Honey, I shrunk the R&D cost: How 'open innovation' can sharpen competitive edge
Businesses cannot work in silos. Although we live in a competitive world, leveraging complementary resources like research, finance and intellectual property among firms, can accelerate innovation and organisational changes.
Economic Time (ET): Traditionally, what are some of the current issues plaguing SMEs to reach a position of scale?
Sandrine Kergroach (SK): SMEs face issues in attracting and retaining talents. They lack scale and networks for identifying and hiring the skills they need. They offer less attractive remuneration and working conditions, paying on average salaries 20% lower than large firms. They are less likely to train their staff and offer personal development opportunities, often because of a lack of dedicated internal training or Human Resources departments to organise and co-ordinate training. In addition, relative financial efforts are higher for smaller firms than cannot distribute training costs over a larger group of employees.
The benefits for SMEs of offering better jobs can be manifold and extensive. First, upskilling their workforce can help them close the productivity-wage gap with large firms, and attract more highly skilled workers. It can also help them strengthen their position in global value chains (GVCs) by enabling specialisation in high value-added activities (e.g. technologically-advanced industries, complex business services) and integration into higher value-added segments of GVCs. Skilled employees are key assets for SMEs to manage organisational change during a transition, such as growth, exporting for the first time, or digital transformation which, in turn, is key for participating in emerging digital-based production and supply chain systems. Improving the quality of these businesses can have a direct impact on the entrepreneur's life by increasing their income, standard of living, and well-being.
The greening of SMEs is also likely to bring them multiple benefits. Although smaller firms are typically less energy intensive and incur relatively lower energy costs in proportion of their overall costs, there is room for improving SME energy efficiency and gains in terms of costs, visibility and resilience. Those benefits range from reduced intermediary consumptions and costs, to access to new markets, to lower vulnerability to energy price volatility, to higher compliance with environmental standards, or to higher profile vis-à-vis customers and business partners etc. Such gains have been estimated from 10% to 30% of SME energy demand by diverse sources (IFC, 2012; Eurochambres, 2014; Thollander and Palm, 2013). Substitution to renewable sources could be all the more facilitated as SME lower energy intensity allows them using a greater range of technology mixes, but benefits will differ across industries and value chains configuration (IEA, 2014).
Moreover, the green transition is creating new market conditions and opening up opportunities for SMEs. As suppliers of green goods and services, SMEs are especially well positioned to operate in green supply chains in local markets that may be unattractive or impenetrable for large global firms.
ET: In what way can the concept of circular economy be helpful for smaller firms?
SK: The circular economy, whereby products, materials and resources are maintained in the economy for as long as possible, waste reduced and natural resources preserved, creates a new business case for smaller firms. Indeed circular industrial systems encourage the creation of 'local value loops' that require both minimum geographical proximity and enough agglomeration effects to be scalable. In this context, business models may evolve towards a more customer-focused thinking, for which more reactive, smaller scale, firms have a comparative advantage. In addition, the old linear system which led to a sub-optimal level of factor productivity (the value created being lost in landfills, and products, components and material being under-utilised), increased SME exposure to risks, notably related to unpredictable resource prices and supply disruptions. A business survey conducted at EU level showed that for over 41% of European SMEs, investing in resource efficiency paid off and helped decrease production costs, this was 6% more than 5 years earlier (European Commission, 2018). The transformational effect of the circular economy will of course differ across sectors, but it is expected to get higher impact in sectors where SMEs are in the majority, e.g. wholesale and retail trade, or accommodation and food services (for the 'share' models), administrative and support services or legal, accounting and knowledge-intensive services (for the 'virtualise' models), or construction and transport and storage (for the 'loop' models).
ET: Why is a collaborative approach - specifically for SMEs - deemed so significant for enterprises when it comes to attaining sustainable development goals?
SK: Collaboration is a means for firms of all sizes to leverage complementary resources (research, finance, talent, data, intellectual property) from other firms, as well as from universities and knowledge institutions, in order to accelerate innovation and organisational changes. In the digital space (social media, platforms), it is also a way to generate or collect valuable data with users/consumers. Yet, collaboration requires trust supported by legal frameworks that protect IPR, data, investors and consumers, or are based on clear governance processes for "pre-competitive" collaboration to address systemic RBC risks.
Collaborative approaches are particularly significant for SMEs because those confront specific barriers in finding and using the technology, data, information and networks that would enable them innovating. SMEs tend to be more dependent on external sources of knowledge but they are also less well integrated into the local, national and global innovation networks that would help them capture knowledge spillovers. It could, for instance, be more challenging for SMEs to find out supply chain risk information or implement policies such as requiring suppliers to pay a living wage, or identifying and preventing forced labour by tracking risk indicators further upstream in their supply chain, and SMEs may gain leverage to effectively address these risks through collaboration.
Yet, smaller firms can have a competitive edge due to their higher risk acceptance, greater flexibility, greater ability to integrate complex sets of information and technologies, more agile and adaptive organisational culture, as well as greater cohesion and sense of collective purpose. SMEs play, therefore, a key role in shifting innovation models towards sustainable pathways, adapting supply and processes to different contexts or user needs, including being more responsive to new or niche demand whether for RBC- or product-related innovation.
Business linkages act as channels for accessing technology, skills or for fostering data exchange and knowledge spillovers. Firms engaged in buyer-supplier relationships can enter in collaborative arrangements for undertaking innovation, for competition or internationalisation purposes or for workforce training. Integration into GVCs is of particular relevance for small firms that can proceed to capacity upgrading through the exchanges that take place within the value chains. Collaboration with customers can also be a channel, especially as SMEs tend to enjoy close relationships with end-users and better understanding of near-by market. So, collaboration can be beneficial in pooling knowledge on sector risks and solutions, increasing leverage (to the extent feasible) with shared business relationships, or generally improving the efficiency of due diligence activities, for example to harmonise supplier assessment methodologies.
In fact, business innovation, no longer confined to corporate R&D labs, is increasingly the results of collaborative efforts between business partners that interact, exchange knowledge and information and share standards and infrastructure. This shift towards an 'open innovation' (OI) paradigm has considerably reduced the investments needed to access innovation assets, making the innovation endeavour more accessible to SMEs.
Large firms have been taking actively part to the OI transformation by developing strategic partnerships with smaller actors or by deploying specialised accelerators where start-up and individuals can access office infrastructure and supportive business environment for nurturing new ideas and incubating projects that could be profitable to their sponsors' business ecosystem. The rise of the platform economy has also been instrumental to the deployment of these new OI practices as industry platforms, marketplaces and crowdsourcing platforms allowed to various degrees enhancing system integration, interoperability and data sharing and openness.
ET: Why is sustainable development so important for an SME? How can it help towards better efficiencies and profitability for them as an enterprise?
SK: Small and medium-sized enterprises (SMEs) have an important role to play in achieving the Sustainable Development Goals (SDGs), by promoting inclusive and sustainable economic growth, providing employment and decent work for all, promoting sustainable industrialisation and fostering innovation, and reducing income inequalities. But, in moving towards more sustainable growth pathways, SMEs can also find new opportunities to reduce costs, improve access to strategic resources, change business models and enter new markets.
Typically, SMEs are where decent jobs could be created. In 2016, almost one person out of three in the OECD area worked in a micro firm (with less than 10 employees) and two out of three in an SME (with less than 250 employees). In 2016, SMEs accounted for 99% of the enterprises and employed more than 99% of the workforce in the garment and footwear sector. SMEs are often the place where many vulnerable populations, such as women, youth, people from poorer socio-economic background etc are employed.
Furthermore, many of the businesses operated by women, youth, seniors, the formerly unemployed and immigrants are small in size. Self-employment is seen as a way to move unemployed or disadvantaged people into work and entrepreneurship. There were 30.6 million self-employed people in the European Union in 2016, of which nearly 10.0 million were women, 11.8 million were seniors, and 3.4 million were immigrants. Recent trends in business dynamics suggest that SME difficulties in doing business and dealing with weak business conditions may have compounded into lower productivity and lower wages at aggregate level.
Since 2010, job creation has been driven by new firm creation (and not firm growth) in most OECD countries, and these new firms have been born smaller, in lower productive sectors and paying lower wages. Between 2010 and 2016 for example, close to 90% of all new jobs were created in lower wage activities in France, over three-quarters in the US and close to two-thirds in Germany and the UK.