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Does innovation lead to Does innovation

lead to
performance? An empirical performance?
study of SMEs in Taiwan
Carol Yeh-Yun Lin and Mavis Yi-Ching Chen 115
Department of Business Administration, National Chengchi University,
Wenshan, Taipei, Taiwan
Abstract
Purpose – This study attempts to probe within a multi-dimensional perspective the nature and type
of daily innovation practices of small- and medium-sized enterprises (SMEs) located in Taiwan. The
relationship between innovation and organizational performance will also be explored.
Design/methodology/approach – Data of interest were collected through a telephone survey. From
the 2000 Directory of Manufacturing and Service Industries in Northern Part of Taiwan, companies
with a total employee number less than 200 (the definition of an SME in Taiwan) were the population.
Telephone calls to 877 firms were successfully completed with a response rate of 87 per cent.
Findings – Eighty per cent of the surveyed companies conducted some sort of innovation, the two
major types of innovations were technological and marketing innovations. Innovation has a weak link
with company sales. Administrative innovations have surfaced to be the most crucial factor in
explaining sales rather than technological innovations.
Practical implications – Creating a successful innovation platform to serve as a base for non-
technology-related innovations may prove to be the most critical catalyst to capitalize on innovation
efforts. The research results also provide some insights for companies that are not sure how to integrate
innovation into their business operations.
Originality/value – This study unveils the innovation practices of this novel economy and
particularly focuses on the less explored SMEs in an Asian context.
Keywords Innovation, Organizational performance, Small-to medium-sized enterprises, Taiwan
Paper type Research paper

Introduction
Innovation has been a dominant factor in maintaining worldwide competitiveness.
It fuels organizational growth, drives future success, and is the engine that allows
businesses to sustain their viability in a global economy (Gaynor, 2002). For companies
pursuing excellence in this era of hyper competition, restructuring, lowering costs, and
enhancing product or service quality are no longer sufficient. Porter and Stern (2001)
argued that companies must be able to create and commercialize a stream of new
products and processes that extend the technology frontier, while at the same time
keeping a step or two ahead of their rivals. Peter Drucker succinctly stated that every
organization needs one core competency: innovation (Gaynor, 2002; McDermott and
Sexton, 1998).
Innovation pressures apply to large companies as well as small- and medium-sized
enterprises (SMEs) (Vrakking and Cozijnsen, 1997). Scholars have noted that SMEs are
often more fertile than larger firms in terms of innovation (Afuah, 1998). Their
comparative advantages over large firms in innovation are their flexibility and speed of
response (Acs and Audretsch, 1990; Dodgson, 1993). As a result, SMEs generally make
a valuable economic and social contribution because of their innovative capacities. Management Research News
Vol. 30 No. 2, 2007
SMEs in Taiwan, which constitute about 97.8 per cent of business establishments pp. 115-132
(White Paper Book, 2005), are ideal targets for innovation study. Porter and Stern # Emerald Group Publishing Limited
0140-9174
(2001) said that Taiwan has made substantial investments in upgrading its innovative DOI 10.1108/01409170710722955
MRN capacities over the past decade and achieved large increases in patenting rates. The
statement was supported by the Industrial and Development and Investment Center,
30,2 Ministry of Economic Affairs (2004) reports that in 2003, Taiwan ranked fourth
globally in the number of US patent grants received, up from 11th place a decade
earlier and was surpassed only by the USA, Japan and Germany. Exploring innovation
practices of SMEs in Taiwan may have academic as well as practical value.
Innovation is a multi-faceted effort. Maravelakis et al. (2006) measured organizational
116 innovations based on product, process, and administrative innovations. Wolff and Pett
(2004) and Walker (2005) both compared the effects of product and process innovations
on firm performance. Han et al. (1998) explored two components of organizational
innovations (technical administrative). Brown and Eisenhardt (1995) found that the
majority of research in the innovation domain focuses on product innovation in a
manufacturing context. However, with increasing business dynamics, more and more
researchers are challenging this uni-dimensional approach (Miller, 2001).
From an organizational perspective, real innovation success resides in the
marketplace. Devising innovative marketing measures is essential to help
organizations transform good ideas and good products into sales revenue and profit.
Changing the rules of the game type strategic innovation has been found to be the key
of many successful market leaders (Markides, 1997). In addition, a company must also
strive to institutionalize innovation by establishing an appropriate culture, structure,
incentives, systems, and processes that facilitate innovation to occur as part of
daily business. Therefore, a multi-dimensional investigation of innovation, including
technological, marketing, administrative, and strategic innovation should be on the
research agenda.
Plenty of research have investigated different natures of innovations via probing
different levels of innovation adoption, for example, radical vs incremental, evolutionary
vs. revolutionary, discontinuous vs continuous, and so on (Garcia and Calantone, 2002).
Leifer et al. (2001) provided some evidence about the radical innovation-performance
linkage. Deowar and Dutton (1986) and Ettlie et al. (1984) examined radial and
incremental innovations. Therefore, the nature of innovations would be a dichotomous
categorization, encompassing radical and incremental innovations.
This study attempts to combine and probe the nature and type of the daily
innovation practices within SMEs in Taiwan from integrated and multi-dimensional
perspectives. The relationship between innovation and organizational performance
will also be explored. A potential contribution of this study is to unveil the actual
innovation practices of a recognized innovative economy – that of Taiwan – in the hope
of providing some insight for companies that are not sure how to integrate innovation
into their business operations. Another attribute of this research focuses on the less
explored SMEs characteristics in an Asian context.

Literature review
What is innovation? From a micro point of view, innovation is management discipline:
it focuses on the organization’s mission, searches for unique opportunities, determines
whether they fit the organization’s strategic direction, defines the measures for success,
and continually reassesses opportunities (Gaynor, 2002). Gaynor (2002) commented
that innovation does not require genius, but it does require a system-wide dedication to
pursue unique opportunities. Drucker (1998) is very explicit in stating that innovation
is work rather than genius; successful innovation requires hard, focused, and
purposeful work. Since successful innovation is achieved through everyday work, this
study sets out to investigate ‘‘down-to-earth’’ types of innovation rather than the Does innovation
‘‘genius-type’’ breakthrough.
In general, innovation research can be approached from the perspectives of an
lead to
individual, an organization, and a nation, focusing on personal traits, innovation performance?
management, and a nation’s source of competitiveness, respectively. Scholars from
various disciplines have explored innovation from different perspectives. They have
enriched this area of study and enabled other researchers to gain a better
understanding of the nature of innovation. A review of the relevant literature reveals
117
that organizational level innovation studies can be grouped into four research streams.
The first stream is concerned with types of innovation, including innovation typology,
its comparison (for example, Garcia and Calantone, 2002; Zaltman et al., 1973), and
illustrations of various types of innovation. Examples of the latter involve
technological innovation (for example, Cardinal, 2001; Damanpour and Evan, 1984),
administrative innovation (for example, Ravichandran, 2000), strategic innovation (for
example, Turock, 2001), and process and product innovation (for example, Bagchi-Sen,
2001; Trott, 1998). The second stream examines issues related to the diffusion of
innovations from various sources (for example, O’Neill et al., 1998). The third stream
investigates the antecedents or determinants of organizational innovations, such as the
influence of structures, processes, and people on the development and marketing of
new products (for example, King, 1990; Sorensen and Stuart, 2000; Trott, 1998). The
fourth stream adopts a consequence or result approach and explores the relationship
between innovation efforts and firm performance (for example, Damanpour and Evan,
1984; Damanpour, 1991; Li and Atuagene-Gima, 2001; Roper and Love, 2002). This
research focuses on the first and fourth streams stated above. The rationale is that the
innovation typology approach helps to portray daily innovation practices in a more
effective way for the purposes of this study. In addition, organizational performance
tends to be the ultimate goal of implementing innovation.
Innovation activities are generally categorized as either incremental or radical. The
distinction between these two different types illustrates how organizations approach
innovation in different ways. A cumulative series of minor changes or introducing
something similar to previous organizational practices is called an incremental or
routine innovation, whereas an abrupt major change or doing something markedly
different from what the organization had done before is called a radical innovation
(Nord and Tucker, 1987; Urabe et al., 1988; West and Farr, 1990). Although there has
been debate over which type of innovating activity is more important and effective, the
more astute managers understand the necessity for both. James (2002) said that timing
the introduction of radical innovations to stay ahead of competition, while
simultaneously utilizing incremental innovations to maximize profits is a major
challenge for contemporary business managers. Hamdouch and Samuelides (2001) also
reported that in the service industry, the innovation process is both cyclic and
cumulative, combining radical innovations and introducing incremental innovations to
fill the gap between two radical innovations.
In addition to the dichotomous categorization of innovations, Damanpour (1987)
suggested the inclusion of various types of innovation such as technological,
administrative, and ancillary innovations. Although technological innovation drives
most organizations, the proof of technological innovation resides in the marketplace,
which requires facilitating marketing and administration measures. Technological
innovation without comparable levels of innovation from all sectors of an organization
significantly reduces the benefits of investing in innovation (Gaynor, 2002; Miller,
MRN 2001). Although not all firms should be innovative in the same manner, several
scholars have suggested that innovation needs to be directed at new products or
30,2 services, new organizational structures or administrative systems, new process
technologies or new programs pertaining to organizational members for these
typically occur simultaneously (Drejer, 2002; Garcia and Calantone, 2002; Johannessen
et al., 2001; Trott, 1998). In addition to the above-mentioned factors, some scholars
placed special emphasis on the importance of strategic innovation, because it may
118 change the direction of the company and even the rules of the game in an industry
(Markides, 1997; Turock, 2001).
Examining how companies actually practice innovation may unveil the black box of
innovation and help translate it from a mere concept into action and competitiveness
(Drejer, 2002; Gaynor, 2002; Hussey, 1997). We first surveyed two layers of innovation
classification. The first layer examined the nature of innovation, for example,
incremental and/or radical. The second layer further probed four different types of
innovation, namely technological, marketing, administrative, and strategic innovations
for both incremental and radical innovations. The definitions of these four different
types of innovation will be provided in the ‘‘Measurement’’ section to avoid redundancy.
Furthermore, we investigated the relationship between innovation and
organizational performance. Previous studies of this link indicated mixed results, some
positive, some negative, and some showed no relationship at all (Capon et al., 1990;
Chandler and Hanks, 1994; Li and Atuagene-Gima, 2001). Damanpour (1990) argued
that the association between innovation and firm performance depends on the
performance measurement and the characteristics of a given organization. That is, the
utilization of objective or subjective performance indicators such as sales or self-
reported performance may lead to different research results. In addition, different types
or different combinations of innovation, such as technological innovation alone or the
combination of technological and marketing innovations may also result in divergent
organizational performances.
According to Pratali (2003), incremental technological innovations help improve
company competitiveness with the ultimate aim of increasing company value.
Incremental market innovation is about new ways of reading and serving current
markets, which ensures firms to provide appropriate offers and yields greater avenues
(Johne and Davies, 2000). In addition, Williams (1999) reported that innovative
marketing aims at increasing product consumption and has a positive influence on
firm sales. Furthermore, continuous work process innovation was regarded as the most
important action for improving the short-term profitability (Soderquist, 1996).
Terziovski (2000) also reported that an incremental strategy is the major driving force
behind any improvement effort. Apparently, incremental innovation leads to the
accumulation of day-by-day improvements and is the backbone of organizational
performance. Therefore, we predict that:
H1. Incremental innovation is positively related to organizational performance of
SMEs.
Adopting radical innovation has mixed results. Various scholars commented that
radical or breakthrough innovations provide the engine for long-term growth (Leifer
et al., 2001). Many small companies also succeeded in introducing more radical
innovations because of their genetic makeup (Stringer, 2000). However, some argue that
the linkage of radical innovation and performance is an S-curve shape because of
diminishing research effort and resource inefficiencies (Foster, 1986). In many cases, the
creative destruction effect of radical innovation may not be shown in a short term Does innovation
horizon and even release a negative impact on firm performance (for example, Freel lead to
and Robson, 2004). Although the current research is on relatively resource constrained
SMEs, we take an optimistic view and hypothesize that: performance?
H2. Radical innovation is positively related to organizational performance of SMEs.

Methodology 119
Obtaining systematic information from SMEs is a big challenge for researchers,
especially in Taiwan. Our past experience showed that in general, SMEs respond to
questionnaire surveys with great reluctance because lean staffing ties their employees
up and sometimes they do not understand the academic terminology in attempting to
respond to questions. To ensure sample representation, having been provided with a
government grant, we launched a large-scale telephone survey to collect the data of
interest and verbally explained the question items with a standard protocol.
According to Frey (1989), the advantages of data gathered by telephone far
outweigh any disadvantages. Lavrakas (1993) also reported the specific advantages of
a telephone survey: it is cost efficient, it speeds up the gathering of data, and it provides
the opportunity of controlling the quality of data. A major disadvantage is its
limitation on the complexity and length of the interview, because it is not easy to keep
an average person on the telephone for longer than 20 minutes (Lavrakas, 1993).
To facilitate the telephone survey process, we have limited the questionnaire items to
about 15 minutes of answering time, conducted 50 pilot surveys to detect potential
problems, hired business school students with a business sense as the telephone
interviewers, trained interviewers, and provided supervision to interviewers and
answered questions as they arose. All interviews were tape recorded and numbered to
control the quality of the survey and process (Groves et al., 1988).

Sample and data collection

Our target companies for investigation are SMEs. The definition of SME in Taiwan is a
company with less than 200 employees or capital less than 2.5 millions US dollars
(White Paper Book, 2000). Based on the Year 2000 Directory of Manufacturing and
Service Industries in Taiwan with less than 200 employees, we have successfully
telephone interviewed 877 companies out of 1,000 attempts by computer-assisted
random sampling. As a result, the response rate is 87.7 per cent. This paper presents a
partial study of a large project sponsored by the Taiwan SME Administration. To the
best of our knowledge, this is the first large-scale survey of its kind in Taiwan.

Measurement
Innovation. This study adopted the dichotomous incremental and radical innovation
as the first layer classification, and named it the ‘‘nature’’ of innovation. Each nature of
innovation was further categorized into technological, marketing, administrative, and
strategic innovations based on the literature review. These four were named as the
‘‘types’’ of innovation. Technological innovations were defined as introducing changes
in product, process, or service technology. Marketing innovations included a new
brand, new market, and new sales approach. Administrative innovations referred to
changes in the organization’s structure or administrative processes (Afuah, 1998;
Damanpour, 1990). Strategic innovations focused on measures to produce a sustainable
MRN competitive advantage and reinvent the rules of competition (Turock, 2001), such as
30,2 strategic alliances with competitors.
To facilitate responses, interviewees were first asked to indicate (yes or no) whether
their companies had ever adopted incremental and/or radical innovations (the
definitions of these two natures were briefly explained to the interviewees). If yes, the
types of innovation (technological – rated as 1, marketing – rated as 2, administrative –
rated as 3, and strategic – rated as 4) were further presented. Cues of each of the four
120 types of innovation were provided to facilitate respondents’ answers. Please refer to the
appendix for the standard protocol of the two innovation natures and four innovation
types used in this study. Respondents were then asked to point out the two most
frequently used innovations in their companies. The rationale for selecting two out of
four is to balance data richness and distinctiveness. Our past experience shows that one
answer limits the respondents’ selection. However, if we allow for all the four answers,
our respondents would likely select them all without putting too much thought on it to
save the trouble and thus bias the results. Since the aim of this government sponsored
research is to collect a set of base-line data probing the general practices of innovations
in Taiwan and innovation is a continuous task (Hargadon and Sutton, 2000), we have
phrased our question as ‘‘whether your company had EVER innovated’’. In addition, it
can remedy the time lag problem using telephone interview. In other words, we are
concerned more on the recency of idea, product or service rather than the time factor.
Organizational performance. Researchers generally use either respondent’s self-
reported performance or objective data such as sales, return on equity, assets,
investments (ROE, ROA, ROI), and profit to reflect organizational performance. For this
research, an objective indicator is deemed to be more appropriate as financial gain is
the ultimate concern of SMEs in Taiwan. However, most of the SMEs in Taiwan are
companies without public offering; therefore, their ROE, ROA, and ROI are not
available. As for profit, in Taiwan, it is regarded as a company secret which cannot be
revealed. Therefore, we adopted ‘‘company sales’’ of the surveyed year as the indicator
of organizational performance.
Control variables. Four organizational variables are also examined in this study as
control variables, namely: company size, company age, R&D source, and overseas
investment. We are aware that firm size and firm age may be the antecedents of
organizational performance (Cummings and Paramita, 1977; Delaney and Huselid,
1996; Huselid, 1995; Kalleberg and Leicht, 1991; Smith et al., 1986), at this time we
would like to explore them as controls to see whether they can be held constant as they
affect both innovation and performance according to the literature. Although some
scholars observed that SMEs are more innovative because of their flexibility and speed
of response (Acs and Audretsch, 1990; Afuah, 1998; Dodgson, 1993), some claimed that
larger firms are more innovative (Damanpour, 1996; Nord and Tucker, 1987),
apparently with more resources. Cummings and Paramita (1977) stated that the larger
the size of an organization, the greater the efficiency and effectiveness, and the
relationship enhanced organizational performance. Nevertheless, Hanna and Freeman
(1984, 1989) reported that large companies accumulate inertia which discourages
organizational change and competitiveness.
With respect to company age, ‘‘younger companies are more innovative’’ has been
well-documented (for example, Hurley and Hult, 1998). However, researchers also
reported that established SMEs have the propensity to accumulate innovative
knowledge and engage in more innovations than the younger ones (Garvin, 1983;
Sorensen and Stuart, 2000). In addition, Kalleberg and Leicht (1991) have noted that
organization’s age is generally positively related to its performance. Apparently, there Does innovation
exist divergent arguments about the relationship between firm size, firm age,
innovation, and organizational performance.
lead to
The rationales for selecting R&D source and overseas investment include that R&D performance?
is an important resource facilitating innovation (Acha et al., 2005) and competing in an
international platform may require more innovative measures to gain competitive
advantage (Mytelka and Barclay, 2004; Petit and Sanna-Randaccio, 1998).
In this study, company size refers to the total number of employees and company 121
age is the tenure of a company. R&D source inquires about whether a company mainly
adopts an in-house R&D, outsourcing R&D, or both. Overseas investment explores
whether a company has already had overseas investment, intend to invest or no
intention at all. R&D source and overseas investment are coded as dummy variables.

Results and discussion

Sample profile
As shown in Table I, 63.6 per cent of the responding companies are from manufacturing
and 36.4 per cent are from service industries. Persons responding to the telephone
survey were top level managers (40.2 per cent) (for example, owner, president, and
general manager), middle level managers (15.9 per cent), the key staff member in a
general manager’s office (31.2 per cent), and others (12.7 per cent) including accountant,
sales manager, and engineer. Generally, people of the first three categories and
accountants are highly involved in company operations. Engineers in manufacturing
and sales manager in service settings are influential and generally involved in routine
management meetings in Taiwan SMEs. Therefore, this data set can be deemed reliable
and valid for further analyses. Other company respondent characteristics include 57.3
per cent companies with less than 20 employees, 87 per cent of the companies with over
11 years of history, and 40 per cent of companies had less than US$1.5 millions annual
sales. More than half of the companies had ‘‘in-house R&D,’’ whereas about 40 per cent
outsource their R&D. As for overseas investment, 56.8 per cent had already invested in
overseas operations. The demographic information shows that our samples are typical
of SMEs in Taiwan, in terms of their small number of employees and sales.

Nature of innovation
Table II shows that about 80 per cent of the surveyed companies engaged in some kind
of innovation. Among them, 53.5 per cent had implemented both incremental and
radical innovations, 21.2 per cent had incremental innovations only, and 5.1 per cent
had radical innovations only. About 20 per cent (177 companies) of the surveyed
companies had never implemented any kind of innovation. For the innovation-
performance linkage, we have dropped these 177 companies from this analysis and
focused on the remaining 700 companies.
The stages of economic development in Taiwan may explain the nature of SME
innovations reported above. The evolution of Taiwanese SME manufacturers largely
follows the path of original equipment manufacturing (OEM), original design
manufacturing (ODM), and original brand manufacturing (OBM). Decades ago,
hundreds of thousands of small companies supported the center-satellite
manufacturing system in Taiwan (Chang, 2001; Lin and Zhang, 2005). Each small firm
had its own specialty and collaborated with other firms under the direction of a large
center company. At the OEM stage, the key to staying in business for a given company
was focusing on its own products to make itself competitive in terms of quality, price
MRN Characteristic Number Percentage
30,2
Industry
Manufacturing 475 63.6
Service 272 36.4
Positions of the respondents
122 Top-level managers
Middle-level managers
352
139
40.2
15.9
Key staff 273 31.2
Others 111 12.7
Number of employees
1-10 275 31.5
11-20 276 25.9
21-30 105 12.0
31-100 205 23.5
101+ 63 7.2
Firm age
0-5 14 1.6
6-10 101 11.5
11-15 300 34.3
16-20 296 33.8
21+ 164 18.7
Firm sales (in US$)
0-0.6 millions 120 19.6
0.6-1.5 millions 126 20.5
1.5-3 millions 110 17.9
3-15 millions 202 33
>15 millions 55 9
Source of R&D
In-house R&D 498 56.8
Outsourcing 348 39.7
Both 31 3.5
Overseas investments
Table I. Investing 514 56.8
Profile of the Intend to invest 90 10.3
responding SMEs No investments 273 31.1

and delivery. Innovation in various aspects was embedded in routine continuous

improvement. Over the years, some companies had been able to advance to the ODM
stage and came to design their own products. For those that excelled at the ODM stage,
original brand manufacturing and marketing their own brand products constituted the

Involved Not involved Total

Table II. Incremental innovation only 186 - 186 (21.2%)

Distribution of the Radical innovation only 45 - 45 (5.1%)
nature of innovation Both incremental and radical 469 - 469 (53.5%)
adopted by SMEs No innovation - 177 177 (20.2%)
in Taiwan Total 700 177 877 (100%)
next step. ODM and OBM enterprises required more radical innovation than those of Does innovation
OEM. A similar pattern ‘‘OEM-ODM-OBM’’ progression was also observed in service
industries. Many service firms copied the business model of foreign companies (similar
lead to
to OEM), such as food stores, apparel stores, and various service companies. At the performance?
initial stage, most of them were very small in a local area. As business grew, companies
developed their own unique services (similar to ODM). At this stage, generally service
lines were expanded and sometimes branches were set up, first in the same city and
afterwards in adjacent cities. Usually when a business expanded, competitors followed
123
the successful path and came to represent a threat. At a certain stage, marketing and
branding (similar to OBM) became concerns and more innovations were needed for a
national and international competitiveness. The composition of innovation exhibited in
Table II reflects actual innovation practices in Taiwan.

Types of innovations
In addition to the nature of innovation, we also probed the contents of innovation to see
the most commonly practiced types of innovation among technological, marketing,
administrative, and/or strategic innovations. Table III displays the frequency of different
types of innovation for both incremental and radical innovations. For incremental
innovations, the frequency ranking was technological, marketing, administrative, and
strategic innovations. In terms of radical innovations, the ranking was similar, except
administrative and strategic innovations were tied. Although more incremental than
radical innovations were practiced, the ranking of each was similar, indicating that as a
whole SMEs in Taiwan place more emphasis on technological and marketing
innovations. Technological innovations represent 41.3 per cent and 41.5 per cent of
incremental and radical innovations, respectively. In Taiwan, technological innovation is
generally perceived as more important, more urgent, and more tangibly shows a return
on investment. In addition, in the past, a very high percentage of Taiwanese SME owners
have technological backgrounds, which increases the likelihood of the occurrence of
technological innovation. Government statistics indicated that from 1981 to 2003, every
year higher education institutes in Taiwan had consistently produced around 40 per cent
of graduates with engineering and mathematics majors (Statistical Yearbook of the
Republic of China, 2003). This big pool of manpower was the source of SME owners in
the manufacturing booming stage in Taiwan.
Marketing innovations are 28.7 per cent and 34.3 per cent of incremental and radical
innovations, respectively. The higher frequency of radical marketing innovations may
explain that new brands and new markets require non-traditional marketing measures
to attract consumers’ attention. As mentioned earlier, marketing is becoming

Incremental innovation Radical innovation

Category type N Percent Ranking N Percent Ranking

Technological 416 41.3 1 326 41.5 1

Marketing 289 28.7 2 276 34.3 2
Administrative 164 16.3 3 101 12.6 3
Strategic 138 13.7 4 101 12.6 3
Total responses 1,007 804 Table III.
Frequency of types of
Notes: Respondents were asked to choose no more than two out of the four types of innovation. innovation undertaken
Frequency count based on 700 companies by SMEs in Taiwan
MRN increasingly important as Taiwanese firms gradually evolve into the ODM and OBM
stages of production or service. A government report further supports this finding that
30,2 Taiwanese SMEs consider strengthening their marketing abilities as a first priority
(White Paper Book, 2001, pp. 64-5). The result that marketing is gaining stature is also
reported by Motwani (1999) that French SMEs were increasing innovations in
marketing strategies. Yet, it is contrary to Huang et al.’s (2002) finding that Australian
SMEs frequently undertake production- or technology-related innovations, while
124 marketing innovations are their least practiced innovation. Varied research results may
reflect various innovation needs for different products, different industries, and
companies in different organizational life cycles.
Administrative innovations undertaken by Taiwanese SMEs are 16.3 per cent and
12.6 per cent for incremental and radical innovations, respectively. More incremental
administrative innovation is understandable, as radical administrative innovation is not
likely to happen unless organization-wide uprooting structural or process changes occur.
Strategic innovations are the least occurring type undertaken by Taiwanese SMEs.
Eppink (1997) observed that companies occasionally employ strategic innovations to
enforce their market strategy, such as re-positioning and differentiation through
acquisitions, mergers, joint ventures or strategic alliances. Strategic innovation is usually
costly, involves a great deal of risk and communication, and should only be taken when
necessary. Therefore, its minimal frequency is expected. A promising sign of this finding
is that at least strategic innovation is on the agenda and has gained some recognition.
The rankings of these four types of innovation are in concert with previous
reasoning about the evolution of economic development in Taiwan. Traditionally,
Taiwanese companies care most about technology or service advancement. When
advancing into the stages of ODM and OBM, marketing innovation takes on added
importance. Once companies become more and more independent and rely increasingly
on their own design and own brand product, administration and strategic innovations
become primary concerns.

Innovation and organizational performance

To answer the questions on whether innovation predicts company sales and what
types of innovation have more explaining power, we conducted hierarchical regression
analyses. Since our samples are from both manufacturing and service companies, we
first employed a t-test. Data analysis indicated that there is no significant difference on
the investigated variables between the two groups. Table IV exhibits two regression
models based on the retained 700 samples. The first model (R square 0.383) indicates
that larger companies and companies with investments overseas have more sales.
Model 2 adds four types of incremental innovations and radical innovations to Model 1.
The R square 0.411 is slightly higher than that of Model 1. The exhibited difference
shows that both ‘‘incremental administrative innovation’’ and ‘‘radical administrative
innovation’’ significantly explains ‘‘company sales’’ at the 0.05 and the 0.01 level,
respectively. The slight R square increase of 0.028 of Model 2 imply that innovation has
less impact on company sales than firm size and overseas investments. In addition,
contrary to the expectation that technological innovation may be the main source of
sales revenues, only incremental and radical administrative innovations positively
explain company sales. Generally speaking, hypothesis 1 and 2 have some support.
Although the rationale for our cross-sectional data has been explained earlier, we
know that dealing with the time lag problem may benefit to this study. Therefore, we
have exerted our best effort and tried to collect 2005 company sales with a five-year lag.
Predictor Model 1 Model 2 Does innovation
lead to
Control variables performance?
Firm size 0.591* 0.582*
Firm age 0.047 0.043
R&D sources
In-house R&D 0.049 0.032 125
Outsourcing R&D 0.068 0.052
Overseas investments 0.092** 0.091**
Investing 0.004 0.001
Intend to invest
Proposed direct effects
Incremental innovations
Incremental-technological 0.001
Incremental-marketing 0.020
Incremental-administrative 0.084**
Incremental-strategic 0.068
Radical innovations
Radical-technological
0.060
Radical-marketing 0.018
Radical-administrative 0.104***
Radical-strategic
0.034
F value 41.739* 19.773*
R2 0.383* 0.411*
Adjusted R2 0.374* 0.391*
R2change 0.383* 0.028**
F change 41.739* 2.419** Table IV.
Hierarchical regression
Notes: N ¼ 700; dependent variable: firm sales; *p < 0.001; **p < 0.05; ***p < 0.01, +p < 0.1 analysis results

As predicted, the follow up telephone calls (without the endorsement of Taiwan SME
Administration) resulted in poor responses, adding to the fact that ‘‘sales’’ is regarded
as a secret by more and more companies due to increasing competition over the five
years. In total, we have been able to collect 2005 sales from 37 companies only. The
correlation between 2000 and 2005 company sales of these 37 SMEs is 0.703 at the
0.001 level. The result provides us with some confidence that the problem of time-lag
may not be serious in this study.
In addition to previous studies (Capon et al., 1990; Li and Atuagene-Gima, 2001), this
research provides another piece of evidence that innovation does not necessarily result
in better company sales. This empirical result based on the bottom line criterion of
sales clearly indicated that innovation is not a panacea. Companies that have fantasies
about innovation need to face the reality that when all is said and done, the key may be
a system-wide dedication to hard, focused, and purposeful work achieved through
administrative innovation.

Conclusion and implications

Supported by a government grant, this study launched a large-scale telephone survey
and unveiled SME innovation practices of a recognized fast-growing and innovative
economy – that of Taiwan. This research approached the topic from a more
MRN comprehensive perspective by investigating different natures and different types of
innovation and their relationships with company sales. The research findings of this
30,2 study provide partial answers to the questions mentioned earlier on about how to fit
innovation into business operations.
Research result indicates that about 80 per cent of the surveyed companies
implemented some sort of innovation. It seems that innovation has become a way of life
in Taiwan. The innovation efforts may explain why Taiwan ranked fourth globally in
126 the number of US patent grants received. Our data analyses reveal that a successful
innovation does not necessarily require a radical change.
The most unexpected finding of this research is the role administrative innovation
plays in relation to company sales. This finding provides evidence of Drucker’s (1998)
comment that a system-wide involvement of all departments is essential to prevent
innovation failure. Another important finding is that ‘‘firm size’’ appears to explain a
major portion of company sales (Table IV). This result overruled our speculation that
by holding firm size constant, we would have a clearer picture about how various types
of innovation contribute to company sales. Since eight types of innovation together
only increase 0.028 explaining power, we have concluded that firm size should be
treated as an antecedent in future relevant research. With the comparatively large
sample size, this result provides a concrete addition to the extant literature that firm
size is a strong antecedent of company sales even in an Asian context.
In answering how to fit innovation into business operations, variables investigated
in this study have the capacity to be easily implemented in company routines. Three
managerial implications may be derived from the research findings as follows.

Pay more attention to administrative innovation

When innovation becomes a way of life, companies are not competing in terms of
innovations per se, but are competing for company-wide devotion to transfer that
innovation into competitiveness. Regression analyses within this study disclosed that
among various types of innovation, only administrative innovations in both
incremental and radical categories show their predicting power on company sales.
Furthermore, radical administrative innovation at the 0.01 significant level is more
powerful than that of the incremental one. This finding further supports the emphasis
of various scholars that innovation requires hard, focused, and purposeful work
(Drucker, 1998; Gaynor, 2002; Hargadon and Sutton, 2000). System-wide dedication
promoted through administrative innovation may play a key role in reaping the
ultimate benefits of innovation – real sales. Measures may include innovations in
facilitating relationships between people to accomplish the relevant innovative work
(King, 1990), innovative ways to drive an effective system-wide implementation of
policies and procedures, innovative leadership, communication, peer coaching, and
structural change.

Innovation through overseas investment

In this study, SMEs which had overseas investment perform better in terms of sales.
Competing in an international arena challenges the company to become more
innovative, because it is the key to stay competitive nowadays. Going global is a
daunting task for some SMEs that generally lack sufficient manpower, financial
resources, language ability, and international perspective. The finding that almost 60
per cent of the surveyed SMEs in Taiwan have already had overseas operations and
achieved better performance is very encouraging for those who intend to go overseas.
Consider alliance to increase organizational size Does innovation
Since ‘‘size’’ is the most powerful predictor of company sales, ‘‘alliance’’ may present a new
avenue for SMEs to increase the firm size and maintain a certain degree of autonomous at
lead to
the same time. The disadvantages of small companies have been well documented performance?
(Rothwell, 1989; Roper, 1997), yet the main reasons that economic entities in Taiwan
remain relatively small include first, a majority of the SMEs are family enterprises which
generally choose to stay small and staffed by family members only; second, the concern
over handing over controlling power to outsiders when company grows and goes for 127
public offering. With alliances, SMEs should be able to reach an economic scale as a
group and maintain internally autonomous as well. This research finding provides a
direction for the interested parties to pursue development that fit their needs and vision.
There is no doubt that the 21st century will be credited as the century of innovation.
The most revealing findings of this research are that innovation has a weak link with
company sales and administrative innovations have surfaced to be the most crucial
factor in explaining sales rather than technological innovations. This finding conveys
a strong message that innovation management has to be viewed differently. Creating
a successful innovation platform to serve as a base for non-technology related
innovations may prove to be the most critical catalyst of success.
As with every social science study, this study has research limitations. First, to
facilitate a successful telephone survey, many items were designed as ‘‘yes-no’’ polar
questions in place of a scale. Valuable information may have been lost with such simple
answers. Second, respondents’ subjective perceptions on the innovation practices of
their organizations are unavoidable. Third, with a large-scale quantitative survey, we
were unable to cover this topic as trenchantly as we would have liked due in part to
resource constraints.
However, this large-scale survey provides us with valuable information and posits
additional avenues for future research. First, further investigations on companies with
‘‘no innovation at all’’ are worthy of pursuit. Principles derived from traditional Chinese
business philosophy to stay small, refrain from change when the present practice
works, and avoid risk may be very different from the innovation concepts held by large
companies in the West. Second, the perception of time as a factor on innovation is also
an interesting approach to see how time plays a role in the innovation journey. Third,
innovation comparisons between SMEs and large companies may provide some
insight into this field of study. Fourth, country comparison in terms of innovation
should most definitely prove to be of great value.
Innovation is one of the core competencies of today’s business world. Those
companies that embrace it are more likely to excel in the ever-increasing competitive
business environment; those that are indifferent to it may gradually lose their ground
while competitors come to surpass them. This study disclosed the actual innovation
operations in a fast growing and SME-dominated economy. Hopefully, the finding that
the underemphasized non-technology innovations are even more crucial may draw
companies’ attention to reap the real benefits of innovation.

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Appendix: A standard protocol – definitions of innovation natures and innovation

types

Radical innovation
Radical or revolutionary innovation means a firm produces thoroughly new patterns of
organizational practices, or a firm makes a large-scale change to form novel innovativeness
comparing with previous practices.

Incremental innovation
Incremental or improved innovation focuses on making current organizational practices better.
New and improved organizational practices resulting from those small magnitude improvements
are similar with previous management actions.
MRN Technological innovation
Technological innovation encompasses product, service and process innovations. Product
30,2 innovation indicates improvements or changes of a product features, a product function, modeling,
material quality and packing. Service innovation is the delivery of new and improved services
distinct from products. Innovative service content and attitudes are also included. Process
innovation relates to operational processes of a firm, such as process reengineering, process
reduction or combination, and innovative production.
132
Marketing innovation
Marketing innovation includes new brands and extension of new markets. For example, brand
building, brand alliance, market reposition, market expansion, and so on.

Administrative innovation
Changes or improvements of organizational structures and administrative processes pertain to
the areas of administrative innovation. For example, innovative benefit policies, modification of
current company structure, transformation of management systems and so on.

Strategic innovation
Strategic innovation is concerned with organizational strategies which exert continuous
competitive advantages for companies. The components of strategic innovation include alliances
with competitors, alliances across industries, alliances with suppliers, outsourcing, and
relocation of a firm’s core competence.

About the authors

Carol Yeh-Yun Lin is a professor of the Department of Business Administration at National
Chengchi University in Taiwan. She received her PhD in Human Resource Development from the
University of Texas at Austin in 1992. Her research interests include strategic human resource
management, international human resource management, and intellectual capital. Carol Yeh-Yun
Lin is the corresponding author and can be contacted at: Department of Business Administration,
National Chengchi University, Wenshan, Taipei, Taiwan. E-mail: yehyunln@nccu. edu.tw
Mavis Yi-Ching Chen is a PhD student in the Business Administration Department at
National Chengchi University in Taiwan. Her current research interests include intellectual
capital, strategic human resource management, and organizational change. Mavis Yi-Ching Chen
can be contacted at: Department of Business Administration, National Chengchi University,
Wenshan, Taipei, Taiwan. E-mail: ycchen17@nccu.edu.tw

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