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Collaboration better than R&D for SMEs

University of Auckland Business School researchers say small businesses need to get used to the idea of collaborating with other companies if they want to boost their bottom lines. 

Innovation is key to economic growth, but new research suggests a powerful innovation strategy for small and medium-sized businesses (SMEs) is being overlooked, underused and misunderstood.

Small businesses are often wary of collaborating with outsiders to innovate, yet new evidence suggests collaborations boost innovation success. And mature firms have an even better chance of success if they train up their own staff as well as collaborating with outsiders to plug skill gaps.

The findings come from a research project involving 839 New Zealand small and medium-sized enterprises (SMEs), conducted by the University of Auckland’s New Zealand Asia Institute, based at the Business School.

It’s known that innovation is crucial for SME growth and survival, but many small businesses lack the breadth of skills and knowledge needed for developing, testing and refining new ideas. They’re also time-poor and want to know where they’ll get the best innovation bang for their buck.

Researchers drew on their earlier extensive survey of SMEs in manufacturing and service industries, called “Growing New Zealand Businesses”. They compared the three strategies that owner-managers in the survey said they used for innovation: training-only, collaboration-only, and combined collaboration-and-training.

They found:

- For young firms (15 years or younger), collaboration alone led to a positive impact on innovation – especially for high-tech firms

- For mature firms (over 15 years), both training and collaboration strategies were important for success

- Training alone gave no innovation boost to either young or mature firms

- Owner-managers with tertiary education are more likely to pursue a training strategy, and mature SME owner-managers with a tertiary education are more likely to use a combined strategy

“This study challenges the widespread focus on driving innovation with spending on patents and traditional R&D,” says researcher Dr Antje Fiedler, a lecturer in the Business School’s Graduate School of Management.

“SME’s are overly focused on R&D, which has a good chance of paying off in high-tech businesses but may not be so relevant to other kinds of businesses. The preoccupation with R&D may be fuelling a misperception among some owner/managers that it’s risky to collaborate with external partners if you haven’t formally protected your innovation.

“But our study shows that collaboration is a strong driver of innovation, especially for younger firms.”

In the study, “training” was defined as formal training, rather than on-the-job learning, and “collaboration” covered working together with other organisations including suppliers, customers, competitors, universities or research institutes, or private institutes and consultants. Innovation was measured by the revenue percentage accounted for by new or significantly improved products introduced within the past three years.

“We were surprised to find that training by itself doesn’t drive profitable innovation, regardless of the business’s age or industry,” says co-researcher Dr Ben Fath, also a lecturer in the Graduate School of Management.

“But the study clearly shows there’s still value in training, especially in non-high-tech industries. You need upskilled, switched-on people in your business to attract high-quality partners, and training also enables you and your staff to get the most out of the collaboration,” he says.

“There’s a popular idea of collaboration that says if you have a capability gap, you find someone who has those capabilities and engage in collaborative innovation or some sort of knowledge exchange. But we found that the most fruitful strategy for mature firms is to build up internal capabilities first through training, and continue to build them while you collaborate externally.”

The researchers say greater awareness of the benefits of collaboration is needed, and suggest creating platforms to foster collaboration by SMEs.

Researchers analysed the responses of 839 participants in the Growing New Zealand Businesses survey. The mean number of employees was 25, 45 percent of businesses were micro (1-9 employees), 40 percent were small (10-49) and 15 percent were medium-sized (50-249). Roughly the same number of businesses operated in high-tech and non-high-tech industries.

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