SME Risk Avoidance Mechanism on Technology Innovation

SME Risk Avoidance Mechanism on Technology Innovation
XU Bin1, ZHU Xiao Yan2
1 School of Economics, Huazhong Universiy of Science and Technology, P.R. China, 430074
2 School of Economics and Management, Wuhan University, P.R. China, 430072
School of Economics and Law, Hubei University of Technology, P.R. China, 430068
Abstract: The technology innovation (TI) risks of small and medium sized enterprises (SMEs) can be
classified as system risk, environment risk and program risk. This paper studies how to identify different
types of technology innovation risk of SMEs and avoid them with full description of the characteristics
existing in the structure, scale and external environment of SMEs. The result of our study shows that it
is necessary to build up a set of clear indicators to measure these risks. To avoid TI risks, SMEs need to
perfect their risk control system including warning system for potential risks, technology innovation
strategy selection system, risk dispersion and socialization system.
Key words: SMEs; TI; risk avoidance
1 Introduction
Present literature shows that the risks of enterprise technology innovation normally include decision risk
from strategic perspective; organization risk, financial risk, information management risk, enterprise
culture risk and external environment risk from organizational perspective; technology risk and market
risk from project perspective (Zhou Jizhong, Xue Gang, 2002). To SMEs, all these risks exist in the
whole process of technology innovation. Research also shows that technology innovation risks arise
from different organization structures and scale features of enterprises, so they are systematic in nature.
2 Systematic base of technology innovation risk of SMEs
American Program Management Institute defined risk as uncertain events or conditions that negatively
or positively affect the outcome of a project. Technology innovation risk refers to the uncertain events
or conditions during the process of technology innovation. They will cause positive or negative effects
on the goal of technology innovation. Events that cause positive effects are called opportunity, while
events that cause negative effects are called threats or crisis.
There exist risks in all technology innovation of enterprises. While for SMEs, due to their systematic
defects, much more likeliness of risks is involved in their technology innovation. Judging by their
systematic characteristics, the structure of SME’s financing channels and scale is relatively limited
compared with large firms; their organizational structure and management policies are also relatively
simple; they are generally in serious short of talents and information resources which are important for
technology innovation. Judging by the external conditions, the social service system for SMEs is partial
and lack of some vital functions. The organization, scale and external condition defects are the
systematic formation base for the TI risks of SMEs.
2.1. Types of technology innovation risks of SMEs
There are no consistent opinions on classification of technology innovation risks according to present
literature. This paper classifies technology innovation risks of SMEs into the following three types in
accordance to the characteristics existing in the structure, scale and external environment of SMEs. (As
showed in figure 1)
The exact forms of technology innovation risks and their formation mechanism will be described in
detail later on.
1
Xu Bin, Male, Born in 1964, PhD student of Huazhong University of Science and Technology, Professor, Vice
Dean of School of Economics and Law, Hubei University of Technology. The Author can be contacted from Tel:
+86 27 88032283.
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Political risk (a1)
Economic risk (a2)
External risk
Environment risk (A)
Legal risk (a3)
Innovation risks of SMES
Unexpected risk (a4)
Financial risk (b1)
System risk (B)
Internal risk
Information risk (b2)
Organizational risk (b3)
Project risk (C)
Technological risk (c1)
Market risk (c2)
Figure 1 types of technology innovation of SMEs
2.2. Formation mechanism of technology innovation risks of SMEs
2.2.1. Features of environment risks of technology innovation of SMEs and their formation mechanism
External environmental factors, including changes in a country’s macroeconomic and political policies,
adjustments of relevant laws or rules, natural or social disasters etc., are all sources of risks. Due to their
systematic features, SMEs are confronting greater uncertainties and more technology innovation risks
than large companies.
Little involvement in politic activities is the main reason that accounts for greater risks in the technology
innovation of SMEs. In China, no matter in the era of planned economy or transit economy, policies are
generally made for the needs of large enterprises. Sometimes even those policies or rules which are
specially made for SMEs are evaluated by satisfaction degree of large enterprises. Due to SMEs’ small
scale, limit cluster effect and weak industrial negotiation ability, the governments usually evade their
power into SMEs’ operation. The SMEs barely have any bargain opportunities and their status in the
game is fairly unequal.
Although Chinese governments take an encourage attitude toward TI of SMEs, but they provide pretty
limited political support. What’s more, it is usually difficult for the SMEs to analyze and foresee the real
intentions of the government policies. So the inaccuracy of estimation is also a source of technology
innovation risk of SMEs.
2.2.2. Features of system risks of technology innovation of SMEs and their formation mechanism
The systems under discussion are at the level of firm and industry, concerning policies of a region,
internal management systems.
According to the Modern Industrial Organization Theory, to operate in clusters is a fundamental
survival method for modern SMEs. However, enterprises within a cluster are unstable. This instability
comes from many aspects, for example, the changes of contract, the changes of suppliers, price changes
of commodities etc. Such changes can be very slow and predictable, but some can be evidential and
inestimable, such as the bankruptcy of a supplier. So the TI activities of SMEs can be easily affected by
these uncertainties because the motive and direction of TI is based on the industrial chain among
enterprises inside a cluster, while above potential changes will actually cause existing industrial chain to
change and make the motive and direction of the TI of SMEs different.
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2.2.3. Features of project risks of technology innovation of SMEs and their formation mechanism
The SMEs usually use TI team for project management. That is to say all hope of success of technology
innovation is put upon such a temporary work team. Since team members are from different departments
or employed in emergency from labor market, the management of such a team is itself a big problem to
solve which is a matter of system innovation, not to say technology innovation.
The key to above problem is to build up a strong restrictive system to manage the innovation teams in
case of moral risk. Many enterprises adopt strict management system such as sign a team contract which
include detailed incentive and punish articles to restrain those team members. But in fact, such methods
are proved to be ineffective. Large enterprises use effective incentives to manage their technology
innovation. But the SMEs are limited by their financial resource to imitate. From above analysis, it is
quite clear that the TI risks of SMEs are not only technological, but also systematic.
3. Avoidance Mechanism of technology innovation risk of SMEs
3.1 Warning system of technology innovation risks
To avoid risks effectively is the basic final goal of any risk avoidance mechanism. Therefore, the most
effective way for SMEs to avoid risks that might arise in their technology innovation activities is to
build up a risk warning system.
This work can be pursued under the following procedure: first, data collection of relevant factors that
account for risks. This is the fundamental step to construct a risk warning system. It requires SMEs
collect datum that reflect the performance of innovative activities of SMEs according to their own
organizational features and specific innovative project. Reliability of sample and datum is the most
important factor that should be considered during this phase. Second, construct the warning model.
Advanced analyzing theories of technology innovation risk are used to handle datum collected during
the first phase. Third, inform of final decision. This part is the conclusive point of the whole warning
system. It is based on analyzing of up-dated datum and come to a conclusion that if SMEs should
continue or stop their innovation project or how to adjust their innovative activities.
The warning system is illustrated in the following figure 2:
Data collection system
Data selection system
Environmental factor A
Systematic factor B
Risk warning model
Project factor C
：
Enterprise decision
Continue project
Adjust project
End project
Risk measurement
：
No risk
Low risk
High risk
Risk identification
system
Figure 2 Warning system of technology innovation risk of SMEs
3.2 Technology innovation strategy selection of SMEs based on risk avoidance
Technology innovation strategy is an overall planning of the innovative activities of SEMs. It aims to
clarify the basic principles, final goals and tasks of technology innovation projects. It is a long-term,
directional and overall issue embodied in the whole enterprise strategy.
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Technology innovation strategies can be separated into seven types according to different standards. The
SMEs must make their choices rationally based on their own conditions. Table 1 shows corresponding
relationship between technology innovation strategies and enterprise conditions.
From the corresponding relationship in table 1, we can easily come to the following conclusion: for
most SMEs, it is suitable to adopt cooperation and imitation as their TI strategy. Only a small number of
SMEs are capable to choose initiative innovation strategy.
Table 1 corresponding relationship between technology innovation strategies and enterprise conditions
Technology
Basic conditions of SMEs under
Advantages and disadvantages of TI
innovation strategy
discussion
Have obvious advantages in sharing of resource and limit resources and capabilities for
Cooperation risk; high probability of innovation success.
independent TI
Have good
strategy
Weak constraint on cooperators
Cooperators platforms
for
favorable
become competitors.
cooperation.
Save of time and financial resource; high innovation no independent R&D dept. &
innovation team; well-established
efficiency and low technology innovation risks
Imitate
information
system;
strong
Low level of profit, slow innovation speed; low TI
strategy
learning abilities.
level; difficult to obtain new technologies; passive in
taking innovation actions.
Technology becomes core advantage of enterprise, Strong and independent innovation
key technology or concept has been turned into
team; have large sum of financial
Independent
productivity, industrialized and marketed; leading status in
support and policy support from
innovation
business line; prosperous revenue from initiative
the governments.
strategy
innovation investment; TI activities in sound cycle.
High risk and high investment.
Leading status in technology will bring high profit return. Strong R&D capabilities and
Leading
Long-term of monopolistic profit keeps enterprise develop powerful market Dept.
strategy
continuously.
Avoid large sum of investment in basic research; no Highly skilled IT experts who are
Follow-up suffering of probable loss due to defects of new products.
capable to digest, absorb and
strategy
There exists limitation from technology patent innovate efficiently; flexible R&D
protection law for new product; limit market share.
organization etc..
A short cut for enterprises that are lack of technology Seriously in short of technology
and capital investment in TI. If re-innovations are carried and innovation fund.
Take-over
out after take-over, more favorable result can be expected.
strategy
Low level of technology innovation and usually
lagged behind technology suppliers.
High learning abilities and
Low risk, relatively high return after successful TI.
capability
of
providing
High requirements on capabilities of learning and
Digest plus
necessary equipments.
innovation absorption of new technological knowledge and providing
necessary equipments Possible sue case from original
strategy
innovators; unstable cost and profit of innovation.
Note □ means advantage factors for TI; means disadvantage factors for TI.
；
；
Source of technology
Degree of technology innovation
：
；
◆
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3.3 organizational optimization of SMEs based on risk avoidance
enterprise cluster and
system integration
In practical, the bad fit ability between industries caused many bad effects including: it is often hard to
get equipments to meet the needs of new technology; few channels to market new technology (few
buyers of new technology); limited access of technical aid ect. All these problems result in an awkward
condition for technology innovation. The settlement for these problems is to facilitate industry cluster.
An “industry cluster” refers to related enterprises in a specific area and related institutions (including
universities) that compete and create synergies, while also cooperating within a region (Xu Bin, 2005).
The motive source of industry cluster generates from supply chain among enterprises.
In respect to technology innovation, the value of industry cluster lies in: enterprise may seek for TI
direction and project from the whole industrial chain and are not limited to specific segments inside a
sole enterprise; the selection of innovation subjects has a high level of strategic insight which may
greatly help the avoidance of innovation risks; once there are breakthroughs in the TI, the results can be
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applied in the whole industry chain, therefore, it is easier to solve the application and marketability
problem.
One condition of industry cluster of SMEs is that it demands enterprises or special R&D institutions
focus their TI on some certain point inside the cluster and industry chain for a long term, which may be
called a type of follow-trail technology innovation. Such type of innovation itself has the function of
reduce innovation risks.
The innovation activities of SMEs can be classified into five systems, namely, financial supporting
system, human resource system, raw material supply system, equipment and production system,
technical inspection and promotion system. The link and operation between systems is a problem of
system integration.
If we analyze from the angle of product development, system integration means a series of product
development related to existing brand. For example, Haier Group has developed its white household
appliance with Haier refrigerator as its core brand and brown goods with Haier television as the core
brand. The white goods and brown goods are two closely related branch systems of a larger system
electronic appliances. The greatest advantage of integrated product development is the conveniences
brought by full sharing of technologies and resources. These conveniences are helpful in avoidance of
technology innovation risks.
3.4 TI risk dispersing mechanism of SMEs
technology innovation coalition
Enterprise technology coalition is composed by two or more legally independent enterprises that are
devoting themselves to innovation activities for each member. One aim of technology coalition of SMEs
is to share risks of loss and achieve revenue growth and profitability for all member companies.
The organizational structure of technology coalition of SMEs can be loose or tight. Optional choices are
listed as following:
Type1. Integral organization of the government, industry, research institutions and universities is a
typical form of technology coalition. The government-industry-university and research institution
integration is based on organizational reengineering of technology innovation. Uncertainties of
technology innovation are effectively reduced through cooperation and innovation risks are shared.
Type2. A normal form of technology coalition is that enterprises tackle key technical problems as an
ally. Firstly, united tackling of key technical problems can reduce possible innovation. Secondly, it links
two or more enterprises together. The industrial chain between these enterprises may greatly reduce the
possible technology innovation risks of SMEs.
Type3. Research order is actually an effective form of technology innovation coalition. The greatest
advantage of this type is that it links the demand and supply side. So to the technology suppliers, they
have enough motivation to carry out technology innovation activities with guarantee of technology
orders, for the wrong selection risk of innovation projects doesn’t exist. While to the technology
demanders, they become jointly financial provider with the technology suppliers under the technology
innovation contract.
Type4. Technology share is a form of joint venture by converting technologies holding by researchers or
an institution into shares. It will largely reduce the risks of using technologies to a certain degree.
Through investigation, we found that the most difficult part of build up technology coalition is to design
a reasonable risk-sharing contract. Approaches used to solve this problem including: share risks
according to the share of capital invested; share risks according to shareholder’s equity, for example,
researchers or institutions may enjoy revenue and bear risks according to the technology shares they
hold; share risks completely in accordance with original contract ect.
3.5 Socialization of TI risks based on risk avoidance
venture investment
Technology coalition share risks among several business partners, while venture investment fund makes
risk sharing in a wider range available. In the past, the investment of scientific and technological
research is mainly from the governments in China. With the furthering reform in this area, such
unreasonable investment mechanism is changing. The appearance of venture investment funds greatly
changed the structure of investment.
Presently, there are about 300 venture-investment institutions in China with more than 50 billion RMB
investing in above 2000 research projects.65% of funds are invested to enterprises that are in their
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growth stages, 80% among which are SMEs whose paid-in capital is less than 30 million RMB. These
datum show that venture capital has strong preference on SMEs. Further perfection of existing
cooperative system between venture investment institutions and SMEs is what we need to focus on.
3.6 policy needs of SMEs based on risk avoidance
well-established enterprise service systems
Outside social environment is vital to the technology innovation activities of SMEs. The service systems
that need to be perfected include: equal-competition economic system, fair political system, harmonious
culture system, internet service platform, effective financial service system, legal protection system.
Firstly, an equal competition economic system provides all enterprises, big or small in scale, with equal
opportunity to compete according to the demand of market. It requires the governments take no “scale
preference” and “ownership preference”. Harmonious culture environment is an atmosphere in which
encourages technology innovation and application of new technologies.
Secondly, internet service platform system refers to sound information platform that may substantially
facilitate innovation cooperation between enterprises and research institutions.
Thirdly, a special financial service system should be designed for technology innovation of SMEs. An
overall financial support coalition for SMEs should be established to combine financial support from the
governments, banks and venture funds (Zhang Bin, 2006). Hu Jin (2006) designed a mechanism for
investing and withdrawing time of capital from above three channels. Besides, an enterprise credit
grantee system should be established and improved as well. A multi-layer capital market system with
Shanghai and Shenzhen Stock Market as its core, SMEs Board and local stock market as its important
components, should be further improved to provide financing platform for SMEs. More favorable
standards are needed for the entrance into capital market of SMEs. The governments also need to do
more to help non-institutionalized capital available to SMEs.
Fourthly, the TI of SMEs needs legal protection. We need to improve our law of knowledge property
rights and provide reasonable pay to the employers in R&D department with scientifically designed
compensation and incentive system.
Finally, better material conditions should be provided to those innovation talents so that they can devote
heart and soul into their scientific research work.
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4. Conclusion
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The formation mechanism of technology innovation risks of SMEs are both external
there exists an
uncertain area of risks and gains during the process of technology innovation
and internal
systematic defects of SMEs cause greater probabilities of innovation risks. Uncertainties of technology
innovation risks and gains make the process of innovation rather interesting. For greater profit,
entrepreneurs are always seeking for methods to avoid risks.
There are effective technology innovation risk avoidance mechanisms. such a risk avoidance system
must include the following mechanisms: a warning system, a strategy selection system, organization
optimization system (such as enterprise cluster), a risk disperse system (such as technology innovation
alliance) and socialization of innovation risk system etc..
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References
[1] Hu Jin, Technology Innovation Needs Suitable Financial System, Hubei Daily, Sept.22, 2006.
[2] Liu Yanhua, Government Help Venture Investment into SMEs, website of the Science and
Technology Ministry of China, www.most.gov.cn
[3] Zhang Bin and Mu Leilei, Self-innovation Arouses Financial Innovation, China’s Reform, 2006(9).
[4] Xu Bin, the Policy Cluster of SMEs Based on Industrial Cluster, East China Economic Management,
2005(3).
[5] Zhou Jizhong and Xue Gang, Classification and Identification of Technology Innovation Risks,
studies in Science of science, 2002(4).
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