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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. 544 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%. , 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. , 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 545 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. 546 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 547 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. 548 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. References [1]. CHEN Chouyong, WANG Yongli. Existing Problem and Measure on the Capability in Independent Innovation of Our Enterprises. Economic Forum, 2007, 1:54 56(in Chinese) [2]. CHEN Rongrong. Reseach on the Cultural Innovation of Independent Innovation of SMEs. Hunan University of Technology, Master Dissertation, 2007:31 32 (in Chinese) [3]. CHEN Wenbiao, RUAN Jingqing. Financing Innovation of SMEs under the Financial Crisis. Enterprise Economy, 2009, 2:11 13 (in Chinese) [4]. CHEN Yanhua. The Opportunity and Challenge SMEs Facing under the Global Financial Crisis. Times Finance, 2009, 1:65 67(in Chinese) [5]. LI Xingwen. 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