INNOVATION AMONG RURAL SMALL AND MEDIUM SCALE ENTERPRISES

Backgroud
The dynamic role of rural small and medium enterprises (RSMEs) in developing countries
has long been recognized (Kayanula and Quartey, 2000). These RSMES can serve as
engines
through which the economic growth and employment objectives of developing countries can
be achieved. However, for many years these rural enterprises have failed to grow
beyond their micro enterprise nature and sometimes at best their small or medium size
(Kayanula and Quartey, 2000). RSMEs face a variety of constraints owing to the difficulty
of absorbing large fixed costs, the absence of economies of scale and scope in key factors of
production, high unit costs, poor cashflow (Rothwell, 1991; Rammer and Schmiele, 2008;
Parker et al, 1995).

In order for SMEs to overcome the several constraints that they face and grow into
large corporate entities; they must be very innovative (Cannarella and Piccioni, 2003).
Innovation is referred to as the use of improved products, processes, services, technologies
or ideas accepted by markets, governments, and society (Christensen, 2002). Innovation
is not the same as invention. Innovation refers to the use of a new ideas or methods,
whereas invention refers more directly to the creation of the idea or method itself (Davila et
al, 2006). RSMEs need not create a new method but adopting the new methods to make it
beneficial to their specific operations. Innovation has been identified as a driver of
organisations and nations (Schumpeter, 1911) as it leads to entrepreneurship and hence
economic prosperity.

Essentially, innovation is holistic. It covers a range of issues necessary to provide

value to customers and a good return to the organization. Buckler (1997) defines
innovation as an environment, a culture - almost spiritual force - that exists in a
company that drives value creation. Innovation cannot be touched, heard, tasted or seen but
it can be felt within an organisation. It is possibly best described as an all-encompassing
attitude that allows businesses to see beyond the present and create the future (Ahmed, 1998).
Innovation typically goes through three stages: idea generation, feasibility analysis and
commercialisation in a typical organisation. These stages run in reality concurrently although
most academics typically want to explain them sequentially.

Innovation occurs in several functional areas of an organisation. Some key areas have been in
product and service innovation (Sundbo, 2003), conceptual innovation (Den Hertog et al,
2010), technological and organisational innovation (Van der Aa and Elfring, 2002), ad hoc
1
innovation (Dolfsma, 2004), administrative innovation (Baba, 2012) and revenue model
innovation (den Hertog et al, 2010). The adoption of these innovation approaches is the
area on innovation that most organisations are concerned with.

The background of the proposal has established the importance of innovation in SMEs. The
next sections look at the problem statement, objectives, theoretical framework,
methodology, relevance of study, area of focus under the scholarship programme and the
references.

2
Problem
Statement
SMEs are critical to the development of any economy as they usually form the bulk of
economic activity (Kayanula and Quartey, 2000) especially in the developing world. Most
of these SMEs
do not survive their second birthday because of certain constraints. These constraints
include lack of capital, human resource challenges, market-based challenges,
unfavourable legal, regulatory conditions and weak institutional regimes (Abor and Quartey,
2010; Kayanula and Quartey, 2000; Mensah, 2004). Innovation is one of the key means
by which SMEs can overcome these harsh business conditions to survive and grow
into large corporate entities (Subrahmanya et al, 2010). Academics have studied the various
innovations (Sundbo, 2003; Van der Aa and Elfring, 2002) that can be adopted by SMEs.
These studies on innovation have focused on process and technological innovation
(Hoffman et al, 1998; Julien et al, 2004; Kalantaridis, 2010). Few studies have looked at
organizational innovation among SMEs with the exception of Salavou et al (2004) who
looked at organizational innovation in SMEs from the context of strategic orientation and
competitive structure in Greek SMEs. This study will consider the spread of
organisational innovation among rural SMEs. There have also been studies on the
spread and adoption of innovation (Hinson, 2007; Klaas et al, 2010). Several models
have been developed regarding the spread and adoption of innovative methods (Wade,
2009). Theoretically, the question still remains: what conditions are necessary to
spread of
innovation among rural enterprises? Do these innovations lead to rural enterprise success?
Also, few studies have focused on a qualitative approach (ODwyer et al, 2009) with most
studies focusing on quantitative approaches (Udry and Goldstein, 1999; Nordman and
Tolstoy, 2011; Salavou et al, 2004; Subramanyah et al, 2010) in studying the phenomenon.
SMEs tend to have flexible organisational structures therefore conducting qualitative research
will afford the opportunity to observe their innovation processes in real life situations using
ethnographic case studies. This study will therefore adopt a qualitative approach using
multiple case studies that present the real situations within which innovations have to be
adopted and their impact on SMEs overall success or failure.

Objectives of the
Study
The aims of this study
are:

i. To identify the sources of organisational innovation in rural small and medium

scale enterprises (RSMEs)
ii. To determine how innovation spreads among rural SMEs
iii. To explain the conditions necessary for the spread of organisational innovation
among
RSMEs
iv. To explore the impact of type of enterprise on the nature of organisational
innovation adopted
v. To understand the impact of organisational innovation adoption on RSME success
and growth
Theoretical
Framework
Innovation in
SMEs
SMEs are a widely discussed phenomenon among academics and policy makers. However,
there
is no clear definition of what it is. This is largely because companies differ in their levels of
capitalisation, sales, profitability and employment yet these have been the bases for definition
(Lopez and Aybar, 2000). Using these measures in defining SMEs therefore becomes
unreliable (Kayanula and Quartey, 2000). The generally accepted definition is Osei et
al (1993) categorisation using employees- a micro enterprise as one with less than 5
employees; small enterprise as one with 5 to 29 employees while a medium enterprise
is one with 30 to 99 employees. In terms of characterisation, Fisher and Reuber
(2000) mentions labour characteristics, sectors of activity, gender of owner and efficiency
(c.f. Abor and Quartey, 2010) as key attributes characterising SMEs in the developing world.

There is no general theory of innovation. Many researchers believe a general theory

is impossible due to the many complexities of innovation (Read, 2000). However, there
is the general believe that it is the adoption of new ideas and methods to enable
organisational survival and success (Drucker, 1985). Innovation comes from R&D that
is mainly organisation knowledge accumulation and imitating the innovations of other firms.
Several researchers have found differing ways by which this can be made possible. Inauen
and Schenker-Wicki (2011) mentions openness to outside-in methods; Cottam et al (2001)
suggests a strategic direction; Ortt and van der Duin (2008) also proposes a contextual
approach; Ahmed (1998) also found organizational culture as key.

The SME innovation link has been explored by several researchers and academics (Amara
et al,
2008; De vrande et al, 2008). The results are controversial despite the universally accepted
belief that innovation leads to greater firm performance. Rosenbusch et al (2011), in their
meta-analysis of the relationship between SME innovation and performance, found
that innovation- performance relationship is context-dependent. This suggests that within the
SME context, innovation does not just lead to direct performance; there are other
intervening variables like size, age and type of innovation.

The contextual factors that are discussed by Rosenbusch et al (2011) change, and
make it difficult for SMEs to know what degree of innovation is needed within the
context-specific issues. Amara et al (2008) provide a solution in their study of
manufacturing SMEs by suggesting that SMEs engage in a process of learning. The current
trend in SME innovation is towards open innovation which is the purposive inflows of
knowledge in and out of SMEs (Martinich, 2005). De Vrande et al (2008) studied
management challenges of innovation and report that SMEs pursue open innovation
primarily for market-related motives and challenges relate to organizational and cultural
issues as a consequence of dealing with increased external contacts (De Vrande et al, 2008).

In terms of the sources of innovation studies have reported personal relationships,

professional relationships, proximity to similar firms are as crucial (Cecci and Lubatti,
2012; Davenport,
2005). In terms of the factors affecting the spread of innovation the literature
reports
interrelationships with other firms, training programmes, culture, nature of markets and
usefulness of technology (Panuwatwanich et al, 2009; Nasco et al, 2008).

Theoretical
Fields
The study will fall on the Diffusion of Innovation (DOI) theory, Technology, Organisation
and
Environment (TOE) framework, organisational innovation (OI) framework, and
institutional theory.

DOI is a theory of how, why, and at what rate new ideas and technology spread through
cultures, operating at the individual and firm level. DOI theory sees innovations as
communicated through certain channels over time and within a social system (Rogers 1995).
The study will use this theory as the basis for spread of organisational innovation among rural
SMEs. The theory provides categories for analysing the stages of innovations among these
rural SMEs, considering the cultural and particular social system.

The TOE framework, developed in 1990 (Tornatzky and Fleischer 1990), identifies three
aspects of an enterprise's context that influence the process of adopting and implementing
technological innovation: technological context, organizational context, and environmental
context. This framework will help understand the innovation context of SMEs and how the
organisation and environment affect SME innovation.

Organizational innovation (OI) refers to the creation or adoption of an idea or behaviour

new to the organization (Damanpour 1996). OI is made up of three dimensions: systems,
primary and secondary dimension (Van der Aa and Elfring, 2002). This model forms the basis
of the current study to understand how, as organisations, SMEs receive new ideas and
methods in their businesses. The absence of a general theory of innovation points study
towards this model.

Institutional theory discusses the deeper and more enduring parts of social structure. It
explains how social structures are created, diffused, adopted, and adapted over space and
time; and how they fall into decline and disuse (DiMaggio and Powell, 1991). This
theory is applied in the study to understand the prevailing rural institutions affecting the
adoption and use of innovation.

Methodolog
y
An in-depth multiple case study methodology underpinned by ethnographic data
collection
methods will be used for the study. This research method is consistent with the philosophy of
inducting theory, combining ethnography and case studies (Eisenhardt, 1989).
Previous exploratory studies have used extensive statistical survey techniques to develop the
key issues in the area of innovation in SMEs (Nordman and Tolstoy, 2011;
Subramanyah et al, 2010).
However, this study attempts to obtain deep rich data on organizational innovations
among SMEs, using ethnographic data collection approaches. The strengths of building
understanding from cases using ethnography includes the possibility of generating new
in-depth insights through data of various kinds from various sources (Creswell, 2007). The
resultant understanding and models are likely to be valid as they are closely linked with case
evidence with multiple data collection methods (Hernes, 2008; Yin, 2004). A group of case
SMEs from will be chosen from various sectors of rural economy. All of the SMEs must be
trying to improve their businesses by applying various management philosophies, mainly
new innovation. The research study is expected to involve ten SMEs (located in rural
areas), all with fewer than 100 employees to investigate the organizational innovation in
SMEs. Rural SMEs (RSME) refers to SMEs located outside Metropolitan areas with literacy
rates less than 40%, agriculture/agriculture-related dominant employment of about 70% and a
per capita income of GHC 500 or less. The rural communities will be determined using
information from the Ghana Statistical Service.

Organizational innovation and its components will be used to carry out initial measures
of innovation. Each RSME will be given an innovation rating. The data will be obtained from:
4 weeks of participant observation in each of the 10 RSMEs working as a business
services provider. The analysis of data will be by means of inductive-based analysis mainly
using data display and analysis (Miles and Huberman, 1994) and analytic induction
(Johnson, 2004). Evidence will be collected in the form of taped interviews, pictures and
field notes using the daily diary approach. Also, focus groups representing a diagonal slice
through the organization will be interviewed to give broader and deeper data and to obtain
triangulation (Saunders et al,
2007; Malhotra and Birks,
2007).

Relevance of
Study
The study is significant for four main reasons. First, the study helps identify the sources
of
innovation among RSMEs; these sources can then be influenced to include any future
innovative methods that can impact positively on rural enterprises. Second, an
understanding of the conditions necessary for spread of innovation will help organisations
training RSMEs to focus on achieving these conditions and desired effects. Third, knowing
the discriminating effect of type of RSME on adoption behaviour will help target specific
innovations to specific RSMEs. Finally, understanding the relationship between RSMEs
success and innovation adoption will build confidence for these enterprises to easily adopt
any future innovations that enhance their organisational effectiveness.
Area of
Focus
The academic area of focus is Innovation and Diffusion Processes. It has cross-cutting
issues
with rural livelihoods and upgrading and
innovation.
References
Abor, J., and Quartey, A. (2010), Issues in SME Development in Ghana and South
Africa,
International Research Journal of finance and Economics, Vol. 39, No. 6, pp. 215-
228

Ahmed, P. (1998), "Culture and climate for innovation", European Journal of

Innovation
Management, Vol. 1 No.1, pp.30-
43

Amara, N., Landry, R., Becheikh, N., Ouimet, M. (2008), Learning and Novelty of
Innovation in
Established Manufacturing SMEs. Technovation, 28, 450-
463

Baba, (2012) "Adopting a Specific Innovation Type versus Composition of Different

Innovation
Types: Case Study of a Ghanaian Bank", International Journal of Bank Marketing, Vol. 30
Iss: 3

Buckler , S.A. (1997), The spiritual nature of innovation, Research-Technology

Management, March-April, pp. 43-7.

Cannarella, C and Piccioni, V (2003), Innovation transfer and rural SMEs Journal of
Central
European Agriculture, Vol. 4 No.4 pp 372-
388

Christensen, J.F. (2002) Corporate Strategy and the Management of Innovation

and
Technology, Industrial and Corporate Change, Vol. 11 No.2 pp 263-
288

Cecci, F and Lubatti, D (2012), Personal relationships and innovation diffusion in

SME
networks: A content analysis approach Research Policy, Vol 41, Issue 3, April 2012,
Pages
565-579
Cottam, A., Ensor, J., and Band, C. (2001), A benchmark study of strategic
commitment to innovation, European Journal of Innovation Management, Vol.4, No. 2, pp.
88 - 94.

Creswell, J. W. (2007), Qualitative Inquiry and Research Design: Choosing Among

Five
Approaches. Thousand Oaks, CA:
SAGE.

Damanpour, F. (1996), Organizational complexity and innovation: developing and

testing multiple contingency models, Management Science, Vol. 42, pp. 693-716.

Davenport, S. (2005), Exploring the role of proximity in SME knowledge-

acquisition
Research Policy, Volume 34, Issue 5, June 2005, Pages 683-
701

Davila, T., Epstein, M. J., and Shelton, R. (2006), Making Innovation Work: How to Manage
It, How to Manage It, Measure It, and Profit from It. Upper Saddle River: Wharton
School Publishing
De Vrande, V, De Jong, J, Vanhaverbeke, W and De Rochemont, M (2008), Open
innovation in
SMEs: Trends, motives and management challenges Technovation Vol 29, Iss 6-7, Pp 423-
437

Den Hertog, P., Van der Aa, W., and de Jong, M. (2010) Capabilities for managing service
innovation: towards a conceptual framework, Journal of Service Management, Vol. 21, No.
4, pp. 490514.

DiMaggio P. J. and Powell, W (1991), The Iron Case Revisited. In Powell & DiMaggio
(eds.): The New Institutionalism in Organizational Analysis. University of Chicago Press,
Chicago, pp.
63-82.

Dolfsma, W. (2004), The process of new service development-issue of formalization and

approbriability, International Journal of Innovation Management, Vol. 8, No. 3, pp. 319-337

Drucker, P. (1985), Innovation and Entrepreneurship, Harper & Raw, New

York

Eisenhardt, K. M. (1989), Building Theories from Case Study Research, Academy

of
Management Review, vol.14, pp 534-
550.

Fisher, E. and R. Reuber, (2000), Industrial Clusters and SME Promotion in

Developing
Countries, Commonwealth Trade and Enterprise Paper No.
3.

Hernes, T. (2008), Understanding Organization as Process: Theory for an entangled

world, Routledge, London.

Hinson, R (2007), Internet and Academics: Towards a Holistic Adoption Model

Online
Information Review, Vol. 30 No. 5 pp 542-
554

Hoffman, K., M. Parejo, J. Bessant, and L. Perren (1998), Small firms, R&D, technology
and innovation in the UK: a literature review. Technovation, Vol. 18, No. 1, pp.39-55
Inauen, M., and Schenker-Wicki, A. (2011), The Impact of Outside-in Open Innovation
on
Innovation Performance, European Journal of Innovation Management, Vol. 14, No. 4,
pp.
496
520.

Johnson, D. (2004), The Innovative Organisation: Linking people Development to Business

Development, Entrecode, [Online] Available at: http://www.entrecode.co.uk/images/The-
Innovative-Organisation.pdf [Accessed on March 17, 2012].

Julien P.A., Andriambeloson, E. and Ramangalahy, C. (2004), Networks, weak signals

and technological innovations among SMEs in the land-based transportation equipment
sector, Entrepreneurship and Regional Development, Vol. 16, No. 2, pp. 251269.
Kalantaridis C, (2010), ``In-migration, entrepreneurship and rural- urban interdependencies:
the case of East Cleveland, North East England'', Journal of Rural Studies, Vol. 26, pp. 418 -
427

Kayanula, D. and Quartey, P. (2000), The Policy Environment for Promoting Small
and Medium-Sized Enterprises in Ghana and Malawi, Finance and Development Research
Programme, Working Paper Series, Paper No 15, IDPM, University of Manchester.

Klaas, B. S., Klimchak, M., Semadeni, M., and Holmes, J. J. (2010), The adoption of
human capital services by small and medium enterprises: A diffusion of innovation
perspective, Journal of Business Venturing, Vol. 25, pp. 349-360.

Lopez-Garcia, J., Aybar-Arias, C. (2000), "An empirical approach to the financial behaviour
of small and medium-sized companies", Small Business Economics, Vol. 14 No.1, pp.55-63

Malhotra, N and Birks, D (2007), Marketing Research: An Applied Approach, Prentice

Hall

Martinich, L. (2005) Being open: managing innovation. Engineering Management

Conference

Mensah, S. (2004), A Review of SME Financing Schemes in Ghana, A Presentation at

the
UNIDO Regional Workshop of Financing SMEs, Accra, Ghana, March 15-
16.

Miles, M. B., and Huberman, A. M., (1994), An Expanded Sourcebook: Qualitative

Data
Analysis, Sage Publications Inc., Thousand Oaks,
California

Nasco, S, Toledo, E and Mykytyn Jr, P (2008), Predicting electronic commerce

adoption in
Chilean SMEs Journal of Business Research, Volume 61, Issue 6, June 2008, Pages 697-
705

Nordman, R. E. and Tolstoy, D. (2011), technology innovation in internationalizing

SMEs,
Industry and Innovation, Vol. 18, No.
7
O'Dwyer, M., Gilmore, A., Carson, D. (2009), "Innovative marketing in SMEs does it
exist?",
European Journal of Marketing, Vol. 43 No.1/2, pp.46-
61.

Ortt, J and van der Duin, P. (2008), "The evolution of innovation management
towards contextual innovation", European Journal of Innovation Management, Vol. 11 Iss:
4, pp.522
538

Osei, B., A. Baah-Nuakoh, K. A. Tutu, and N. K. Sowa, (1993). Impact of

Structural Adjustment on Small-Scale Enterprises in Ghana, in Helmsing, A. H. J. and
Kolstee, T. H. (eds.), Structural Adjustment, Financial Policy and Assistance Programmes in
Africa, IT Publications, London.
Panuwatwanich, K, Stewart, R and Mohamed, S (2009) Critical pathways to
enhanced innovation diffusion and business performance in Australian design firms
Automation in Construction, Technovation, Volume 18, Issue 6, October 2009, Pages 790-
797

Parker, R., Riopelle, R., and Steel, W. (1995), Small Enterprises Adjusting to Liberalisation
in Five African Countries, World Bank Discussion Paper, No 271, African Technical
Department Series, The World Bank, Washington DC.

Rammer, C and Schmiele, A (2008), Globalisation of Innovation SMEs: Why They Go

Abroad and What They Bring Back, Applied Economic Quarterly 59 (Supplement) 173-206

Read, A. (2000) Determinant of successful organizational innovation: a review of

current research, Journal of Management Practice, Vol. 3, pp. 95119.

Rogers, E.M. (1995), Diffusion of innovation. New York: Free

Press

Rosenbusch, N., Brinckmann, J., & Bausch, A. (2011), Is innovation always beneficial? A
meta- analysis of the relationship between innovation and performance in SMEs. Journal of
Business Venturing.

Rothwell, R. (1991), External networking and innovation in small and medium-

size manufacturing firms in Europe Technovation, 11 (2), 93-112

Salavou, H., Baltas, G., Lioukas, S. (2004), "Organisational innovation in SMEs: the
importance of strategic orientation and competitive structure", European Journal of
Marketing, Vol. 38
No.9, pp.1091-
112.

Saunders, M, Lewis, P and Thornhill, A (2007), Research Methods for Business Students,
4/e
Prentice
Hall

Schumpeter, J.A. (1911/1938), The Theory of Economic Development, Cambridge,

MA.: Harvard University Press [German original 1911].
Subrahmanya, M.H.B, Mathirajan,M. and Krishnaswamy, K.N. (2010). Importance
of
Technological Innovation for SME Growth. Working Paper No. 2010/03. [Online].
January
2010. Available from: http://www.wider.unu.edu/publications/working-papers.
[Accessed: 2
January
2011]

Sundbo, J. (2003), Innovation and strategic reflexivity: an evolutionary approach applied to

services, in Shavinina, L.V. (Ed.), The International Handbook on Innovation, Elsevier,
Oxford, pp. 97-114.
Tornatzky, L. G. and M. Fleischer (1990). The Processes of Technological
Innovation, Lexington, Massachusetts, Lexington Books.

Udry, C and Goldstein, M (1999), Agricultural Innovation and Resource Management

in
Ghana Final Report to IFPRI under MP17

Van der Aa, W., and T. Elfring (2002), Realizing innovation in services, Scandinavian
Journal of Management, Vol. 18, No. 2, pp. 155-171.

Wade, M (2009), Resource-based View of the firm [online] www.fsc.yorku.ca

accessed
10/12/2011

Yin, R (2004), Case Anthology, Sage Publications

10
10