Academic journal article Innovation: Organization & Management

The Effect of Innovation on Financial Performance: A Research Study Involving SMEs

Academic journal article Innovation: Organization & Management

The Effect of Innovation on Financial Performance: A Research Study Involving SMEs

Article excerpt

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A key component in the success of industrial firms is the extent of their innovativeness. Since the last decades, as a result of intense international competition, fragmented and demanding markets, and rapidly changing technologies, innovation has become one of the most relevant factors for firms. In particular, it is widely recognized that innovation impacts on financial performance (Hult, Hurley, & Knight, 2004). Therefore, it is no surprise that the influence of innovation on performance has been a classical subject of analysis, with a number of empirical studies providing evidence of a positive effect (e.g., Damanpour & Evan, 1984; Schulz & Jobe, 2001). The results of innovation, in fact, provide a transitory competitive advantage that allows firms to obtain returns on innovation, such as higher sales and firm growth.

While having been the object of many studies, the relationship between innovation in small and medium enterprises (SMEs) and financial performance still requires clarification and further understanding. Based on these premises, in this study this relationship is investigated among Italian SMEs, by verifying also whether or not this effect changes according to the size of the company.

The paper strives to provide contribution to both research and practice. From a theoretical point of view, it reviews the literature in order to examine the ways in which innovation has been studied, with the final aim to extend our understanding of the relationship between innovation and firm performance of SMEs. The extant literature, in fact, provides numerous research on the relationships between innovation and financial performance of big companies, while still little attention has been paid to the smaller ones. Moreover, only a few papers refers to Italian companies. As for the practical implications, this analysis should contribute to our understanding of how to manage innovation in SMEs. Moving from the awareness that managers have to be innovative and maintain a continuous state of innovativeness to attain superior performance, results should show which factors related to the innovation developed by the company are more influencing financial performance.

The paper is organized as follows: theoretical background section reviews the literature on the main concepts of this research, that is innovation and financial performance, and presents the research hypotheses. Research methodology section presents the research methodology, with reference to the sample's characteristics, the data collection, the measures adopted in the conceptual model and the statistical analysis performed. The results section is dedicated to the description of the results obtained, while Conclusions and implications and Study limitations sections offer the conclusions and limitations.


Innovation and SMEs

Innovation is a complex phenomenon that involves the production, diffusion and translation of knowledge in new or modified products or services, or the development of new production or processing techniques. Broadly, the innovation process can be understood as a complex activity in which current and new knowledge is applied for commercial ends (Escribano, Fosfuri, & Tribò, 2009; Galende, 2006). As far back as the first study from Schumpeter (1934), the term 'innovation' found a broad appeal in literature, and a general definition is still unlikely to materialize. Similarly, the literature on innovation suggests that it is present in various forms, and numerous classifications are available (Bigliardi & Dormio, 2009).

Regardless its definition and classification, innovation is considered a firm's core value creation capacity and one of its most important competitive weapons not only for larger firms, but also for SMEs (Jong & Vermeulen, 2006). Schumpeter (1934) himself initially suggested that SMEs are likely to be the source of most innovation. …

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