater than 0.5 is considered adequate. The average variance extracted is calculated as given below.
+ 𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑟𝑟 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 After obtaining a good assessment of the reliability of the study it is important to get a good assessment of its validity. Kerlinger & Lee (2000) discuss three main categories of validity namely content validity, criterion-related validity and construct validity. Content validity or face validity basically tests whether the content of the measure is a fair representation of the universe the measure purports to measure. Criterion-related validity is analysed by comparing the scores on the scales with one or more external variables or criterion. Two primary types of criterion validity are predictive and concurrent validity.
Construct validity is perhaps the most important validity and is concerned with whether
276 a construct behaves in a way consistent with the theory or not (Kerlinger and Lee, 2000,
Bagozzi and Yi, 2012).
7.8 Measurement Concepts
This section provides a definition of key terminology that is used throughout the next chapter when assessing the measurement and structural models.
Standardised Loadings
The standardised loadings provided in the tables represent the standardised parameter estimates. They expose how many standard deviation changes occur in the outcome variable, per standard deviation in the predictor variable.
Standard Error (SE)
The standard error shows how precisely the value of the parameter has been estimated.
Thus, smaller standard errors point to a more appropriate estimation of the factor.
Est./SE Values
As a substitute to the t-test, Mplus offers the Est./SE value. The Est./SE basically tests the null hypotheses, a particular parameter estimate is significantly different from zero in the population (Muthen and Muthen, 2010, Fornell and Larcker, 1981). An unstandardized estimate divided by its standard error can be considered as a Z-statistic, so values between -1.96 and +1.96 indicate that the corresponding parameter is not significantly different from zero at p=0.05 (that is a 5% significance level).
R Squared (R2)
The R Squared value displays the amount of variance in the dependent variable which is accounted for by the independent variable(s) in the equation. The higher values i.e. closer to 1 the better the fit. Therefore, appropriate measures of the latent variable indicate that
277 the variable accounts for a significant variance in the factor. A value of 0.4 or more is considered adequate (Anderson and Gerbing, 1988, Bagozzi and Yi, 2012).
7.9 Conclusion
As discussed in this chapter, structural equation modelling (SEM) is a robust technique for determining the relationship between multiple exogenous and endogenous variables.
Given the large macro-level innovation financing model proposed in this research, informed initially by the literature review and further validated by the interview findings, structural equation modelling is an appropriate mechanism for survey data analysis. The next chapter discusses the analysis which was applied to the data obtained from 351
Uzbek machine building and chemical industry firms. Mplus will be used as the primary tool for structural equation modelling for simultaneously testing all the hypotheses in this thesis.
278
CHAPTER EIGHT CFA and Structural Equation Modelling
279
8.1 Introduction ...... 281 8.2 Descriptive Statistics ...... 281 8.3 Measure of Access to Finance ...... 293 Measure of Access to Direct Public Funding ...... 293 Measure of Access to Indirect Public Funding ...... 294 Measure of Access to Debt Finance ...... 295 Measure of Access to Equity Finance...... 296 Measure of Access to Internal Finance ...... 297 Reliability of the Access of Finance Components ...... 298 8.4 Measures of Mediators ...... 299 Measure of Absorptive Capacity (ACAP) ...... 299 Measure of International Growth Orientation (IGO) ...... 300 Measure of Investment in In-House R&D (IRD) ...... 302 Measure of Barriers to Innovation (BI) ...... 303 Reliability of the Mediator Factors ...... 305 8.5 Measures of Performance ...... 305 Measure of Incremental Innovation Performance ...... 305 Measure of Radical Innovation Performance ...... 307 Measure of Financial Performance ...... 308 Reliability of the Performance ...... 308 8.6 Financing Innovation (FI) Framework Analysis ...... 309 8.7 Discussion ...... 312 8.8 Summary of Overall Findings ...... 332 8.9 Conclusion ...... 339
280 Chapter 8: CFA and Structural Equation Modelling
8.1 Introduction
Chapter 7 provided a detailed overview of structural equation modelling and its appropriateness for this study. This chapter is laid out as follows. Firstly, a descriptive analysis of the individual items that make up the twelve constructs is provided. Secondly, the twelve constructs of the theoretical model are evaluated. Thirdly, the structural part of the model, whereby the relationships between the various constructs are analysed, is discussed in detail. Fourthly, the control variables and their effect on the model are discussed. Finally, an overview of the analysis is provided in the conclusion section. The data analysis was undertaken using SPSS and Mplus. While SPSS was used to perform the preliminary descriptive assessment as reported in chapter 6, Mplus was used for the majority of the analysis in this chapter.
8.2 Descriptive Statistics
This section presents the descriptive statistics of the items underpinning the constructs from the survey split by sector. From the descriptive analysis of respondents’ degree of access to finance, internal capabilities (mediators including barriers to innovation) and innovation and financial performance (Tables 8.1-8.12), it emerges that debt finance is the most challenging source of finance to access among machine-building industry firms.
However, it also transpires that firms from both industries have limited access to debt finance. Interestingly, indirect public funding seems more accessible among the machine- building industry, whereas chemical industry firms are slightly better positioned to access direct public funding. These results consistent with the earlier findings from Chapter 5, as the machine-building industry was for a long time favoured by government industrial support policies in contrast to the chemical industry. In contrast, the less internationalised machine-building industry gets support through indirect public funding mechanisms. It is
281 not surprising that internal finance, consistent with Pecking Order Theory, remains the initial source of finance for firms across both industries. Each item is grouped under the relevant construct. A one-way ANOVA was computed to test for statistically significant different means across sectors for all items, with a 95% confidence level. The purpose of this section is to see if there are specific issues that arise from the items themselves before going on to the measurement model.
TABLE 8.1: ACCESS TO DIRECT PUBLIC FUNDING Chemical Machine Mean Std. Dev. Mean Std. Dev. Access to Payment for work on public 3.93 1.626 4.04 1.635 contracts Access to Public grants 4.96 1.278 4.95 1.329 Access to Investment in equity 4.16 1.564 4.14 1.665
Access to Public credit (Direct Earmarks) 4.13 1.632 3.95 1.663
Access to Funding for new technologies 4.46 1.582 4.50 1.698 and modernisation
Access to Funding for Reconstruction 4.14 1.728 4.11 1.670 and Development of Uzbekistan
Access to public grants is the most accessible source of public finance, and this is consistent across both sectors. Furthermore, this has the lowest standard deviation which suggests that this source is accessible across different types of ownership and size. The
One-Way ANOVA results show that there are no statistically significant differences between the means across the sectors for any of the items that measure access to direct public funding.
282 TABLE 8.2: ACCESS TO INDIRECT PUBLIC FUNDING Chemical Machine Mean Std. Dev. Mean Std. Dev. Access to Tax exemptions/credits 4.73 1.821 4.82 1.525 holidays Access to Custom duties 4.72 1.601 4.84 1.484 Access to Capital Allowances 4.33 1.303 4.63 1.166 (depreciation) Access to Interest rate subsidies on loans 4.42 1.379 4.67 1.513 4.07 1.889 4.46 1.722 Access to Localization program
Access to Free industrial economic zone 4.50 1.470 5.01 1.561 Republic Fair of Innovative Ideas, 5.28 1.572 5.31 1.092 Technologies and Projects
The result shows that the “Republic Fair of Innovative Ideas, Technologies and Projects” is easily accessible across all type of ownership, as this is a free event. Furthermore, it is important to highlight that the State indirectly funds innovation mainly via tax exemptions and access to rebates on custom duties. However, these do have not the lowest standard deviation which suggests that these sources are not equally accessible across different types of ownership, size and growth orientation. In other words, the indirect public funding mechanisms for innovation support may across firms. An example of the basis for such variation may be firm growth orientation trajectory which is oriented either on the local market or to export markets. The One-Way ANOVA results show that there are no statistically significant differences between the means across the sectors for any of the items that measure access to indirect public funding.
283 TABLE 8.3: ACCESS TO DEBT FINANCE Chemical Machine Mean Std. Dev. Mean Std. Dev. Access to Corporate Bonds 3.29 1.969 3.35 2.056 Access to Factoring/Invoice Discounting 4.00 1.671 4.17 1.580 Access to Trade Credit 3.99 1.802 3.62 1.933
Access to HP & Leasing 4.06 1.815 3.68 1.749 3.23 1.885 3.19 1.927 Access to Bank loan
Access to credit line/syndicated line of 3.34 1.989 2.34 1.726 credit loan Access to overdraft 3.13 1.770 3.03 1.716
Bank loans are an equally accessible source of debt finance across sectors. Furthermore,
HP & Leasing is the most accessible source of finance for chemical industry firms and factoring among machine building industry. Furthermore, Factoring has the lowest standard deviation across both sectors which suggests that this source is accessible across different types of ownership and size. The One-Way ANOVA results show that there are statistically significant differences of the means across sectors for the following two items: Access to credit line/syndicated line of credit loan and Access to HP & Leasing.
In both these cases the chemical industry has better access to these sources, and this may be because it is a more internationalised industry.
TABLE 8.4: ACCESS TO EQUITY FINANCE Chemical Machine Mean Std. Dev. Mean Std. Dev. 3.89 1.855 3.61 1.811 Access to Venture Finance Access to Equity Markets 3.60 1.796 3.40 1.924 3.83 1.713 3.63 1.896 Access to the reinvestment of dividends
Access to venture finance is the highest source of equity finance for the chemical industry, but also with the highest level of standard deviation which suggests that this source is not equally accessible across different types of ownership and size. On the other side,
284 reinvestment of dividends is a most common source of equity finance in machine-building industry, but this item does not show the lowest standard deviation which articulates varying access and availability such finance for all type of firms. The One-Way ANOVA results show that there are no statistically significant differences between the means across the sectors for any of the items that measure access to equity finance. It should also be noted that the mean scores are comparatively low. This result also justifies, along with the main findings of the research, that the capital market is insufficiently developed in the country to invest in innovation.
TABLE 8.5: ACCESS TO INTERNAL FINANCE Chemical Machine Mean Std. Dev. Mean Std. Dev. Access to Cash 4.83 1.614 4.66 1.612 Access to Capacity Utilisation (e.g. If a 5.48 1.343 5.66 1.221 company is running at a 70% capacity utilisation rate, it has room to increase production up to a 100% utilisation without incurring the costs of building a new plant or facility) Access to Divesting (e.g. to sell a 5.36 1.346 5.66 1.221 business that is not closely related to your firm’s core businesses to obtain funds) Access to Working Capital Management 5.15 1.619 4.71 1.669 6.36 .902 6.33 .984 Access to Personal Savings
Access to personal savings is the highest source of internal finance, and this is consistent across the two sectors. However, access to cash is most challenging for firms as a source of investment in their innovation activities amongst internal sources of finance. This has been also emphasized by interviewee 12, as inconvertibility of Uzbek currency (the SUM) stops foreign investors legalising their income and therefore they bring this income out of the country. Furthermore, this has one of the highest standard deviation which suggests that this source is not similarly accessible across different types of ownership and size.
285 The One-Way ANOVA results show that there is a statistically significant difference of the mean across the two sectors for the working capital management item that measures access to internal finance. In this case the chemical industry has the highest level of access.
TABLE 8.6: ABSORPTIVE CAPACITY Chemical Machine Mean Std. Dev. Mean Std. Dev. Recognizing and understanding 5.53 1.280 5.57 1.278 potentially valuable new knowledge outside the firm through exploratory learning Assimilating valuable new knowledge 5.31 1.318 5.52 1.261 through transformative learning Using the assimilated knowledge to 5.17 1.374 5.24 1.483 create new knowledge and commercial outputs through exploitative learning The ability of your firm to provide 5.01 1.581 4.58 1.597 training for R&D personnel
Acquisition of external knowledge through exploratory learning of recognizing and understanding potentially valuable new knowledge outside the firm is the highest rated source of absorptive capacity, and this is consistent across the two sectors. Furthermore, this has the lowest standard deviation in the chemical industry, but the second lowest in the machine-building industry which suggests that this method is common across different types of ownership and size. The One-Way ANOVA results show that there is a statistically significant difference of the mean across the two sectors for the ability of a firm to provide training for R&D personnel. R&D is a more significant issue for the chemical industry where human resources talent plays a larger part in their success, so this result is perhaps unsurprising.
286 TABLE 8.7: INTERNATIONAL GROWTH ORIENTATION Chemical Machine Mean Std. Dev. Mean Std. Dev. It makes more sense for us to grow 4.44 1.596 4.38 1.467 internationally than domestically Our marketing competence is better 3.57 1.412 3.86 1.392 applied internationally Our personnel is better utilised in 3.16 1.205 3.27 1.447 international markets Our reputation and brands support 3.59 1.801 3.49 1.450 internationalisation better Our current customer relations support 3.74 1.662 3.63 1.531 international growth
Growing internationally rather than domestically is chosen as the highest growth trajectory for firms who participated in this research and this is consistent across the two sectors. This result justifies the view of interviewees 2, 3, 6, 8 and 11, in that export- oriented firms get more financial benefits from direct and indirect public schemes than domestically oriented firms. However, this item does not have the lowest standard deviation which suggests that not all firms agree with this statement. The One-Way
ANOVA results show that there are no statistically significant differences between the means across the sectors for any of the items that measure international growth orientation.
TABLE 8.8: INVESTMENT IN IN-HOUSE R&D Chemical Machine Mean Std. Dev. Mean Std. Dev. The annual volume of capital raised for 4.60 1.952 4.56 1.918 product innovation in our firm The annual volume of capital raised for 4.08 1.602 4.31 2.014 process innovation in our firm The annual volume of capital raised for 3.44 1.563 4.03 1.695 marketing innovation in our firm The annual volume of capital raised for 3.30 1.513 3.45 1.685 organisational innovation in our firm We are annually increasing the volume of 3.96 1.836 4.25 1.745 seed capital We are annually increasing the volume of 3.36 1.586 2.90 1.781 venture capital
287 The annual volume of capital raised for product innovation is the highest and most common method of investment in in-house R&D, and this is consistent across the two sectors. This is perhaps unsurprising given that both industries can be classified as manufacturing. However, the standard deviation is relatively high suggesting that this strategy varies across different types of ownership and size. Nevertheless, investment in organisation innovation has the lowest standard deviation in both sectors, and this seems to be the method of leveraging sources in in-house R&D projects that does not depend on the size and ownership of a firm. The One-Way ANOVA results show that there are statistically significant differences of the means across sectors for the following two items: marketing innovation and venture capital. Marketing innovation capital is higher for the machine building firms as it is likely that in their efforts to internationalise and grow, they need to spend on marketing assets to build markets for their products. Venture capital is more available for some industries than others and the chemical industry seems to have greater access than the machine building industry.
288 TABLE 8.9: BARRIERS TO INNOVATION Chemical Std. Machine Std. Mean Dev. Mean Dev. Lack of engineering/technical talent 4.27 1.785 4.55 1.527 Lack of sales/marketing talent 4.4 1.874 4.59 1.538 Lack of managerial/leadership talent 2.6 1.645 2.51 1.622 Economic Turbulence 2.64 1.961 2.72 1.778 High Cost and Risk 4.92 1.684 4.37 1.537 Lack of External Partners Opportunities 3.95 1.809 3.35 1.514
Difficulty in finding co-operation partners 3.99 1.623 3.91 1.548 Lack of Information 3.66 1.653 3.83 1.534 Lack of Government Support 4.05 1.99 4.27 1.679 Lack of Regional Infrastructure 3.81 1.883 4.13 1.745 Inadequate/costly infrastructure 3.92 1.885 4.04 1.608
Lack of customer responsiveness to new products and processes 4.23 1.652 3.97 1.392 Lack of tax incentives 3.73 1.754 3.29 1.392 Lack of intellectual property protection 3.27 1.352 3.81 1.629 Bureaucracy 3.67 1.656 4.14 1.765 Exchange rate fluctuations 4.18 2.178 4.4 1.87 Lack of appropriate source of finance 4.13 1.586 4.48 1.778 Access to Finance 4.24 2.001 4.37 1.912 Cash Barriers 4.32 1.454 4.46 1.227 Competition 4.82 1.54 4.1 1.625 Cost labour 3.34 1.446 3.29 1.39
These are a lot of items and thus some key outcomes are as follows. The lowest rated barrier across both sectors is the lack of managerial talent. This is an interesting result but given that the survey was completed by managers, this is perhaps to be expected. The highest results are those for Competition and risk for the chemical industry and lack of engineering/technical and sales/ marketing for the machine building industry.
Competition is growing for natural resources in Uzbekistan and the chemical industry is trying to compete on the world stage. This means that competitive pressures are high. The
289 levels of education are relatively low in Uzbekistan as discussed in chapter 4, and this lack of university graduates may be the cause of the highest barriers noted by the machine building industry. Given the importance of finance for this thesis, it is somewhat worrying that exchange rate fluctuations are perceived as highly rated barriers by the respondents across industries.
The One-Way ANOVA results show that there are statistically significant differences of the means across sectors for the following four items: Bureaucracy; High Cost and Risk;
Lack of Intellectual property protection; and Lack of External Partner Opportunities.
Bureaucracy is perceived to be a higher barrier for the machine building industry. This is perhaps due to the more privileged position of the chemical industry in Uzbekistan vis a vis the machine building industry. Cost and risk are more important barriers for the chemical industry. The chemical industry competes largely on cost and quality as the product is somewhat standardised worldwide. Cost pressures are therefore more likely to be important versus the machine building industry which makes products that are more specific. Following this the perceived lack of intellectual property protection is highest for the machine building industry as it aims to try to protect the innovations that it has developed versus the chemical industry who are creating defined products to compete globally. While both firms can find partners within their industry, finding partners outside the industry is more difficult and this is perceived to be more challenging for the chemical industry.
290 TABLE 8.10: INCREMENTAL INNOVATION PERFORMANCE Chemical Machine Mean Std. Dev. Mean Std. Dev. Incremental innovation products 4.34 1.229 4.23 1.351
Incremental innovation process 4.64 1.686 4.06 1.683 Incremental innovation technologies 5.19 1.721 3.70 1.521
Incremental innovation of organisational 3.99 1.225 3.78 1.304 structures Incremental innovation of strategic 5.90 1.223 5.42 1.206 orientation Incremental innovation of management 4.07 1.484 3.80 1.583 methods
Incremental innovation of strategic orientation is the item in this scale that is perceived as the highest and this is consistent across the two sectors. Furthermore, this has the lowest standard deviation which suggests that incremental innovations performance is similar across different types of ownership and size. The One-Way ANOVA results show that there are statistically significant differences of the means across sectors for the following three items: Incremental innovation process; Incremental innovation technologies and
Incremental innovation of strategic orientation. In all cases it is the chemical industry respondents who rated these the highest. Incremental Innovation Processes, technologies and strategic orientation seem to be more important for a externally focussed industry that competes internationally on cost, and that needs stability. These statistically significant differences show the importance of using industry as a control in the structural model for this thesis.
291 TABLE 8.11: RADICAL INNOVATION PERFORMANCE Chemical Machine Mean Std. Dev. Mean Std. Dev. Radical Innovation - products 3.83 1.448 4.63 1.371
Radical Innovation - process 3.61 1.425 4.28 1.426 Radical Innovation - technologies 2.92 1.146 4.15 1.452
Radical innovation - organisational 3.72 .825 4.14 1.181 structures, strategic orientations and management methods
The highest rated of the radical innovation types is product innovation. This is consistent across sectors. It is interesting to note that the scores for the machine building industry are higher for all items and a one-way ANOVA showed that these differences are statistically significant. The machine building industry is more successful at radical innovation. This is perhaps due to the nature of the innovation processes in machine building which are bespoke to individual contracts. This is different to the chemical industry where products and processes are standardised worldwide to a greater extent. It is interesting that innovation in structures, orientations and management methods is relatively high in both industries but higher in the machine building industry.
TABLE 8.12: FINANCIAL PERFORMANCE Chemical Machine Mean Std. Dev. Mean Std. Dev. organisation's return on investment 4.65 1.312 4.26 1.725 (ROI) relative to your competitors organisation's sales growth relative to 4.93 1.561 4.32 1.804 your competitors organisation’s total operating costs 4.75 1.104 4.83 1.408 relative to your competitors organisation's market share relative to 4.14 1.594 3.79 1.773 your competitors organisation's productivity relative to 4.51 1.221 4.42 1.646 your competitors organisation's return on assets (ROA) 4.56 .975 4.06 1.595 relative to your competitors
292 The highest rated performance measure for the chemical industry is “organisation's sales growth relative to your competitors” whereas for the machine building industry it is
“organisation’s total operating costs relative to your competitors”. This depicts a very different strategic posture by these two industries. While cost is important for both industries (there is no statistically significant difference between the scores at the 5% level), there is a statistically significant difference for the sales growth item. Given the international growth focus of the chemical industry, this result makes sense.
8.3 Measure of Access to Finance
Access to finance is examined by the following factors: Access to government sources, external market sources and internal sources of finance. Access to government sources are considered first. Access to government sources consist of Direct Public Funding
(ACDPF) and Indirect Public Funding (INDPF) constructs.
Measure of Access to Direct Public Funding
As illustrated in Table 8.13, the data for the six items used to measure the access to direct public funding indicated a satisfactory fit.
TABLE 8.13: ACCESS TO DIRECT PUBLIC FUNDING MEASURE RESULT Items Standardised SE Est/SE R2 Loadings 1 Access to Payment for work on public 0.873 0.016 53.449 0.763 contracts 2 Access to Public grants 0.470 0.044 10.68 0.221 3 Access to Investment in equity 0.848 0.018 46.162 0.719 4 Access to Public credit (Direct 0.680 0.031 21.707 0.463 Earmarks) 5 Access to Fund for new technologies 0.828 0.020 41.153 0.685 and modernisation 6 Access to Fund for Reconstruction and 0.831 0.020 41.984 0.690 Development of Uzbekistan Model Fit: Chi Square=27.333 (df=9), RMSEA=0.076, SRMR=0.025, CFI=0.985, TLI=0.975
293 As shown in Table 8.13 the key fit-indices fit satisfactorily with the RMSEA = 0.076.
However, the second item had a low R2 value. It was noted that its removal from the scale led to unacceptable values for the fit statistics. It was therefore decided to allow it to remain in the scale. The remainder of the loadings were similar to those of Radas et al.
(2015), Guan & Yam (2015), and Nishimura & Okamuro (2011) from whom the scales were taken. This provided further evidence of the reliability of the scale. Two of the final items were extracted from the interview process and had high factor loading matches to the scale. The next section discusses the indirect public funding variables.
Measure of Access to Indirect Public Funding
Illustrated in Table 8.14 is the data for the initial seven observed items which were used to measure access to indirect public funding indicated a satisfactory fit.
TABLE 8.14: ACCESS TO INDIRECT PUBLIC FUNDING MEASURE RESULT Items Standardised SE Est/SE R2 Loadings 1 Access to Tax exemptions/credits 0.626 0.046 13.715 0.392 holidays 2 Access to Custom duties 0.729 0.043 17.043 0.532 3 Access to Capital Allowances 0.464 0.053 8.788 0.216 (depreciation) 4 Access to Interest rate subsidies on loans 0.353 0.057 6.219 0.125 5 Access to Localization program 0.392 0.056 7.012 0.154 6 Access to Free industrial economic zone 0.490 0.051 9.548 0.240 7 Republic Fair of Innovative Ideas, 0.217 0.060 3.607 0.047 Technologies and Projects Model Fit: Chi Square=21.692 (df=14), RMSEA=0.040, SRMR=0.033, CFI=0.973, TLI=0.959
Global statistical indices fitted satisfactorily with the RMSEA = 0.040. However, it is noted that last five items had low R2 values. These items were removed from further analysis one by one, as it was observed these items significantly improved the CR and
AVE. As a result, indirect public funding was left with two variables. Therefore, the CFA
294 for indirect public funding variables was run with those of the direct public funding variables. This was done since with only two indicator variables, the CFA model for indirect public funding was just-identified. When running with direct public funding variables, the resulting model had an acceptable fit (see Table 8.15). The next section discusses how the access to external market funding variables were measured.
TABLE 8.15: ACCESS TO INDIRECT PUBLIC FUNDING MEASURE RESULT Items Standardised SE Est/SE R^2 Loadings 1 Access to Tax exemptions/credits 0.802 0.081 9.941 0.717 holidays 2 Access to Customs duties 0.599 0.068 8.813 0.462
Model Fit: Chi Square=44.716 (df=19), RMSEA=0.062, SRMR=0.023, CFI=0.981, TLI=0.972
Measure of Access to Debt Finance
Illustrated in Table 8.16 are the data for the seven observed items used to measure the level of access to debt finance indicated which fitted satisfactorily with RMSEA = 0.049.
TABLE 8.16: ACCESS TO DEBT FINANCE MEASURE RESULTS Items Standardised SE Est/SE R2 Loadings 1 Access to Corporate Bonds 0.511 0.047 10.767 0.261 2 Access to Factoring/Invoice 0.216 0.058 3.733 0.047 Discounting 3 Access to Trade Credit 0.752 0.035 21.256 0.565 4 Access to HP & Leasing 0.641 0.040 15.882 0.411 5 Access to Bank loan 0.710 0.037 19.105 0.504 6 Access to credit line/syndicated line 0.346 0.054 6.382 0.120 of credit loan 7 Access to overdraft 0.399 0.052 7.616 0.160
Model Fit: Chi Square= 25.627 (df=14), RMSEA=0.049, SRMR=0.036, CFI=0.972, TLI=0.958
However, the standardised loading for the second, sixth, and seventh items is below the
0.5 value suggested by Hildebrandt (1987) or the 0.4 suggested by Gerbing and Anderson
295 (1988), and Ford et al. (1986). Additionally, their R2 value is also very low (0.047, 0.120 and 0.160). Therefore, these items were removed from further analysis. While the fit indices significantly improved (RMSEA = 0.000), the levels were unacceptable due to a low R2 for the first item (0.243), and lower CR and AVE values. This item was also removed from further analysis. As a result, the access to debt finance remained with three variables. Therefore, CFA for access to debt finance was run with direct public funding items. This was undertaken with only three items, and the CFA model for access to debt finance was just-identified. When run with access to direct public funding variables, the model fit was acceptable (see Table 8.17).
TABLE 8.17: ACCESS TO DEBT FINANCE MEASURE RESULTS Items Standardised SE Est/SE R2 Loadings 1 Access to Corporate Bonds 0.749 0.039 19.365 0.561 5 Access to Bank loan 0.658 0.041 15.991 0.433 7 Access to overdraft 0.719 0.04 18.143 0.518 Model Fit: Chi Square=35.859 (df=19), RMSEA=0.050, SRMR=0.025, CFI=0.988, TLI=0.983
Measure of Access to Equity Finance
The data relating to the initial three items which were used to measure the level of access to equity finance are provided in Table 8.18.
TABLE 8.18: ACCESS TO EQUITY FINANCE MEASURE RESULTS Items Standardised SE Est/SE R2 Loadings 1 Access to Venture Finance 0.688 0.038 17.992 0.474 2 Access to Equity Markets 0.791 0.036 21.807 0.625 3 Access to the reinvestment of 0.705 0.040 17.616 0.490 dividends Model Fit: Chi Square=47.139 (df=19), RMSEA=0.065, SRMR=0.043, CFI=0.981, TLI=0.972
296 The CFA for access to equity finance variables were run in conjunction with direct public funding variables. This was done as with only three indicator variables, the CFA model for access to equity finance was just-identified. When run with access to direct public funding variables, the resulting model had an acceptable fit, RMSEA = 0.065. The next section discusses the measure of access to internal finance variables.
Measure of Access to Internal Finance
The data relating to the initial five observed variables used to measure the level of access to the firm’s internal financial sources is given in Table 8.19.
TABLE 8.19: ACCESS TO INTERNAL SOURCES MEASURE RESULTS Items Standardise SE Est/SE R2 d Loadings 1 Access to Cash 0.275 0.063 4.333 0.076 2 Access to Capacity Utilisation (e.g. If a company is running at a 70% capacity utilisation, it has room to increase production up to a 100% -0.729 0.064 -11.366 0.532 utilisation rate without incurring the costs of building a new plant or facility) 3 Access to Divesting (e.g. to sell a business that is not closely related to -0.682 0.061 -11.177 0.465 firm’s core businesses to obtain funds) 4 Access to Working Capital 0.278 0.064 4.373 0.077 Management 5 Access to Personal Savings 0.053 0.065 0.809 0.003 Model Fit: Chi Square=52.169 (df=5), RMSEA=0.164, SRMR=0.076, CFI=0.738, TLI=0.475
The standardised loading for the second and third item provided negative values. While the fit indices improved with the RMSEA = 0.0845, the levels were still unacceptable as the fifth item had a low R2. Therefore, this item was removed from future analysis of internal sources of finance, leaving this factor with two indicators. Therefore, it was tested with absorptive capacity and led to excellent model fit (see Table 8.20).
297 TABLE 8.20: ACCESS TO INTERNAL SOURCES MEASURE RESULTS Items Standardised SE Est/SE R2 Loadings 1 Access to Cash 0.423 0.084 5.013 0.279 4 Access to Working Capital 0.919 0.064 5.863 0.844 Management Model Fit: Chi Square=5.561 (df=8), RMSEA=0.000, SRMR=0.017, CFI=1.000, TLI=1.009
The next section discusses the reliability of measures in regard to access to finance.
Reliability of the Access of Finance Components
Composite reliability (CR) and average variance extracted (AVE) values are well above the cut-off value of 0.7 and 0.5 respectively. This provides evidence for a hig level of scale reliability (Chen et al., 2013). It was noted that the access to indirect public funding and access to internal sources of finance had CR values of 0.663 and 0.648 respectively
(see Table 8.21). These values are very close to the minimum value of 0.7 suggested by
Bagozzi and Yi (2012). Furthermore, the average variance extracted value of both factors, was well above the minimum value of 0.5. Overall, all five sources of finance displayed satisfactory values as suggested by the extant literature (Guan & Yam, 2015; Bakar &
Ahmad, 2010; Leonid et al., 2014; Nguyen & Rugman, 2015; Nishimura & Okamuro,
2011).
TABLE 8.21: RELIABILITY RESULTS FOR ACCESS TO FINANCE COMPONENTS Access to Finance Average Variance Composite Extracted Reliability (AVE) (CR) Access to Direct Public Funding 0.590 0.893
Access to Indirect Public Funding 0.501 0.663
Access to Debt Finance 0.504 0.752
Access to Equity Finance 0.532 0.773
Access to Internal Finance 0.512 0.648
298 Having discussed access to finance and its components, the next section discusses the measurement of the four mediators.
8.4 Measures of Mediators
The following section discusses the measurement of a firm’s internal capabilities to innovate; namely absorptive capacity (ACAP), international growth orientation (IGO), investment in in-house R&D (IRD) and barriers to innovation (BI) where a firm operates.
Extant research has highlighted the significant effect of ACAP as it enables a firm to successfully learn, acquire external knowledge, and adopt new ideas which later lead to superior innovative performance (Escribano et al., 2009; Lane et al., 2006). Companies wish to both maintain and raise their profit while expanding their competitiveness by looking for international growth opportunities (Autio & Rannikko, 2016). It is proposed that annually, external and internal funds are rising for investment in in-house R&D, which is considered to be a key factor in obtaining these aims (Bergek et al., 2008;
Gunday et al., 2011). However, as a noted in the literature, innovative performance is significantly affected by market entry barriers and the geographic location from which a firm operates (Cincera & Santos, 2015; Madrid-Guijarro et al., 2009).
Measure of Absorptive Capacity (ACAP)
The data relating to the initial four items which were observed, was used to measure a firm’s absorptive capacity is given in Table 8.22.
299 TABLE 8.22: ABSORPTIVE CAPACITY MEASURE RESULT Items Standardised SE Est/SE R2 Loadings 1 Recognizing and understanding 0.659 0.039 17.042 0.434 potentially valuable new knowledge outside the firm through exploratory learning 2 Assimilating valuable new knowledge 0.736 0.034 21.371 0.542 through transformative learning 3 Using the assimilated knowledge to 0.778 0.033 23.745 0.605 create new knowledge and commercial outputs through exploitative learning 4 The ability the firm to provide training 0.668 0.04 15.572 0.394 for your R&D personnel Model Fit: Chi Square=1.178 (df=2), RMSEA=0.000, SRMR=0.008, CFI=0.1000, TLI=1.006
The standardised loading for the fourth item is above the 0.5, but with a low R2.
Removing it led to a significant decrease in the composite reliability and average variance extracted values. This item was therefore not removed. It was noted that TLI had a value slightly greater than 1 (1.006). As outlined in the previous chapter, the TLI is a non- normed fit index and its value can sometimes go slightly above 1 (Hu and Bentler, 1999,
Bagozzi and Yi, 2012).
Measure of International Growth Orientation (IGO)
The data relating to the initial five observed items used to measure firms’ international growth orientation is given in Table 8.23.
300
TABLE 8.23: INTERNATIONAL GROWTH ORIENTATION MEASURE RESULT Items Standardised SE Est/SE R2 Loadings 1 It makes more sense for us to grow 0.751 0.028 26.499 0.564 internationally than domestically 2 Our marketing competence is better 0.745 0.029 25.817 0.555 applied internationally 3 Our personnel is better utilised in 0.793 0.025 31.795 0.629 international markets 4 Our reputation and brands support 0.803 0.025 32.698 0.645 internationalisation 5 Our current customer relations support 0.743 0.029 25.701 0.552 international growth Model Fit: Chi Square=49.360 (df=5), RMSEA=0.159, SRMR=0.034, CFI=0.949, TLI=0.898
Following the initial testing of international growth orientation, the results indicated an unacceptable RMSEA of 0.159. The proposed reasoning for this is a considerably high correlation between the second and fifth questions. Parasuraman et al. (2005) recommended that when two items measure the same thing, one item should be eliminated. Compared to the fifth item, the second had higher R2 and lower error variance.
Therefore, the fifth item was excluded from further analysis. When the international growth orientation construct was re-examined without the fifth item, positive improvements were seen in the key fit indices (see Table 8.24).
TABLE 8.24: INTERNATIONAL GROWTH ORIENTATION MEASURE RESULT Items Standardised SE Est/SE R2 Loadings 1 It makes more sense for us to grow 0.756 0.029 26.095 0.572 internationally than domestically 2 Our marketing competence is better 0.799 0.026 30.216 0.638 applied internationally 3 Our personnel is better utilised in 0.781 0.028 28.328 0.610 international markets 4 Our reputation and brands support 0.766 0.028 26.969 0.587 internationalisation Model Fit: Chi Square=5.957 (df=2), RMSEA= 0.075, SRMR=0.014, CFI=0.993, TLI=0.980
301 Measure of Investment in In-House R&D (IRD)
The data relating to the initial six observed items used to measure a firm’s investment frequency in their in-house R&D is given in Table 8.25.
TABLE 8.25: INVESTMENT IN IN-HOUSE R&D MEASURE RESULT Items Standardised SE Est/SE R2 Loadings 1 The volume of annual capital raised 0.876 0.017 52.825 0.767 for product innovation in our firm 2 The volume of annual capital raised 0.906 0.014 63.012 0.822 for process innovation in our firm 3 The volume of annual capital raised 0.731 0.028 26.561 0.534 for marketing innovation in our firm 4 The volume of annual capital raised 0.482 0.044 11.065 0.232 for organisational innovation in our firm 5 We annually increase seed capital 0.809 0.021 37.759 0.655 volume 6 We annually increasing venture 0.469 0.045 10.47 0.221 capital volume Model Fit: Chi Square=89.540 (df=9), RMSEA= 0.160, SRMR=0.060, CFI=0.993, TLI=0.928
From the initial analysis of this construct, the fit statistics were not acceptable.
Furthermore, the fourth and sixth items had a low R2 of 0.232 and 0.22 respectively.
Therefore, these items were omitted from further analysis. On re-examination, the final global fit statistics results are excellent, which can be seen in Table 8.26.
TABLE 8.26: INVESTMENT IN IN-HOUSE R&D MEASURE RESULT Standardised SE Est/SE R2 Items Loadings 1 The volume of annual capital raised for 0.854 0.018 46.913 0.729 product innovation in our firm 2 The volume of annual capital raised for 0.930 0.013 69.228 0.866 process innovation in our firm 3 The volume of annual capital raised for 0.733 0.027 26.809 0.537 marketing innovation in our firm 5 We annually increase seed capital 0.806 0.022 37.2 0.650 volume Model Fit: Chi Square=0.153 (df = 2), RMSEA=0.000, SRMR=0.002 CFI=1.000, TLI=1.006
302 Measure of Barriers to Innovation (BI)
The data relating to the initial twenty-two observed items used to measure barriers to innovation is given in Table 8.27.
TABLE 8.27: BARRIERS TO INNOVATION MEASURE RESULTS Items Standardised SE Est/SE R2 Loadings 1 Lack of Financial Resources 0.818 0.019 42.233 0.670 2 Lack of appropriate sources of 0.413 0.046 9.02 0.170 finance 3 Access to Finance 0.318 0.049 6.426 0.101 4 Lack of engineering/technical talent 0.659 0.032 20.798 0.435 5 Lack of sales/marketing talent 0.896 0.012 72.461 0.802 6 Lack of managerial/leadership talent 0.174 0.053 3.279 0.030 7 Economic Turbulence 0.339 0.049 6.958 0.115 8 High Cost and Risk 0.236 0.052 4.541 0.056 9 Lack of External Partner 0.262 0.051 5.135 0.069 Opportunities 10 Difficulty in finding co-operation 0.436 0.045 9.767 0.190 partners 11 Lack of Information 0.312 0.05 6.288 0.097 12 Lack of Government Support 0.943 0.009 108.287 0.889 13 Lack of Regional Infrastructure 0.508 0.041 12.419 0.259 14 Inadequate/costly infrastructure 0.558 0.038 14.58 0.311 15 Cash Barriers 0.625 0.034 18.416 0.390 16 Lack of customer responsiveness to 0.259 0.051 5.048 0.067 new products and processes 17 Cost of labour 0.265 0.051 5.185 0.07 18 Lack of tax incentives 0.641 0.033 19.508 0.411 19 Lack of intellectual property 0.541 0.039 13.729 0.293 protection 20 Competition 0.149 0.054 2.785 0.022 21 Bureaucracy 0.529 0.04 13.233 0.28 22 Exchange rate fluctuations 0.725 0.027 26.605 0.525
Model Fit: Chi Square=1051.466 (df=209), RMSEA=0.107, SRMR=0.018, CFI=0.732, TLI=0.704
303 The initial ‘barriers to innovation’ test illustrated that the global statistics were unacceptable, RMSEA = 0.107. Before omitting the low loading items, principal component analysis with varimax rotation was run for factor loading analysis (the barriers to innovation scale was designed initially from three sources). As a result, six factors were observed, and after excluding low loaded items, four factors remained. Then every single factor with its items were tested all together in Mplus. The fit statistics were not acceptable. If the results had an acceptable fit indexes then barriers to innovation had to be tested as a second-order factor analysis (Hoyle, 1995). However, the result of CFA for all single factors of ‘barriers to innovation’ showed an acceptable fit index. Therefore, the entire scale with twenty-two items were run and low loaded indicators eliminated if they did not result in acceptable fit statistics. This led to the result in Table 8.28.
TABLE 8.28: BARRIERS TO INNOVATION MEASURE RESULT Items Standardised SE Est/SE R2 Loadings 1 Lack of Financial Resources 0.818 0.019 42.233 0.646 4 Lack of engineering/technical talent 0.659 0.032 20.798 0.437 5 Lack of sales/marketing talent 0.896 0.012 72.461 0.794 12 Lack of Government Support 0.943 0.009 108.287 0.955 13 Lack of Regional Infrastructure 0.578 0.041 12.419 0.247 14 Inadequate/costly infrastructure 0.558 0.038 14.58 0.274 15 Cash Barriers 0.625 0.034 18.416 0.375 18 Lack of tax incentives 0.641 0.033 19.508 0.385 21 Bureaucracy 0.529 0.04 13.233 0.254 22 Exchange rate fluctuations 0.725 0.027 26.605 0.607
Model Fit: Chi Square=109.825 (df=34), RMSEA=0.080, SRMR=0.038, CFI=0.962, TLI=0.95
304 Reliability of the Mediator Factors
It was noted that the composite reliability and average variance extracted values of four mediator constructs namely absorptive capacity, international growth orientation, investment in-house R&D, and barriers to innovation showed satisfactory values, as shown in Table 8.29.
TABLE 8.29: RELIABILITY RESULTS FOR MEDIATOR FACTORS’ COMPONENTS Mediators Average Variance Composite Extracted Reliability (AVE) (CR) Absorptive Capacity 0.507 0.804
International Growth 0.589 0.877 Orientation Investment in in-house R&D 0.695 0.901 Barriers to Innovation 0.503 0.897
Having discussed the mediator factors, the next section reviews the innovation and financial performance components.
8.5 Measures of Performance
This analysis measures the CFA of three performance variables namely incremental, radical and financial innovation performance.
Measure of Incremental Innovation Performance
The data relating to the initial six observed items used to measure a firm’s incremental innovation performance is given in Table 8.30.
305 TABLE 8.30: INCREMENTAL INNOVATION PERFORMANCE MEASURES RESULT Standardised SE Est/SE R2 Items Loadings 1 Incremental innovation products 0.663 0.034 19.262 0.440 2 Incremental innovation process 0.778 0.026 29.45 0.605 3 Incremental innovation 0.574 0.040 14.368 0.329 technologies 4 Incremental innovation of 0.842 0.023 37.383 0.709 organisational structures 5 Incremental innovation of 0.251 0.054 4.662 0.063 strategic orientation 6 Incremental innovation of 0.786 0.026 30.056 0.619 management methods Model Fit: Chi Square=12.021 (df=9), RMSEA=0.031, SRMR=0.018, CFI=0.996, TLI=0.993
The initial incremental innovation performance test illustrated that the global statistics were acceptable. However, standardised loading of the fifth item was 0.251, and therefore this item was omitted from future analysis. Any element with a factor loading smaller than 0.4 was not considered for future analysis as it could not measure a specific construct
(Fabrigar et al., 1999; Hair et al., 2017). The remaining items were re-tested. A low R2 for the third item was noted and however its removal from the scale led to unacceptable values of fit statistics. This item was therefore retained, and the final result can be seen in
Table 8.31.
TABLE 8.31: INCREMENTAL INNOVATION PERFORMANCE MEASURES RESULT Items Standardised SE Est/SE R2 Loadings 1 Incremental innovation - products 0.660 0.035 19.063 0.436 2 Incremental innovation - process 0.777 0.027 29.289 0.604 3 Incremental innovation - technologies 0.573 0.04 14.327 0.329 4 Incremental innovation - organizational 0.845 0.023 37.498 0.714 structures 6 Incremental innovation - management 0.786 0.026 29.852 0.618 methods Model Fit: Chi Square=7.840 (df=5), RMSEA=0.040, SRMR=0.014, CFI=0.996, TLI=0.992
306 Measure of Radical Innovation Performance
The data relating to the initial four observed items used to measure a firm’s radical innovation performance is given in Table 8.32.
TABLE 8.32: RADICAL INNOVATION PERFORMANCE MEASURES RESULT Items Standardised SE Est/SE R2 Loadings 1 Radical Innovation - products 0.928 0.013 73.128 0.86 2 Radical Innovation - process 0.928 0.013 73.245 0.862 3 Radical Innovation - technologies 0.783 0.023 33.875 0.613 4 Radical innovation - organisational 0.414 0.047 8.907 0.172 structures, strategic orientations and management methods Model Fit: Chi Square=59.615 (df=2), RMSEA=0.286, SRMR=0.055, CFI=0.935, TLI=0.804
From the initial analysis of this construct the fit statistics were not acceptable with the
RMSEA of 0.286. The standardised loading for the fourth item is below 0.5. Also, this item had a very low R2. The item was removed from future analysis. As a result, the radical innovation performance construct was left with three indicators. Therefore, the
CFA for this factor’s variables was run with those of the direct public funding variables.
This was done since with only three indicator variables, the CFA model for radical innovation performance was just-identified. When run with direct public funding variables, the resultant model had an acceptable fit (see Table 8.33).
TABLE 8.33: RADICAL INNOVATION PERFORMANCE MEASURES RESULT Items Standardised SE Est/SE R2 Loadings 1 Radical Innovation of products 0.933 0.014 68.251 0.871 2 Radical Innovation of process 0.927 0.014 66.572 0.860 3 Radical Innovation of technologies 0.773 0.024 32.702 0.598
Model Fit: Chi Square=77.052 (df=26), RMSEA=0.075, SRMR=0.043, CFI=0.970, TLI=0.959
307 Measure of Financial Performance
The data relating to the initial six observed items used to measure a firm’s financial performance is given in Table 8.34.
TABLE 8.34: FINANCIAL PERFORMANCE MEASURES RESULT Items Standardised SE Est/SE R2 Loadings 1 organisation's return on investment 0.840 0.022 38.915 0.705 (ROI) relative to your competitors 2 organisation's sales growth relative to 0.826 0.022 37.088 0.683 your competitors 3 organisation’s total operating costs 0.522 0.042 12.293 0.272 relative to your competitors 4 organisation's market share relative to 0.563 0.04 14.009 0.317 your competitors 5 organisation's productivity relative to 0.771 0.026 29.215 0.595 your competitors 6 organisation's return on assets (ROA) 0.714 0.03 23.571 0.509 relative to your competitors Model Fit: Chi Square=24.482 (df=9), RMSEA=0.070, SRMR=0.023, CFI=0.983, TLI=0.971
Following the initial testing of financial performance, the result indicated an acceptable level of RMSEA 0.070. However, the standardised loading for the third and fourth items are above 0.5, but with a low R2 (0.272 and 0.317 respectively). Removing these items led to a significant decrease in the global fit indices, so it was decided to keep these for further analyses. The next section discusses the reliability of three performance variables.
Reliability of the Performance
It was noted that the composite reliability and average variance extracted values of all three performance constructs showed satisfactory values, as suggested by the extant literature (Bigliardi, 2013; Forés & Camisón, 2016; Gunday et al., 2011). Table 8.35 lists
CR and AVE values for the firm’s innovation and performance components.
308 TABLE 8.35: RELIABILITY RESULTS FOR PERFORMANCE Performance Average Variance Composite Extracted Reliability (AVE) (CR) Incremental Innovation 0.540 0.852 Performance Radical Innovation Performance 0.776 0.912 Financial Performance 0.514 0.860
Having confirmed each of the constructs in the proposed model through the use of CFA in Mplus, the second stage of analysis was carried out as recommended by Anderson and
Gerbing (1988).
8.6 Financing Innovation (FI) Framework Analysis
After completing the measurement of all the exogenous and endogenous constructs, and obtaining reliable measures, this section discusses the structural part of the model, following Anderson and Gerbing (1988). Firstly, in Figure 8.1 the fully mediated model is illustrated without controls. Following that, in Figure 8.2 the fully mediated model is depicted with controls, namely government ownership, industry, age and size. The details of these controls were discussed in chapter 6. Secondly, the detailed discussion of the individual hypotheses based on the outcomes of the FI model findings. Finally, a summary list of the hypotheses, and whether they were accepted or rejected is given in
Table 8.36 at the end of this chapter.
The overall measurement model with no controls gives satisfactory fit indices of RMSEA
= 0.064, Standardized Root mean square residual (SRMR) = 0.067, the comparative fit index (CFI) = .856, and the Tucker-Lewis fit index (TLI) = .845. Those values indicate a good fit between the model and the observed data.
309
,SRMR=0.067, CFI=0.856, TLI=0.845
.064 Model Fit: Chi Square=2899.334(df=1184),
ONTROLS
RMSEA=0 C
ITHOUT
W
ESULTS R
ODEL M TRUCTURAL S
: 1 . 8 IGURE F
310
TLI=0 819 SRMR=0.069,CFI=0.834, , , .067 RMSEA=0 Model Fit: Chi Square=3470.253(df=1355),
ONTROLS C ITH W ESULTS R ODEL M TRUCTURAL S
: 2 . 8 IGURE F
311 In Figure 8.1 and 8.2 those relationships shown by dashed lines are not considered significant. This illustrates that some of the specified hypotheses are not supported. The direction of the arrows denotes the direction of the assumed relationship between variables. The significance of the path coefficients corresponding to these hypotheses was tested using t-values (one-tailed), at 5 per cent significance level. The next section discusses the hypotheses related to the fully mediated model with control.
8.7 Discussion
This section examines each hypothesis in turn. The effects of controls, namely; age, size, ownership and industry are discussed under the relevant hypothesis.
Hypothesis 1a: The higher the level of access to direct public funding, the higher the level of absorptive capacity.
Hypothesis 1b: The higher the level of access to indirect public funding, the higher the level of absorptive capacity.
The survey data supports H1a and partially supports H1b, with standardised coefficients of 0.178, p = 0.012 and 0.147, p = 0.062 respectively. The result of this research implies that there is a significantly positive association between access to direct public funding and absorptive capacity. As noted in previous chapters, access to direct and indirect public funding is an essential determinant of the firm’s absorptive capacity. Absorptive capacity is one of the critical factors which significantly affects a firm’s innovation performance
(Arfi, Hikkerova, & Sahut, 2018; Božič & Dimovski, 2019; Lin & Hsiao, 2016; Escribano et al., 2009). However, lack of development infrastructure, economic turbulence, or firm- level financial constraints affect the acquisition of existing knowledge from other enterprises or institutions. Therefore, the role of government is crucial in this process in
312 supporting both public sector and private sector firm innovation activities, mainly through direct and indirect public intervention mechanisms when firms have difficulty in accessing finance (Casanova et al., 2018; Cincera & Santos, 2015).
The analysis indicates a significant association between public funding and a firm’s absorptive capacity. As discussed previously, governmental intervention in the economy has a significantly positive effect on firms’ absorptive capacity, especially in a transition period (Guan & Yam, 2015; Porter, 1990). As noted in Chapter 4, Uzbek government policies play an essential role in guiding science and technological capability development, as part of the national economic development strategy (Uzbek model and
Uzbekistan Development Strategy). This in turn creates external knowledge and infrastructure for firms. By enabling SMEs to engage in R&D and innovation, public instruments will facilitate the build-up of absorptive capacity (Limaj & Bernroider, 2019;
Radas et al., 2015). However, it is important to mention that only the size and age controls had a statistically significant positive effect on firm absorptive capacity. While industry and government ownership controls also show positive effects, these are not significant.
Hypothesis 2a: The higher the level of access to direct public funding, the higher the level of international growth orientation.
Hypothesis 2b: The higher the level of access to indirect public funding, the higher the level of international growth orientation.
In line with the extant literature (Hyytinen & Toivanen, 2005; Nuruzzaman, Singh, &
Pattnaik, 2018; Wu, Ma, & Liu, 2018), this research finds support for these hypotheses, providing a standardised coefficient of 0.215, p-value = 0.049 and 0.295, p-value = 0.009 respectively. There is a strong positive association between access to direct and indirect public funding and an international growth orientation. A similar result can be found in
313 the EU policy context, as direct state aids which support the manufacturing sectors have a positive impact on export performance, and consequently, on the economic growth of
EU states (Santos et al., 2016). This result, combined with the previous results
(hypotheses 1a and 1b), suggests that the Uzbek government is supporting internationally growth-oriented firms not only with direct and indirect public funding but also through having an impact on firm’s absorptive capacity. This may enable firms to maintain their international market share. As exporting firms are the main businesses which attract hard currency for the sustainable economic growth of the country (Karabag, 2018), these types of companies usually face more financial constraints, in contrast to local market-oriented firms, due to higher levels of competition in the global market (Nuruzzaman et al., 2018).
Many studies provide empirical support for government intervention policies by explaining how exposure to growth in diverse international markets, can significantly facilitate emerging market firms' new product performance (Wu et al., 2018; Zhang &
Wu, 2018). Governmental intervention through direct public funds provides subsidies by indirectly allocating budget to support firms via a range of fiscal supports (such as reductions in tax and customs duties), and providing incentives for technological upgrading for all sectors of the economy (Watkins et al., 2015; Wonglimpiyarat, 2011;
Yu, 1997). Unsurprisingly, government ownership controls had a significantly positive effect on international growth-oriented firms, in the case of Uzbekistan. This result sheds further light on the issue. As mentioned in earlier chapters, the majority of exporters within the chemical and machine-building sectors are large, old, and partially government owned. In other words, the Uzbek government is highly motivated to support export oriented firms both through direct and indirect public funding mechanisms.
Hypothesis 3a: The higher the level of access to direct public funding, the higher the level of investment in in-house R&D.
314 Hypothesis 3b: The higher the level of access to indirect public funding, the higher the level of investment in in-house R&D.
The survey data weakly supports these hypotheses, with a standardised coefficient of
0138, p-value = 0.064 and 0.114, p-value = 0.062 respectively. The results of the research imply that there is a weak positive association between the Uzbek government’s direct and indirect public funding mechanisms, with investment in in-house R&D. There could be various reasons for this. One reason can simply be that the majority of firms which participated in this research were small to medium in size. Lee et al. (2015b) contends, that smaller innovative firms have more constraints and difficulties in accessing finance since they tend to have riskier projects and business models, whereas, their more prominent counterparts do not. In other words, firms become more innovative if they can raise both the volume of capital annually for the development of all four types of innovation, and increase the volume of seed and venture capital to boost new innovative projects (Bergek et al., 2008; Kerr & Nanda, 2015). However not all SMEs are capable of this. The presence of capital market imperfections forces public policy to complement capital markets (Hyytinen & Toivanen, 2005; Owen et al., 2018; Zhao et al., 2018).
This result can be justified as the controls, namely government ownership, industry, and size have a significantly positive impact on a firm’s investment in in-house R&D. It would appear that different sectors, such as chemical and machine building, within the context of this study, have a differential impact on a firm’s investment in-house R&D activities.
On the other hand, this result validates that the machine building industry is more innovative, when compared with the chemical industry. This can be explained by the fact that the machine building industry was for a long time, under the radar of Uzbek governmental public support policies which are discussed in the Chapter 4. Also, governmental ownership and the size of firms have a significantly positive effect on a
315 firm’s investment in in-house R&D, and these ownership structures are more common in the machine building industry. This means that firms which are older and have a higher level of government ownership have a greater competitive advantage than privately owned SMEs. The model result suggests that further supports should be put in place by the Uzbek government in support of private SMEs.
Hypothesis 4a: The higher the level of access to direct public funding, the lower the level of barriers to innovation.
Hypothesis 4b: The higher the level of access to indirect public funding, the lower the level of barriers to innovation.
As noted in previous chapters, the role of government intervention in the economy, through direct and indirect public funding in promoting entrepreneurship, and facilitating technological start-ups, is a critical driver of innovation. A government intervenes through macro-level financial mechanisms by lowering or removing obstacles to innovation, and therefore improving the national entrepreneurial ecosystem (Casanova et al., 2018; Intarakumnerd & Goto, 2018). This can be achieved by reducing regulatory barriers, developing existing markets and shaping new ones; providing fiscal incentives; licensing technology derived from government-sponsored research; and implementing a legal environment conducive to private risk-taking (Casanova et al., 2018).
Only, hypothesis 4a is supported with a standardised coefficient = -0.177 and p-value =
0.009. It can be interpreted that, in the context of Uzbekistan, the direct public funding, which was offered, had a significantly negative effect on barriers to innovation. This is a good outcome as it means that access to funding is reducing barriers. Hypothesis 4b also had negative path effects, which also lowers the levels of barriers to innovation. However, this effect is insignificant, p-value = 0.357 with a standardised coefficient = -0.083. The
316 Uzbek government policy of indirect public funding negatively affected barriers which decrease the innovative performance of firms, but the result of such policy was insignificant, at least during the reference period 2013-2015. Also, there is widespread support for this result as the impact of governmental policies and regulation depends on the country’s well-functioning financial markets coupled with its economic development stage (Demirgu-kunt & Maksimovic, 2000). As the Uzbek economy is in a transitional period, the insignificant effect of indirect public funding on barriers to innovation is not a surprising result, which at the same time supports the key findings from the semi- structured interviews (see Chapter 5). Also, none of the controls had a statistically significant effect on the barriers. It is important to consider that, a high level of access to finance does not always guarantee firm innovation performance or a positive financial outcome if there are obstacles to innovation in the sector, geographic location, or particular part of the economy where the firms operate.
Hypothesis 5a: The higher the level of access to debt finance, the higher the level of absorptive capacity.
Hypothesis 5b: The higher the level of access to equity finance, the higher the level of absorptive capacity.
As noted in the previous chapters, external market sources namely debt and equity finance, have been identified as essential sources in the relationship between a firm’s absorptive capacity and its performance. Access to these sources may be a key determinant of competitive advantage (Barney, 1991; Thorsten Beck & Demirguc-Kunt,
2006). The foundation of a firm’s subsequent performance lies in its ability to generate, combine, recombine, and exploit knowledge (Grant, 1996). This usually depends on
317 firms’ capabilities and on their level of access to external market financial sources
(Carpenter & Petersen, 2002; Pellegrino & Savona, 2017; Pissarides, 1999).
This research strongly supports these hypotheses. The results imply that there is a significantly positive relationship between external market sources, namely debt and equity finance, and absorptive capacity, with standardised loadings of 0.283, p = 0.000 and 0.151, p = 0.036 respectively. This result suggests that a firm with a greater level of access to external market sources to invest in developing their absorptive capacity, is therefore more efficient and effective in innovation, resulting in superior performance
(Knight & Cavusgil, 2004). In addition, both the level of governmental ownership and the industry controls had insignificant effects on a firm’s level of absorptive capacity, whereas older and larger firms had a comparative advantage over newer firms or SMEs.
Hypothesis 6a: The higher the level of access to debt finance, the higher the level of international growth orientation.
Hypothesis 6b: The higher the level of access to equity finance, the higher the level of international growth orientation.
This research does not fully support these hypotheses with standardised estimates for H6a and H6b of 0.131 and 0.019, and with p-values = 0.052 and 0.790 respectively.
Hypothesis 6a is weakly supported in this research. There is a positive association between access to debt finance and an international growth orientation. Banks are the primary supplier of debt finance in Uzbekistan, and from this result, it can be interpreted that banks have a significantly positive effect on export-oriented firms. This may be due to export-oriented firms attracting government interest and thus more funding from financial institutions because of this support from the government. This is in line with the
318 extant literature (Chaney, 2016; Kim, 2016; Knack & Xu, 2017) and, this research strongly supports this hypothesis.
In contrast to hypothesis 6a, this research does not support hypothesis 6b. The analysis indicates an insignificant association between access to equity finance and international growth orientation. As discussed previously, it appears in the Uzbek context, the insufficient development of the equity market may be a primary cause for the poor effect
(Hottenrott & Peters, 2012; Hsu et al., 2014; Lewis & Tan, 2016). In other words, access to equity finance might not always be possible as the equity market in Uzbekistan was not sufficiently developed during the data collection period, 2013-2015. Another reason for this result might be that up to two-thirds of the respondent firms were new SMEs.
Almost nine out of ten of these firms operate in the private sector without government and foreign ownership. They are not a part of any holding companies who could provide equity finance. The government ownership control is the only factor which significantly and positively affected international growth orientation.
Hypothesis 7a: The higher the level of access to debt finance, the higher the level of investment in in-house R&D
Hypothesis 7b: The higher the level of access equity finance, the higher the level of investment in in-house R&D
The extant literature argues that external market sources are a key financing instrument for investment in firms’ innovation activities, especially when governmental grants and funds are not suitable or not available for innovative projects (Cole & Sokolyk, 2017;
Kerr & Nanda, 2015; Berger & Udell, 1998). A well-functioning financial system plays a vital role in supporting sustainable growth and meeting the financial needs of all firms.
In developed economies, stock markets and venture capital funds are the main financial
319 sources for firm investment in in-house R&D. Ideally, in transition economies with little public or private equity availability, bond and debt finance are present (EBRD, 2014;
Wonglimpiyarat, 2013; Zhang & Guo, 2019).
This research does not support these hypotheses, with standardised estimates - 0.067 and
0.005, and with p-values of 0.283 and 0.936 respectively. The result of the research indicates that there is no significant association between access to external market sources namely debt and equity finance with investment in in-house R&D (Hottenrott & Peters,
2012; Zheng, Moudud-Ul-Huq, Rahman, & Ashraf, 2017). As a result, combined with previous results (hypotheses 6a and 6b), it is suggested that equity finance markets are practically non-existent and the banking system of Uzbekistan is not sufficiently developed to support firm-level innovation projects. This result validates the key findings from the semi-structured interviews. Also, the result of controls confirms the outcome of the model. Government ownership, industry, and size controls, had a significantly positive effect on a firm investment in in-house R&D. Taking into consideration those mentioned above, the current (i.e. during the data collection period) National Innovation
System (NIS) and National Industry Policy (NIP) of Uzbekistan were designed to support all levels of firms demonstrating international growth-orientation and/or involved in import substitution schemes. These firms have a competitive advantage over other internal market-oriented firms. The Uzbek government, via fiscal and monetary policies, leveraged direct and indirect public funding mechanisms to support these firms. However, state funding neglects innovations in the early stage of development due to the high probability of non-performing loans (NPL). In sum, a poorly functioning financial market and weak governmental support means that young and small firms mainly rely on their internal finance and capabilities when compared to medium and large firms who have a higher level of access to external market finance due to their ownership structure.
320 Hypothesis 8a: The higher the level of access to debt finance, the lower the level of barriers to innovation.
Hypothesis 8b: The higher the level of access to equity finance, the lower the level of barriers to innovation.
This research does not support H8a and H8b. These results indicate an insignificant association between access to external market sources and barriers to innovation. Access to equity finance and access to debt finance have poor path negative effects on barriers to innovation, with standardised coefficients of -0.039, p = 0.255 and -0.067, p = 0.603 respectively. While the result is in the right direction, they are insignificant. As discussed previously, it seems that within the context this research, investment in a firm’s innovation activities and financing choices (Wang & Thornhill, 2010), depend on the degree of intervention barriers. Indeed, investment in innovation also depends on the level of innovativeness of a firm which leads to discrepancy among capital providers. The extant literature provides evidence that small and new firms are not only more likely to report higher obstacles than larger and older enterprises (Thorsten Beck & Demirguc-
Kunt, 2006), but also to suffer more from these obstacles. Interestingly, none of the controls had a significant effect on barriers to innovation.
As noted in previous chapters, in order to secure external market funding such as debt and equity finance (among others), firms face a variety of constraints. This depends significantly on a firm’s characteristics. In this process, a functioning financial market plays a central role in driving innovation performance through their ability to spur technological innovation (Hsu et al., 2014; Levine, 1997). However, without appropriate public policies and institutional reforms, financial markets cannot operate efficiently to boost firm-level innovation. The other key point is that the barriers to innovation and
321 lack of access to external market sources (including both debt and equity finance) are part of the overall business ecosystem. In a transition economy, the weaknesses in the macroeconomic and institutional framework conditions in the country, push the government to provide direct intervention to fix market failure. The Uzbek government owns the majority of the banks in the country and the equity market is not sufficiently developed to independently provide financial resources for business. However, outcomes of this research show that the government is on the right path as direct public funding measures (H4a) have a significantly negative impact on barriers to innovation. In other words, it signals a general willingness of the government to improve the overall business ecosystem in the country by preventing the barriers firm’s experiences in engaging in innovation activities. This result also fits with the analysis of the CIS data in chapter 6.
Hypothesis 9: The higher the level of access to internal finance, the higher the level of absorptive capacity.
The literature argues that firms with well-developed absorptive capacity evaluate the knowledge offered by the external environment more efficiently (Kostopoulos et al.,
2011; Xie et al., 2018). Firms better utilise R&D cooperation when they have committed investment for internal department and personnel for R&D (Cassiman & Veugelers,
2006). Firms usually prefer to use internal sources of finance rather than external financing as the latter can be very costly (Brown & Lee, 2014). Several factors shape firm’s decisions to allocate resources to financing innovation activities. Larger more established firms, in contrast to new start-ups, have more opportunity to attract external finance when internal reserves are insufficient to finance R&D. This research does not support this hypothesis. The result of the study implies that there is no significant association (a standardised coefficient -0.046, p = 0.456) between internal sources of finance and absorptive capacity. There could be various reasons for this. Firstly, most of
322 the firms which participated in this research were small to medium sized. Božič and
Dimovski (2019) contends that smaller-sized firms often do not have the resources, in contrast to larger counterparts, to invest in absorptive capacity type staff. Secondly, investment in absorptive capacity is often considered less important than investment in new technology, raw materials, or paying rent, especially for newly established firms (Lau
& Lo, 2019; Rush, Bessant, & Hobday, 2007; Zahra & George, 2002). The results also find that age and size have a significantly positive effect on absorptive capacity (see
Figure 8.3).
Hypothesis 10: The higher the level of access to internal finance, the higher the level of international growth orientation.
This research strongly supports this hypothesis. With a standardised coefficient of 0.160 and p = 0.009, there is a positive association between access to internal finance and international growth orientation. The extant literature confirms that access to finance has been found to be a highly significant factor in influencing firm activities and in promoting aggregate growth (Kersten, Harms, Liket, & Maas, 2017; Lee et al., 2015a). Specifically for illiquid foreign and privately owned firms, international growth orientation is strongly constrained by the unavailability of internal finance (Chen & Guariglia, 2013). Chen et al. (2013) identified that differentiating firms by ownership, both private and foreign firms’ productivity are affected by their cash flow, while state-owned and corporate firms, which are more likely to benefit from soft budget constraints, are not (Bhattacharya et al.,
2019). Governmental ownership control has a significantly positive relationship with the level of international growth orientation. By combining findings from earlier analyses
(H6a and H6b), internal finance plays a vital role in supporting the sustainable growth of firms via investing in international growth orientation. So far, insufficient development of the equity market and banking system in Uzbekistan results in suboptimal financing
323 for Uzbek business entities. There may be various reasons for this outcome. The literature suggests that firms undertaking innovative activities typically hold relatively large R&D related intangible assets such as patents and knowledge, which cannot be used as collateral (Chen & Guariglia, 2013). Therefore, these firms typically find it difficult to obtain loans from banks to finance their activities (Brown et al., 2009). Therefore, firms employ primarily internal sources of finance.
Hypothesis 11: The higher the level of access to internal finance, the higher the level of investing in in-house R&D
Consistent with the extant literature (Brown, Fazzari, & Petersen, 2009; Caggese &
Cuñat, 2013; Helfat, 1997; O’Brien, 2003; Scherer & Ross, 1990), this research strongly supports this hypothesis. With a standardised coefficient of 0.774, p-value = 0.000 there is a positive association between access to internal finance and investment in in-house
R&D. This result, combined with the previous result (hypothesis 10), suggests that internal finance plays a critical role for all levels of firms in Uzbekistan in financing innovation projects. This is especially true when the outcomes of these projects are expected to be implemented in a foreign market. Also, except for the age control, the other three controls had a significantly positive effect on firms’ investment in in-house
R&D. The Uzbek government stimulates firms through direct and indirect public funding mechanisms to invest in R&D. However, firm size, type of ownership, and industry are key criteria in attracting government sources. Otherwise, internal finance is the primary funding source for innovative development of these firms.
This result may shed more light on the results from hypothesis 9. Investment in in-house
R&D allows firms to more effectively use external sources of knowledge and, in turn, stimulate innovative output (Brown, Martinsson, & Petersen, 2017; Zhang & Guo, 2019).
324 R&D investment helps build firm-specific resources and capabilities (Helfat, 1994,
1997), which are strategic and thus can lead to superior performance (Phillips & Scherer,
2006; Zahra & Covin, 1995). In other words, firms which invest in the creation of in- house R&D are better able to recognise and evaluate external sources and, in turn, integrate and use their knowledge (Cohen and Levinthal, 1990). This may help to explain why hypothesis 9 was rejected.
Hypothesis 12: The higher the level of access to internal finance, the lower the level of barriers to innovation.
In line with the extant literature, the data does not support this hypothesis. The result of the research (a standardised coefficient = -0.078, p = 0.252) implies that there is no significant association between access to internal sources of finance and barriers to innovation. The literature suggests that access to internal finance can be significantly varied depending on a firm’s development stage, characteristics such as age and size and ownership structure. Such systemic barriers hinder firms growth (Elsas & Klepsch, 2019;
Heredia Pérez et al., 2018; Mohan, 2012).
This is not a surprising result when taking into account that the majority of the respondents were young and privately-owned Uzbek firms. Indeed, this illuminates the current entrepreneurial ecosystem in the country in regard to barriers to innovation. If it is assumed that most respondent firms had access to internal finance, this level of finance was probably insufficient to have a significant negative effect on existing barriers to innovation, in the market where these firms operated during data collection period 2013-
2015. The literature highlights access to finance as one crucial deterrent for firm-level innovation. It’s believed that understanding financial constraints, among others, is highly important due to the possible macroeconomic consequences. However, innovation may
325 also be hampered by other constraints which relate to a firm’s ability to absorb new technology (Cohen and Levinthal, 1990) and enhance competitiveness (Teece, Pisano, and Shuen, 1997). Indeed, regarding the macroeconomic environment, these findings draw a parallel between Hypotheses 8 and 12. Whereas, external market sources along with internal finance were not enough to impact and enhance the business ecosystem, due to insufficient development financial market.
Hypothesis 13a: The higher the level of absorptive capacity, the higher the level of incremental innovation performance.
Hypothesis 13b: The higher the level of absorptive capacity, the higher the level of radical innovation performance.
The survey data supports H13a but not H13b, with standardised coefficients of 0.210, p
= 0.000 and -0.012, p = 0.879 respectively. The results of this research imply that there is a significantly positive association between absorptive capacity and incremental innovation performance. However, the result of hypothesis 13b indicates that there is no significant relationship between absorptive capacity and radical innovation performance.
There could be various reasons for this. The literature suggests a firm's absorptive capacity is not a goal in itself but can generate critical organisational outcomes
(Kostopoulos et al., 2011). The core rationale is that absorptive capacity promotes the speed, frequency, and magnitude of innovation, which, in turn, can produce knowledge which becomes part of the company's future capacity (Yang & Tsai, 2019; Zahra &
George, 2002). In other words, in Uzbekistan, a firm’s absorptive capacity is the primary driver for incremental innovation performance, but for radical innovative change, absorptive capacity is not enough. The main activity of a firm, which is shown through the industry control, shows a significant effect on innovation, the standardised coefficient
326 of -0.186 and p = 0.043 respectively. This implies that there is an industry-level impact on innovation performance. As noted in previous chapters, the machine building industry of Uzbekistan is more innovative compared to the chemical industry and that may be the reason for differing results.
Hypothesis 14a: The higher the level of international growth orientation, the higher the level of incremental innovation performance.
Hypothesis 14b: The higher the level of international growth orientation, the higher the level of radical innovation performance.
As noted in previous chapters, international growth orientation is considered as the channel through which firms access complementary assets, innovative ideas, and technology developed by foreign counterparts in the global market (D’Angelo & Presutti,
2018; Nummela, Puumalainen, & Saarenketo, 2005). Here they are exposed to new and diverse opinions from multiple markets and cultural perspectives (Rose & Shoham, 2002;
Wu & Voss, 2015; Zahra & George, 2002). In short, firms operating in international markets face more competitive pressures than in the domestic market, they tend to intensify the search for innovative resources and invest more to enhance their innovative capacity (Moen et al., 2016; Wu & Voss, 2015).
This research strongly supports these hypotheses with standardised coefficients of 0.233, p = 0.000 and 0.179, p = 0.009 respectively. There is a positive association between international growth orientation and incremental and radical innovation performance.
This result, combined with the prior results, suggests that the positive effect of various sources of finance on a firm’s international growth orientation leads to significantly positive outcomes on incremental and radical innovation performance. Internationally diversified firms can use a broader range of resources available globally, which are often
327 inaccessible or unavailable to domestic firms (Kafouros et al., 2015). This may be a reason why hypothesis 13b did not give the expected result, even though a firm may have a strong absorptive capacity, but is limited to the domestic market, they lack the capability to acquire external knowledge from the global market which in turn could result in more radical innovative performance.
Hypothesis 15a: The higher the level of investment in in-house R&D, the higher the level of incremental innovation performance.
Hypothesis 15b: The higher the level of investment in in-house R&D, the higher the level of radical innovation performance.
The survey data supports H15a but not H15b with standardised coefficients of 0.597, p =
0.000 and 0.047, p = 0.440 respectively. The results of this research imply that there is a significantly positive association between investment in in-house R&D and incremental innovation performance. The firms which participated in this research had a significantly positive outcome from their investment in in-house R&D through incremental innovation.
However, the result of hypothesis 15b indicates that there is no significant relationship between R&D investment and radical innovation performance. There could be various reasons for this. The recent literature (Berger & Black, 2011; Casanova et al., 2018; de
Bettignies & Brander, 2007; Fernandez, 2017) emphasises that equity markets are the main financial supplier for innovation. However, equity markets face certain limits, especially for radical forms of innovation due to issues such as short-term pressures, imperfect monitoring, and stakeholders. Taking into consideration that the equity market is insufficiently developed in Uzbekistan, and access to equity finance had an insignificant effect on investment in in-house R&D (hypothesis 7b), the result of hypothesis 15b is perhaps not surprising.
328 Hypothesis 16a: The higher the level of barriers to innovation, the lower the level of incremental innovation performance.
Hypothesis 16b: The higher the level of barriers to innovation, the lower the level of radical innovation performance.
In accordance with the literature (Cincera & Santos, 2015; García-Quevedo et al., 2018;
Madrid-Guijarro et al., 2009; Uyarra, Edler, Garcia-Estevez, Georghiou, & Yeow, 2014), this research supports hypothesis 16a, with a standardised coefficient of -0.083 (p-value
= 0.030). The results of the research imply that there is a significantly negative association between barriers and incremental innovation performance. This result illustrates that barriers to innovation in Uzbekistan have a significantly negative effect on a firm’s incremental innovation performance. Firms operating in Uzbekistan face a number of obstacles (e.g. bureaucracy and exchange rate fluctuations) which limits their ability to remain competitive and profitable.
In contrast to hypothesis 16a, this research finds the reverse effect of hypothesis 16b, with a standardised coefficient of 0.122 (p-value = 0.025). The findings indicate a positive relationship between barriers to innovation and radical innovation performance, which is contrary to what was expected from the initial findings. Based on the wording of the hypothesis and its directionality, the result of the hypothesis must be rejected. However, this result is supported by several studies (Laursen & Salter, 2006; Naidoo, 2010; Story,
Daniels, Zolkiewski, & Dainty, 2014), and further qualitative research might shed more light on this issue. These studies argue that economic turbulence, social conflicts, and other crisis situations motivate radical changes. Radical changes are often needed to break stalemates and put firms on a path to survival in a crisis atmosphere (Bers, Dismukes,
Miller, & Dubrovensky, 2009).
329 Radical innovation refers to major changes in technology/knowledge which stem from the discovery of something new. Indeed, as suggested by the extant research (Forés &
Camisón, 2016; Oke, 2007; Schot & Kanger, 2018; Story et al., 2014; Zahra, 1996), in order to achieve radical innovation, firms often need to make a considerable investment in in-house R&D, and although the chances of success are lower the rewards are greater.
However, the result of this study indicates that the cocktail of barriers such as lack of financial sources, cash barriers, lack of government support, bureaucracy and exchange rate fluctuations among others (see Table 8.28) pushed firms during the reference period
(2013-2015), to make radical changes in their own business. If we consider that
Uzbekistan is in a transition period of economic development, this result is perhaps not surprising. Instead it may be transferable to the general characteristics of transition economies. A recent study on access to finance for enterprises in the Euro zone (European
Central Bank, 2015b) indicates that access to finance has become the least important barrier for the Eurozone enterprises. It is the external environmental barriers which were the most significant.
Hypothesis 17a: The higher the level of incremental innovation performance, the higher the level of financial performance.
Hypothesis 17b: The higher the level of radical innovation performance, the higher the level of financial performance.
This research strongly supports both these hypotheses, with a standardised coefficient of
0.7000, p = 0.000 and 0.180, p = 0.000 respectively. The result of the research implies that there is a significantly positive association between innovation performance, both radical and incremental, with firms’ financial performance. This result indicates that both radical and incremental innovations are essential aspects of a firm’s financial
330 performance. Extant literature argues that the success of innovation is not guaranteed, and a high input to innovation does not always positively affect financial performance (Baker
& Sinkula, 2005; Gatignon et al., 2002). By extension, recent data shows a positive relationship between innovation and financial performance (Bigliardi, 2013; Jansen et al.,
2006; Laforet, 2013). This research confirms that innovative performance is a significant factor in influencing financial performance. In other words, firms who engaged in higher incremental and radical innovation performance have higher positive outcomes to their financial performance.
Regarding the controls, the results of this study shows that there is no significant difference between a firm’s age, size, and ownership on financial performance. The industry control had a significantly negative impact, as mentioned in earlier chapters, the machine building sector is more innovative than the chemical industry, boosted by Uzbek government sectoral policy.
TABLE 8.36: RESULT OF HYPOTHESIS TESTING (WITH CONTROLS)
Standardised Structural Path (relationship) Est/SE P-value Result Loadings
access to direct public funding - H1a absorptive capacity 0.178 2.509 0.012 Supported access to indirect public funding - Weakly H1b absorptive capacity 0.147 1.869 0.062 Supported access to direct public funding - H2a international growth orientation 0.136 1.969 0.049 Supported access to indirect public funding - H2b international growth orientation 0.220 2.602 0.009 Supported access to direct public funding - Weakly H3a investment in in-house R&D 0.114 1.866 0.062 Supported access to indirect public funding - Weakly H3b investment in in-house R&D 0.138 1.853 0.064 Supported access to direct public funding - H4a barriers to innovation -0.177 -2.624 0.009 Supported access to indirect public funding - H4b barriers to innovation -0.083 -0.920 0.357 Not Supported
access to debt finance - absorptive H5a capacity 0.283 4.059 0.000 Supported access to equity finance - absorptive H5b capacity 0.151 2.098 0.036 Supported access to debt finance - international Weakly H6a growth orientation 0.131 1.940 0.052 Supported
331 access to equity finance - H6b international growth orientation 0.019 0.267 0.790 Not Supported access to debt finance - investment in H7a in-house R&D -0.067 -1.074 0.283 Not Supported access to equity finance - investment H7b in in-house R&D 0.005 0.080 0.936 Not Supported access to debt finance - barriers to H8a innovation -0.083 -1.138 0.255 Not Supported access to equity finance - barriers to H8b innovation -0.039 -0.519 0.603 Not Supported
access to internal finance - absorptive H9 capacity -0.046 -0.746 0.456 Not Supported access to internal finance - H10 international growth orientation 0.160 2.594 0.009 Supported access to internal finance - investing H11 in in-house R&D 0.774 10.188 0.000 Supported access to internal finance - barriers to H12 innovation. -0.078 -1.146 0.252 Not Supported
absorptive capacity - incremental H13a innovation performance 0.210 3.842 0.000 Supported absorptive capacity - radical H13b innovation performance -0.012 -0.152 0.879 Not Supported international growth orientation - H14a incremental innovation per 0.233 4.829 0.000 Supported international growth orientation - H14b radical innovation per. 0.179 2.620 0.009 Supported investment in in-house R&D - H15a incremental innovation per. 0.597 14.950 0.000 Supported investment in in-house R&D - radical H15b innovation per. 0.047 0.772 0.440 Not Supported barriers to innovation - incremental H16a innovation performance -0.083 -2.175 0.030 Supported barriers to innovation - radical H16b innovation performance 0.122 2.238 0.025 Not Supported
incremental innovation performance H17a - financial performance 0.700 15.577 0.000 Supported radical innovation performance - H17b financial performance 0.180 3.964 0.000 Supported
Table 8.36 shows the standardized loadings, Est/SE, and P-value. Some of the
hypothesised relationships indicate insignificant links (not supported) and some indicated
significant links (supported), or partially supported in the overall model.
8.8 Summary of Overall Findings
The primary goal of this research was to assess the impact of access to different sources of finance on individual firm levels of innovation and performance taking into account the effect of four distinct mediators. These mediators include three key internal
332 capabilities of a firm, and the barriers to innovation it faces. The majority of extant research has focused on micro/meso supports for innovation, however there is a significant gap in literature at the macro level. This study bridges this gap in research by conceptualising and testing the effect of macro-level financial support mechanisms on both innovation and performance constructs within a Sectoral Innovation System (SIS) context. The results show that access to finance across firm-level characteristics such as age, size and ownership differ between the chemical and machine building industrial sectors, and by a firm’s export status. Specifically, the results of this research demonstrate that an insufficient developed financial market puts pressure on the Uzbek government to intervene to the market through SIS measures. The outcomes suggest that financial constraints are particularly detrimental for firm-level innovation in companies with no exporting activities. The results emphasise the importance of a firm’s internal capabilities and barriers to innovation for successful innovation and financial performance. Finally, an outcome of this study indicates that a cocktail of barriers such as lack of financial sources, cash constraints, lack of government support, lack of regional infrastructure, lack of engineers, lack of marketing talent, bureaucracy and exchange rate fluctuations (see
Table 8.28) limited firms to innovate during the reference period (2013-2015). This latter point is perhaps unsurprising for a transition economy but is important to note.
Firstly, the differential impact of access to finance between machine-building and the chemical industry can be explained by sectoral differences in the type, combination and intensity of use of innovation inputs. The machine-building industry has had significant governmental industrial support for quite some time when compared to the chemical industry as discussed in chapter 4. This outcome emphasises the existence of a dual macro-level financial support mechanism, based on Sectoral Innovation System (SIS) characteristics, for the 351 respondent firms. This study finds different levels of firm- level investment in in-house R&D profiles, across sectors, as explained by the
333 significance of the control for industry in the model, and also from section 8.2 the descriptive analysis. These differences may be related to the success in innovative performance of machine-building industry firms, as this sector has had direct and indirect governmental support for quite some time. Currently, this sector relies more on inputs which are less dependent on the availability of funds through exporting, given that the raw materials for the industry are relatively abundant in Uzbekistan.
Secondly, the findings show that the issue of access to finance for non-exporting firms reflects the relatively lower productivity and financial performance of these firms. This in turn weakens their ability to overcome the sunk costs of innovation investments. In addition to this, non-exporting firms tend to lack access to the international financial market, and this can increase the impact of external financial constraints (e.g. access to bank borrowing and access to equity markets). This is because these lenders are less assured that these firms will be able to meet their debt obligations. These results shed light on the insufficiently developed financial market in both equity and debt finance in
Uzbekistan and drives the need for the Uzbek government to intervene in the market. The role of government is crucial in designing a robust platform including healthy financial institutions, a strong legal system and infrastructure, from which all firms can benefit.
This finding emphasises that low access to both external sources of finance (bank loans and equity finance) and internal sources of finance is one of the principal driving forces behind low innovation performance for a significant portion of firms in the sample. This research finds a significantly positive association between governmental ownership, size and industry controls with investment in in-house R&D. Furthermore, access to direct public funding and internal sources of finance had a significantly positive impact on investment in in-house R&D. This validates the findings from the semi-structured interviews (chapter 5) and the CIS results (chapter 6) that public policy in Uzbekistan focuses on removing obstacles to industrial development and fostering entrepreneurship.
334 Thirdly, this research validates that the internal capabilities of a firm such as absorptive capacity, international growth orientation, and in-house investment in R&D are vitally important for both innovative performance and financial stability. These capabilities specifically relate to the third objective, and its sub-objectives. This objective was the focus of this chapter. Objective 3 was to “Assess the impact of access to financial mechanisms on firm-level innovation and performance”. It had four sub-objectives: one for of the three internal capabilities and one for the barriers to innovation. These will now be dealt with in turn. The information in Table 8.36 will be relied on to generate the discussion.
Objective 3.1: to assess the impact of access to financial mechanisms on firm-level innovation and performance as mediated by absorptive capacity.
Objective 3.1 is about how absorptive capacity (ACAP) mediates the relationship between access to finance and forms of performance. This requires consideration of outcomes of H1a, H1B, H5a, H5b, H9, H13a, and H13b hypotheses which shows that only internal finance did not have a significant impact on firm’s absorptive capacity.
Firstly, to the second part of the mediating discussion. ACAP is a key factor for a firm to achieve superior incremental innovation performance as per H13a. H13b was not supported and therefore ACAP does not play a role as a mediator of the access to finance- radical innovation performance relationship. Both H1a and H1b (albeit weakly) for direct and indirect public funding are supported. Both H5a and H5b for access to debt and finance respectively are strongly supported. H9 is not supported thus finding that access to internal finance has no effect on ACAP. Thus, ACAP mediates the relationship between both forms of public funding and access to debt and equity finance and incremental innovation performance. Objective 3.1 is thus partially supported by the data.
335 Objective 3.2: to assess the impact of access to financial mechanisms on firm-level innovation and performance as mediated by international growth orientation.
The purpose of sub-objective 3.2 is to understand the influence of international growth orientation (IGO) as a factor which mediates the relationship between a firm’s access to finance, on its innovation performance. In this research, international growth orientation is identified as a factor critical to performance across many business entities. The summary of objective 3.2 is based on the outcomes of H2a, H2b, H6a, H6b, H10, H14a, and H14b. Interestingly an IGO positively affects both incremental and radical innovation performance as per the results of H14a and H14b. H2a and H2b, on direct and indirect public funding, and their effects on IGO are also both supported. This means that direct and indirect public funding have a significant effect on both incremental and radical innovation performance as mediated by IGO. H6a is weakly supported for debt finance and H6b is not supported for equity finance. As a result, it can be stated that debt finance has an effect on both incremental and radical innovation performance as mediated by IGO but the same effect is not present for equity finance. This lack of a result may be explained by the underdeveloped capital market in Uzbekistan. This result provides support for the recent findings of Hernández, et al. (2016), that authors found significant positive effects on a firm’s international growth orientation and overall performance. Furthermore, this results also sheds a light on the role of Uzbek government which plays a critical role on supporting export-oriented firms not only for the acquisition of knowledge to sustain their local business, but also to stimulate domestic firms to export and thus attract foreign currency.
Objective 3.3: to assess the impact of access to financial mechanisms on firm-level innovation and performance as mediated by investment-in house R& D.
336 The purpose of sub-objective 3.3 is to understand the influence of investment in in-house
R&D as a mediating variable in the relationship between a firm’s access to finance and its level of both incremental and radical innovation performance. Assessing this objective involves consideration of the following hypotheses: H3a, H3b, H7a, H7b, H11, H15a, and H15b. Firstly H15a is supported thus investment in in-house R&D has a direct positive effect on incremental innovation performance. This is perhaps not surprising.
However, H15b is not supported thus investment in in-house R&D does not have a direct positive effect on radical innovation performance. This may be due to time-lagged effects whereby investment in in-house R&D is for specific purposes, mainly related to incremental innovation and the benefits for radical innovation are not evident. As a result, there is no mediating effect of in-house R&D investment on the relationship between access to finance and radical innovation performance. H3a and H3b on the impact of access to direct and indirect public funding on investment in in-house R&D are both weakly supported. H7a and H7b are not supported so there is no mediating effect at all for in-house R&D investment in relation to debt and equity finance. H11 is strongly supported with a path coefficient of 0.774. As a result, the outcome of this hypothesis is that investment in in-house R&D is a mediating factor in the relationship between access to direct public funding, indirect public funding and internal sources of finance and incremental innovation performance. These results of this study reiterate the implication of the facts that equity finance markets are practically non-existent, and the banking system of Uzbekistan is not sufficiently developed to support firm-level innovation projects. This result validates the key findings from the semi-structured interviews.
Objective 3.4: to assess the impact of access to financial mechanisms on firm-level innovation and performance as mediated by barriers to innovation.
337 The purpose of sub-objective 3.4 was to understand the influence of barriers to innovation in the market, as a mediating factor, in the relationship between access to finance and both forms of innovation perforamnce. The evidence for this is based on the outcomes of
H4a, H4b, H8a, H8b, H12, H16a and H16b. The existence of barriers to innovation would be expected to reduce innovation performance and this was how H16a and H16b were hypothesised. Interestingly while this was supported for incremental innovation with a path coefficient of -0.083, H16b showed a positive coefficient of 0.122. Both were significant at the 5% level. This is an interesting finding in that the more barriers there are the better the level of radical innovation. It seems that radical innovation is spurred on by challenges, such as barriers, whereas incremental innovation is slowed down.
Bearing these results in mind, attention now turns to the impact of access to finance on the barriers. H4a was supported and showed that access to direct public funding reduced barriers to innovation. The same was not found for H4b on indirect public funding. H8a,
H8b and H12 demonstrated that access to neither debt nor equity not internal finance reduced barriers. This is a somewhat surprising result. Barriers to innovation therefore only mediate the direct public funding effects and while this is an overall positive significant effect for incremental innovation (-0.177 * -0.083 = 0.0147), it is a negative effect on radical innovation (-0.177 * 0.122 = -0.0216). As a result, we find that direct public funding helps incremental innovation performance through reducing barriers to innovation but conversely impedes radical innovation performance by the same mechanism. Perhaps firms who have good access to direct public funding have a different view as they have a more stable stream of income from government and therefore they focus more on incremental innovation and less on radical innovation. Either way it is a very interesting result.
338 8.9 Conclusion
This chapter opened with a descriptive analysis of the items underpinning the scales to be used in the structural model. This analysis showed that there was remarkably little variation by industry but that key constructs like innovation (radical and incremental) performance and financial performance had significant differences. The focus then turned to the measurement model for this thesis. This model showed the fit of each of the key constructs and tested their reliability and validity. Outcomes of this process showed that the core components of the structural model had a good level of measurement, as indicated by the fit and reliability statistics, and thus was a solid foundation for the structural model which was employed to test the hypotheses. The structural model fit well, and also when controls were added. In sum, the 17 hypotheses generated 30 testable statements (many hypotheses had an a and b component). Of these 30 research informed statements, 20 were found to be supported. Of the 10 unsupported statements, they mainly related to hypotheses about access to external (debt and equity) sources of finance. These results were expected given that the financial system in Uzbekistan is at a nascent stage when it comes to this type of financing. An interesting outcome was that for H15b were the finding was that radical innovation performance improves when there are higher barriers to innovation. This research shows that despite the presence of significant barriers to innovation, radical innovation performance is not stopped and that firms that must innovate still do. Funding for innovation is commonly referenced by the extant literature as a central element of Innovation Systems models. Extant research has focused on micro/meso supports, but there is a significant gap in the literature at the macro level, particularly with reference to a more thorough picture of the role played by governments in transition economies (Bruton et al., 2018). This thesis fills an important gap in the literature. The next chapter discusses the major conclusions, managerial implications and limitations along with future research directions.
339
CHAPTER NINE CONCLUSIONS
340
9.1 Introduction ...... 342 9.2 Contributions to Theory ...... 342 9.3 Limitations of the Research ...... 354 9.4 Recommendations for Future Research...... 355 9.5 Managerial and Policy Implications ...... 357 9.6 Conclusion of the Thesis ...... 365
341 Chapter 9: Conclusions
9.1 Introduction
This study makes two principle contributions. Firstly, in the literature on financial economics and the economics of innovation, the role of government as a dominant player in innovation support has been overlooked (Goldberg, 1962; Grobéty, 2018; Mazzucato,
2014; O’Sullivan, 2006). Few studies put forward a framework identifying the role of government in financing innovation and there is a lack of empirical data considering macro-level financial mechanisms. This study responds to this gap in the literature by conceptualising a holistic macro-level financing innovation construct and empirically testing it in two industries. Secondly, this study focusses on a transition economy, the
Republic of Uzbekistan where the government takes an active role in financing innovation. The empirical findings of this study have implications for managers, policymakers and future research, given that few studies on financing innovation have examined the policies essential for creating and enabling National Systems of Innovation
(NSI) in Asia (Eriksson, 2005; Mani, 2004; Wonglimpiyarat, 2013), and particularly in
Central Asia.
This chapter is divided into four main sections. The first section discusses the contributions to theory. Following this, the limitations of the research are outlined. The third section provides recommendations for future research. Finally, the thesis concludes with managerial and policy implications to advance our understating of firm-level innovation and performance through application of the Financing Innovation Framework proposed.
9.2 Contributions to Theory
This thesis contributes to theory in two major ways. Firstly, existing models to measure the impact of access to finance on firm-level innovative performance are limited
(Hottenrott & Peters, 2012; Kostopoulos, Papalexandris, Papachroni, & Ioannou, 2011;
342 Rajapathirana & Hui, 2018; Ruziev & Webber, 2019; Santos, Basso, & Kimura, 2018).
This stream of literature fails to consider key factors; specifically, firms’ internal capabilities, the specifics of key sectors and barriers to innovation in the market in which a firm operates. The second major contribution is that this study is among very few that analyse the role of government in the context of financing innovation (Hottenrott &
Peters, 2012; Kerr & Nanda, 2015; Lerner, Schoar, Sokolinski, & Wilson, 2015). While funding for innovation is a central element of both Innovation Systems and the National
Systems of Entrepreneurship (NSE) models, there is a significant gap in the literature on this topic, particularly in regard to the role played by governments in transition economies
(Bruton, Su, & Filatotchev, 2018). Each of these is outlined in turn below.
Impact of access to finance on firm-level innovative performance
The extant research has focused primarily on micro or meso-level supports for innovation
(Agénor & Canuto, 2017; Avnimelech & Teubal, 2008; Bostan & Spatareanu, 2018;
Bruton, Su, & Filatotchev, 2018), however there is a significant dearth of research addressing supports at the macro level. The literature does not currently offer a macro- level model capable of considering the effect of both external and internal factors on firms’ innovation and subsequent performance. This study makes a contribution by conceptualising and testing the effect of access to macro-level financial support mechanisms on both innovation and performance outcomes within a Sectoral Innovation
System (SIS) context. A two-phase methodology, spanning a qualitative exploratory phase followed by a large-scale quantitative study, enabled the identification of the factors that have significant influence on firm innovation and performance. The Financing
Innovation Framework was analysed using Structural Equation Modelling (SEM) using
Mplus 8.3.
343 The model proposed by this research is based on a review of literature in the finance and innovation disciplines, exploratory interviews, reviews of the Community Innovation
Survey (Ireland Central Statistics Office, 2014), and the ‘access to finance’ module of the
European Central Bank survey (European Central Bank, 2015). The framework developed here assesses the impact of access to finance on firm-level innovation and performance as mediated by four firm-level internal capabilities: absorptive capacity
(ACAP), international growth orientation (IGO), investment in in-house R&D (IRD) and barriers to innovation (BI). These four factors are used as mediators in the research model.
The first three factors represent a firm’s internal capabilities: firstly, absorptive capacity
(Escribano, Fosfuri, & Tribó, 2009; Lane, Koka, & Pathak, 2006); secondly, international growth orientation (Autio & Rannikko, 2016; Moen, Heggeseth, & Lome, 2016); and thirdly, investment in house R&D (Bergek, Jacobsson, Carlsson, Lindmark, & Rickne,
2008; Gunday, Ulusoy, Kilic, & Alpkan, 2011). The fourth and final factor concerns barriers to innovation (Cincera & Santos, 2015; Madrid-Guijarro, Garcia, Auken, & Van
Auken, 2009) in the market or region where a firm operates. The overall measurement model had a satisfactory level of fit. Findings from the model, as detailed in the prior chapter, indicate that the existence of macro-level financial support mechanisms significantly impacts innovation and performance outcomes through the mediating factors. These factors in turn illuminate the relationships between different sources of finance (governmental, external market and internal) and firm-level outcomes, as measured by both innovation and financial performance. The following sub-sections synthesise the impact of these factors followed by a short section discussing the implications for the underpinning theory of the Resource-Based View (RBV) and, firm financing behaviour over lifecycle stages within the context of the Pecking order theory
(POT) is also explored.
344 Absorptive Capacity (ACAP)
This research finds that there are significant positive relationships between both direct and indirect public funding and absorptive capacity, with standardised coefficients of
0.178 (p = 0.012) and 0.147 (p = 0.062) respectively. As noted in previous chapters, access to direct and indirect public funding is an essential determinant of firms’ absorptive capacity, and this outcome validates this effect. Furthermore, the results imply that there are significant positive relationships between external market sources of funding and absorptive capacity, with standardised loadings of 0.283 (p = 0.000) and 0.151 (p = 0.036) for debt and equity finance respectively. Furthermore, the thesis finds strong support for the relationships between absorptive capacity and incremental innovation performance, and between incremental innovation and firm financial performance, with standardised coefficients of 0.210 (p = 0.000) and 0.700 (p = 0.000) respectively. These results validate a chain of reasoning from the finance literature where a firm with a greater level of access to public and external market sources has the capability to invest in developing absorptive capacity, and is therefore more efficient and effective in their innovation activities, resulting in superior performance (Distel, 2019; Knight & Cavusgil, 2004).
Indeed, the findings from this research confirm, in line with the extant literature, that absorptive capacity is one of the critical factors which significantly affects a firm’s innovation performance (Arfi, Hikkerova, & Sahut, 2018; Božič & Dimovski, 2019; Lin
& Hsiao, 2016; Escribano et al., 2009; Yang & Tsai, 2019).
International Growth Orientation
As noted in the review of the industries surveyed for this research, the majority of exporters within the chemical and machine building sectors tend to be large, old, and partially government owned. The Uzbek government is highly motivated to support export oriented firms through direct and indirect public funding mechanisms. In line with the extant literature (Hyytinen & Toivanen, 2005; Nuruzzaman, Singh, & Pattnaik, 2018;
345 Wu, Ma, & Liu, 2018), this research finds a strong positive association between access to both direct and indirect public funding and the adoption of an international growth orientation, with standardised coefficients of 0.215 (p-value = 0.049) and 0.295 (p-value
= 0.009) respectively. Furthermore, this research finds a strong positive association between access to debt and internal finance with an international growth orientation, with standardised estimates of 0.131 (p=0.052) and 0.160 (p=0.009) respectively. In line with the literature, the results show international growth orientation as one of the key factors having a strong positive impact on both incremental and radical innovation performance
(Autio & Rannikko, 2016; Rajapathirana & Hui, 2018; Wadho & Chaudhry, 2018), with standardised coefficients of 0.233 (p = 0.000) and 0.179 (p = 0.009) respectively. As noted in prior chapters, international growth orientation is considered as the channel through which firms access complementary assets, innovative ideas, and technology developed by foreign counterparts (D’Angelo & Presutti, 2018; Nummela, Puumalainen,
& Saarenketo, 2005).
Investment in in-house R&D
The results show a significant positive association between investment in in-house R&D and incremental innovation performance, with a standardised coefficient of 0.597 (p =
0.000). Firms that participated in this research had a significantly positive outcome from investment in in-house R&D. However, there is an insignificant relationship between
R&D investment and radical innovation performance.
Economic theory validates public funding as the driver of radical innovation across large firms (Cumming, 2007; Mazzucato & Semieniuk, 2017; Munro, 2015). Mazzucato and
Semieniuk (2017) stress that when there are concrete market failures, in the case of innovation, successful policies that have led to radical innovations have been more about market shaping and creating through direct and indirect public financing, rather than
346 market fixing. The findings of this research support this explanation as public funding in the prioritised sectors under the concept of ‘mission-oriented’ industrial policies have created new technological and industrial landscapes which promote radical innovation by large firms. The findings of this research support this as direct public funding and internal sources of finance had a significant positive impact on investment in in-house R&D.
However, the findings show that access to these sources may not be sufficient for radical innovation performance. One reason might simply be that the majority of firms which participated in this research were small to medium in size. Lee et al. (2015b) contend that small innovative firms experience more constraints in accessing finance since they tend to have riskier projects and business models than their more established counterparts. In contrast, more established firms have a different array of challenges such as choice of market scope, competency and people issues for the development of radical products
(McDermott & O’Connor, 2002).
In order to achieve radical innovation firms need to make a considerable investment in in-house R&D (Benavente, Crespi, & Maffioli, 2007). The evidence suggests that there is an insufficiently developed market for both equity and debt finance, requiring the
Uzbek government to intervene. This research finds a significant positive association between controls for government ownership, size and industry sector with in-house R&D investment. The sectors examined in this study demonstrate different levels of investment in-house R&D, as explained by the significance of the control for industry in the model.
The results show that the machine-building industry is more innovative when compared with the chemical industry, potentially due to the fact that machine-building was, for a long time, one of the national priority sectors and was strongly supported by industrial policy.
347 Barriers to Innovation
Firms are an important source of both economic and social benefit for society. They make an important contribution in terms of job creation, innovation, and economic dynamism
(Acs and Audretsch, 1988; Acs et al., 2014; Davis et al., 1996). Throughout their lifecycle, firms face different obstacles to innovative development, particularly in emerging markets like Uzbekistan. Governments intervene to address market failures and shape new markets to ease economic turbulence (Audretsch et al., 2007). It is important to consider that a high level of access to finance may always have a positive impact on a firm’s innovation or financial performance despite the existence of barriers to innovation in the industrial sector or in the economy where a firm operates.
In line with the extant literature (Cincera & Santos, 2015; García-Quevedo et al., 2018;
Madrid-Guijarro et al., 2009; Uyarra, Edler, Garcia-Estevez, Georghiou, & Yeow, 2014), this research finds a significant negative association between barriers to innovation and incremental innovation performance with a standardised coefficient of -0.083 (p-value =
0.030). The findings show that there are various obstacles to innovation in Uzbekistan, which limits firms’ ability to remain competitive and profitable. This study found an unexpected result on the impact of barriers to innovation on radical innovation. The findings imply that there a positive relationship between barriers to innovation and radical innovation performance. It seems that barriers in the Uzbek market drove firms to adapt their approach. As highlighted in the literature, radical changes are often the main solution to surmounting a stalemate and putting the firm on a path to survival in a crisis (Laursen
& Salter, 2006; Naidoo, 2010; Story, Daniels, Zolkiewski, & Dainty, 2014). In line with this perspective, Chaminade and Edquist (2006) note that innovation processes are path- dependent over time and as a result, it is not always possible to know whether the potentially best or optimal path is being exploited. The Innovation Systems approach has its roots in evolutionary and industrial economics theory, embedding a fundamental tenet
348 that the system never achieves equilibrium, and therefore the notion of optimality is perhaps irrelevant in an innovation context.
Interestingly, radical innovation is, in this context, achieved through adversity and the higher the barriers to innovation, the more firms are pushed towards more radical forms.
Furthermore, the results of this study show that not all firms were capable of attracting public and external market finance to invest in-house R&D, unless they were not partially owned by government or international entities (see Chapter 4 for a discussion on the different forms of ownership in Uzbek industry). The outcome of this study indicates that the cocktail of barriers such as lack of financial sources, cash constraints, lack of government support, lack of regional infrastructure, lack of engineers, lack of marketing talent, bureaucracy and exchange rate fluctuations (see Table 8.28) forced firms during the reference period (2013-2015), to make radical changes to their business. If we consider that Uzbekistan is in a period of economic transition, this result is perhaps not surprising. The results may be transferable to other transition economies that share similar characteristics. A recent study by Maldonado-Guzman
(2017) shows that the effects of external environmental barriers are most significant when compared to a lack of financial and human resources. Nonetheless, it is important to highlight that the direct public funding with a standardised coefficient of -0.117 (p-value = 0.009), had a significant negative impact on barriers to innovation as government support reduces barriers to innovation. Furthermore, the effect of indirect public funding on barriers to innovation was negative, though insignificant, also contributing towards lowering the level of barriers to innovation.
The Uzbek government is supporting firms’ innovative activities through monetary, fiscal and industrial policies but these efforts were not always significant in terms of radical innovation outcomes, at least during the reference period.
349 Resource-based View
The outcomes of this research contribute to our understanding of how the Resource-based view (RBV) of the firm can apply to innovation, insofar as three specific resources
(absorptive capacity, international growth orientation and investment in in-house R&D) have a significant role to play. The RBV is a core theory within this research as it provides the justification for the use of internal resources as a foundation for innovation and financial performance. RBV examines the resources and capabilities which enable a firm to achieve superior financial performance while maintaining a sustainable competitive advantage, however, the theory does not consider the dynamics of the business environment, and thus has been criticised as being somewhat static (Kraaijenbrink et al.,
2010). According to the RBV, a sustained competitive advantage can be achieved if resources are meeting the criteria of being valuable, rare, inimitable and non-substitutable
(VRIN). Nonetheless, in this constantly changing environment, the competitive advantage derived from these resources is not constant or long-lasting (Barney, 1991;
Kraaijenbrink et al., 2010).
This thesis contributes to the RBV through the identification of the key internal capability factors which enable Uzbek firms in the chemical and machine-building industries to enrich innovation and financial performance. This thesis provides an empirical examination of the firm’s internal capabilities such as absorptive capacity, international growth orientation, and investment in R&D can create a competitive advantage to enable sustained innovation and financial performance. Furthermore, the research identifies a set of barriers that prevent a firm from innovating and assesses their impact. The contribution here is that resources are positioned as mediators within the Financing
Innovation Model and this thesis identifies that access to finance is an important driver of resource acquisition which in turn affects both innovation and financial performance.
350 The Financial growth lifecycle and Pecking Order Theory
This thesis contributes to our understanding of how the financial growth lifecycle theory within the pecking order theory (POT) can impact firm-level innovation in the SIS context. The POT suggests that firms have a particular preference in the order of capital they use to finance their endeavours whereas, under the financial growth lifecycle theory, finances are typically available at various stages of firm growth.
This thesis presents an empirical examination of these phenomena. Our approach is significantly different from that traditionally adopted in empirical investigations of firm financing, which examines the applicability of theories developed in corporate finance on panel data. Additionally, it presents data on internal and external sources of finance employed by firm owners and managers, typically unavailable, even in comprehensive secondary databases. This research finds that external financing sources are not consistent with the POT throughout firms’ life cycle for reasons of availability and access, ownership and industry. The research findings partially support the financial growth life cycle in that financing cannot be encompassed in a ‘one size fits all’ universally applicable model. These can be characterised by insufficient financial market development and/or strong government intervention through the SIS approach to boost certain industries that have a multiplier effect on other sectors and firm-level innovation.
This research finds that not only firm and sector-specific determinants influence a firm’s capital structure, but country-specific governmental financing factors do as well.
This research broadens our understanding that access to different sources of finance depends on project related risk, firm size, age, and information availability (Berger and
Udell, 1998) as is traditional in these studies. This research finds that growth orientation, ownership type, sector and barriers in a market where a firm operates are also considered as key factors (Riding et al., 2012) when accessing sources of finance. In addition, the
351 macroeconomic context of a country affects the choice of capital structure within institutional frameworks and financial systems. Last but not least, the thesis contributes to the stream of the literature emanating from POT (e.g. Allini et al., 2018; Faff, 2016) by demonstrating how industry effects and the nature of ownership can be decisive factors when accessing external finance. sources across a firm’s age and size.
Role of Government
The second major contribution is a focus on the role of government as an enabler of firm- level innovation through its role as a provider of direct and indirect finance. This particular role of government is neglected in the literature (Kerr & Nanda, 2015; Lerner,
Schoar, Sokolinski, & Wilson, 2015), and there is a dearth of studies in transition economies (Bruton, Su, & Filatotchev, 2018).
This research fills this gap by providing a comprehensive conceptualization of the impact of the role of government, as a source of finance, on firm innovation and performance as mediated by firms’ internal capabilities and barriers. Mazzucato (2014), taking an institutional economics approach, noted that the role of government is not only to fix market failure but also to shape new markets and institutions where all types of firms can gain equal benefit. This thesis contributes to this stream of literature emanating from the institutional economics literature (Angelucci, Missikoff, & Taglino, 2011; Dolfsma &
Seo, 2013) by demonstrating how government, through the provision of direct and indirect funding, can not only shape markets but also create institutions that provide support for firms to develop resources that will enhance their innovation and financial performance.
This research finds a significantly positive association between governmental interaction in the economy and a firm’s overall innovation performance, finding that the level of
352 government ownership had a significantly positive effect on the level of international growth orientation with a standardised coefficient of 0.104 (p-value = 0.000). This demonstrates that as government ownership increases, firms adopt a more outward- looking approach. This could be because with the security of government backing, firms feel that they have the space to take risks by entering new markets. SMEs that both innovate and export generate significantly greater sales growth than companies that do one or neither (Golovko & Valentini, 2011). As mentioned in the earlier chapters, the majority of exporters in both sectors are large, old, and partially government owned.
Interestingly, this research found that international growth orientation is a more significant factor than absorptive capacity and in-house R&D respectively, in the relationship between access to finance and innovation performance.
The evidence presented in Chapter 8 provided robust empirical support on the sector- specific nature of firms’ innovation activities and performance. The amount of resources devoted to the innovation process, the type of activity undertaken by firms to innovate and the technological content of the output differ greatly by industry. This result confirms the existence of sector-specific regimes which hold across the machine building and chemical firms in Uzbekistan. This justifies the existence of a differentiated SIS approach for innovation support in Uzbekistan. This expands our understanding of the role played by government, particularly in emerging markets, that is essential not only to the survival of individual firms but ultimately to a country's economic growth and stability. The outcomes of this study strongly point to the use of SIS as a key factor in enabling innovation at firm level. As highlighted in the literature (Hyytinen & Toivanen, 2005;
Owen, Brennan, & Lyon, 2018; Zhao, Xu, & Zhang, 2018), the presence of capital market imperfections forces public policy to complement capital markets. This research finds strong empirical support for this proposition.
353 A minor, but important contribution of this research, is the development of an instrument to assess access to finance. This instrument was used to assess the impact of access to finance on firm-level innovation and performance in the SIS context.
In summary, the Financing Innovation Framework developed in this thesis has several theoretical implications. This research advances our understanding of what factors contribute to firm innovation and performance. It focuses on the types of financial support required by firms, and how they are accessed by different actors in the financial system, to maximise innovative performance outcomes. The research creates a platform through which the evaluation of the role of government in financing innovation in specific sectors is made possible. Based on these arguments, the main theoretical contribution of this research is the development of a conceptual framework which is capable of assessing the impact of access to finance on firm-level innovation and performance as mediated by firms’ internal capabilities and the barriers to innovation where a firm operates.
9.3 Limitations of the Research
The findings of this study should be evaluated in light of a number of limitations. Firstly, the Financing Innovation Framework has been developed in the context of the Uzbek chemical and machine building industries. Accordingly, the economic, social and cultural background of Uzbekistan may have a significant influence on the attitude of business owners and managers towards the constructs in the framework. To address this limitation, future research could replicate the design in other countries with different cultural dimensions. This will help to determine the applicability and validity of the Framework.
Another potential shortcoming of the Framework is the population sample for this research drew primarily on manufacturing firms. Manufacturing industries share similar working procedures in most countries (Jin, Zhao, & Kumbhakar, 2019; Lyon-Hill,
354 Cowell, Tate, & Alwang, 2019; Madrid-Guijarro et al., 2009), however, the dynamics can be significantly different compared with other industries, such as the service or IT sectors.
It is important to emphasize, despite the industry-specific nature of technological regimes, and the globalization of scientific and technological activities, the direction and spread of innovation remain influenced by the economic, social and institutional framework in which firms operate (Chang, 2009; Høyvarde Clausen, 2013; Love & Roper, 2001). To address this limitation, the FI Framework developed in this research would be subject to adaptation in respect to firm types, sectors and the local economy. Uzbekistan is a transition economy and thus different in a variety of ways, not only from developed economies, but also from major emerging economies such as China or Central Asian countries (Sharma, 2012). Indeed, this study reflects a particular point in Uzbek history and, with a new president, some of the results may change should the study be replicated.
To address this limitation, the FI Framework developed in this research would be subject to adaptation in respect to firm types, sectors and the local economy.
The final limitation of the Framework pertains to the scope of the instrument for measuring the impact of access to finance on firms’ innovation and performance. The FI
Framework consists of twelve high level factors, all of them are latent variables.
Accordingly, the instrument could have been perceived as somewhat onerous by respondents thus perhaps reducing the response rate. Furthermore, this study only controlled for firm-size, age, ownership and industrial sectors. This was done in consideration of the length of the questionnaire. More control variables could be introduced to further test the reliability of the model.
9.4 Recommendations for Future Research
The research findings provide several new insights; however, they also indicate the potential for further research on the issues of access to finance and firm’s innovation and
355 performance. Access to finance and its effect on firm innovation and performance is an important topic, with significant theoretical and practical implications that to date have not received due attention. This thesis helps to establish foundations for further research in this area. Multiple avenues exist for conducting further research on the macro-level financing innovation context. Researchers can apply the framework proposed in this research to firms from other economies and sectors. Research findings from different settings would test the generalizability of the proposed framework and consequently enhance its reliability.
Future research is necessary to explore the role of R&D investment in the relationship between access to internal finance and absorptive capacity in the context of the FI framework presented in this thesis. Further research could also explore the relationship between access to finance and a firm’s innovation and performance in the light of industry networks that may exist. Political connections can also be an important consideration in transition economies especially given the way that Uzbekistan is governed. Access to finance for example may differ if the executive team of the organisation is politically connected. Further research might also explore the effect of specific financial interventions such as tax-free zones on innovation and performance. It is hoped that this research will stimulate further examination of this important topic.
Finally, in order to improve the validity of the findings, researchers might assess the effect of new policies in Uzbekistan, established by the newly instated President. This step would add more credibility to the findings. Additionally, a longitudinal study would facilitate observation on the causal effect of access to finance on firm innovation and performance as mediated by firms’ internal capabilities such as absorptive capacity
(ACAP), international growth orientation (IGO), investment in in-house R&D (IRD) and barriers to innovation (BI). In order to suggest causality, longitudinal studies support
356 stronger inferences and thus make observing changes more accurate (Kim and
Mauborgne, 1993, Lorenzoni and Lipparini, 1999, Hoffmann, 2007).
9.5 Managerial and Policy Implications
The macro-level financing innovation framework proposed in this thesis has several practical implications for firm managers and policy makers.
Managerial Implications
The extant literature confirms that access to finance is a significant factor in influencing firm activities and in promoting aggregate growth (Kersten, Harms, Liket, & Maas, 2017;
Lee, Sameen, & Cowling, 2015). Deficiencies are heavily influenced by the level of development of the financial sector, and specifically the level of availability of bank and risk finance. Financial constraints are frequently cited as the most significant barrier to innovation. Research indicates that SME access to non-bank sources of finance in
Uzbekistan is quite low (by international norms) and that this is particularly detrimental to the development of Uzbek SMEs (Oripov, 2018). While the availability of external sources of finance is seen to mitigate obligations for supporting innovative performance, the funding gap for young firms exerts persistent pressure on growth prospects and, when allied to the absence of seed funding, acts as a barrier to later rounds of investment
(McBride, 2014). This links to the challenge for SMEs in that the problems encountered, and the skills necessary to deal with them, change as firms grow, and thus the ability to anticipate and manage issues is one of central importance to on-going development. The
Framework proposed in this thesis highlights that access to finance drives the development of key capabilities that enhance both innovation and financial performance.
Therefore, it is of paramount importance for managers to consider ways in which to improve their firms' internal capabilities to boost growth and innovation. One solution, proffered by this thesis, is to focus on access to finance to drive development of
357 capabilities and reduction of barriers, and through this means ultimately enhance performance.
This thesis offers the potential for managers to consider methods to increase their firm’s level of performance. As highlighted earlier the ACAP, IGO and IRD are considered the main factors which impact firms’ innovation and overall performance. Managers should analyse these internal capabilities in terms of how they are operationalised within their organisations and identify if they may contribute to deficits in innovation performance outcomes. Being aware of the different sources of finance and how they impact on firm level internal capabilities is also important. Should a firm have choice between different sources of finance, then the outcomes of this model may help them decide which one would best boost internal capabilities in the drive to increase innovation performance.
The findings from this study show that for local market oriented private firms, it is a challenge to attract debt finance and/or public grants. One option would be to consider an element of government ownership. The subsequent increase in opportunity to grow may warrant the dilution associated with government ownership, especially if the deal is structured in such a way as to give the firm an exit mechanism.
The findings clearly indicate that export firms outperform non-exporters in attracting bank and government sources as these firms have strategic importance for sustainable economic growth (Karabag, 2018). On top of that, this research finds a strong positive association between access to all sources of finance (excluding the equity market, which is not, as yet, well developed in Uzbekistan) and international growth orientation and absorptive capacity. However, this research finds no impact of age, size, ownership or industrial sector on access to finance for international growth. It is important to emphasize that managers need to understand that firms can get similar economic benefits, in the
358 Uzbek context, if their main activity is also related to import-substitution or other industrial programmes.
It is well established that businesses seek to enhance their performance by means of management ability, including acquisition of external knowledge to adapt their strategies to changes in the environment (Geroski, 1995). There may be a perception, in particular by smaller firms, that banks will not lend to these firms. It is also possible that management of these firms are so busy managing their organisations on a day-to-day basis that they have insufficient knowledge of potential lenders. Due to these factors, firms are perhaps missing out on potential borrowing opportunities. As the results from this research show, funding is available, and firms can secure access if they are involved in industrial projects prioritised by the Uzbek government for economic sustainability.
Indeed, managers need to be aware that the Uzbek government is providing significant economic incentives including tax and discounted infrastructure to manufacturing firms who operate in Free Industrial Zones and/or the Special Industrial Zones in Navoiy and other industrial regions of Uzbekistan (see Chapter 4 for details of these zones).
In summary, managers should identify gaps in their firm’s internal capabilities that might be contributing to a deficit. The findings of this research show that these capabilities are important mediators between access to finance and innovation performance. This multipronged approach, although difficult to achieve in practice, would help to drive more favourable outcomes. This thesis demonstrates that each of the twelve components of macro-level financing is individually important, and they need to be synchronized to maximise value creation
359 Policy Implications
The results of this research demonstrate the impact of government policies for financial support for firm-level innovation in the chemical and machine building sectors in
Uzbekistan. This study finds that the number of obstacles in a market, or even the country, where firms operate results in lethargic innovation and sub-optimal growth of business entities. The following implications are drawn, primarily, from the quantitative phase of the study, in conjunction with the semi-structured interviews with policymakers, practitioners and academics.
Recent empirical studies have shown that access to finance is essential for all firms in that it fuels economic growth, exerting a positive influence on innovation (Brown, Fazzari, &
Petersen, 2009; Wang & Zhou, 2011). This research finds the characteristics of firms in relation to their access to finance for investment in innovation varies substantially. The findings clearly show that firms who were able to secure sectoral support also had access to other direct sources of government funding such as public grants, credits and access to funds for reconstruction and development (see Table 8.1). Small firms can experience difficulty with access to funding unless they are involved in special industrial projects, such as localization programs or production of export-oriented goods, which attract foreign currency. In comparison to private domestically owned firms, all large partially government-owned firms were shown to have a higher level of access to all sources of finance. The research shows some inequity in access, partial government ownership seems to confer advantages in terms of access to finance.
As discussed in Chapter 4, after the mid-1990s the Uzbek government adopted a long- term “picking winners” industrial policy. This policy facilitated the selection of priority sectors whose development would have not only the direct effect of increasing production and creating jobs but also a multiplier effect (CER, 2013b). The result of this study shows
360 that this active industrial policy shifting the country’s focus from producing raw materials to finished products with high added value has been successful. Firms involved in these industries are the most innovation-active and are predominantly large and medium-sized.
These firms are partially government-owned with foreign and/or local investors. The rapid growth of Asia’s tigers (Hong Kong SAR, Singapore, South Korea and Taiwan), and China, has given rise to optimism and justified trust in state-led innovation and industrial policies, which if correctly executed, can make a major contribution to economic growth (Stiglitz, Lin, & Monga, 2013). However, the other side of the coin has to be taken into consideration as prioritizing measures of market liberalization, enhancing fiscal sustainability and tax reforms, and promoting well designed financial institutions are also essential to sustainable development. Larger firms, in contrast to newly established firms, can finance R&D by using internal sources, employing capital assets as collateral for bank loans, or by raising equity finance (Brown, Martinsson, & Petersen,
2012).
This research finds that state funding mechanisms neglect innovations in the early stage of development due to the high probability of non-performing loans. These findings should inform policy insofar as young and medium-sized firms contribute to the country’s economic growth and sustainability as much as large enterprises, as very simply smaller firms become larger through growth (Mohan, 2012; Wang, 2018). The role of government in this process is central as it provides a leverage effect and regulates financial markets which allow firms access to finance from lenders to improve innovation performance. In sum, an ill-functioning financial system and weak governmental support for domestically orientated new firms and SMEs presents a blunt contrast to the financial sources available for innovation projects among larger, partially government-owned firms.
361 This study shows that there is no significant association between access to external market sources namely debt and equity finance with investment in in-house R&D. However, as expected, both incremental and radical innovation performance are linked to financial performance. The results demonstrate that if the level of financial performance is the same across varying firm characteristics (such as size, age, ownership and industry), small and young firms find it more difficult to obtain bank credit in comparison to medium, large and partially government-owned firms. The outcomes from the study confirm that equity finance markets are practically non-existent and the Uzbek banking system is not sufficiently developed to support firm-level innovation projects. Lending is more important to small and young firms’ innovation performance (Hall, Moncada-Paternò-
Castello, Montresor, & Vezzani, 2016; Ruziev & Webber, 2019), and this research shows that these firms are disproportinately disadvantaged by the ill-functioning market. The market for bank credit is not functioning efficiently. Small and young firms are more sensitive to the interest burden on loans (Guariglia, Spaliara, & Tsoukas, 2016). Because young firms, in particular, have difficulty obtaining long term credit, they are driven to accept shorter-term credit arrangements, which are unsuitable for funding long term innovative projects. This indicates that the market for bank credit is not functioning efficiently.
The current (i.e. during the data collection period) National Innovation System (NIS) and
National Industry Policy (NIP) of Uzbekistan were designed to support all levels of firms demonstrating international growth-orientation and/or involved in import substitution schemes. The results of this research point to the need for reforms in the banking system which can provide affordable short- and long-term credit to all groups of enterprises. In addition, public support for other sources of financing, such as equity financing in the form of venture capital, for small and young firms, would help mitigate against the disadvantages that these firms face in the market for bank credit, by diversifying the
362 sources of finance available. A functioning financial system plays a vital role in supporting sustainable growth and meeting the needs of all firms. In developed economies, stock markets and venture capital funds are the main sources of firm investment in in-house R&D (Carlin & Mayer, 2003). Ideally, in transition economies with little public or private equity availability, bond and debt finance are present (EBRD,
2014; Wonglimpiyarat, 2013; Zhang & Guo, 2019). Furthermore, with regard to new or existing industrial projects, policy measures should be introduced that boost the market knowledge of small and young firms, as well as training in the preparation of loan proposals. Given the variation in the severity of the financial crisis across countries, policy measures and instruments to improve SME access to public and external market finance should take into account country specific considerations.
As well as the improvement required in the banking system and equity market, the Uzbek government should address the quality of the Higher Education system. This thesis found that the scarcity of specialists such as technicians, engineers and marketing specialists were one of the main constraints identified in the barriers to innovation construct. This research shows that Investment in R&D has a significant positive effect on innovation and performance, but one of the key issues is that not all firms were capable of investing in in-house R&D due to their size, age and ownership structure, primarily perhaps because these firms are smaller and domestically owned. Policymakers should design a platform which motivates and supports industry-university collaborations (Filippetti & Savona,
2017). Public support for R&D collaborative projects is a standard policy tool, across
NISs, to enhance firm-university linkages and spur innovativeness and competitiveness
(Květoň & Horák, 2018). For instance, the Irish government specifically aimed to provide a skilled labour force for industries such as engineering, pharmaceuticals, medical, scientific instruments and software (Cooney, 2008) in order to address the lack of specialists in knowledge-intensive sectors. Efforts to boost levels of business R&D and
363 connectivity have also intensified, with a particular focus on indigenously owned and smaller firms. As a result, high levels of inward investment, including in the Higher
Education sector, have enabled Ireland to achieve rapid growth compared to other
European countries (Rios-Morales & Brennan, 2009). Firm–university R&D collaborations offer resource constrained SMEs access to resources available in university hubs and techno parks.
The goal for policymakers should consist of progressively shifting the model of industrial specialization towards knowledge-intensive sectors by adapting policy measures from developed economies considering the specific conditions of Uzbekistan. However, as
Niosi (2011a, p.1641) notes “the simple copying and pasting of institutions and policies from one context to another will not produce economic development or innovation”.
Different countries have different resource endowments and while the Irish case is interesting, it is quite different from Uzbekistan where the country has significant natural resources of value in the world economy.
The focus of this research was on the machine building and chemical industries, resulting in the SIS concept being deemed the relevant framework to facilitate the mapping of actors and innovation capabilities at the industry level (Kashani & Roshani, 2019;
Scordato, Klitkou, Tartiu, & Coenen, 2018). The SIS framework provides a methodology for analysis and comparison regarding sectoral transformations, structure and boundaries
(Malerba & Nelson, 2011; Malerba, 2005). This study, situated in the SIS context, indicates the importance of several factors which have influence on innovation and financial performance and allows the prioritisation of those factors based on the extent of their influence on implementation. In line with the nascent concept of National Systems of Entrepreneurship (NSE) which focuses on the dynamics of interactions between individuals and institutions by contributing to firm performance while considering the
364 sector (Acs et al., 2016; 2016a; 2016b; Acs, Estrin, Mickiewicz, & Szerb, 2018), policymakers should consider that small and young firms are critically important, in conjunction with larger enterprises, for the country’s ultimate sustainable development.
9.6 Conclusion of the Thesis
This thesis assesses the impact of access to different finance sources on firm-level innovation and performance, taking into account the effect of four distinct mediators among a sample of 351 Uzbek firms across the chemical and machine-building industries.
The data derived from self-administered questionnaires, and the findings from this study corroborate the major argument of this thesis. The extant research has largely focused primarily on micro/meso supports, however there is a significant gap in the literature at the macro level, particularly concerning a more thorough understanding of the role of governments in transition economies. This study responds to this gap in the literature by conceptualising a holistic macro-level financing innovation construct and empirically testing it in two industries in the Republic of Uzbekistan. The Financing Innovation (FI) conceptual model is generalizable and can be adapted to other economies, as Uzbekistan is only the research context in this study. The findings suggest that the government's role through NIS and SIS policies needs revision for optimal support of firm-level innovation in Uzbekistan.
This research is underpinned by aspects of Institutional Economics theory, Sectoral
Innovation Systems, the Resource-based view, Pecking Order theory and Financial
Growth Lifecycle theory. Bringing together these theories makes a unique contribution to the literature, as this thesis shows that they complement each other in explaining the data generated in this research study. Researchers, managers and policymakers can get benefit from this research as it validates the role of government in designing a robust
365 platform including healthy financial institutions, a strong legal system and infrastructure from which all firms can benefit.
The findings emphasise that insufficient low levels of access to internal and external finance (low levels of bank loans and equity finance in the Uzbek market) and internal sources of finance are principal driving forces behind low innovation performance. In line with the pecking order theory, internal financing is usually preferred when available, and debt is preferred over equity if external finance is required. However, this research finds that access to external financing sources is not consistent with pecking order theory, at sectoral level, during a firms’ life-cycle due to availability and access to particular financial sources, ownership and the nature of industry factors. This phenomenon can also be explained within SIS, for instance, if a firm is involved in specific industry programmes (e.g. import substitution) or is partially government-owned, a firm can have increased likelihood in raising funds for its innovation activities. This result is at odds with the hierarchical capital structure argument posited by POT and financial growth lifecycle theory across firm age and size. Furthermore, within RBV, access to finance also depends on a firm’s internal capabilities as a foundation for innovation and financial performance. This research finds that a combination of a firm’s well-developed internal capabilities, such as absorptive capacity, international growth orientation, and investment in in-house R&D, can create a competitive advantage that mediates access to finance and firm’s innovation and financial performance. The proposed conceptual framework broadens our understanding of the SIS concept and ultimately the results of this work can be used by the Government of the Republic of Uzbekistan in drafting legislation on innovation supports and funding
This research has several practical implications that serve as a basis for further developing the model of economic development of Uzbekistan. Institutional policymakers need to
366 realise that institutional constraints hamper financial intermediation and public policy effectiveness (Carlin & Mayer, 2003; Rakas & Hain, 2019). Examples of such constraints include an insufficiently developed capital market and banking system which cannot always provide appropriate sources of finance. Therefore, policymakers should develop a deeper understanding of the institutional conditions under which different intervention policies produce results.
In parallel, this research identifies the list of barriers including lack of financial sources, cash constraints, lack of government support, lack of regional infrastructure, lack of engineers, bureaucracy and exchange rate fluctuations, among others (see Table 8.15) that forced firms during the reference period (2013-2015) to make radical changes in their business. Perhaps firms with access to direct public funding would have a more stable income stream, while privately owned firms, to survive, have to implement radical changes in their main business activities due to those barriers. Therefore, the implication for policymakers is to ensure appropriate financial mechanisms that are essential for firms’ innovation and financial performance so that a variety of entrepreneurs can benefit rather than, and so that not just partially government-owned entities. Policymakers need to understand that direct and indirect public funding and internal sources of finance are the key initial sources for a firm to raise investment in innovation in developing economies. It is therefore important to design a roadmap-type system of policies including macro-level financial support mechanisms capable of boosting firm-level innovation at all stages of a firm’s lifecycle.
Uzbek government policies historically prioritised chosen sectors when it became independent from the former Soviet Union and supported export-oriented firms, managed to not only to acquire knowledge to sustain their local business but also stimulated domestic firms to export and thus attract foreign currency. Therefore, government
367 intervention in the economy is crucial for supporting firm-level innovation, at least in an
Uzbek context. However, it is worth highlighting that the market and the state are not alternatives for supporting firm-level innovation, but, on the contrary, are mutually dependent. The effective functioning of the market depends on the proper functioning of the state. While the strategy of ‘picking winners’ has served Uzbekistan well, the outcomes of this research suggest that a more inclusive level of support for firm-level innovation is needed, such as investment in Human Capital Development (HCD) and
Tacit Knowledge. This research validates that internal capabilities such as absorptive capacity, international growth orientation, and in-house investment in R&D are vitally important for both innovative performance and financial stability.
The stated limitations of this study suggest avenues for further research. Future research can apply the framework proposed to firms from other industries and economies.
Uzbekistan is unique and changing, yet it shares important features with other emerging economies. For example, these economies have a similar reliance on public sector resources and a correlated institutional void at the macro-level around financial support mechanisms for firm-level innovation. Research findings from different settings across similar industries would test the FI framework's generalizability and, consequently, enhance its reliability. Researchers may conduct this study in a longitudinal setting to be better able to comment on the causal effect of access to finance on firm innovation and performance as mediated by a firm’s internal capabilities (ACAP, IGO, and IRD) and barriers to innovation (BI). Further research could also explore the relationship between access to finance and the firm’s innovation outcomes and performance in the light of political connectedness and industry networks. Lastly that may exist. Finally, in order to improve the validity of the findings, future research can attempt to evoke responses by looking at the impact of Uzbek policies established by the recently appointed President.
368 This thesis represents contribution to the finance and innovation literature in general and the impact of access to finance on firm innovation and performance in particular. It is sincerely hoped that the findings can support successful outcomes for policymakers and innovative firms.
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428 Appendices
Author Definition
Joseph Schumpeter (1934) • Introducing a new product or modifications brought to an existing product; • A new process of innovation in industry; • The discovery of a new market; • Developing new sources of supply with raw materials; • Other changes in the organisation. Peter Druker (1954) • One of the two basic functions of an organisation (along with marketing). • Innovation is change that creates a new dimension of performance Thompson (1965) the generation, acceptance and implementation of new ideas, processes, products and services Howard and Sheth (1969) Any new element brought to the buyer, whether or not new to the organisation.
Mohr (1969) • The degree to which specific new changes are implemented in an organisation. • the function of an interaction among the motivation to innovate, the strength of obstacles against innovation, and the availability of resources for overcoming such obstacles Utterback (1971) an invention which has reached market introduction in the case of a new product, or first used in a production process, in the case of a process innovation Damanpour and Evan Broad utility concept defined in various ways to reflect a specific (1984) requirement and characteristic of a particular study. Kenneth Simmonds (1986) Innovations are new ideas that consist of new products and services, new use of existing products, new markets for existing products or new marketing methods. Dosi (1988) The search for, and the discovery, experimentation, development, imitation, and adoption of new products, new production processes and new organisational set-ups Damanpour (1991) Development and adoption of new ideas by a firm; Complete a task development in a radically new way. Evans (1991) The ability to discover new relationships, of seeing things from new perspectives and to form new combinations of existing concepts. King, N. (1992) is the sequence of activities by which a new element is introduced into a social unit, with the intention of benefiting the unit, some part of it, or the wider society. The element need not be entirely novel or unfamiliar to members of the unit, but it must involve some discernible change or challenge to the status quo Covin şi Slevin (1991), Innovation can be defined as a process that provides added value and a degree of novelty to the organisation, suppliers and customers, Lumpkin and Dess (1996), developing new procedures, solutions, products and services and new ways of marketing. Knox (2002)
429 Business Council Australia Adoption of new or significantly improved elements to create added (1993) value to the organisation directly or indirectly for its customers. Henderson and Lentz Implementation of innovative ideas. (1995) Nohria and Gulati (1996) Any policy, structure, method, process, product or market opportunity that the manager of a working business unit should perceive as new. Rogers (1998) Innovation - involves both knowledge creation and diffusion of existing knowledge. Van de Ven, et al., (1999) …the process of developing and implementing a new idea The European Commission Successful production, assimilation and exploitation of novelty in Green (1999) the economic or social environment. Boer and During (2001) Creating a new association (combination) product market- technology-organisation Bessant, Lamming, Noke, Innovation represents the core renewal process in any organization. & Phillips (2005) Unless it changes what it offers the world (product/service innovation) and the ways in which it creates and delivers those offerings (process innovation) it risks its survival and growth prospects. Hobday, M. (2005) a product, process or service new to the firm, not only new to the world or marketplace Oslo Manual (2005) third Innovation is an implementation of a new or significantly improved edition7 product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations.
This implicitly identifies the following four types: • Product innovation: the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics • Process innovation: the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. • Marketing innovation: the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. • Organisational innovation: the implementation of a new organisational method in the firm’s business practices, workplace organisation or external relations. Carlson & Wilmot (2006) innovation is the process that turns an idea into value for the customer and results in sustainable profit for the enterprise
7 Oslo manual (2005) definition of innovation used in this research. The Oslo Manual developed jointly by Eurostat and the OECD is part of an ever-evolving family of manuals on measuring and interpreting data related to science, technology and innovation.
430 Baregheh et al. (2009) Innovation is the multi-stage process whereby organisations transform ideas into new/improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace O’Sullivan & Dooley (2009) Innovation is the process of making changes, large and small, radical and incremental, to products, processes, and services that results in the introduction of something new for the organization that adds value to customers and contributes to the knowledge store of the organisation Kahn (2012) A new idea, method, or device. The act of creating a new product or process, which includes invention and the work required to bring an idea or concept to final form Trott (2012) Innovation = theoretical conception + technical invention + commercial exploitation Kumar (2013) a viable offering that is new to a specific context and time, creating user and provider value McKinley, Latham, & any novel product, service, or production process that departs Braun (2014) significantly from prior product, service, or production process architectures Oslo Manual (2018) fourth This 4th edition defines an innovation as: edition8 A new or improved product or process (or combination thereof) that differs significantly from the unit’s previous products or processes and that has been made available to potential users (product) or
brought into use by the unit (process). This general definition is given a more precise formulation for use with businesses. This definition uses the generic term “unit” to describe the actor responsible for innovations. It refers to any institutional unit in any sector, including households and their individual members. Innovation activities include all developmental, financial and commercial activities undertaken by a firm that are intended to result in an innovation for the firm. A business innovation is a new or improved product or business process (or combination thereof) that differs significantly from the firm's previous products or business processes and that has been introduced on the market or brought into use by the firm.
Source: Created by author
8 Oslo manual (2018) definition of innovation was designed recently. This fourth edition of the Oslo Manual takes account of major trends such as, the pervasive role of global value chains; the emergence of new information technologies and how they influence new business models; the growing importance of knowledge-based capital; as well as the progress made in understanding innovation processes and their economic impact.
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1. To date, which sectors of the Uzbek economy are the most promising regarding innovation? 2. Which industrial sectors are in the area of particular state interest? a. Can a firm based in these sectors count to the government support for their innovation activities? If Yes i. What do you think about how these government programs are doing for support firm-level innovation? 1. Any drawbacks of the Localization programs? 2. Evidence of particular technology being funded more. b. Do these programs differ regarding supporting innovation in both public ownership factories and the private sector? c. Do they all have the same level of access to government funds? 3. How do the government support systems work to select innovative projects? 4. Does the Uzbek government support firms focused on the domestic consumers' priority projects? 5. Uzbek government gives priority to the projects focused on domestic consumers, or highly-up focused on export-oriented products? a. Does there any obstacles for export-oriented firms? 6. How do current Financial Institutions (Banks, Stock markets etc.) support firmlevel innovation both for traditional business and for new technology-based startups? a. Evidence of government intervention when firms faced financial constraint for fueling their innovation. 7. What do you think are the main obstacles in Uzbekistan which are slowing down firms innovation activities? 8. In your opinion, what the weakness of the majority of Uzbek firms in terms of their innovation performance, or is only access to finance issue?
Note: All questions were asked in the Russian/Uzbek language
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