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Innovation and Small Enterprises in the Third World

Innovation and Small Enterprises in the Third World

New Horizons in the Economics of Innovation series

Edited by Meine Pieter van Dijk and Henry Sandee

Innovation is crucial for small enterprises to become and remain competitive in the global economy. In this book, the authors have combined theoretical insights with comprehensive case studies on innovation among small-scale enterprises in developing countries, paying particular attention to technological change in clusters of small firms.

Chapter 8: Why Do(n’t) They Innovate? Explaining Diverse SME Adjustment Strategies After an External Shock

Regine Qualman

Subjects: development studies, development economics, economics and finance, development economics

Extract

Chapter 8 15/3/02 9:08 am Page 1 8. Why do(n’t) they innovate? Explaining diverse SME adjustment strategies after an external shock Regine Qualmann Small and medium-sized enterprises (SMEs) are often assumed to adjust more easily to sudden changes in their economic environment than larger firms. Their responses to shifts in incentive structures are reported to be often flexible and innovative. In this chapter we assess a specific type of shift in incentive structures that are brought about by Structural Adjustment Programmes (SAPs). SAPs aim at changes in relative prices of tradables and non-tradables through stimulating trade liberalization and currency devaluation. Such measures are usually considered to be favourable for small enterprises. This applies in particular if SMEs rely on domestic inputs and labour to produce import substitutes or exportable goods. Theory suggests a rather dynamic response of SMEs in the case of a major shift in incentives towards tradable goods. A series of World Bank studies analysing the adjustment of micro- and small enterprises1 to liberalization in five African countries supports this notion (World Bank, 1995).2 According to the World Bank studies, small enterprises adapted to relative price changes and increased import competition by changing their product line, upgrading their technology, introducing new products and entering export markets. The authors acknowledge great differences in adjustment behaviour at the level of individual enterprises, but the diversity of reactions within the same country and size group remain unexplained. This chapter discusses small enterprise adjustment after the sharp devaluation of...

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