1. 2016 Eu-SPRI Conference, CIRCLE, Lund University, June 7-10, 2016
Why enhancing resources and capabilities of newly-established firms can lead to superior innovative performance? Implications for innovation and entrepreneurship policy
1Aimilia Protogerou, 1Yannis Caloghirou, 2Nicholas Vonortas
1 Laboratory of Industrial and Energy Economics, National Technical University of Athens
2 Center for International Science and Department of Economics and Technology Policy, George Washington University
2016 Eu-SPRI Conference, CIRCLE, Lund University, June 7-10, 2016

2. Aim of the paper
To explore the effect of diverse firm resources and capabilities such as founder’s human capital, workforce human capital and acquisition of knowledge from external sources on the innovation performance of newly established firms and suggest relevant policy implications.

3. The context
Young, small firms that innovate successfully increase their chances of survival, and can stimulate economic development and growth.
The low share of young innovative firms within European industries, both manufacturing and services, have attracted greater attention on this group of firms among scholars and policy makers alike (Audretsch et al., 2014).

4. Theoretical background (I)
Being young, entrepreneurial firms tend to lack substantial tangible and intangible resources that restrict their resilience and ability to adapt to changing environmental conditions.
On the other hand, innovating firms develop their own unique collection of fundamental resources and capabilities that engender organizational performance (Autio et al., 2000; Penrose, 1959).

5. Theoretical background (II)
One type of resource that might be particularly relevant to the innovative performance of young firm’s is human capital encapsulated both in founders (Arvanitis and Stucki, 2012) and the workforce (Romijn and Albaladeho, 2002).
In addition, access to external information and knowledge are pivotal elements of a firm’s absorptive capacity and hence for its innovative activities (Caloghirou et al., 2004)

6. Hypotheses: Founder’s characteristics affecting innovative performance (I)
Entrepreneurs who have greater generic and specific human capital will have a greater ability to identify and seize innovative opportunities.
Therefore,
H1a: Founders’ generic human capital, i.e. educational attainment and professional experience, is positively related to innovation performance.
H1b: Founders’ specific human capital, i.e. prior industry and R&D experience, is positively related to innovation performance.

7. Hypotheses: Founder characteristics affecting innovative performance (II)
Founders with diverse functional experience and different professional backgrounds are expected to have a higher probability to produce innovation.
Therefore,
Hypothesis 2: Greater heterogeneous functional and occupational experience on the young firm’s founders has a positive impact on innovative performance.

8. Hypotheses: Firm-specific factors affecting innovative performance
Internal firm resources, such as knowledge, skills and expertise brought into the firm by the workforce, as well as external knowledge sources can be important determinants for firm innovation.
Therefore,
H3: Better qualified workforce in terms of formal education and training may be positively related t0 competitive advantage.
H4: Networking with universities and targeted collaborative agreements are expected to have a positive impact on young firms’ innovative performance

9. The Data
The quantitative analysis data originate from the AEGIS project survey carried out during late Fall and early Spring 2011
The sample firms were 3-10 years old spanning a wide range of sectors and originating from 10 European countries
Data were collected through telephone interviews with one of the firm’s founder using a structured questionnaire

10. Country and sectoral group distribution of firms
No of firms
Czech Republic
199
Croatia
196
Denmark
329
France
568
Germany
548
Greece
326
Italy
573
Portugal
327
Sweden UK
570
Total
3962
Sectoral group
Firms
High-tech manufacturing 87
Medium high-tech manufacturing
328
Medium low-tech manufacturing
280
Low-tech Manufacturing
891
KIBS
2377
Total
3962

11. Determinants of innovation in young firms
Founders’ characteristics
Radiclalness of innovation
R&D Intensity
Educational attainment
***
***
Professional experience
Prior industry experience
Prior experience in R&D ns ns
***
*** **
***
Team diversity in functional expertise
Team diversity in occupational background
*** ns ** ns
Firm-specific characteristics
International sales
Size
Employees with university degree
Employees’ training
Venture capital funding
Technology collaborations
Networking activities with universities
***
***
*** ** ns
*** **
*** ns ns ns
***
***
***
Industry-specific variables
Price competition
Market dynamism
Medium-to-low tech manufacturing
***
*** ns
***
*** ns
Medium-to-high tech manufacturing
KIBS
*** ns
*** **
Log likelihood:
Log likelihood:
LR test (X2): ***
LR test (X2): ***

12. Research Findings: Founders’ specific human Capital
Previous R&D experience appears to be important to both innovation measures implying that this type of knowledge is required to manage effectively available research resources, to devise R&D strategies and to organize and coordinate relative projects.
Prior industry experience appears to impact positively R&D intensity suggesting that founders with such experience have accumulated valuable market and technology knowledge that may facilitate opportunity recognition that thus strengthen their decision to invest in specific research directions in their new venture.

13. Research Findings: Founders’ general human capital
Founders’ educational attainment is found to be significantly related to both measures of innovation activity suggesting that entrepreneurs with higher formal education will tend to invest more in R&D and at the same time are more likely to introduce a radical product innovation.
Findings do not support the hypothesis that working experience in general has a positive impact on a young firm’s innovative performance.

14. Research findings: heterogeneity in founding teams
Increased diversity in terms of functional expertise appears to enhance the ability of founders to pursue radical innovation by bringing together a larger pool of perspectives, alternative solutions and ideas.

15. Research findings: workforce human capital
Our findings partially support the hypothesis that the knowledge and skills brought into the firm by the workforce positively contribute to a young firm’s innovative activity. This may be related to the fact that at this stage of the firm’s life cycle, the human capital of founders is much more decisive in shaping its innovative capability.

16. Research Findings: external knowledge sources
Findings support the hypothesis that the ability of a young firm to interact and access external knowledge sources through university networking and formal technology collaborations has an important effect on its innovative activity.

17. Policy Implications (I)
Given the human and financial constraints that many young firms face in achieving the final marketing stage policy makers, should try to encourage, for example, technically oriented founding teams to embrace business and management training or they should create mechanisms through which adequate support could be offered to such firms.
Policy makers that are responsible for allocating financial aid to firms which undertake projects of high innovative potential should not only look for technical efficiency in a team but also ensure the existence of adequate managerial and business skills.

18. Policy Implications (II)
Beyond supporting education and training programmes, policy makers should also consider initiatives that encourage the development of an ‘innovative human capital’ by developing more ‘soft’ skills for innovation “intertwined with methods to incentivize and inspire managers to innovate and encourage innovation within the firm’ (McGuirk et al., 2015, p. 973).

19. Policy implications (III)
Policies to strengthen linkages between universities and small young firms should always be encouraged, as well as policies that support interfirm technology cooperation.
Human capital resources, especially those of founders, and external knowledge linkages can have a positive parallel role in the innovative performance of young firms. Therefore, efforts for establishing interaction mechanisms and openness to knowledge sharing should complement internal efforts for a balanced and more efficient approach to innovation.

20. Policy Implications (IV)
Create a larger pool of high-potential would-be entrepreneurs among, for example, university graduates and people working in R&D labs in universities and research centers. This can be achieved by providing such populations with the necessary entrepreneurial skills and by cultivating, in general, a mindset for innovation and entrepreneurship.

21. Policy Implications (V)
Middle aged, highly educated people that used to work for large or smaller enterprises but are currently unemployed due to the crisis, downsizing, closure or delocalization of their companies should be encouraged through specific start-up programmes to complement their accumulated technical and market skills and knowledge with those skills necessary to undertake entrepreneurial action.

22. Thank you for your attention !