International Journal of Accounting & Business Management Vol. 4 (No.2), November, 2016 ISSN: 2289-4519 DOI: 10.24924/ijabm/2016.11/v4.iss2/31.42 This work is licensed under a Creative Commons Attribution 4.0 International License.
www.ftms.edu.my/journals/index.php/journals/ijabm
Research Paper
FINANCIAL AND NON-FINANCIAL FACTORS OF INNOVATIVENESS Dr. Armin Kovači University of Modern Sciences- CKM Bosnia and Herzegovina
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Abstract This study focuses on financial and non-financial factors affecting the innovation environment of a certain country and, as a result of country's innovation environment, the innovativeness of companies operating in that country. Financial factors include GDP per capita, firms using banks, research and development expenditure etc. On the other hand, non-financial factors include online creativity, time to start a business, university and industry collaboration research etc. As a part of this study, a total of 109 countries is analyzed. Among these countries, 34% of countries are from Europe, 28% from Asia, 17% from Africa, 2% from Australia and Oceania, 10% from North America and 9% from South America. Due to the large number of factors and countries, software package for the interactive visual exploration of multivariate data sets was used during an analysis phase. This study focuses on a series of questions. How different combinations of factors affect innovativeness? Are financial factors more important than non-financial factors of innovativeness? How important is research and development expenditure as a factor of encouraging new ideas? How important is university and industry collaboration for the creation process? How important is the role of government in creating innovative environment? The results of this study show that financial and non-financial factors affect innovativeness through a series of mutual interactions and correlations. Key Terms: innovativeness, financial factors, non-financial factors, innovation system 1.
Introduction
Inventions and innovations are changes that lead to a series of improvements for the large number of actors in the business environment. Innovations are perceived to ensure competitiveness of goods produced by enterprises and of sustainable success of companies or corporations in the market on the whole (Morozov and Taskaeva, 2016). The development of the theory of innovation is linked to J. Schumpeter. According to him, innovation is a basic factor of technological progress and economic development. The replacement of existing technologies to new is called creative destruction (Carol, 2006). Nowadays, management of innovation applies to all types and forms of innovation, innovation processes and innovation. According to Peter Drucker (1985), innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced. Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation. And they need to know and to apply the principles of successful innovation. On the other side, the innovation process is
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essential to increase public sector efficiency and for delivering quality and competitive public services (Matei et al., 2016). This study focuses on financial and non-financial factors affecting innovation environment of a certain country and, as a result of country's innovation environment, the innovativeness of companies operating in that country. In today's dynamic business environment, there is a variety of factors that interact with each other and have different effects on the level of knowledge and creation of new solutions. For a policy to be efficient, it is first necessary to analyze the innovation performance and the character of the innovation system (Žitek, 2016). Technological innovation processes do not follow a set sequence but rather emerge from complex adaptive systems involving many actors and institutions operating simultaneously from local to global scales (Anadon, 2016). Mutual interactions of market participants leads to multiplication of knowledge and its usage in new products, services, technologies, processes, organization design and so on. The government can encourage greater diffusion of new technologies by encouraging networking. Participants of these networks exchange information, knowledge and technology and in this way contribute to each other in achieving even better results. On the other hand, there are many barriers to the diffusion of technology. Some of the most important are the lack of information, lack of financial resources and lack of technological knowledge. In addition to these barriers, it should be noted the lack of adequate managerial and organizational skills, particularly in small and medium enterprises. Policy makers should adopt a policy mix fostering both absorptive capacity and open innovation activities (Radičić and Pugh, 2014). In this study, all factors affecting innovativeness are divided on financial factors and non-financial factors. Financial factors include GDP per capita, firms using banks, R&D expenditure, etc. On the other hand, non-financial factors include online creativity, time to start a business, university and industry collaboration research etc. These factors do not affect the innovation in isolation. Any combination of these factors gives different results in different countries. Some of these factors have greater, and some others have smaller impact on the creation of new solutions. As part of the research, data from 109 countries from all continents has been collected and analyzed. Due to the large number of factors and countries, software for visual data analysis is used during the data analysis. The main advantage of this method is the possibility of visual analysis of large amounts of data to a larger number of changing variables simultaneously. In accordance with the above, the main objectives of this study are: • To examine the effects of financial factors on innovativeness • To examine the effects of non-financial factors on innovativeness • To examine the effects of different combinations of factors that affect innovativeness This paper is organized in five basic parts: introduction, literature review, research design and methodology, results and discussion and conclusion. In first two parts, introduction and literature review, problem of the study, objectives of the study and literature review are presented. In the following parts, research methodology, data sources, instruments and results of the analysis of the collected data are presented. In this paper, The Global Innovation Index is used as the main indicator of innovativeness. 2.
Literature Review
The process of creating, analyzing and implementing of innovation is a rather chaotic. There are no two innovations that were created, analyzed and implemented in the same conditions. This represents an additional difficulty in determining the path that must be Page 33
followed when innovating. On the other side, innovation is not exclusively a chaotic process, because there are certain principles that create the specified stronghold for innovations. These principles depend on the level of competitiveness, financial resources, technology development, product life cycle, and so on. The theory of management has historically created various models which emphasized the factors that are at the time considered to be the most important for the creation of new innovative solutions. Rothwell (1994) gave the classification of models of innovative process that is shown in the following table. PERIOD 1950-1960s 1970s 1980s 1980-1990s 2000s
MODEL Technology-push models Market pull models Coupling models Interactive models Network models Source: Rothwell, 1994 Table 1: Classification of models of innovative process Many changes in society, technology and business have led to the creation of new opportunities and business models. These changes have led to an increase in the population of highly educated workforce, business networks, e-commerce, e-learning and so on. In the area of innovation, there has been a shift in the manner in which the innovation process takes place. During most of the 20th century, an innovative process has been implemented as an exclusively internal process. In this traditional system, an innovative process takes place within a single business entity. This concept is called closed innovation. Using both internal and external sources in the innovative process is called open innovation. In an open innovation there are several types of innovators: base innovators, internal and external innovators. Base inventors are employees whose job it is to work on the research and development of new products. Other internal innovators are employed elsewhere in the company. They have ideas that can lead to innovation (accountants, employees in production, purchasing, etc.). External innovators are all external sources of innovation. External sources that may contribute to the greater success of innovation are: customers, suppliers, universities, local communities, chambers of commerce, associations of innovators, local and international training institutions, etc. Open innovation represents a new opportunity for small and medium enterprises. Due to its flexibility in the application of innovative solutions, small and medium enterprises have a chance to provide specialized services to large enterprises.
Source: Adopted from Daventport, T.H. et al. (2006) Figure 1: Open innovation process Open innovation process has led to an increase in importance of national innovation systems. The national innovation system is a concept that emphasizes the importance of Page 34
understanding the relationship between the actors involved in the innovation process. According to this concept, technological development is the result of interaction between actors who create, distribute and implement new ideas. These actors come from business sector, educational and research institutions, public sector and financial institutions. This concept is designed for those who create and implement various development policies.
Source: Adopted from Yim (2006) Figure 2: National innovation system This concept contributes to: economic recognition of knowledge, increased application of systemic approach and increased number of institutions involved in the creation process There are several definitions of national innovation systems that are in use: “... the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies.” (Freeman, 1987) “ ... the elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge ... and are either located within or rooted inside the borders of a nation state.” (Lundvall, 1992) “... a set of institutions whose interactions determine the innovative performance ... of national firms” (Nelson, 1993) “ ... the national institutions, their incentive structures and their competencies, that determine the rate and direction of technological learning (or the volume and composition of change generating activities) in a country. “ (Patel i Pavitt, 1994) “.. that set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artefacts which define new technologies.” (Metcalfe, 1995) 3.
Research Design and Methodology
Subjects As a part of this study, a total of 109 countries is analyzed. Among these countries, 34% of countries are from Europe, 28% from Asia, 17% from Africa, 2% from Australia and Oceania, 10% from North America and 9% from South America. All countries are equally treated in the Page 35
study, and no country has given more importance regardless of size, population, political influence or other criteria. Procedure and data collection The study was conducted in three basic steps: - data collection, - data entry and - data analysis. For the purposes of this study, data were used from a various number of sources: - Global Innovation Index Report 2016, which consists of a series of indicators that affect innovativeness, - World Bank Indicators and - Global Competitiveness Report 2015-2016 The main reason for using multiple sources is that data, for specific indicators for individual countries, did not exist from certain sources and were therefore collected from other sources. Another reason is the mismatch-date of data in different countries. In this way, in some countries, the latest of data for example mobile subscription was from year 2015, while the same latest data for other countries was from year 2009. A combination of these data sources solved most of these dilemmas. Nevertheless, for some indicators, there were no available data for certain countries. After data collection, data entry in Microsoft Excel is performed. Data analysis was performed by using of software package for the interactive visual exploration of multivariate data sets Tableau Public 10.0. During the analysis phase, factors affecting innovativeness were divided into financial and non-financial factors. Financial factors of innovativeness include: firms using banks, R&D expenditure, public spending on education, information and communication technology goods (ICT) export, information and communication technology goods import, GDP per capita, charges for usage of intellectual property rights (IPR) and cost of living. Non-financial factors of innovativeness include: mobile cellular subscription, online creativity, school enrollment, time needed to start a business, university and industry collaboration research, urban population, science and technology journal articles, political stability, government effectiveness and ease of protecting investors. These factors are analyzed separately and in various combinations through the aforementioned software tools. 4.
Results and Discussion
In this part, the main results of the study will be presented. Presented series of conclusions is the result of multiple iterative process of visual statistical analysis of factors of innovativeness. Selected countries are presented with blue dots on scatter plots and box-andwhisker plots below. The analysis (presented in the Figure 3) shows that ICT goods imports, ICT goods exports and high technology exports are not a good indicator of innovativeness of the country. The most innovative countries do not achieve the highest rates of imports and exports of final ICT products. The most innovative countries create new solutions, but mass production of these new products is located in less innovative countries with cheaper labor force.
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Figure 3: Comparison of ICT goods imports, ICT goods exports, high technology exports and Global Innovation Index Figure 4 shows that research and development (R&D) expenditure is a good factor of innovativeness. The higher expenditure on research and development in companies further increases innovativeness and provides a great financial support for implementation of new solutions.
Figure 4: Comparison of R&D expenditure, charges for use of intellectual property rights and Global Innovation Index Other thing that is evident is that the charges for use of intellectual property rights in the most innovative countries are mainly higher than those in less innovative countries. Therefore, the introduction of measures to reduce charges for use of intellectual property rights would not lead to the desired effect of increasing innovation.
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Figure 5: Comparison of university and industry research collaboration, researchers in R&D, science and technology journal articles and Global Innovation Index Figure 5 shows that countries with high university and industry research collaboration are countries that achieve higher levels of innovation. Such countries usually have a high proportion of researchers in R&D and high number of science and technology journal articles. Countries with greater university and industry research collaboration have high Global Innovation Index, and mostly have a high number of researchers in R&D and science and technology journal articles with the exception of three countries: China, Spain and Italy.
Figure 6: Position of China, Italy and Spain in comparison of university and industry research collaboration, researchers in R&D, science and technology journal articles and Global Innovation Index These countries are presented with blue dots in the Figure 6. It can be seen that these countries have a high number of science and technology articles, but do not have sufficiently developed university and industry collaboration. Also, these countries do not have a sufficiently high number of researchers in R&D to be one of the innovation leaders.
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Figure 7: Comparison of online creativity, number of Internet users, mobile cell subscriptions and Global Innovation Index Figure 7 shows that countries with higher online creativity also have high Global Innovation Index. Online creativity is in correlation with high number of Internet users. On the other side, it can't be said that online creativity is correlated with mobile cell subscription. Due to the increasing functionality of mobile phones, it is assumed that in the future, mobile phones and other „smart devices” will be one of the main drivers of online creativity.
Figure 8: Comparison of ease of protecting investors, Global Innovation Index and time to start business Figure above presents a comparison of ease of protecting investors, Global Innovation Index and time to start a business. In the 25% of the most innovative countries, the level of investor protection is quite dispersed. On the other hand, the upper 25% of countries according to innovativeness are in the top 75% of countries with the time required to start a business. It can be said that the time of starting a business is not a decisive factor for greater development of ideas. Ideas can be developed within existing companies, and not exclusively within start-up
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companies. In addition, countries in which it takes too long to start a new company do not achieve high levels of innovativeness.
Figure 9: Comparison of Global Innovation Index, government effectiveness and political stability If the efficiency of the government is analyzed as a factor of innovativeness, it can be said that the efficiency of the government is one of the main conditions of achieving greater innovativeness. The top 25% of countries according to the government effectiveness is mostly in the top 25% of the most innovative countries. Efficient government creates and supervises the implementation of laws that are directed at increasing innovation and competitiveness. Such government is focused on continuous improvement of performance of the economy and the country's progress. Effective governments have lower levels of corruption and greater accountability of elected representatives. On the other hand, political stability is an important, but not decisive precondition for the efficiency of the government. Stability gives the government space to be more concerned with issues of competitiveness and innovativeness, rather than internal political problems. It can be said that the political stability of the country can create conditions for higher effectiveness of the government, but that further guidance and vision of the government will be crucial in determining the direction of how the government will work in the future.
Figure 10: Comparison of GDP per capita, Human Development Index and Global Innovation Index 1
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Figure 10 presents a comparison in which GDP per capita is seen as a measure of wealth in a certain country, Global Innovation Index as a measure of innovativeness and Human Development Index as a measure of sustainable development. All of these indicators have specific strengths and weaknesses. Countries with high Global Innovation Index are relatively wealthier countries. These countries are in the top 25% of countries according to GDP per capita. Exceptions are Romania, Bulgaria and Costa Rica that are in the upper 50% of the countries according to GDP per capita. The question that arises is whether the wealthier countries are wealthy because of their greater innovativeness or greater innovativeness is a result of their wealth and resources they possess. The first argument would not include Romania, Bulgaria and Costa Rica. Proving the second statement would require a special study that would attempt to determine which resource baselines these country had in the past, so they can generate high rates of innovativeness and GDP per capita today. On the other hand, all countries that achieve higher innovativeness, also have high Human Development Index. Exceptions are Romania, Bulgaria and Costa Rica, but are much better placed compared to the previous criterion of GDP per capita. In other words, more innovative countries are those countries whose development is more sustainable.
Figure 11: Comparison of GDP per capita, Human Development Index and Global Innovation Index 2 Due to the great dispersion of data series, the figure 11 presents comparison in which are excluded countries with extremely high GDP per capita and extremely low Human Development Index. This case also led to the same conclusion as mentioned above. 5.
Conclusion
Innovativeness is a function of financial and non-financial factors. All these factors affect innovativeness through a series of mutual interactions and correlations. Financial factors are not able to create adequate effect on innovativeness without non-financial factors. Effective government needs to use available financial resources and create laws in order to motivate innovators to create new solutions. This kind of government needs to combine university and industry potentials and to motivate them to achieve higher levels of collaboration. Internet connection needs to be available to everyone so people can be more online creative. On the other hand, new and especially current companies needs to be motivated to give chance to their employees to suggest and develop new and creative solutions. This paper can be used as a baseline for new research in the field of innovativeness and especially in the field of government role in creating innovative environment in particular country. Reference Page 41
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