This paper investigates the role of research and development (R&D) and innovation management for innovation success in small and medium-sized enterprises (SMEs). While there is little doubt about the significance of in-house R&D activities for generating successful innovations and obtaining a novelty-based competitive advantage, entering into continuous in-house R&D activities may be a particular challenge for small firms. They will have to bear high fix costs such as setting up a separate R&D laboratory, meet minimum scale requirements of effective R&D activities and have to deal with high sunk costs in case of stopping R&D. Since the nature of R&D implies high uncertainty of its outcome, devoting large resources to R&D may jeopardise the whole enterprise in case R&D investment fails. Given these restraints, SMEs may opt to substitute R&D by innovation managing practices which demand less investment and bear less uncertainty. Innovation management science has developed a number of tools which should support firms in identifying innovation potentials, transferring them into new products and processes and implementing them successfully in the market or within a firm’s operations. These include human resource management, team working, co-operating with external partners and sourcing relevant knowledge from the firm’s environment, particularly from clients, suppliers and competitors. The paper analyses whether SMEs can in fact substitute R&D activities by innovation management in order to achieve the same innovation success as R&D performing SMEs. The research question is closely linked to the innovation policy as it explores whether R&D is a necessary prerequisite for innovation success, or whether other in-house activities can play a similar role. The analysis rests on data obtained from the 2003 wave of the German CIS. Innovation success is measured through a categorial variable that captures the extend to which an SMEs has successfully introduced “challenging” product and/or process innovations, i.e. innovations that significantly change the firm’s market position. We run ordered probit models that control for a potential selection bias between innovating and non-innovating firms. Our findings show that continuous R&D activities are a main driver of innovation success in SMEs, especially when linked to external knowledge sourcing. Firms without in-house R&D activities can still yield a similar innovation success as R&D performers. On the one hand, they may contract out R&D which will reduce their own risk and allows them to better control costs of R&D. On the other hand, human resource management and team work are innovation management tools that can help non-R&D performing SMEs to gain similar innovation success as R&D performers, especially when combined with each other or combined with external knowledge sourcing or formal co-operations with external partners. In contrast, focusing on searching external sources of innovation without in-house R&D is a less successful strategy, as is occasional R&D (i.e. starting R&D only in case a technological problem needs to be solved). Our results have some relevance for innovation policy. First, the strong focus on promoting in-house R&D often to be found in innovation policy is not fully supported by our study when it comes to SMEs. First, in-house R&D seems to be particularly effective only if combined with external knowledge sourcing. Policy initiatives should thus attempt to combine financial R&D support to SMEs with strengthening the capacities of SMEs to co-operate with other partners, including links to customers and suppliers. Secondly, innovation policy should also acknowledge the key role of external R&D in SMEs and also offer financial support to this type of R&D activity. Finally, policy may try to identify likely barriers in SMEs that prevent them from effectively using innovation management practices, particularly human resource management and team working.


Innovation Success, R&D, Innovation Management, SMEs