The Impact of Innovation on Small and Medium Enterprises Performance: Empirical Evidence from
Hargeisa, Somaliland
- Introduction
The fact that Small and Medium Enterprises (SMEs) constitute around 99.7 percent of the enterprises globally (Martin and Namusonge, 2014) proves their significance in contributing to the economic and industrial development in most countries. It is, therefore, necessary to put in place a policy mechanism that will assist their growth. In order to remain competitive, grow faster and function effectively and efficiently, SMEs need to utilize knowledge and technology efficiently. Employing advanced process technology, for example, generally leads to a better product quality and durability. Moreover, adopting a new technology results reduced costs by saving materials, energy or through replacement of conventional materials with cheaper alternative materials. SMEs play a major role in both developed and developing countries,
encompassing more than 90 percent of business operations in Africa, and also contributing over 50 percent of GDP and employment of their economies (Martin & Namusonge, 2014).
Innovation (in business) means novelty, new things being done, or old things being done in new ways to increase the performance in terms of sales, profitability and market shares in an organization. It is an application of technological, institutional, human resources and discoveries of productive processes, resulting in new practices, products, markets, institutions and organizations that need organizational improvement or performance in terms of sales, profitability and market shares. Innovation in SMEs can be a product, process or marketing innovation adopted in order to increase performance of enterprises in terms of sales volume or otherwise. Small and medium enterprises are considered as the machine of economic growth that drives and promotes equitable development of nations, which is achieved by adopting innovation principles. The role of Small and Medium Enterprises in the economic and social development of countries is well established when the concept of innovation is applied on the SMEs, and as a result, performance will be improving substantially. The sector is a nursery of entrepreneurship, often motivated by innovation (Twaliwi & Isaac, 2017).
SMEs in Hargeisa have not frequently applied the concept of innovation in their businesses. There are less new products in the market, less adoption of marketing innovation strategies and poor business innovation processes. As a result, these enterprises may not likely experience growing sales volume which in turn means poor performance. The market is full of old and previously existing products which the consumers already have knowledge about their quality. However, although SMEs in Hargeisa do not adopt innovation (product, process, marketing or organizational) fully and frequently, this does not mean there is a complete absence of innovation. Though in different degrees, all these innovations are present in these SMEs, and hence, their performance effect needs to be examined.
As innovation enhances the overall performance and competitiveness of the business, its effect can be probed from different angles. One of them is to evaluate the sales volume of the enterprise. Increased sales volume means increased business activities and revenue, and thus, it can be a clear measure of business performance. The purpose of this study is to investigate the effect of innovation on SMEs performance in Hargeisa, Somaliland. It specifically examines the impact of product innovation, process innovation, marketing innovation and organizational innovation on enterprises’ sales volume, and in turn, performance. Hargeisa is the capital of Somaliland, a self-declared republic in the Horn of Africa that broke away from Somalia in 1991 but has not obtained official recognition from any country since then.
The paper is organized as follows. Section one introduces the study while section two reviews the relevant literature. Section three is the methodology and section four presents the findings of the study. Section five concludes the study.
2.1.1 Small and Medium Enterprises (SMEs)
Small and medium enterprises may have different definitions in different areas. For instance, what is categorized as SMEs in Europe or America, may not be similar to that of Africa. Definitions are mainly based on the number of employees as well as the total assets of the enterprise. We, thus, attempt to compare and contrast various definitions. According to Nigerian National Council of Industries, SMEs are those enterprises whose total costs (excluding land) are 200 million Nigerian Naira (equivalently, around 553,000 USD) maximum (Onugu, 2005). In Britain, small scale business is considered as that industry with annual turnover of not more than 2 million pound (equivalently, around 2.6 million USD) with fewer than 200 paid employees (Bakare, 2014). Organization for Economic Cooperation and Development (OECD) provides a slightly different but close definition. As far as the number of employees is concerned, “[t]he most frequent upper limit designating an SME is 250 employees, as in the European Union. However, some countries set the limit at 200 employees, while the United States considers SMEs to include firms with fewer than 500 employees…Financial assets are also used to define SMEs…[T]he turnover of medium-sized enterprises (50-249 employees) should not exceed EUR 50 million [equivalently, around 58.7 million USD]; that of small enterprises (10-49 employees) should not exceed EUR 10 million [equivalently, around 11.7 million USD] while that of micro firms (less than 10 employees) should not exceed EUR 2 million [equivalently, around 2.3 million USD]” (OECD, 2005:17).
2.1.2 Innovation
According to Merriam-Webster English Dictionary, innovation is “the introduction of something new”. This could be “a new idea, method or device”. Innovation is a general concept that can be applied in diverse areas. The definition of business innovation, hence, has specific importance and relevance here. Innovation is “[t]he process of translating an idea or invention into a good or service that created value or for which customers will pay…In business, innovation often results when ideas are applied by the company in order to further satisfy the needs and expectations of the customers” (businessdictionary.com). In short, the concept of innovation is always associated with the term ‘new’; it is the process of adopting new ideas, methods or means. As Kuratko and Hodgetts (2004) maintain, innovation is the creation of new wealth or the change and enhancement of prevailing resources to generate new wealth.
OECD classifies innovation into four types: product innovation, process innovation,
marketing innovation and organizational innovation. According to OECD (2009), a product
innovation is “the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses” (p. 11). A process innovation is “the implementation of a new or significantly improved production or delivery method” (p. 12). A marketing innovation is “the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing” (p. 12). And finally, an organizational innovation is “the implementation of a new organizational business practices, firm organization or external relations” (p. 12). Due to their relevance and significance, the study employs these four types of innovations as independent variables during the analysis, and they are incorporated into the regression model.
- Empirical Findings 4.1 Introduction
This section presents analysis, results and major findings of the collected data. The results are mainly demonstrated in descriptive and regression analysis, accompanied by their interpretations.
4.2 Data Analysis
4.2.1 Demographic Characteristics (Employees and Managers/Owners of SMEs)
In this section, demographic characteristics of respondents are demonstrated. Our respondents were either managers/owners or employees of the selected SMEs. Respondents’ gender, education level, age and marital status were recorded. Small and Medium Enterprises are a male dominated business. According to Table 2, 71.7 percent of the respondents are male, while 28.3 percent are female. Table 3 shows that 32.8 percent of the respondents belong to the age group of 18-25 years; 35.4 percent belong to the age group of 26-33; 17.5 percent belong to the age group of 34-41; 10.6 percent of the respondents belong to the age group of 42-49, and only 3.7 percent are 50 above. Respondents were found to be of a different academic background. Most of them attained high school or above. As table 4 reveals, 29.4 percent completed secondary school, 36 percent were holding diploma, and 26.7 percent completed postgraduate studies. 5 percent of the respondents did not belong to any of this group, and filled others option. Table 5 indicates that around 90 percent of the respondents were either single or married. 48.4 percent of them were single while 40.5 were married. The rest were as follows: 7.1 percent were widowed and 4 percent were divorced. Since job opportunities are very low in Somaliland, and youth unemployment is particularly very high, numerous educated (or possibly school dropouts) youngsters end up in the market establishing their own businesses, working at family businesses or alike. It is, thus, plausible that majority of the respondents are single.
4.2.2 Business Profile
Profiles of the targeted enterprises are presented in this section. First table shows the type of the enterprise – small or medium. Then, the number of employees in the enterprise and the number of years the business existed follow. Of the 378 targeted SMEs, 65 percent were small enterprises while 34.9 percent were medium enterprises (table 6). The result from table 7 shows that majority of the enterprises’ employees are 1-5 as they have the highest percentage (61.4 percent). 27 percent have 6-10 employees; 6.3 percent have 11-20 employees and the remaining 5 percent have above 20 employees. This implies that majority of the employees work at small enterprises.
Table 8 illustrates that majority of these SMEs existed five years or less. 35.2 percent of them operated two years or less while 41.5 percent existed three to five years. The remaining SMEs existed six years or more.
This table illustrates the regression results of our model. With number of observations of 378, the coefficients of significant variables are interpreted here. Both marital status and type of the enterprise are significant variables in our equation. This could mean that performance of the enterprises varies due to the marital status of the owners/employees as well as type of the enterprise (small or medium). However, we are interested in the coefficients of the four variables representing the innovations in our model, to estimate their effect on the sales volume of the enterprises. The four innovations are product innovation (PN), process innovation (PSI), marketing innovation (MI) and organizational innovation (OI). As can be seen from the regression results, three of the innovation variables – PN, MI and OI – are significant variables. Innovation coefficient for product innovation (PN) is positive and significant in achieving SMEs performance in terms of sales volume in Hargeisa. The SV = 0.83 + 0.28PN indicates that sales volume will increase by 28 percent for every 1 percent increase in product innovation (PI). Innovation coefficient for marketing innovation (MI) is positive and significant in achieving SMEs performance in terms of sales volume in Hargeisa. The SV = 0.83 + 0.299MI indicates that sales volume will increase by 29 percent for every 1 percent increase in marketing innovation (MI). Innovation coefficient for organizational innovation (OI) is positive and significant in achieving SMEs performance in terms of sales volume in Hargeisa. The SV =
0.83 + 0.36OI indicates that sales volume will increase by 36 percent for every 1 percent increase in organizational innovation (OI). It is obvious from our findings that innovation significantly affects sales volume, and in turn, performance of small and medium enterprises in Hargeisa.
- Conclusion
In this study, the effect of innovation on Small and Medium Enterprises performance is examined. Sales volume was adopted as a proxy variable to the performance of the enterprises. Target population of the study was 6930 SMEs in Hargeisa, Somaliland. This number was provided by Hargeisa Local Government and Somaliland Ministry of Commerce and Investment. A sample of 378 SMEs has been drown from this population. Furthermore, the study adopted both descriptive and regression analyses to estimate the impact of innovation.
In the previous section, analysis has been conducted, and then results have been presented. The study investigates the SMEs in Hargeisa and finds that these SMEs are male dominated businesses. Majority of the employees/owners are youth, single, and attained diploma level of education. On the contrary, majority of the targeted SMEs were small enterprises, with one to five employees and existed five years or less. Our regression results reveal that innovation significantly affects the performance of SMEs in Hargeisa. The effects of product innovation, marketing innovation and organizational innovation are statistically significant among these SMEs. The study, hence, concludes that innovation has a positive effect on business performance. The findings of this study are in line with those of Rosli & Sidek, (2013), Terziovski, (2010), Ndalira, Ngugi & Chepkulei, (2013) and Twaliwi & Isaac (2017). The findings are also consistent with those theories that underscore the significance of innovation in business performance. Given the importance of innovation in business performance unveiled in this study, the study recommends for SMEs in Hargeisa to adopt all kinds of innovations, and at the same time, improve the existing innovation practices.
By Muhumed Mohamed Muhumed3
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