Download Research on Independent Innovation of SMEs Under the Influence of

Research on Independent Innovation of SMEs Under the Influence of
the Financial Crisis
YIN Yahong
Department of Finance, Guangdong University of Finance, Guangzhou, Guangdong, P. R. China,510521
[email protected]
Abstract: SMEs of China are an important force to develop national economy. However, with the
financial crisis affecting the real economy step by step, SMEs is now starting to face unprecedented
subsistence pressure. Only by independent innovation, can SMEs improve their competitive power to
minimize the effects of the financial crisis. Centering on this theme, firstly, this paper analyzes that the
financial crisis has disadvantageous effects on SMEs. Secondly, this paper analyzes the significance of
independent innovation of SMEs under the financial crisis. Finally, this paper brings forward the
measures of driving independent innovation of SMEs to cope financial crisis based on innovative edges
of SMEs.
Keywords: Independent Innovation; SMEs (small and medium-sized enterprises); Financial Crisis
1 Introduction
SMEs of China are an important force to develop national economy. At present, China’s registered
SMEs exceeded 4.3 millions. The output value of final products and services provided by SMEs was
equivalent to 60% of GDP. Tax revenue handed in by SMEs exceeded half of tax revenues of the
government. SMEs have played extremely important roles in ensuring sound growth of the national
economy, mitigating employment pressure, revitalizing China through science and education, and
economic restructuring.
However, with the financial crisis affecting the real economy step by step, SMEs is now starting to face
unprecedented subsistence pressure. According to Ministry of Industry and Information Technology of
China issued statistics, up to the end of 2008, Chinese SMEs being out of business accounted for 7.5%
under the influence of the financial crisis. Only by independent innovation, can SMEs improve their
competitive power if they want to minimize the effects of the financial crisis, survive in the environment
of the intense market competition and maintain sustainable development.
2 Disadvantageous Effects on SMEs Resulting from the Financial Crisis
2.1 More difficult financing of SMEs
The conditions for financing from international financial market have deteriorated as a result of the
financial crisis so that SMEs have more difficulty in international financing. At present, SMEs is about
30% short in the fund and the fund chain break shows a tendency to spread. Although the government
has already come up with a series of measures to enlarge credit for SMEs, banks are more cautious to
provide loans for SMEs due to banks themselves also affected by sub-prime mortgage crisis. In addition,
from the view of controlling own risk, banks don’t dare to make loan even if they have line of credit
because of real estate price sliding and real estate mortgage loan’s bad debt largely enhancing. The
Secretary of Ministry of Industry and Information Technology of China disclosed that the aggregate of
credit all over the country increased by 4.8 trillion RMB in the first three months of 2009, but the
increasing line of credit for SMEs accounted for less than 5%. It is obvious that the fund shortage of
SMEs is still resolved with difficulty in the short-run.
2.2 Further rise of production cost of SMEs
In recent years, the rise of the energy and raw material cost results in the unceasing increase of the
production cost and decrease of the profit of SMEs. It is hard hit for those SMEs who concentrated in
the traditional industry, in particular realized extensive development through consuming mass resources.
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However, Chinese SMEs can have no idea how to effectively transfer the production cost of raise to the
upstream or downstream enterprises because they have been in the low end of international industry
chain for a long time. Furthermore, the government adopts some macroeconomic control measures to
restrict liquidity surplus, which also causes the raise of financing cost and production cost of SMEs.
With the unceasing rise in the exchange value of RMB, capacity of SMEs to earn foreign exchange
through export also unceasingly decline. As a result, a large quantities of SMEs with meager profit are
unable to withstand the heavy load, even some are on the insolvency’s edge, and some can not but out of
business.
2.3 Large drop of oversea market demand and sharp decline of export trade
Chinese SMEs in particular those SMEs in the developed coastal areas, who were mainly dependent on
export markets, have taken advantage of inexpensive labor force and RMB underestimated to
unceasingly develop the oversea market for many years. As a result, they have obtained the high-speed
growth. However, oversea market demand of SMEs largely reduces and the amount of export trade
sharp declines because the financial crisis results in the weak demand for their products from Europe
and America, and developed countries implement trade protectionism. The growth rate of export of
SMEs slowed down by 5.7% against the same period of last year in the first half of 2008, while the
growth rate of export of them to USA decreased by 9%.
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3 The Significance of Independent Innovation of SMEs under the Financial Crisis
SMEs with the capabilities for independent innovation and the high and new technology demonstrated
the strong ability of resisting risk in this global crisis. In addition the 17th National Congress of the
Communist Party of China pointed out enhancing Chinese capacity for independent innovation and
establishing innovation-type country. To achieve the developmental strategy, it needs the powerful
support of scientific and technological advancement and independent innovation. Therefore, the
improvement of the capabilities for independent innovation of SMEs is able to not only strengthen the
ability of resisting financial crisis themselves but also play an important role in sustainable development
of economy.
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3.1 Enhancing competitive power and promoting cluster edge of SMEs so as to strengthen the
ability for resisting risk of SMEs
The core technology is the core of competitive power. The true core technology cannot be introduced.
Only sustained independent innovation through craft and product innovation and accelerating
application of the new technique, material and craft, can SMEs form new core technologies and provide
competitive product to obtain sustained profitability and enhance economic efficiencies in the intense
market competition. Moreover, because the scale of SMEs is small and their resources are limited,
innovation of SMEs is demanded to mutually cooperate. SMEs may exert cluster edge through division
of labor and cooperation due to geographic adjacency, tight operational contact and rapid informational
communion. For any significant technological innovation with potential and market foreground in the
market, almost all SMEs in the cluster can synchronously absorb and digest the kind of innovation
achievement, realize their own update and upgrade through rapid study and imitation. Thus, it should be
of help to strengthening the ability for resisting risk of SMEs.
3.2 Optimizing and upgrading the industrial structure
Accelerating the industrial restructuring and upgrading the industrial structure are the key strategy for
economic restructuring. Extensive economic growth heavily relied on the consumption of material
resource in the past. Now, only adjusting and upgrading the industrial structure through scientific and
technological advancement, can intensive economic growth be come true. Rapid development of
network and information technology has accelerated the technical innovation and the emerging
industrial development has promoted the industrial restructuring. These are challenges which SMEs in
traditional industry need to face. Traditional industry, and low technical content and attachment value
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industry in SMEs still occupied the dominant position. Consequently, we should actively utilize the
high-tech to rebuild traditional industry so as to propel independent innovation of SMEs, which will be
of help to not only strengthening the ability for resisting risk of SMEs but also optimizing and upgrading
the industrial structure.
3.3 Promoting Chinese international competitive power
Virtually, competition between nations and regions is the competition of science and technology. The
core of competition in science and technology is the competition of independent innovation capabilities.
After joined in WTO, we must overcome the obstacles of the intellectual property rights and technical
barriers. This demands us to have vigorous independent intellectual property rights. Facing
unprecedented subsistence pressure under the financial crisis, only enhancing independent innovation
capabilities and providing produces with independent intellectual property rights and being ahead of
world, can enterprises remain invincible in the competition with developed country. Therefore,
improving independent innovation capabilities of SMEs will be of help to promoting Chinese
international competitive power.
3.4 Accelerating further economic development
SMEs are the important components of national economy, whose quality and level of development will
directly affect the economic and social development of our country. Firstly, with the development of
people’s standard of living, people’s demand is also in continuous change for the quality of produces
and services provided by SMEs. Pushing forward independent innovation of SMEs may effectively meet
increasing market demand. Secondly, SMEs are the main vehicle of the scientific research to be
industrialized. Advancing independent innovation of SMEs and enhancing their capabilities for
independent innovation should be of help to facilitating rapid diffusion of new technique, craft, product
and material in industries, promoting structural level of industry, increasing the utilizable efficiency of
resources and competitive power of SMEs so as to impel the economy to continuously, rapidly and
healthily develop. Finally, SMEs are the important path to addressing to employment. They contributed
to almost 75 percent of new jobs every year (China Association of Small and Medium Enterprises
president Li Zibin, 2008). Improving independent innovation capabilities of SMEs will play an
important role in expanding employment and optimizing the employment structure.
4 The Edges of Independent Innovation of SMEs
Being the main forces of independent innovation, SMEs have the unique edge compared with the large
enterprises.
4.1 Simple structure and flexibility of innovation
Although having many advantages of powerful funds and technical forces on the hi-tech development,
large enterprises have the limits to technology innovation posed by huge organization and cumbersome
approval procedures. Being simple structure of SMEs, people’s spirits of exploration and creativity can
be much more excited. In the environment of rapid change of information, SMEs have more edges in
innovation due to their flexibility to cope with change, rapid decision-making and spirit of innovation.
4.2 Short cycle and high efficiency
SMEs have not only more powerful inventiveness, but also higher transformation capability of
achievement and shorter recycling of investment in scientific research. According to a recent
investigation of United States Small Business Administration, with regard to the time what new products
launched need, SMEs generally take 2.22 years, while large enterprises take 3.05 years. SMEs are
quicker than large enterprises in utilizing new technical patent, updating and improving product.
4.3 The edge of engaging in hi-tech industries
Development of hi-tech industries like semi-conductor, bio-engineering, software and computer, etc.
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promotes the development of new industries which suits SMEs to manage. Generally, these emerging
industries belong to technological and knowledge-intensive industries. They update quicker in
production technology and equipment. Their product life cycle is shorter. Consequently, SMEs with
simple structure, few administrative level and rapid decision-making obviously predominate among
these industries.
4.4 Extremely powerful competitive power in developing and providing hi-tech product.
Most of the enterprises engaging in hi-tech are small-sized enterprise. These small-sized enterprises are
mostly set up by individual or several people, which are often taken as the main object of venture
investment. Generally, the hi-tech enterprises reside in a place where there are more venture investments
in USA. The reason “Silion valley” has received universal attention from the whole world is because
there are many hi-tech SMEs rather than large enterprises. It is technological innovation of SMEs that
promotes US economic development.
5 The Right Path to Driving Independent Innovation of SMEs to Cope Financial
Crisis
Chinese SMEs have greatly contributed to the development of economy, but SMEs are still inferior in
the capability for independent innovation. For various reasons, there are still many problems associated
with SMEs, including shortage of technical talents, lack of fund, lower technology level and
imperfection of innovational mechanism. These problems have become large obstacles to independent
innovation, and will directly affect the ability for fighting financial crisis of SMEs if not addressed on a
timely basis. In view of the unique edge in independent innovation of SMEs, it is necessary for us to
take various measures of further driving independent innovation of SMEs to minimize the effects of the
financial crisis.
5.1 Accelerating development of hi-quality technical talents.
Shortage of technical talents has become universal phenomenon in each country. Therefore, it is
necessary for SMEs to take various measures to address to the issue.
Firstly, the enterprises need to design and implement policy to introduce all kinds of talents. Secondly, in
view of demand for talent, SMEs need to provide flexible training services. Finally, SMEs should
improve work and living condition and utilize the better mechanism, policy and environment so as to
attract and gather all kinds of talents to establish solid basis of talent for independent innovation.
5.2 Perfecting of excitation mechanism in independent innovation of SMEs
Imperfection of interior excitation mechanism has a direct effect on the enthusiasm and creativity of
technologists. Therefore, excitation innovation is the important tool which stimulates the enthusiasm and
creativity of staff of enterprises.
Firstly, SMEs should reform income distribution system and perfect excitation mechanism. The
emphasis is on excitation of staff in R & D. Secondly, SMEs should make excitation method diversify
and integrate the physical with the spirit incentive. Finally, SMEs should establish examination and
assessment system in innovation performance of staff with fairness.
5.3 Promoting cultural innovation of enterprises
Shortage of the atmosphere of cultural innovation of enterprises directly affects the capability for
independent innovation of SMEs.
Cultural innovation of enterprises is that for the sake of promoting quality themselves, developmental
potential and competitive strength, enterprises carry on the innovation in cultural idea, value, cultural
environment, behavioral monitor and ethic. The core of cultural innovation is reconstructing the spirit
culture of enterprises. The spirit of enterprise and staff is be made to fully release and exert.
Firstly, SMEs should establish the spirit of “sustained innovation” to give innovation mechanism
impetus of spirit and intellectual support. Secondly, the value of “lifelong study” should be established
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to impel continuous technological innovation of SMEs. Thirdly, the idea of “putting the human
fundamental” should be set up to promote the innovation of mechanism and management. Finally, the
atmosphere of cultural innovation of enterprises should be constructed to form a better innovation
environment.
5.4 Constructing the diverse path to financing
With incomplete capital market and without established venture investment withdrawal system,
financing has been identified as a dominant constraint to independent innovation. In order to address to
the issue of financing, SMEs should construct the diverse path to financing.
Firstly, government should reform financing policy for SMEs to increase SMEs’ bank loans, namely
encourage financial institutions to set up departments that solely concentrate on granting credit to the
SME sector. These financial institutions include policy bank, commercial bank and private bank.
Therefore, setting up credit departments which specially serve SMEs is to support the development of
SMEs.
Secondly, government should actively set up venture investment mechanism of independent innovation
of SMEs and advance the construction of multi-level credit guarantee system, especially encourage
developing multi-level credit guarantee aiming at independent innovation of SMEs.
Thirdly, the construction of capital market should be speeded up. On the one hand, stock financing
system should be completed, issue approval system which accords with the characteristic of SMEs
should be established and the listing threshold of SMEs should be adjusted. On the other hand, the
second-board market should be perfected and the threshold accessing to this market should be decreased
so that large numbers of SMEs can obtain more funds in the equity market.
Finally, SMEs should get the best out of widespread social relationship to carry on folk financing.
5.5 Increasing protection of intellectual property rights
The innovative spirit of enterprises should be shocked and the impulse of innovation should be
restrained if innovative technologies and achievements are rapidly plagiarized and copied by others.
Therefore, it is essential for us to increase protection of intellectual property rights by various means.
Firstly, SMEs should need to establish the intellectual property rights system which suits their survival
and development so as to protect their own important equipment of hi-tech and the development of
product with intellectual property rights.
Secondly, the legislature should perfect the safeguard system of intellectual property rights law so as to
prevent intellectual property rights from being abused or inhabit the malfeasant competition of
technological innovation.
Thirdly, judicial and administrative departments should enlarge the punishments for the encroaching
intellectual property rights in order to provide the support of law for the enterprises suffering injuries.
Finally, the whole society should universally set the idea which respects other intellectual property
rights and protect own intellectual property rights by the legislation and propaganda. Only in this way
can the protection of intellectual property rights slowly filter the whole process of its creation, protection
and use.
5.6 Constructing service system
In the process of innovation, SMEs are short of enough scientific and technical information and agency
service institutions which engage in valuation of technology, consultation and venture investment.
Therefore, constructing service system is of great help to promoting the capabilities for independent
innovation of SMEs.
On the one hand, social service organizations and professional service institutions which serve
independent innovation of SMEs should be developed, especially the powerful development of
innovation-type service institution with region and characterized special service.
On the other hand, agency service system should be constructed which can provide SMEs with
financing, management consultation, technical development, training talent and informational
communication.
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5.7 Further reforming the public finance system to serve independent innovation of SMEs.
Independent innovation of SMEs will get into difficulties without government’s support. Therefore, the
public finance system should be further reformed to serve independent innovation of SMEs.
Firstly, government should increase fund input of independent innovation, fully stimulate the vigor of
technological innovation, support and develop the important hi-tech product with independent
intellectual property rights and set up the special fund to enhance the capabilities for independent
innovation of SMEs.
Secondly, government should inspire enterprises increasing input in scientific and technological
innovation by tax preference.
Finally, utilizing government purchasing policies supports independent innovation of SMEs.
Government should preferentially purchase the product of independent innovation and take encouraging
and protecting independent innovation of SMEs as an essential target of government purchasing
policies.
6 Conclusion
The capabilities for independent innovation of SMEs not only determine the development of enterprises
themselves but also relate to the economic health of China. However, independent innovation of SMEs
is a systematic project, which involves all aspects such as enterprises, government, and so on. Only the
whole society makes concerted efforts to construct a good innovation environment for SMEs, can the
capabilities for independent innovation of SMEs be enhanced to minimize the effects of the financial
crisis.
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