Filipino SMEs employ innovation model requiring least capital expenditure—study

When faced with strong competition, small and medium enterprises (SMEs) are more likely to innovate, but they favor forms of innovation that require the least amount of resources, including financial, according to the outcome of a survey conducted by the Asian Institute of Management (AIM).

The AIM survey conducted last year of 480 SMEs in Metro Manila and Calabarzon focused on whether competition enhanced or hindered innovation, and on the different barriers to innovation that SMEs face.

The study pointed to research showing that innovation is linked to positive firm outcomes such as increased productivity, improved financial performance, and increased competitiveness allowing the firm to adapt to tough competition. It also observed that limited innovation is one of the significant challenges that Filipino SMEs deal with.

The survey questionnaire considered five forms of innovation, and asked respondents if their firms implemented them: introduced a product or service new to the company; introduced a product or service new to the market; improved current products and services; improved process of production or service delivery; and improved marketing.

In terms of competition, 37% of respondents said they faced “high” or “very high” competition, 16% said they faced “low” or “very low” competition, and the remaining experienced “medium” competition. On average, respondents reported having six competitor firms.

The average year in operation of the enterprises was 14 years, and the average age of the owner was 52. Small firms comprised 86% of all respondents, with the rest being medium-sized companies. More than one in five respondents took out a loan in the past two years, and half engaged in at least one type of formal partnership with large firms, such as subcontractor, licensed manufacturer or distributor, or a joint venture or alliance.

Results of the survey indicated that 89% of all respondents implemented at least one of the five innovations mentioned, with the average firm implementing three innovations.

When faced with high degrees of competition, the most commonly implemented innovation was improving existing products and services, with 82% of respondents doing so, followed by improving the production process or service delivery (70%) and improving marketing (64%).

The least implemented innovations were introducing a product or service new to the market (42%) and introducing a product or service new to the firm (51%).

The study found that SMEs were “weaker on innovations that arguably require more resources, including financial capital­e.g. developing new products and improving existing ones­compared to innovations that generally require less resources, such as improving marketing strategies.”

It concluded: “The form of innovation most strongly associated with competition is improvement of the production process, followed by improvement in marketing. It is most weakly associated with the introduction of a product new to the market and with improvement of an existing product. The types of innovation with the strongest association with competition are those that require the least financial resources, as competition can shrink market share, which can potentially reduce profit and revenue.”

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