1 R&D ACTIVITIES AS A GROWTH FACTOR OF FOREIGN OWNED SMEs IN CROATIA Zoran Aralica Domagoj Račić Denis Redžepagić Zagreb, November 2008.

2 Outline 1 Introduction 2 Motivation 3 Literature overview R&D activities in context of the firm performance Exploring growth of SMEs in transition economies and Croatia 4 Methodology and model The influence of R&D activities on growth of SMEs The firms as a source of knowledge for other market participants 5 Concluding remarks

3 Motivation Explore relation between R&D activities and above- average firm performance Analyse the influence of R&D activity on growth of foreign owned SMEs in Croatia SMEs growth - provides a raison d'etre of entrepreneurial activities What is a statistical difference between high growth foreign owned SMEs and low-growth (other) foreign owned SMEs in Croatia with regard to R&D activities ?

4 R&D activities in context of the firm performance (I) Two possibilities of conducting R&D activities in house and/or out of house Mutual interdependence between R&D activities and innovation activities caused primarily by increase in complexity of expected (innovative) output as well as the accompanying risks and costs of R&D and innovation activities R&D activities have become closely connected to internalization of business activities where foreign investors (especially MNEs via FDI) play an indispensable role.

5 R&D activities in context of the firm performance (II) The determinants of R&D activities and R&D cooperation are connected with type of firm (part of MNE or not) characteristics of firms and industries Various reasons explain presence of popularity of R&D cooperation Cost-economizing reason Increase of competition due to liberalization process Technological convergence between different industries

6 The methodology and model (I) The empirical analysis is based on the postal survey of foreign investment enterprises in manufacturing in Croatia. Methodology tries to depict the influence of various R&D activities on enterprise growth. High growth enterprises are defined as ones that achieve continuing, significant and often outstandingly rapid increase of total revenues and/or number of employees as well as the other indicators of growth like total assets and profits (cf. McMahon et al., 1993).

7 The methodology and model (II) The analysis tackles the population of foreign owned enterprises – above-average performance in relation to other foreign owned enterprises (Foreign Investment Enterprises Questionnaire 2007) Growing firms characterised by: above average real growth (more than 20%) of revenues (2006 / 2003) increase in the number of employees (2006 / 2003) Average real annual revenue growth rate 6-7% in the overall sample of 95, there were 38 growing firms

8 Types of R&D activities – the empirical analysis Existing research the importance of innovation and export orientation for growth positive impact of R&D cooperation on labour productivity growth, but different types of cooperation have different influences on labour productivity Will similar triggers stimulate growth of foreign owned SMEs in Croatia? Categories of analysis: R&D activities (in house) R&D cooperation in relation to business entities (firms) R&D cooperation in relation to other organisations the firm technological knowledge and influence on innovation activities and R&D activities of other firms and organisations

9 Share of R&D expenditure in total expenditures Shares of groups of SMEs Share in total number of SMEs Low growth SMEs High growth SMEs 053.9%65.7%58.6% 0.1% - 10%5.7% 5.8% 10.1% and higher40.4%28.6%35.6% There are no statistically significant differences between high growth SMEs and low growth SMEs regarding the share of their R&D expenditures in total expenditures Achieving high growth performance is not a result of use of knowledge created within local foreign owned SME

10 R&D cooperation with other firms (domestic and foreign) Shares of groups of SMEs Share in total number of SMEs Low growth SMEsHigh growth SMEs Not important46.3%33.3%41.1% Little important5.6%19.4%11.1% Important35.2%22.2%30.0% Very important13.0%25.0%17.8% R&D cooperation does not play a significant role, the value of chi–square test is 7.603, and the differences among high growth and low growth SMEs are not statistically significant (p=0.055). Similar results have been obtained in the analysis of R&D cooperation with other foreign firms. High growth SMEs engage relatively more in cooperation with other foreign firms, 24.3% of them consider it very important, whereas low growth SMEs much more often consider such cooperation as not important (42.6%). Table: R&D cooperation with other domestic firms

11 R&D cooperation with other organisation (domestic and foreign) Shares of groups of SMEs Share in total number of SMEs Low growth SMEsHigh growth SMEs Not important46.2%48.5%47.1% Little important5.8%12.1%8.2% Important30.8%18.2%25.9% Very important17.3%21.2%18.8% Table: R&D cooperation with other domestic organisations Almost half of the respondents in both groups consider R&D cooperation with other domestic organisation as not important Foreign owned SMEs in Croatia are the least likely to be involved in R&D cooperation with organisations from abroad

12 Firms as source of knowledge for other market participants (I) EntryToday Shares of groups of SMEs Share in total number of SMEs Shares of groups of SMEs Share in total number of SMEs Low growth SMEs High growth SMEs Low growth SMEs High growth SMEs Not important54.4%44.4%50.5%50.9%45.9%48.9% Little important8.8%33.3%18.3%7.0%18.9%11.7% Important28.1%11.1%21.5%21.1%13.5%18.1% Very important8.8%11.1%9.7%21.1%21.6%21.3% Significant proportions of foreign owned SMEs emphasize that their knowledge is not important for R&D and innovation activities of domestic suppliers and customers – both during entry and today However, in the entry period, high growth SMEs seem to have a relatively stronger role as knowledge source (there are statistically significant differences among observed groups (p = 0.013), chi-square value is Table: The firms as source of knowledge for domestic suppliers and customers - entry and today

13 Firms as source of knowledge for other market participants (II) EntryToday Shares of groups of SMEs Share in total number of SMEs Shares of groups of SMEs Share in total number of SMEs Low growth SMEs High growth SMEs Low growth SMEs High growth SMEs Not important61.4%47.2%55.9%57.9%48.6%54.3% Little important12.3%38.9%22.6%10.5%24.3%16.0% Important21.1%5.6%15.1%22.8%13.5%19.1% Very important5.3%8.3%6.5%8.8%13.5%10.6% Table: The firms as source of knowledge for foreign suppliers and customers - entry and today At the time of foreign investment entry, high growth SMEs more frequently act as a source of knowledge; chi-square result is and differences between two groups are statistically significant (p = 0.009). High growth SMEs are relatively more important knowledge sources to both domestic and foreign suppliers and customers during the entry period, but such differences tend to diminish over time.

14 Firms as source of knowledge for other market participants (III) EntryToday Shares of groups of SMEs Share in total number of SMEs Shares of groups of SMEs Share in total number of SMEs Low growth SMEs High growth SMEs Low growth SMEs High growth SMEs Not important61.4%47.2%55.9%57.9%45.9%53.2% Little important19.3%30.6%23.7%8.8%18.9%12.8% Important17.5%8.3%14.0%26.3%10.8%20.2% Very important1.8%13.9%6.5%7.0%24.3%13.8% Table: The firms as source of knowledge for foreign competitors - entry and today The most important differences between the two groups are higher importance of high growth SMEs as source of knowledge for foreign competitors in the two periods. High growth SMEs much more frequently report being a very important source of knowledge to foreign competitors – both during entry of foreign investors and today. In the first case the chi-square result is and there are statistical significance differences between high growth and low growth SMEs (p = 0.039).

15 Concluding remarks (1) The analysis shows that different types of R&D activities cannot explain the growth performance (i.e. increase of total revenues and number of employees) of foreign owned SMEs in Croatia. The analysed SMEs are more frequently involved in cooperation with other firms (both domestic and foreign) than with other organisations. In the case of analysis of the firm‘s importance as knowledge source for both domestic and foreign suppliers and customers, statistical differences among the high grow and low growth groups appear only in the period of entry of foreign investors

16 Concluding remarks (2) Statistical difference between high growth and low growth SMEs have been observed in the case of the higher importance of the high-growth SMEs as knowledge sources for foreign competitors. Further research needs to tackle the influence of external knowledge (i.e. the knowledge of MNE headquarters and units) on the R&D activities of high- growth SMEs (both domestic and foreign owned) in Croatia.