Knowledge sources as determinants of firm level innovation in Vietnam: An empirical study

n, will benefit a firm’s innovative performance. However, the degree to which knowledge from inside or outside the supply chain affects innovation might be different. It has been demonstrated that 53 joining alliance networks can enhance firm learning and innovation (Ahuja, 2000; Soh, 2003; Walker, Kogut, & Shan, 1997). Pittaway, Robertson, Munir, Denyer, and Neely (2004) emphasize that network relationships with suppliers, customers and intermediaries are vital factors affecting firms’ innovation performance and productivity, as different partners control different sources of knowledge and information, which will influence firms differently. Furthermore, firms that do not collaborate nor exchange knowledge, limit their knowledge base in long term. Several lines of evidence suggest that collaborative knowledge sources are critical not only to create in-house innovations, but also for learning about innovative work practices that other organizations have done or adopted (Biemans, 1991; Erickson & Jacoby, 2003). Empirical findings from South African firms showed that these firms used different external sources, including (1) business organizations: buyers, suppliers, competitors, consultants and sectoral institutes; (2) technological knowledge sources: public research labs, universities, innovation centers; and (3) codified knowledge sources: patents, electronic databases (Oerlemans & Knoben, 2010) . Using knowledge from competitors and suppliers seems to increase the number of innovations within a firm, while others sources such as universities and institutes have less effects on the innovative potential of firms (Oerlemans & Knoben, 2010; Doloreux and Lord-Tarte (2013) (Oerlemans & Knoben, 2010; . However, Laursen and Salter (2006) also provided evidence for an inverted U-shape relationship between the number of collaborative knowledge and innovative performance. In addition, they also found a curvilinear effect related to how deep firm’s use collaborative knowledge. They concluded that when firms adopt too many collaborative knowledge sources or if firms use more than three sources of collaborative knowledge deeply in their innovative activities, the declining returns are likely to begin. Evidence from several recent studies found an inverted U-shape as well (Bayona-Saez et al., 2017; Chiang & Hung, 2010; Garriga, Von Krogh, & Spaeth, 2013). However, given our specific research context in a lower middle- income country with a still underdeveloped technological environment, the amount 54 of collaborative knowledge sources is probably more restricted compared to more advanced countries. This means that the author does not expect that firms are confronted with external information overload. Yet, given the negative effect of over- search on innovation in developed countries, the study tentatively explores the existence of this relationship in Vietnam in a separate analysis (in line with Bayona- Saez et al. (2017); Hung and Chou (2013); Laursen and Salter (2006)) ). The author formulates the following hypotheses: Hypothesis 2a: The stronger a firm’s collaborative knowledge gained from inside the supply chain, the higher the likelihood that that firm produces product innovation. Hypothesis 2b: The stronger a firms’ collaborative knowledge gained from outside the supply chain, the higher the likelihood that that firm produces a product innovation. 3.5.3. Regional knowledge sources Access to resources that are not internal to the firm can also stem from simply being located in a region where many other firms are located, a so-called agglomeration. Within that region, firms could take advantage of available specialized labour, specialized inputs, technological spill-overs, and demand market thickening thickening (McCann & Folta, 2008). A large body of research shows that tacit knowledge can be implanted in geographic regions, enabling firms within these regions to draw from this knowledge (Boschma, 2005; Sorenson & Baum, 2003; Tsuji & Miyahara, 2010). Additionally, social scientists have long recognized the importance of geography for innovation (Doloreux & Lord-Tarte, 2013; Frenken, van Oort, Verburg, & Boschma, 2005; Funk, 2013; Laursen et al., 2012). Being in scientific communities and recruiting skilled employees provide knowledge that help firms innovate and generate competitive advantage. McCann and Folta (2008) state that if firms are located in clusters, there is a pooled market for workers with specialized skills, which benefits both workers and firms. 55 Moreover, when firms require specialized inputs such as tools, suppliers, manufacturing facilities or services, being in the same region with other firms in the same or similar fields would help them to reduce transaction costs. Schumpeter (1934) mentioned that proximity is helpful as it enables access to diverse knowledge that firms can recombine in novel ways to make discoveries. Furthermore, the benefit of being in the same region with other firms can help a firm to stay informed of technological knowledge, which help them to be more innovative (Funk, 2013). Proximity is considered an important condition for knowledge sharing, transfer and technology acquisition (Gertler, 1995). Firms’ innovation processes can change remarkably across regions (Doloreux & Lord-Tarte, 2013). Being close to firms from the same or similar industry could bring firms benefits in terms of labor market pooling and transport cost savings. At the same time, being with firms from outside its industry could provide firms with knowledge spillovers (Beaudry & Schiffauerova, 2009). For those reasons, the author supposes that when firms are located in a region with more firms or a region with high levels of R&D activities, it is more likely for them to innovate. Hypothesis 3a: The stronger the knowledge base of the region a firm is located in the higher the likelihood that that firm produces a product innovation Hypothesis 3b: The higher the population of the region a firm is located in the higher the likelihood that that firm produces a product innovation 3.6. Research model Innovation has been studied as an indicator for firm performance in numerous studies (Artz et al., 2010; Calantone, Cavusgil, & Zhao, 2002; Darroch, 2005; Hitt et al., 1997; Kasseeah, 2013). It is broadly viewed as one of the most important springs of sustainable competitive advantage in an progressively changing milieu, because it leads to firm’s improvements, creates continuous advances that benefits firms to survive, lets firms to develop more speedily, be more efficient, and finally be more 56 profitable than their competitors who do not innovate. Hence, a firm’s capacity to generate innovations has consistently been considered a source of sustained competitive advantage (Barney, 1991). Additionally, innovation often originates from the exchange and recombination of knowledge. Therefore, firms need to acquire new knowledge from numerous sources to continuously generate innovations and maintain their competitive edge (Porter, 1990). Moreover, the increasing of knowledge-based economies has directed to the growth of the ‘knowledge-based view’ theory. This theory suggests that knowledge is the core source of firms’ competitive advantage and therefore the ability to generate knowledge is one of the most significant abilities of firms (Grant, 1996a) . Under this hypothesis, firms could be considered as knowledge creating hub (Nonaka & Takeuchi, 1995). Firm-level resources allow firms to distinguish themselves from their competitors and develop a competitive advantage. According to the resource-based view (RBV) of the firm, this is only possible, however, when resources are valuable, rare, inimitable and non-substitutable (Barney, 1991). Even though knowledge is crucial for all type of firms, the exact type of knowledge that is most useful might differ between larger and smaller firms. Large companies engaged in internationalization pay particular attention to internal knowledge as a source of innovation (Scaringella, 2016). SMEs on the other hand are resource-constraint so they need to draw on knowledge networks that tie a broad set of partners, customers and suppliers together to take advantage of innovation resources. As such, these firms could benefit from an ‘open innovation’ approach. According to to ChesbroughChesbrough (2003, p. XXIV) “open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as firms look to advance their technology.”. Hence, open innovation refers to the capability of firms to connect with other actors and develop connections in order to make use of external sources 57 and ideas (Chesbrough, 2003; Sakkab, 2002). Firms that are solely focused on internal knowledge sources, miss opportunities and potentially suffer from lock-in of existing ways of doing business (Uzzi, 1997). Several recent studies suggest that a growing number of firms pursue an open innovation strategy, which means involving both inbound activities (focusing on external knowledge sources and collaboration with external stakeholders) and outbound activities (generating knowledge through R&D for own uses and commercializing innovations) (Greco et al., 2015; Schroll & Mild, 2012; West & Bogers, 2014) . In a related stream of literature, Boschma (2005) and Asheim and Isaksen (1997) and argue that firms can learn and gain external knowledge by being located in a region with other firms. Hence, knowledge might flow from various sources, which can be internal, collaborative and regional sources. Internal knowledge sources could be generated by firms through in-house R&D activities, employee training or managers’ experience (Chen & Huang, 2009; Frenz & Ietto-Gillies, 2009; Martínez-Ros & Orfila-Sintes, 2012). Collaborative knowledge sources could come from collaborative activities between firms and their counterparts from inside the supply chain, such as competitors, suppliers and customers, or from outside the supply chain, such as universities and research institutes (Lin, Hung, Wu, & Lin, 2002). Regional knowledge sources come to firms from the information available in the region where firms are located, because knowledge may spill over across firms, especially when the distance between them is small (Boschma, 2005; Knoben & Oerlemans, 2006). Boschma (2005) states that short distances could bring people together, favor information contacts and facilitate the exchange of tacit knowledge. Hence, within the same region, firms could have access to specialized labor sources and gain knowledge from their expertise. Furthermore, more recent attention has focused on the effect of internal firm dynamics, inter firm linkages and regions on innovation (Doloreux & Lord-Tarte, 2013; Giuliani, 2006; Wang & Lin, 2012). Similarly, this study therefore aims to simultaneously test the relationship between three different sources of knowledge (internal, collaborative and regional) with innovation. 58 In this study, the author focuses on product innovation, which is defined as “a good or service that is new or significantly improved. This includes significant improvements in technical specifications, components and materials, software in the product, user friendliness or other functional characteristics” (OECD/Eurostat, 2005, p. 48). Illustrations of product innovation might contain new product's inventions; technical condition and quality enhancements made to a product; or the attachment of new components in that product, materials or desirable functions into a current product. It is now well established from a variety of studies that the ability of firms to introduce product innovation is considered a key determinant of organizational performance and sustainable development (Danneels, 2002; Laursen, Masciarelli, & Prencipe, 2012). 59 Figure 3.1: Research model with all the variables Source: The author composed and designed Innovation outcome - Product innovation Regional Knowledge Sources - Knowledge benefit from the position of the firm even when firms do not enter in any collaboration Collaborative Knowledge Sources - Knowledge from inside the supply chain (from customers, competitors, suppliers) - Knowledge from outside the supply chain (Universities, Research institutes) Internal Knowledge sources - Internal R& D - Managerial Experience 60 CHAPTER 4: METHODOLOGY AND DATA COLLECTION 4.1. Research context Although Vietnam has grown astonishingly in the past three decades, the transition to a flourishing and modern economy has only just begun. Vietnam has per capita income still accounting for only a little part of the global average, the country is attempting to maintain its fast-growing path and follow the direction of other successful East Asian economies to join the ranks of high-middle income countries for the past half-decade. Even though Vietnam has every potential to achieve this goal, victory is not by itself. The population is aging rapidly, which moderate labor productivity. Moreover, slow investment growth is weighing on Vietnam's medium- term growth potential. How to cope with the resistance of domestic structures? According to the political report of the 10th Central Committee of the Party at the 11th National Congress of the Party, Vietnam needs to steer the external environment changing, where global trade structures are shifting, breakthrough technology, rapid innovation, and Climate change is shaping opportunities and creating new risks for the country. Whether Vietnam can continue to maintain previous growth or not, this is extremely important. Although growth is not the goal that the government are aiming for, growth is a necessary condition for the wider development. It is the basis needed for creating jobs, alleviating poverty and mobilizing resources to invest in health, education and other social goals. Vietnam have some advantages that we should not forget which are a geographic location, an open economy, a young and largely labor force in rural areas, and a high level of domestic savings. Therefore, the country has conditions for high and sustainable growth. Nonetheless, in order to take advantage of these fundamentals, the government needs to regularly focus on policy and institutional reforms targeted at creating increased productivity, effective investment in human capital and physical capital, sustainable and efficient use of natural resources. 61 Recently, the big trends are global transforming forces, shaping the future world by profound influence on businesses, society, economy, culture and human life. Hence, Vietnam should be able to identify success, analyze and has action to face those major trends to build a long-term dynamic development strategy that contributes to successful economic development due to the fact that Vietnam is likely to be the country most affected by major global trends. Vietnam is one of the most open countries in the world, with trade to GDP ratio reaching nearly 200% and FDI inflow accounting for about 7% of GDP in 2018 (GSO, 2019). Regarding geopolitical position and trade structure, Vietnam may be more vulnerable to climate change and US-China trade tensions. Therefore, The Central Theoretical Council (2019) suggest four major global trends that Vietnam needs to consider in the next two decades which are population movement, disruptive technology, the rise of China and climate change. We could see the vital role of innovation especially breakthrough technology which could be defined as emerging technologies that cause a change in costs or access to products or services, or quickly change the way we collect information, produce or interact operative (Lientz & Rea, 2016) . Vietnam are currently in the midst of the 4th industrial revolution, characterized by rapid technological diffusion, multi-technology convergence, and emergence of global platforms. Breakthrough technology is often based on technology and digital products, but they can go beyond the connection and potential of the internet. This includes modern production methods such as robotics, artificial intelligence, and the internet of things. They also include advances in nanotechnology and biotechnology - and new production lines such as batteries, drones, solar panels, self-driving cars, and exotic materials (Lientz & Rea, 2016). The vast opportunities will be associated with innovation and technological breakthroughs that contribute to expanding access to global markets, creating new 62 goods and services, transforming production processes, changing business models, and make a significant impact on development. The economic and social transformation that innovation and especially breakthrough technology could bring is that they could accelerate development of a country. If a country cannot compete in the future global economy, they will be left behind. Hence, to take advantage of the potential of new business models, ways of providing services, and shifting the source of competitiveness, Vietnam need to have a multi-sector and multi-pronged approach to increase opportunities especially foster innovation and technology for the country. Assessing innovation policy in Vietnam In the 2017-2018 Global Competitiveness Report carried out by the World Economic Forum (WEF), Vietnam's institution was awarded 3.8 out of 7 points, ranked 79th out of 137 economies, behind Laos (62/137) and Thailand (78/137). Additionally, the 2016 World Bank's Easy Business Index also showed difficulties in the business process in Vietnam such as starting a business (ranking 119/189), protecting investors (ranking 122/189), and tax (ranked 168/189). These obstacles have made business activities in general and innovation activities of firms in particular difficult. Phung Xuan Nha and Le Quan (2013) in research on innovation of Vietnamese enterprises also pointed out the main obstacles that many businesses often encounter when conducting innovation, in which the unstable state policy, high risk of innovation and lack of legal protection accounted for 80 percent and 70 percent respectively. US Embassy (2018) reported that despite various efforts made the government, intellectual property in Vietnam is yet to be effectively safeguarded. In 2017, the piracy software rate for the IT industry remained at 74 percent – a concerning record in comparison with other manufacturing destinations in the world. These are major barriers to the development of science and technology, technological innovation in Vietnam. 63 In recent years, the Ministry of Science and Technology (MOST) has identified firms as the center of innovation (creative innovation), in which, attaching importance to technological innovation to increase productivity and competitiveness of enterprises and nation. Policies and laws on science and technology have focused on promoting businesses to renovate technology and production processes. The national technology innovation program by 2020 has more than 50 technology innovation projects in diverse fields, in the form of a leading enterprise, cooperating with research institutes, universities or receiving transfer technology from abroad for technological innovation. In addition, the 3 parties linkage policy (Chính sách ba nhà) about the collaboration between universities, the government and firms announced at the 16th Conference of Science and Technology in 2019 emphasizes that innovation could only boosted and bring fruitful results when 3 parties work in harmony. For the State, they have investment programs on R&D (research and development), infrastructure investment, laboratories and most importantly, development of science and technology policies. As for entrepreneurs, they have financial resources, knowledgeable market, venture capitalists. With universities, they have human resources, advanced training programs, etc. Each party has its own strengths and needs a model of cooperation and cooperation to create high-value commercialized products. Vietnam could build up an environment to foster innovation by enforcing this policy as there are many other foreign countries do it very well. There are numerous policies in Vietnam related to innovation listed in Table 3.1 64 Table 4.1: Key Policy Documents related to innovation in Vietnam Parliament and Party promulgated documents Innovation and growth-related contents Notes Law on Science and Technology (2000, amended 2013) Encouraging innovative activities, technical improvements, production rationalizing and innovation (Article 47) Technology Transfer Act (2006) National technological innovation program (Article 38) National technological innovation fund (Article 39) Tax policies to promote technology transfer activities and other encouragements (Article 44, 45) High Technology Act (2008) The goal of technological innovation and the measures to promote high technology application (item a, Clause 2, Article 9, Article 10, Article 11, Article 12) Intellectual Property Law (2006) General conditions for protected industrial designs are new, innovative, capable of industrial application (Article 63) Central Resolution 6 in the development of science and technology The specific objectives of science and technology in 2020 (Paragraph b, Section 2) Government / ministry promulgated documents 65 Decision 1342/QD-TTg (5/8/2011) on the establishment of National Technological Innovation Fund Introduction of the national technology innovation fund and operational support funding for organizations, individuals and businesses doing research, transfer, innovation and technological perfection (Article 2) Decision 677/QD-TTg (10/5/2011) approving the national technological innovation program until 2020. Missions until 2015 and 2020 on technological innovation (Part I) Decree 122/2003/ND-CP on established national scientific and technology development fund Financial support methods from the fund for scientific missions and extraordinary new technologies (paragraph b of Article 13) Decree 119/1999/ND-CP of the Government on incentives for firms to invest in science and technology Encouraging technological innovation, manufacturing new products (Article 1, Paragraph 3 of Article 4) Decision 2075/QD-TTg (11/08/2013): To approve the program of science and technology market development until 2020 Regulations on science and technology market (Section 1, Part I) Decision 418/QD-TTg (2012) approved the development strategy of science and technology in the period of 2011-2020 Development of science and technology market associated with enforcement of intellectual property law to promote the commercialization of applicable research results and technology development, encourages scientific creativity and 66 technology. (Section 1 & Section 4, Part I) Decision 1244/QD-TTg (2011) on the approval of the direction, goals and tasks of science and technology in the period of 2011-2015 The target number of registered patent protection increased 1.5 times compared with the period 2006-2010. (Section 1, Part II) Decree No. 56/2009/ND-CP on support for the development of small and medium enterprises Innovating, technological capacity building, increasing number of technical qualifications (Article 9) Decision 2441/QD-TTg (2010) on the approval of the national product development program until 2020 National product development based on new technology and high technology (Section 1, Article I) Decree 115/2005/ND-CP, amended by Decree 96 provides for autonomy, self-organization and accountability of public science and technology organisations Strengthening accountability and enhancing positivity, proactivity, dynamic, creativity for science and technology organisations and their heads (Paragraph 1, Article 2) Decision 68/2005/QD-TTg on the approval of supporting the development of the intellectual property program for firms Supporting firms in creating and developing intellectual property for innovative achievements of science – technology. Encouraging creative work in firms; delevering intellectual property information to research activities, science – technology i