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Young Innovative Companies: Are They High Performers in
Transition Economies? Evidence for Vietnam*
Enrico Santarelli
Department of Economics, University of Bologna, Piazza Scaravilli, 2 – 40126 Bologna, Italy
Tel. +39 051 2098487; Email: enrico.santarelli@unibo.it
Hien Thu Tran
Business School, Edge Hill University, St Helens Road, Ormskirk (Lancs) – L39 4QP, United Kingdom
Email: Hien.Tran@edgehill.ac.uk
Abstract
We study the economic value of both embodied technological change and Research and
Development (R&D) investment as proxies for the inputs of innovative activities conducted by
Vietnamese firms. Our main focus is on the profitability of young innovative companies (YICs),
private innovative companies (PICs), and small and young companies (SYCs). In particular, we
test whether YICs could prove successful in fostering economic development through their
technological change activities. Results show that a) although YICs are more R&D intensive and
innovative than PICs and SYCs, in general they do not produce equivalent performance;
however those specific YICs focusing on technological change potentially outperform their
counterparts, and b) PICs are more capable than the other types of firms in translating their
innovative effort to higher profitability.
Version: February 24, 2016
Keywords: Young innovative companies; Embodied technological change; R&D; Profitability;
Vietnam.
JEL classification: L26; O31; O33.
* A previous version has been presented at the “Conference on National Systems of Entrepreneurship” held in
Mannheim on 20-21 November 2014. We thank Zoltan Acs, David Audretsch, Carlos Carreira, Erik Lehmann,
Georg Licht, conference participants and two anonymous reviewers for their useful comments. Enrico Santarelli
acknowledges financial support from the Italian Ministry of Education, FIRB 2012 #RBFR1269_003, project leader
Roberto Patuelli.
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1. Introduction
Whereas advanced countries call for policies supporting the formation of innovative firms
with the expectation of gaining from their breakthrough innovations (Klepper, 1996; Veugelers,
2008; Rosenbusch et al., 2011), developing countries generally focus on policies aimed at
improving their institutional infrastructure and financial system to fulfill the gap. Among the
developing countries, despite an average annual gross domestic product growth rate of over 7
percent since the Doi Moi economic reform of 1986, Vietnam still lags behind in both production
of fundamental research and its conversion into technological innovation. Traditionally, the
dominant sources of technological change and innovation of Vietnam are foreign direct
investments (FDIs) from Western countries joined by some Northeast Asian mid-income
economies and China (Kaplinsky, 2011).
Recently, innovation scholars have started to compare the profitability of different types of
innovative and non-innovative firms (for a survey, see Czarnitzki and Delanote, 2013). These
firms include: young innovative companies (YICs), which are firms that, according to the
European Commission (article 35 of the General Block Exemption Regulation), are less than six
years old, have fewer than 250 employees, and are highly research and development (R&D)
intensive (R&D intensity > 15%); private innovative companies (PICs), which are private firms
with R&D spending above zero; and small and young companies (SYCs), which are firms
specified according to the YIC definition that do not have any R&D expenditures.
For Vietnam, we address the economic effect of internal and external sources of innovation
on firms’ profitability by comparing YICs with PICs and SYCs. The aim is to test whether YICs
are the best performing components of the Vietnamese National System of Innovation, as in the
case of some Western countries. The dataset is derived from the annual enterprise survey
conducted by the General Statistics Organization (GSO) of Vietnam. The census data of more
than 400,000 observations cover the whole population of existing firms from 2000 to 2005. The
empirical results show that, although YICs are more R&D intensive than other types of firms,
they do not produce equivalent outperformance. PICs are the type of firms that prove to be more
capable of extracting higher profits from innovative activities.
The paper proceeds as follows. Section 2 presents the conceptual framework. Section 3 gives
an overview of the National System of Innovation (NSI) in Vietnam in relation to innovative
activities and outlines the research hypotheses. Section 4 describes the dataset and presents the
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variables together with their descriptive statistics and correlation matrix. Section 5 presents the
methodological approach. Section 6 discusses the estimation results. Section 7 gives the
concluding remarks and suggestions for policy action.
2. Conceptual framework
Endogenous growth models (Romer, 1986) postulate that technological change stimulates
economic growth if the return to innovation with respect to human capital used in the R&D-
intensive sectors is constant.
At the macro level, the relatively small total factor productivity growth found in East Asia
(Chen, 1997) does not imply that technological change is not important for economic growth in
this area. It simply reflects the fact that the major component of technological change in the
region is quality improvement in factor inputs or embodied technological change rather than
disembodied technological change. At the micro level, one may distinguish between two groups
of studies: those focusing on the way innovation is obtained by firms of different sizes and those
emphasizing the relationship between innovation and profitability.
As regards the first group, Hall and Ziedonis (2001) show that both in-house R&D and
capital expenditures exert a positive impact on the innovative output of US semiconductor
companies. Similarly, Branzei and Vertinsky (2006) show that capital investment catalyzes both
the external absorption and the internal emergence of novel capabilities in small and medium
enterprises (SMEs). Piergiovanni and Santarelli (2013) also support the idea that capital
expenditures—taken as equivalent to technical change embodied in new machinery and capital
equipment
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—play a crucial role in the development of new patentable items by firms in high-
tech industries. Whereas large firms show an overwhelming importance in innovation because of
their ability to spread the fixed costs of R&D over a large sales volume and of their potential to
undertake more innovation projects of the same magnitude (Van Dijk et al., 1997), SMEs rely
successfully on the external or “used” R&D embodied in intermediate and capital goods
(Santarelli and Sterlacchini, 1990). In this sense, R&D and capital expenditures are
complementary forces and determinants in the overall innovation process in SMEs.
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Technological change is “embodied” when it takes the form of newer capital input (tangible internal
investments in new machinery, equipment, and work-in-progress), whereas it is “disembodied” when resulting in
intangible accumulation of knowledge.
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As regards the second group, Geroski et al. (1993) identify for a sample of large, quoted UK
firms a two-fold effect of innovation on profitability. On the one hand, innovation exerts a direct
but transitory impact on profitability by enabling the production of a new product or the use of a
new process. On the other hand, it exerts an indirect but stronger and more persistent effect by
signaling the transformation of firms’ internal capabilities associated with innovativeness. For
Finland, Leiponen (2000) finds that the profitability of innovating firms differs in its
determinants from that of non-innovating ones, with a) educational competencies being more
important for innovators than for non-innovators and b) the determinants of profitability of
product innovators differing from those of process innovators. Using a panel of UK
manufacturing firms, Cefis and Ciccarelli (2005) find (i) a positive but decreasing overtime
effect of innovation on profits, (ii) a difference in profitability between innovators and non-
innovators, and (iii) a long-run persistence in profit differentials. Finally, using a panel of
manufacturing plants in Ireland and Northern Ireland, Love et al. (2009) find that innovators and
non-innovators have different profitability determinants and that the profitability of externally
owned plants depends on factors different from those of indigenously owned enterprises.
Since the early 1980s, various studies have stressed the importance of technological learning
in developing countries, showing that it is much more widespread than usually found when
considering technology issues only in association with organized R&D activities (Bell and
Pavitt, 1993; Kim and Nelson, 2000). Moreover, with respect to transition countries,
technological change is a key element of their industrialization process. However, the
development policy literature that considers Western technological trajectories as the dominant
paradigm commonly conceptualizes technological progress in transition/developing countries as
an externally driven process consisting of straightforward selection and implementation of
foreign technology through FDIs (Barba Navaretti et al., 2002). Consistent with this view, the
requirement of large resources for the application of Western technology implies the process of
technological change to be prevalent among large firms only and disregards the possible
contribution of SMEs (Romijn and Caniels, 2011).
In recent years, many transition and developing countries have started to question the
effectiveness of such an FDI-led technological change strategy, calling for greater emphasis on
autonomous innovative activities within SMEs and newborn firms as a driver of economic
growth. According to Bell (2009), intensive technology-borrowing strategies carry the danger of
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lock-in or technological path dependence. Therefore, transition/developing countries can no
longer rely solely on adoption and incremental adaptation of Western technology to reduce their
technological dependence from abroad. Therefore, the following question arises: are YICs more
profitable than other types of firms in transition/developing countries?
Although the idea of R&D cost spreading supports the advantage of large firms in R&D
(Cohen and Klepper, 1996), new technology-based firms (NTBFs)
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using highly skilled workers
may show a propensity to perform R&D not less significant than that of large firms (Audretsch,
1995). A comparison of the effect of capital expenditure and R&D investment on the innovative
output of large established firms and NTBFs may shed light on the relationship between R&D or
embodied technical change and firm size. Public awareness about NTBFs arose in the early
1980s, when several traditional industries were in decline and some fast-growing new industries
began to emerge (Licht and Nerlinger, 1998). NTBFs gained research attention because of their
high growth potential, innovative nature, low failure rate, and ability to increase the science base
of a country by successfully commercializing radically innovative products and services and by
favoring technological diffusion (Licht and Nerlinger, 1998; Rickne and Jacobsson, 1999; Vaona
and Pianta, 2008). For their ability to achieve higher levels of innovation performance in relation
to other firms, especially new-to-market innovations, NTBFs have been the recipients of
specialized government support in a number of countries, including the United States, the United
Kingdom, and several European Union countries (Licht and Nerlinger, 1998; Ferguson and
Olofsson, 2004; Schneider and Veugelers, 2010).
Recent research has focused on the complementary effect of smallness and newness of
innovative firms, paying attention to YICs (cf. among others, Pellegrino et al., 2012), which are
actually a subset of NTBFs. Despite conflicting arguments on the important role of YICs in the
overall national economic performance, researchers still share one common consensus that their
existence indeed stimulates technological change and productivity growth. According to Baumol
et al. (2007), productivity growth in advanced economies over the last 15 years has been due to
the development of innovative entrepreneurial companies (cf. also Hölzl, 2009).
Correspondingly, Acs et al. (2014) point out that the “heroic entrepreneur” is not the sole
determinant of entrepreneurial success, with the environment and the institutional context in
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NTBFs are independently owned firms, are less than 25 years old, and belong to a high-tech sector (Tether
and Storey, 1998).