Collaboration and Outsourcing: Different Requirements in Terms of Research Managers And

Formal R&D management and Research Collaboration and R&D Outsourcing in SMEs

Teirlinck Peter°,* & André Spithoven*

° Hogeschool-Universiteit Brussel, Stormstraat 2, 1000 Brussels

* Vrije Universiteit Brussel, Pleinlaan 2, 1040 Brussels & Belgian Science Policy, Avenue Louise 231, 1050 Brussels

Abstract

The views on ‘distributed’ or ‘open’ innovation emphasize the useof external knowledge in order to innovate. Particularly for SMEs, research cooperation and R&D outsourcing can offer possibilities to complement the often limited internal research resources. However, external knowledge relations potentially bring in their wake a loss of technology assets.

This paper focuses on research cooperation and R&D outsourcing in SMEs. Two functions of research cooperation are envisaged: generating new knowledge and exchanging existing knowledge previously developed within the firm. The paper addresses two items that are underdeveloped in the current literature. First, attention is paid to the heterogeneity in terms of firm size of SMEs. A distinction is made between micro, small-sized, and medium-sized firms. Second, consideration is given to the formal management of R&D activities. This is related to the management of the potential risks inherently involved in external knowledge relations. It is measured by the presence of a formal R&D manager within the SME.

Adescriptive quantitative empirical analysis is presented based on firm-level data provided by the OECD business R&D survey for Belgium covering the period 2004-2005. The starting point is a representative sample of 140 (quasi-) permanent R&D active SMEs.

The analysis revealsmarked differences in R&D outsourcing behaviour according to the size of the SME. In this respect, medium-sized firms are found to be significantly less involved in R&D outsourcing (one out of four firms) compared to micro and small-sized firms (one out of two firms is engaged in R&D outsourcing). On average, two-thirds of the (quasi-) permanent R&D active firms have a formal R&D manager and there are no marked differences according to firm size. The presence of an R&D manager turns out to be significantly associated with the firm’s engagement in R&D outsourcing and with knowledge exchange in research cooperation. There is no interaction effect between the presence of an R&D manager and firm size to explain firm engagement in research cooperation and R&D outsourcing.

Keywords: SME, firm size, R&D manager, R&D collaboration, R&D outsourcing

1. Introduction

Research cooperation and R&D outsourcing can offer SMEs important ways to undertake research with relatively low capital and limited risk involvement in case of failure. However, these activities might bring in their wake a potential loss of technology assets. Therefore, the decision to engage in R&D outsourcing and research cooperation has important implications for the management and organization of innovation processes (van de Vrande et al. 2009). For the time being, the management of innovation in SMEs is still being more a process of trial and error than professional management (Gassman et al. 2010).

Following Narula (2004) marked differences can be expected in terms of internal firm requirements for R&D management between activities related to research collaboration versus R&D outsourcing. Considerable managerial resources are required in particular for cooperation agreements, both because of the collaborative aspect and because of the tendency to use collaboration where technology is tacit (Narula 2004). With regard to R&D outsourcing, according to Veugelers (1997), there is a need to maintain a minimum level of in-house capacity in order to utilise the codified results of research performed outside the firm.

Therefore engagement in research cooperation and/or R&D outsourcing has important implications for research in companies that are faced with size limitations and, in a context of open innovation, increasingly have to devote resources to other aspects of the value chain in order to effectively market the internally developed and externally sourced knowledge. Especially SMEs are faced with these limitations.

In the literature on open innovation and external knowledge relations the particularities of SMEs are somewhat neglected (Gassman et al. 2010). Moreover, it can be argued that there could be marked differences among SMEs. Using the EU definition for an SME and related to firm size, an SME ranges from a very small firm with a few employees to a medium-sized firm with up to 250 employees.

This paper addresses decisions in SMEs to engage in research cooperation and R&D outsourcing by taking into consideration the role of the presence of a formal R&D manager and the heterogeneity in firm size. For the latter, a distinction is made between micro, small-sized, and medium-sized enterprises. Both the focus on external knowledge linkages in SMEs and the role of the R&D manager are underdeveloped items in the literature on open innovation (Gassman et al. 2010; Spithoven and Teirlinck 2010). This paper intends to increase our knowledge to fill this gap.

Section 2 provides an overview of the literature regarding research cooperation and R&D outsourcing in SMEs and the requirements in terms of R&D management. Section 3 formulates the research questions. The dataset is described in Section 4 andSection 5 highlights the empirical findings. Section 6 presents the main findings and conclusions.

2. Literature review

Market failure, increasing complexity and competitive pressure for the development of new products and processes in combination with raising budgets and risks related to innovation drive companies to use external knowledge to complement their in-house innovative activities (Chesbrough 2003; Coombs et al. 2003; Howells et al. 2003). The complementary characteristics of these activities to internal R&D can be related to the tacit nature of innovation and the risks associated with loss of technological competitiveness. This requires a sufficient internal R&D activity (Cohen and Levinthal 1990). In this respect, Narula (2004) identifies a distribution of competences at firm level between in-house R&D, research cooperation, and R&D outsourcing.

External knowledge sourcing can take different forms of which research cooperation and R&D outsourcing are two prominent ones (e.g. von Hippel 1988; Chesbrough et al. 2006).Research cooperation can be formal collaboration and - more flexible - informal network activities. It can involve both joint development of knowledge within a cooperation agreement as well as the exchange of previously internally developed knowledge in cooperation (Cohen and Levinthal 1990; Coombs et al. 2003).The outsourcing of R&D activities can be connected to the firm’s inability to conduct all R&D activities internally and the resulting need to capitalize on external knowledge (Gassman 2006).

So far, little attention has being paid to the implementation of external knowledge sourcing in SMEs (the focus mainly has been on large - multinational - enterprises, Gassman et al. 2010). A notable exception is van de Vrande et al. (2009), using a sample of 605 Dutch SMEs, and concluding that open innovation practices (in- and out-licensing of proprietary technologies, external networking, R&D outsourcing) have been increasingly adopted by SMEs in the period 1999-2005. From the existing literature (see e.g. Audretsch and Vivarelli (1996), Narula (2004)) this could be related to the fact that SMEs tend to have a higher R&D productivity compared to large firms. This is largely due to the ability to innovate by exploiting more efficiently knowledge created outside the firm (which in general can be related to a lower path-dependency). However, SMEs might be disadvantaged due to their absolute size limitations which may be enhanced by tendencies towards multiple technological competences and cross-border competition (Narula 2004). This refers to the cognitive limits on what firms can and cannot do by emphasising that - besides the firm size independent challenge to consistently innovate at the technological frontier within the dominant paradigm - there is a minimum threshold size of a research group within any area, and this represents a constraint to SMEs (Pavitt 1998). Taking into account these arguments it can be argued that,

As mentioned before, in a context of open innovation, SMEs increasingly have to devote resources to other aspects of the value chain in order to effectively market the internally developed and externally sourced knowledge. Also, SMEs in particular tend to be concerned about the possible loss of technological assets due to outsourcing and especially cooperation agreements. The latter can be related to their often vulnerable position to maintain a sufficiently high level of internal competences in only a few (or even a single) technological areas (Narula 2004) and to the limited opportunities to engage in cooperation or outsourcing due the smaller technological portfolio. Therefore, it comes to no surprise that the engagement in research collaboration and R&D outsourcing activities hasmajor implications for the management and organization of innovation processes in SMEs (van de Vrande et al. 2009). In the words of Gassmann et al. (2010) it necessitates ‘increased professionalism’ in the sense of professionalizing the internal processes to manage open innovation more effectively and efficiently. In order to strengthen the competitive advantage (Wong and Aspinwall 2004) of SMEs,appropriate knowledge management (development and exchange) is important to accelerate the information flow and to enhance the integration of knowledge, innovation, and creativity in the organisation. This requires a well-developed knowledge management system (Malhotra 2003) with considerable attention to knowledge exchange by means of ex-post R&D cooperation through patents and licensing (cf. Katz and Ordover 1990). Especially, this is relevant for the exchange of internally developed knowledge in research cooperation.

Based on their empirical analysis for the Netherlands, van de Vrande et al. (2009) highlight the existence of important managerial problemsaffecting small businesses involved in external knowledge sourcing. Taking into account that as SMEs grow they tend to increasingly develop more formal structures, van de Vrande et al. (2009) think of a critical size to be reached for SMEs in order to be able to formalize the innovation practices, manage innovation portfolios and reserve structural funds to finance innovation.

3. Research questions

Based on the literature review, this paper examines the relation between external knowledge sourcing (by means of research cooperation and R&D outsourcing) and form management of research in SMEs. Within SMEs a distinction is made between micro (very small) firms, small firms, and medium-sized firms (see Section 4). The research hypotheses are:

Hypothesis 1: ‘Small’ SMEs tend to be more engaged in R&D outsourcing and face fewer requirements in terms of a formal R&D manager;

Hypothesis 2a: ‘Large’ SMEs and SMEs having a formal R&D manager tend to be more engaged in the development of knowledge in research cooperation;

Hypothesis 2b: ‘Large’ SMEs and SMEs having a formal R&D manager tend to be more engaged inthe exchange of internally developed knowledge in research cooperation;

The hypothesis (1) that small SMEs tend to be more engaged in the outsourcing of R&D activities is based on less abilities for small firms to conduct all R&D activities internally and the resulting need to capitalize on - licensed or bought - external knowledge (Gassman 2006). Also the aspect of vulnerability of knowledge leaking is important (Narula 2004). Hypotheses 2a and 2b arebased on theargument of a minimum threshold size to internally develop knowledge (Pavitt 1998) and onNarula’s (2004) motive that research cooperation agreements in particular require considerable management resources because of the tendency to engage in collaboration in case the nature of technology is tacit. The role of the manager can be supposed especially important for knowledge development (Malhotra 2003).

4. Data description

4.1 Survey

Firm-level data are provided by the bi-annual OECD business R&D survey for Belgium. This postal survey collects data regarding R&D (employment, cooperation, outsourcing …). Firms are defined at the level of the smallest legal entity: i.e. those having a VAT number. The survey includes both firms known from the past to be R&D active, and a monitoring of firms declaring to be R&D active (e.g. by means of press releases, demands for R&D grants, and regularly organised random and stratified samples among the population of firms in Belgium). The presented analysis is based on the R&D survey organized in the year 2006 and offering results for 2004 and 2005. It was not possible to use more recent data because more actual surveys do not distinguish research managers among the R&D personnel. The target population includes368 (quasi-) permanent R&D active SMEs with 10 employees or more in Belgium in the period 2004-2005. An SME is defined as a firm with less than 250 employees; not being controlled for more than 25% by firms that are not SMEs; an annual turnover less than 50 million euro and/or a balance total less than 43 million euro).

4.2. Data description

This paper relates external knowledge sourcing with firm size and formal R&D management. Table 1 presents the variables of interest.With regard to external knowledge relations, attention is paid to firm engagement in outsourcing, development of knowledge for use in the internal R&D activities, and the exchange of previously internally generated knowledge in the framework of research cooperation.

The OECD (2002) acknowledges R&D managers as employees involved in the management of the conception and generation of new knowledge, products, processes, methods and systems. With regard to firm size, the analysis focuses on different categories of SMEs. Guided by the differences found by van de Vrande et al. (2009), within SMEs we make a further distinction by size class. Whereas van de Vrande et al. (2009) for the Netherlands distinguish between two categories: 10-99 and 100-499 employees, we take a more refined classification and use the EU definition of SMEs (see Section 4.1). A distinction is made between micro (10 or more and less than 20 employees), small-sized (20 or more and less than 50 employees) and medium-sized (50 or more and less than 250 employees) firms.

It can be argued to include the firm’s sector of activity as a control variable. With regard to external knowledge relations, open innovation mainly started in the high-tech sector but there is a trend for the low-tech sector to exploit the potentials of opening up the innovation process. Also, little attention is paid to the service sector (Gassmann et al. 2010). Therefore, we did use an extended Pavitt (1984) sector classification (distinguishing labour intensive, scale intensive, resource intensive, specialised suppliers, and science based manufacturing, and specialised supplier and information intensive services) to differentiate among the sector activity of the firms. However, sector classification did not reveal to be of any importance for explaining research activities (at least not in terms of external knowledge relations behaviour and presence of R&D managers/personnel). This is not surprising since only permanent R&D active firms are included. In other words, the sector of activity is less important to determine the R&D characteristics conditional upon the firm being (quasi-) permanently engaged in R&D. This is in line with earlier findings by Teirlinck et al. (2010). Therefore, we do not include/report sector classification in the remainder of the analysis.

Table 1: External knowledge sourcing and firm size: descriptive statistics SMEs (N=140)

Over two-fifth of the R&D active SMEs engage in R&D outsourcing. Close to one third is involvedin knowledge development in research cooperation and around one-fifth in the exchange of knowledge in research cooperation. Note that these activities are not mutually exclusive.

On average, an SME employs 0.75 full time equivalent managers. This represents about one fifth of the total R&D personnel and 3% of total firm employment. Two thirds of the (quasi-) permanent R&D active SMEs have an R&D manager whereas one third has no formal management of their R&D activities. The latter is rather surprising for a firm (quasi-) permanently involved in R&D and confirms the absence of formal innovation management in SMEs (Tidd and Bessant 2009).

In the sample there are 37 firms with 10 or more and less then 20 employees. 61 firms have 20 or more and less then 50 employees. 42 employ more than 50 and less than 250 employees.Between these size groups some important differences can be noted. With regard to external knowledge relations about half of the micro and small sized firms are engaged in R&D outsourcing. For medium-sized firms this is only about one fourth. Pairwise t-tests revealed R&D outsourcing to occur significantly less in medium-sized firms. For research cooperation it turns out to be the micro firms that are least engaged (both in terms of knowledge development in research cooperation and knowledge exchange based on internal research). In particular in terms of knowledge exchange, small sized firms are mostly engaged. This reveals a rather inverse U-shaped profile for research cooperation according to the size of the SME.

On average, an SME has 5.04 R&D employees, representing 17% of the total labour force. Medium-sized firms have a significant lower share of R&D personnel in the total firm employment. Concerning the employment of R&D managers, the average R&D active SME employs 0.75 full time equivalent (FTE) R&D managers and 2.25 R&D experts. The absolute share of R&D managers and experts however does not significantly differ among the size classes (this can be explained by the fact that the high average value for R&D experts in small firms is the result of a relatively high variance within this size class).

4.3 Selection bias

Due to both unit and item non-response, out of the population of 368 (quasi-)permanent R&D active SMEs, only 140 firms reveal detailed information on R&D personnel, research cooperation and R&D outsourcing agreements. With regard to the representativeness of this sample, a comparison has been made with the 228 firms not included in the analysis. A Student t-test comparing means between both groups in terms of internal R&D expenditures, the total R&D personnel, the share of R&D personnel in total employment, and the engagement in R&D outsourcing revealed no significant differences between the firms included in the analysis and those excluded because of incomplete data. The distribution in terms of size classes (micro: 27% - small-sized: 44% - medium-sized: 29%) nearly exactly matches between the group of firms included and those excluded. In terms of sector activity, based on a Chi-square test and 5% significance level, there is no significant different distribution between the group of firms included in the analysis and those excluded.