Innovation and SMEs performance: evidence from Vietnam

Purpose - The purpose of this paper is to examine the effect of innovation on the performance of small and medium-sized enterprises (SMEs) in Vietnam. Design/methodology/approach - The paper uses data from the surveys on SMEs in Vietnam conducted by the Development Economics Research Group at the University of Copenhagen, the United Nations University’s World Institute for Development Economics Research, Central Institute for Economic Management and Institute of Labor Science and Social Affairs, and applies least squared regressions and 2SLS regressions to examine the effect of innovation on the performance of SMEs. Findings - The authors find that SMEs with innovation tend to perform better than SMEs without innovation. The authors further show that the positive effect of innovation on firm performance mainly comes from the effect of improvement of existing products, an important type of innovation in SMEs. This result is persistent when the authors use propensity matching score and 2SLS regression with instrumental variable approaches. Overall, the results show the important role of innovation in enhancing the firm performance of SMEs, which sheds light on the literature on the controversial relation between innovation and SMEs performance in the world. Research limitations/implications - The major limitation of the paper is the lack of data. Although the database used in the paper is widely used to analyze SMEs in Vietnam, it covers about 2,500 firms in only nine provinces/cities in Vietnam. Practical implications - Policymakers should enact relevant policies to support SMEs with innovation activities, thereby increasing firm performance and their competitiveness. For instance, encouragement policies or financial incentives (tax reduction or subsidies) for innovative firms should be implemented and/or fostered. Originality/value - To the best of the authors’ knowledge, this is the first paper to examine the effect of different types of innovation on the performance of SMEs in Vietnam.