An Inquisition Into Innovation In SMEs In Developing Countries

There are around 99.21% SMEs out of total industrial establishments in the country and they provide an employment of 47.6% out of the total employment provided by the all industrial establishments in the country. This shows that SME sector is an important sector for the country's development. Even though the situation is so, it was found that Sri Lankan SMEs sector is informal and disorganized. Unavailability of timely and reliable data in this sector is a crucial problem when carrying our research. There no much research carried out in the field of SMEs in Sri Lanka and when it comes to SMEs and innovation this situation is very serious. The researchers need to carry out much research in the field of SMEs and especially in the filed innovation to develop SMEs to contribute to the country's development. Thus, this study will be an eye opener for policy makers and academics as well.This study focused on finding out the reasons for lack of innovations in Sri Lankan SMEs and the determinants of innovation in Sri Lankan SMEs. Two Global environmental factors, six local environmental factors, eight management related factors and nine entrepreneur related factors have been considered as the main determinants of innovation in organizations. After finding out the main determinants of innovation in Sri Lankan SMEs it has also made an effort to find out the most important factors affecting an organizational innovativeness. Subsequently, in this study it was made an attempt to find out the relationship between innovation and business success in Sri Lankan SME sector and to find out what are the determinants of business success in Sri Lankan SMEs. In addition to innovation five factors such as management skills, marketing ability, skilled labor, ability to adopt new technology and government assistance have been considered as main determinants of organizational success.Study data was collected in Western province (Gampaha, Colombo, and Kalutara districts) of Sri Lanka. Both survey and case study methods were used in this study. Self-administered questionnaire has been used to collect data for survey and Depth interview method has been used to collect data form case studies. Random sampling method was used to select the sample for survey. Six hundred and thirteen respondents were used in the survey and six case studies were use to qualitative analysis. Six case studies consist of three successful innovative and three stagnating non innovative businesses. Six hundred and thirteen businesses comprise around 7% of the total SMEs in Western province and 3% of total SMEs in the country. There are around 44% Small businesses and 52% medium businesses located in western province only. Therefore it justifies that the sample used for survey is representative. This study also tested seven hypotheses in relation to research issue. Survey data was analyzed using Discriminant Analysis, Two Independent Sample T Test, Chi-Square Test. Discriminant analysis has been used to understand the difference between innovative and non-innovative entrepreneurs in firm specific factors and environmental factors. Two Independent Sample T Test has been used to find variables that can best discriminate innovative and non-innovative entrepreneurs. Chi-Square Test has been used to see the relationship between innovation and business success. Case study data was categorized based on ABC principles. In ABC analysis A represents 'High', B represents 'Medium' and C represents 'Low'.There is no disparity between survey results and case study results and found to be compatible with each other. According to the study results impact of global environmental factors on innovative businesses is higher than non innovative businesses. Study results also show impact of local environmental factors is equivalent to innovative organizations and non innovative businesses. According to study results innovative businesses have favorable management related factors than non innovative businesses and impact of management related factors are higher for innovative businesses than non innovative businesses. Study results confirm that innovative businesses have favorable entrepreneur related factors than non innovative businesses. According to Discriminant analysis and ABC analysis it was found that firm specific factors found to be more important than environmental factors for a SME to be innovative. Study results also confirm that there is a positive relationship between business success and innovativeness of the business. It means that success of a business depends upon innovativeness of the business. According to study results and case study results innovative businesses have favorable other factors affecting organizational success than non innovative businesses.