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External And Internal Factors To Consider For SMEs To Innovate Innovation has a wide range of meanings, and it is not necessarily linked to high technology.

By Marc Proksch

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Innovation has a wide range of meanings, and it is not necessarily linked to high technology. In the case of SMEs, innovation may require changes in organizational structure and culture and refer to changes in process and management and the kind of services rendered rather than to new products.

It also relates to improving efficiencies in supply chains, marketing and advertising, and business operation models. Innovation, as a concept, also applies to social entrepreneurship and responsible business practices.

Innovations for existing SMEs are usually incremental rather than radical. Radical innovations are pushed by new startups commercializing new ideas. It's important to remember that innovation rarely occurs in isolation; it's a highly interactive process of collaboration across a growing and diverse network of stakeholders, institutions, and users. Why is a strategy for innovation needed? Simply because it allows SMEs to optimize strengths and minimize weaknesses relative to competitors. A single set of recommendations is not appropriate for all SMEs, as anyone will attest, because their attributes and environments vary considerably but there is a wide range of innovation options that can serve different purposes at different times.

While no one option is right for all SMEs, innovation in products, processes, or services of varying type and degree can be appropriate for different SMEs in different industry sectors or product lifecycle stages. An important set of innovations relates to services SMEs can provide in addition to the product they deliver (e.g. maintenance and provision of spare parts).

Marc Proksch speaking on an SME innovation panel at Global Trade Development Week in Dubai, UAE


1. What type of climate is needed for innovation to happen?

There's a tremendous need for an entrepreneurial spirit and mentality based on risk-taking, coupled with an enabling environment. It's important to remember that not every culture is innovation-minded.

2. Where is your country's competitive advantage?

Countries need to determine where they have competitive advantages. Innovation needs to be focused in certain sectors, including services. The main drivers are spread of private sector driven global value chains (GVCs) and government-driven foreign trade agreements, such as Trans-Pacific Partnership (TPP). Supplier SMEs may need to undertake innovation as their customer Transportation network companies (TNCs) innovate and adopt new standards and product specifications.

3. What constitutes an enabling environment?

One that has a high ranking on ease of doing business, high level of education and skills development, available finance in the form of venture capital, government policies that support innovation and entrepreneurship and champion the free flow of information and ideas, etc. Also, a market economy environment characterized by a high level of competition/rivalry. A proper competition policy must be in place for SMEs to thrive.

Huawei headquarters

4. What types of frameworks and schemas should be in place?

Countries need to possess the necessary infrastructure to promote innovation-based SMEs. Provision of business services is also important. Business development services help effective access to laws (national and FTAs), accounting, taxation, regulations, market intelligence, training, business development, financial sources etc.

5. Is your country's established policy set up to foster SME?

Possible policy options include establishment of high technology zones and incubator programs, strengthening of national and subnational innovation systems, investment promotion agencies' strategies towards attracting high technology foreign direct investment (FDI); strengthening legal and regulatory framework, including intellectual property regulations and competition/ anti-monopoly laws. Sectors where barriers to entry are low are more competitive, and therefore more innovative.

6. Is the establishment synergistic?
National Innovation System (NIS) refers to the complex and interactive web of knowledge flows and relationships among industry, government and academia and making them work systematically to sustain innovation and science and technology development efforts. The innovative performance of a country depends to a large extent on how these NIS actors relate to each other as elements of a collective system of knowledge and technology creation and use.

Is your SME committed in the right way? Innovative SMEs are aware of the capacities of the competition, and they have a good understanding of market needs. However, this requires investment of scarce resources, and this also refers to investment in employee skills and training. SMEs are flexible, so the capacity for innovation rests with product customization, customer intimacy, and exploiting market niches. They do not depend on scale. Linking SMEs to high technology FDI is next step. This requires strengthening SME capacity in terms operations, management, financing and meeting standards through accessing, adopting and adapting suitable technologies. Technology refers both to hardware (physical assets) and software (knowledge and skills). SMEs that engage in R&D have higher chance to be innovative.

Qatar Science and Technology Park


The creation of dedicated areas, like Science and Technology Industrial Parks (STIPs) is an indicator of an enabling environment for business growth and inception. Good examples from Asia are China's SPARK and TORCH programs. The TORCH Program created Innovation Clusters by creating national STIPs, Software Parks, and Productivity Promotion Centers. In this region, the Qatar Science and Technology Park is a good example. Another key part of China's cluster strategy was collaboration between research and business, as well as between large enterprises and tech-based small and medium enterprises. It did so by building a national network of a 1,000+ Productivity Promotion Centers. They provide consulting, promotion, product testing, hiring, training and incubation services to startups.

While the Innovation Clusters designated specific areas of the countries where high tech was to occur, it's the Technology Business Incubators (TBIs) located inside these clusters where the startup companies physically reside. Much like incubators worldwide, they provide startups with office space, free rent, access to university technology transfer, etc. By 2011, there were a total of 1034 Technology Business Incubators across China, including 336 as National Incubators, hosting nearly 60,000 companies. (20% of the National Incubators were privately-run and their percentage is steadily increasing.) In recent years, Business Incubators have developed into diverse models. For example, the Ministry of Education and the Ministry of Science and Technology teamed up to put 45 incubators in universities. There are close to 100 specialized incubators for companies founded by returned overseas Chinese scientists and engineers. There are a dozen sector-specific incubators (a Biomedicine Incubator in Shanghai, An Advanced Material Incubator in Beijing, a Marine Technology Incubator in Tianjin, etc.) These incubators are mostly clustered in the eastern coastal regions, and disproportionately target TMT (Technology Media and Telecom) and Biotech. Some of the startups coming out of these incubators have become large international companies including Lenovo, Huawei, and Suntech Power.


There is a need for supply chain management, access to technology, investment in R&D, and financial management, including working capital requirements. Execute analysis of your SME market potential and the existing competitors. SMEs should also consider branding, as it's very important. Adoption of RBC is also a priority. Clustering may help overcome R&D, marketing, information and financial bottlenecks by pooling resources and access to business development services.

The weakest link in an SME's chain is often access to finance. It often starts with SME capacity to prepare solid business plans, but here, online opportunities for funding exist, such as crowdfunding and equity crowdfunding. Support can also be gained through seed funding (such as InnoFund) and venture guide funds to assist and guide VC firms.

Marc Proksch has Master’s Degrees from the Free University of Amsterdam in political science, international relations and from the London School of Economics in international political economy. After working in the private sector in the U.K. as a research analyst at a management consultancy, he joined the United Nations in 1990 in the Economic and Social Commission for Asia and the Pacific (ESCAP) in Bangkok. From 2000 until 2010, Proksch worked in ESCAP’s Trade Policy Section of the Trade and Investment Division. Proksch is currently Chief of the Business and Development Section in the Trade and Investment Division and manages the work of the Section in the areas of development of SMEs, promotion and facilitation of investment for development, and the promotion of responsible business practices. 

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