The impact of technological capability on MSME innovation: a case study of Vietnam

ABSTRACT

This paper explores the dynamic complementary interaction between investment in technological capability and investment in specific innovation projects based on a decision model of innovation, using Vietnamese MSME data. The empirical results show that firm size, technological capability and current specific R&D investment have a positive impact on innovation. Firm age was positive but not significant, implying that conscious technological effort may be more important for innovation than passive learning by doing. The combination of significant economies of scale and technological capability imply that government assistance for firms with low technological capability maybe important, but government assistance is shown to be either insufficient or ineffective. Results from this paper suggest that government policy aimed at facilitating increases in firm size and providing technical extension services would be more constructive than merely providing R&D subsidies to MSMEs.

KEYWORDS:

• Technological capability
• MSMEs
• low technology trap
• technological change
• tackit knowledge
• learning and complementarity

Acknowledgements

This work was supported by the Catholic University of Korea, Research Fund 2020. This work was also supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2020SIA5A2A01041778). I would like to thank anonymous reviewers for constructive comments and Professor M. J. Kwon of Yonsei University for fruitful conversations. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Kwon (2008) is an exception, which applies the Kwon and Ha (2008)’s model to Korean data. The study finds that around 33% of sample SMEs subjected to study was in a ‘low technology trap

2 Such peculiarities of the nature of technological change in developing countries described by the TC scholars are well noted in the Annex A of the 3rd edition of the Olso Manual, and have contributed to the broadening of the concept of innovation in the 4th edition (OECD/Eurostat 2005, 2018).

3 For comprehensive reviews of the TC literature, see Dutrinet et al (2019) and Bell and Figuiredo (2012).

4 I would like to thank one of the reviewers for bringing this survey to the author’s attention.

5 The concept of innovation input (termed ‘innovation investment’) in this study is similar to the technological capability perspective in that it recognizes external knowledge sources and informal activities outside of the R&D system as important innovation efforts in developing countries. The study estimates the impact of predicted innovation investment on innovation output to capture not only visible innovation efforts but also latent efforts.

6 The empirical model abstracts away from specification of time elements for the sake of empirical tractability. This does not alter the main arguments or conclusions of the theoretical model. For technical details of the model, see Kwon and Ha (2018).

7 The three cities are Hanoi, Hai Phong, and Ho Chi Minh City. The covered provinces are Ha Tay, Phu Tho, Nghe An, Quang Nam, Khanh Hoa, Lam Dong, and Long An. The 2011 survey covers data from 2009-2010, the 2013 survey covers data from 2011-2012, and the 2015 survey covers data from 2013-2014.

8 For a descriptive analysis of the results of the 2015 Survey, see CIEM et al 2016, ‘Characteristics of the Vietnamese business environment: Evidence from a SME survey in 2015.’

9 Only one, three, and four firms are joint-stock-company with government investment in 2011, 2013 and 2015 surveys, respectively.

10 Despite macroeconomic instability and a large number of bankruptcies occurring in the aftermath of the 2008 global financial crisis, Vietnam was able to maintain an average GDP growth rate of 5.09% during 2009-2015. Further, profit rate of firms, which decreased from 4.02 in 2008 to its lowest of 3.13 in 2012, started to recover in 2013, reaching pre-recession levels by 2017. In particular, the profit rate in the manufacturing sector has sharply increased since 2013, and surpassed the profit rate for all industries as a whole (see Figure A1 and A2 in the Appendix).

11 Having innovated in 2009/2010 increases the probability of innovating again in 2013/14 by 4.36%. The Probit regression result with dependent variable Y = 1 if the firm innovates in 2013/14 and 0 otherwise, and innovation in 2009/2010 as the independent variable is reported in Table A1 in the Appendix.

12 For detail on how the TCI is constructed, see page 14–15.

13 Only 1 firm was established in 2013 and it did not respond to 2011 survey.

14 Estimation results with TCI excluding government assistance component are not reported here for the sake of space, but are available on request.

15 The same set of regressions have been repeated using the Probit model with robust standard error. The results are the same, with only slight changes in the coefficients, except that R&D is significant positive in all Probit estimations. These results are not reported in the interest of space but are available on request.

16 For a critique of Vietnam’s S&T policy in general, see Kingler-Vidra and Wade (2019).

17 For example, institutional reforms may be necessary to facilitate growth in firm size. A large number of small, low productivity, quasi-formal household business (HHBs) benefit from lighter regulation with respect to registration, book-keeping, tax report and payment as well as social security obligations, pitting their registered, formal SME competitors into disadvantage. HHBs are a unique form of business in Vietnam that came to be favored by entrepreneurs after Doi Moi. The upper tier HHBs are said to make ‘all possible efforts’ to evade being formalized which will force them to become more transparent (Le Duy Binh 2018, pp. 60–68).

Additional information

Funding

This work was supported by the Catholic University of Korea, Research Fund 2020, and the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2020SIA5A2A01041778).

Notes on contributors

Mikyung Yun

Mikyung Yun is a professor at the School of International Studies, The Catholic University of Korea. Her primary research interests are economic development, technological change, and international trade regime.