Impact of ICT on Innovation: The Case of Japanese SMEs

Impact of ICT on Innovation: The Case of Japanese SMEs

Hiroki Idota (Kinki University, Japan), Teruyuki Bunno (Kinki University, Japan) and Masatsugu Tsuji (University of Hyogo, Japan)
DOI: 10.4018/978-1-4666-8598-7.ch005
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The innovation process in SMEs (small- and medium-sized enterprises) is complex and in comparison with large firms the causal relationships between promoting factors and innovation have yet not been sufficiently clarified. This chapter attempts to analyze the innovation process using Structural Equation Modeling, in particular focusing on the role of ICT. Seven hypotheses are demonstrated by two models. The results obtained are as follows: (i) top management participation and employee motivation in the innovation process enhance the effect of introducing ICT; (ii) the effect of ICT use raises innovation capability, in particular the ability to connect with external linkages; (iii) ICT use, innovation capability and external linkages enhance innovation activity; and (iv) the effect of ICT use and innovation capability promote innovation directly.
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To achieve innovation is essential for sustainable economic development in all economies. In Japan, SMEs (small- and medium-sized enterprises) were looked to as an important economic actor in the Reconstruction Japan Initiative decided by the Cabinet Office in July 2012, in which SMEs were expected to develop into global firms and to create employment opportunities in the region. In reality, on the other hand, SMEs have found themselves facing a severe situation due to the long stagnation. In this environment, only a few SMEs achieved a greater than average rate of profit (The Small and Medium Enterprise Agency, 2009). These SMEs have a number of common features such as strong leadership by top management, quick and flexible decision making, strategies for seeking niche markets, engineering craftsmanship, and effective use of ICT (Information and Communication Technology). Efficiency of the business process is improved by introducing and utilizing ICT. Introducing ICT is considered to be one type of process innovation which includes adopting new production methods and logistics. Moreover, information on customer needs and the market can be promptly obtained by using the Internet and social media, for example. In addition, since communication among employers and top management is activated and intramural knowledge management can be strengthened by ICT, all these lead to innovation (Dodgson, Gann, & Salter, 2006; Lee & Xia, 200; Idota, Bunno, & Tsuji, 2012a).

However, ICT is not the only factor driving innovation, since the innovation process is complex. In this analysis, innovation is categorized into the following four types according to the Oslo Manual (OECD & Eurostat, 2005); (i) product innovation (new products and services); (ii) process innovation (new production methods and new logistic methods); (iii) marketing innovation (changes in design, packaging, and production sites); and (iv) organizational innovation (business practices, workplace environment, and the relationship between the organizations both inside and outside the firm). Since both product and process innovation are created as a result of organizational innovation, and some marketing innovations include product and process innovation, this chapter discusses both kinds of innovation. Regarding the sources of innovation, on the other hand, based on the analysis of many previous studies, the authors’ previous studies identified the following three key factors; (i) innovation capability, (ii) external linkages, and (iii) ICT use. The objectives of the paper are (i) to define the content of innovation capability of firms and (ii) to analyze how innovation sources contribute to innovative creation, in particular to examine the causal relationship between the three sources and innovation.

As shown below, although there has been ample research on innovation capability, fewer analyses have been conducted in the context of innovation capability and ICT. Moreover, little research focuses on the causal relationship between the above three sources and the final outcome of innovation. These problems have not been successfully clarified yet. Hence, this chapter attempts to analyze the causal relationship by employing Structural Equation Modeling (SEM).

Key Terms in this Chapter

Innovation: To create new products and services and to promote productivity by renovating management. This mainly consists of product and process innovation.

Employee Motivation: Voluntary behavior of employees toward their work, particularly innovation, which characterizes the competitiveness of firms.

SMEs (Small- and Medium-Sized Enterprises): Japanese SMEs are defined by Article 2 of the Small and Medium- sized Enterprise Basic Act as firms in manufacturing industries with 300 employees or less, or with capital of JPY 300 million (USD 3 million) or less, firms in other industries with 100 employees or less, or with capital of JPY 100 million (USD 1 million) or less, firms in the wholesale industry with 50 employees or less or with capital of JPY 50 million (USD 500 thousand) or less and firms in the retail industry with 100 employees or less or with capital of JPY 50 million (USD 500 thousand) or less.

External Linkages: External organizations such as customers, suppliers, universities or research organizations, for example, providing information on technologies, consumer needs or the market, or engaging in joint R&D with other firms.

Innovation Capability: Organizational capability related to the creation of new products and services, which is the basis for innovation of firms.

Innovation Activities: Activities for innovation which include not only R&D but also data analysis on customers’ needs, the market, and rival firms.

Top Management Participation: Leadership of top management engaging in innovation activity including R&D, establishing project teams, and so on.

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