Innovative capabilities among SMEs in Malaysian manufacturing: An analysis using firm-level data

Abstract

SMEs are important in Malaysia because they form the bulk of all establishments in the country and are predominantly domestically owned and managed. The objective of this paper is to examine the innovative capabilities of SMEs and their level of innovation by applying an ordered probit model. The results suggest that for SMEs, competition is a key driver of innovation. In addition, younger and medium-sized firms tend to be more innovative relative to older, smaller firms.

Keywords:

• innovation
• manufacturing
• firm level analysis
• ordered probit
• Malaysia

Acknowledgements

I thank my supervisor, Prof Suresh Narayanan, for his advice and guidance in preparing this paper. Without his assistance, this paper would not have been possible.

Notes

1. Furthermore, no data were collected with respect to marketing or organizational changes.

2. According to World Bank (2005) firms were categorized into three groups depending on the proportion of foreign equity ownership. A firm was considered domestically owned firm there was no foreign equity ownership; if foreign equity was less than 30 per cent, the firm was considered to be a joint venture; and if foreign equity was 30 per cent or more it was assumed to be foreign owned. A dummy was used to separate foreign and joint venture firms from domestic firms.

3. Note that according to the definition adopted in UNDP (2007, p. 2) and the National Survey of Innovation (East Asia and Pacific Region, 2000) firms with more than 150 workers were considered large firms and were therefore not analyzed in this study.

4. Export orientation was entered in a continuous and a categorical variable. While the direction and statistical significance of the relationship with the outcome variables remained unchanged, regardless of the specification used, the categorical form revealed more information and was easier to interpret. A cut-off point of 10% of sales was utilized based on the World Bank (2005) categorization.

5. The age variable was also entered in a continuous and categorical form. The former was insignificant but the latter proved to be significant. The cut-off age was chosen based on the mean age of firms in our sample.