Scholarly article on topic 'Developing New Ideas & Capability-based Framework for Innovation Process: Firm Analysis for Indonesia'

Developing New Ideas & Capability-based Framework for Innovation Process: Firm Analysis for Indonesia Academic research paper on "Economics and business"

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Abstract of research paper on Economics and business, author of scientific article — Arif Hartono

Abstract This paper aims to propose a new holistic measure of innovation that encompasses the various narrow definition of innovation along three steps of the innovation process, namely new ideas and capability-based framework. The framework consists of three sequential steps such as news ideas generation, conversion and exploitation. Compared to the previous studies, this framework will be the pioneer that provides the following contribution such as the integration of new ideas and relevant a firm's capability, a wider range of internal and external new ideas sources and types of innovation as the output of innovation activities. The developed framework will be tested to measure innovation activities of the Indonesian firms from a wide range of size and types of industry background

Academic research paper on topic "Developing New Ideas & Capability-based Framework for Innovation Process: Firm Analysis for Indonesia"

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Procedia - Social and Behavioral Sciences 169 (2015) 161 - 169

The 6th Indonesia International Conference on Innovation, Entrepreneurship and Small Business,

12 - 14 August 2014

Developing New Ideas & Capability-Based Framework for Innovation Process: Firm Analysis for Indonesia

Arif Hartonoa,b*

aManagement Department, Faculty of Economics, Universitas Islam Indonesia, Yogyakarta 55283, Indonesia bPhD Student, Warwick Business School, The University of Warwick, Coventry CV4 7AL, UK


This paper aims to propose a new holistic measure of innovation that encompasses the various narrow definition of innovation along three steps of the innovation process, namely new ideas and capability-based framework. The framework consists of three sequential steps such as news ideas generation, conversion and exploitation. Compared to the previous studies, this framework will be the pioneer that provides the following contribution such as the integration of new ideas and relevant a firm's capab ility, a wider range of internal and external new ideas sources and types of innovation as the output of innovation activities. The developed framework will be tested to measure innovation activities of the Indonesian firms from a wide range of size and types of industry background

© 2015 PublishedbyElsevierLtd.Thisisanopenaccess article under the CC BY-NC-ND license (http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-reviewunder responsibilityof Center forInnovation,Entrepreneurship, and Leadership (CIEL), School of Business and Managements (SBM), Institut Teknologi Bandung (ITB).

Keywords: new ideas; firm capability; innovation process; firm level; Indonesia

* Corresponding author. E-mail address:

1877-0428 © 2015 Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of Center for Innovation, Entrepreneurship, and Leadership (CIEL), School of Business and

Managements (SBM), Institut Teknologi Bandung (ITB).


1. Introduction

1.1. Innovation in Developing Countries

Innovation role as the important driving force of economic development is widely acknowledged. Evidences have shown that innovation is the main driver of prosper, growth and sustain a high profit for firms (e.g. Drucker, 1988; Christensen 1997). In the case of industrialised countries, evidence from innovation studies at the firm level showing the positive links between R&D, innovation and productivity (Griffith et al., 2004; Griffith et al., 2006; OECD 2009). However, evidence shows that firms' ability to transform R&D into innovation in developing countries is much more mixed than in industrialised countries (Crespi & Zuniga, 2012). Previous studies from newly industrialised countries such as South Korea (Lee & Kang, 2007), Malaysia (Hegde & Shapira, 2007), Taiwan (Yan Aw et al., 2008), China (Jefferson et al., 2006) reveal that a positive association between R&D, innovation and productivity. In addition, evidence shows that the higher levels of investment in innovation (i.e. R&D) lead to a higher propensity to introduce technological innovation in firm level in the following developing countries Argentina (Arza & Lopez, 2010; Chudnovsky et al., 2006), Brazil (Raffo et al., 2008) and Bulgaria (Stoevsky, 2005). In contrary, evidence from Chile (Alvarez et al., 2010; Benavente, 2006) and India (Krishnan & Jha, 2011, p. 22); do not support the findings. In the case of Indian firms, "conventional innovation indicators - such as R&D intensity and patenting activity - does not give the impression of a strong innovation strategy in these firms" (Krishnan & Jha, 2011, p. 22).

It is often argued that many firms in the developing countries rely on 'reinventing the wheel' strategy and do not heavily rely on R&D efforts (Basant & Fikkert, 1996); accordingly imitation and acquisition technology seem to be more important than performing R&D and innovation activities (Bell & Pavitt, 1993). Altenburg et al., (2008) adds that firms in emerging economies are laggards in innovation, especially in cutting-edge innovations. However, recent evidence derived from case studies in emerging economies such as Korea (Yong Choung et al., 2014), show that some innovation systems are currently in a transition period from being adopters and imitators (catch-up period) of foreign technology; to being creators of new technology and process (post catch-up period), aiming to be a player in global market. This suggests that developing endogenous innovation capabilities is possible.

Previous scholars have studied innovation in developing countries from a wide range of perspectives for instance: intellectual property and patent (e.g. Chen & Puttitanun, 2005; Lee et al., 2013); technological innovation (e.g. Almeida & Fernandes, 2008; Becheikh, 2013; Crespi & Zuniga, 2012; Srinivas & Sutz, 2008; Zhao et al., 2005); R&D investment and activities (Alvarez et al., 2010; Arza & Lopez, 2010; Benavente, 2006; Chudnovsky et al., 2006; Crespi & Zuniga, 2012; Hegde & Shapira, 2007; Jefferson et al., 2006; Lee & Kang, 2007; Raffo et al., 2008; Stoevsky, 2005; Yan Aw et al., 2008). One of the main weaknesses of the mentioned studies is that they tend to use one aspect of innovation such as IP and patent, R&D investment or technological innovation rather than a multidimensional construct that might not be appropriate for developing countries (Bogliacino et al., 2009). Battisti & Stoneman (2010) add that one aspect of innovation, for example technological innovation, is not sufficient to gain competitiveness and it avoids synergistic effects as well as joint adoption of other aspects.

1.2. Innovation Activities of Indonesian Firms

Indonesia is predicted to be one of the emerging economic giants from the MINT (Mexico, Indonesia, Nigeria and Turkey) countries. It is also predicted that the Indonesian economy has the potential to be the ninth largest in the world by 2050 (BBC, 2014). To achieve this, Indonesia need to learn from China's experience. Many economists argue that China now has reached a phenomenon known as a 'middle trap income', as the country is not able to achieve rapid growth to be a high income country (Flanders, 2012). According to the World Bank, increasing competitive ability in the economy and fostering innovation is the answer to overcome such phenomenon (Flanders, 2012). Accordingly, innovation measurement must be conducted to support any relevant strategy and policy that involve interconnectedness between policy, research and statistics in order to shed light on strategy and policy (Sloan, 2006). However, despite its importance the knowledge of the innovation mode and the overall innovation dynamic by Indonesian firms is quite fragmented and limited.

Bogliacino et al., (2009) reviewed published innovation survey conducted in developing countries in Europe, Asia, Africa and Latin America regions. They revealed that innovation surveys similar to the European ones based

on Oslo Manual e.g. the Community Innovation Survey (CIS), were conducted in East and South East Asian countries such as South Korea, Taiwan, Malaysia and Thailand. This provides comparability across countries on the various innovation practices. However there is no evidence that such a comprehensive survey was conducted across Indonesian firms.

Innovation studies by Indonesian firms have mainly focused on three themes. Firstly, innovation studies on small and medium firms (e.g. Brata, 2011; Kristiansen, 2002; Najib & Kiminami, 2011; Sandee & Rietveld, 2001; Van Geenhuizen & Indarti, 2005) show that collaboration among SMEs' leaders and the usage of internal and external sources of new ideas plays important role in enhancing information, innovation adoption and innovation performance; however most SMEs' rely heavily on the internal sources of new ideas to be employed in the innovation process. Secondly, technological capability and commercialization (e.g. Dhewanto & Umam, 2009; Rasiah, 2009) influence the export intensity, human resources and R&D capability; and the commercialization the technology can be tracked down to universities, government and business organization laboratories. Thirdly, business model innovation have been studied and developed to be used in an entrepreneurial research based-university (Payumo et al., 2013), innovative national innovation systems (Lakitan, 2013) and a sequential model of innovation strategy (Ciptono, 2006). These three themes are interesting on their own. However, no previous study has been carried out that looks at a wide range of innovation activities by Indonesian firms and more generally the nature and the range of activities undertaken.

1.3. Objective of the Study

The main aim of this study is to propose a new holistic measure of innovation that encompasses the various narrow definition of innovation along three steps of the innovation process, namely new ideas and capability-based framework. The holistic measure needs a framework that accommodates innovation activities conducted by the Indonesian firms. The developed framework will be tested by using a large scale of the Indonesian firms that consists of wide range of industry sectors and firms size.

2. Literature Review

2.1. Definition of Innovation

Innovation is related to change and "it may involve a wide range of different types of change depending on the organisation's resources, capabilities, strategies, and requirements" (Baregheh et al., 2009, p. 1324). As innovation is studied from many perspectives and disciplines, therefore there is lack either a single definition or measure of innovation (Adams et al., 2006). Newness and novelty are to be the focus of most innovation definition (Goswami & Mathew, 2005, Johannessen et al., 2001). The following are examples of the use of newness in the innovation definition from the previous studies. Schumpeter in the 1930s defined five types of innovation such as (1) introduction of a new product or a qualitative change in an existing product; (2) process innovation new to an industry; (3) opening of a new market; (4) development of new sources of supply of raw material; and (5) other inputs and changes in the industrial organisation. Mohr (1969, p. 112) defined innovation as "the successful introduction into an applied situation of means or ends that are new to that situation". "Innovation as the earliness or extent of use by a given organisation of a given new idea, where "new" means only new to the adopting agent, and not necessarily to the world in general" was defined by Downs & Mohr (1979, p. 385). Damanpour (1991, p.556) defined innovation as "the generation, development, and implementation of new ideas or behaviors". Nohria & Gulati (1996, p. 1251) defined innovation to include "any policy, structure, policy, method or process, product or market opportunity that the manager of the innovating unit perceived to be new". A question remained is how newness contribute to the creation of profit or additional economic value?

Wallin & Krogh (2010) defined innovation in a different way and they defined that innovation is a process of creating and managing knowledge for the development and introduction of something new and useful. They added that identifying and integrating various types of knowledge along the innovation process is the central for organising innovation (Wallin & Krogh, 2010). Three main points of their definition are (1) "innovation is a process that involves the creation of relevant knowledge" such as customer needs, market and technology development and trend as well as the knowledge is used for technical and scientific development; (2) the knowledge is used for developing

and producing something new, novel and useful then to be transformed into various innovative products; (3) subjectivity of the usefulness (Wallin & Krogh, 2010, p. 145). Sawhney et al., (2006) emphasise that innovation is relevant if it is able to create value for both customers and the firm. Customers judge a product is useful if the product is able to solve their problems; while the firms consider useful if the innovative product is able to generate cash (Wallin & Krogh, 2010). A more simple definition was defined by Bercovits & Feldman (2007), innovation is the ability to create economic value from new ideas.

Based on the aforementioned review; innovation need to be defined in order to operationalize the innovation process in this paper. The new definition elaborates some terms from the existing innovation definition for instances ideas, process, capability, new, outcome, and economic value. Therefore, this study defines innovation as generation, conversion and exploitation of new ideas and it is combined with firm capability through a systematic process for producing outcome to be perceived as new that have economic values for customers and firms.

2.2. Types of Innovation

Investing in different types of innovation is very important for the firm because each type of innovation influences the firm in different ways and contributes different outputs and impacts (Siguaw et al., 2006). Type of innovation is defined as "the kind of innovation as in the type of output or the result of innovation, e.g. product or service" (Baregheh et al., 2009, p. 1331). Product and process innovations are the most widely studied typology in innovation (Abernathy & Utterback, 1978; Kotabe & Murray (1990) and another most widely known but less studied typology are technological or technical and administrative or organisational or management innovations (Kimberly & Evanisko, 1981; Birkinshaw et al., 2008). Baregheh et al., (2009) conducted content analysis to develop further understanding of the innovation concept from multi-disciplinary of previous innovation literature review. The most types of innovation cited from the previous studies are product, service, process and technical (Baregheh et al., 2009). In this study a wide range of innovation types will be used to measure outcome of innovation activities. Following Battisti & Stoneman (2010, 2013), this study employs the following types of innovation: new product innovation; new process innovation; technological innovation such as new machinery, equipment and computer hardware or software to produce new or significantly improved goods, services, production processes or delivery methods; implementation of new or significantly changed corporate strategy, implementation of advanced management techniques; implementation of major changes to the organisation structure, and implementation of changed marketing concept or strategy.

2.3. Innovation Process

Organising search for new ideas that have commercial potential for firms is the central part of innovation process (Laursen & Salter, 2006). Combination of internal and external sourcing of know how would be employed by the successful firms in order to enhance innovation process (Krishnan & Jha, 2011). Recent studies on innovation show that open innovation process has become an increasingly important issue (Trott & Hartmann, 2009; Dahlander & Gann, 2010; Van de Vrande et al., 2010; Huizingh, 2011; Lichtenthaler, 2011). How the firm utilises ideas and knowledge of external partners during the innovation process is the centre of open innovation model (Laursen & Salter, 2006). In the open innovation process "companies still manage and assess their innovation process as a series of phases, but ideas can come from external as well as internal sources and can enter the innovation process at any stage" (Collins, 2006, p. 15).

Need for knowledge and the implementation of knowledge management practices are crucial to support the success of innovation process as well as allow the firm to explore and to exploit knowledge (Levinthal & March, 1993; March, 1991). Wallin & Krogh (2010, p. 149) added that "understanding the goal of the innovation process and its various steps allows a directed search for knowledge outside the company by which the innovation process becomes increasingly open". Previous innovation process have been studied and most of them perform similar stages such as idea generation, conversion and diffusion (Hansen & Birkinshaw, 2007); knowledge sourcing, transformation and exploitation (Doran & O'Leary, 2011; Ganotakis & Love, 2012; Roper et al., 2008); knowledge acquisition, integration and exploitation (Elmquist et al., 2009); knowledge exploration, retention and exploitation (Lichtenthaler & Lichtenthaler, 2009); and sourcing, using and exploiting of new ideas (Battisti & Stoneman, 2013). In this paper, the innovation process steps are elaborated based on the previous studies that consist of new ideas generation, conversion, and exploitation.

2.4. New Ideas Generation

Based on the open innovation principle, an important agenda for the firms is how they explore and use knowledge from external actors in their innovation process. External knowledge exploration means a firm acquisition knowledge from external sources and then the result will be integrated with the existing knowledge to be strategic value (Lichtenthaler, 2011). Segarra-Cipres et al., (2012, p. 203) argue that "competitive advantage in innovation is not based so much on an organisation's internal resources as on its capacity to detect valuable external knowledge and integrate it into its own innovation process". The firms' speed in integrating and adopting current and acquired external knowledge influence the firms' sustainable competitiveness (Henderson & Clark, 1990, Kogut & Zander, 1992, Powell et al., 1996). Berchicci (2013) found that better innovative performance can be gained by performing an internal and external R & D system. In the open innovation concept, internal R & D and external knowledge of sources such as universities, clients, suppliers and other firms are used as the input in innovation process (Chesbrough, 2003b). Following Hansen & Birkinshaw (2007), new ideas will be generated inside the firm (within units and across units) and outside the firm (parties outside the firm).

Previous studies of the innovation process listed sources of ideas and knowledge such as internal R & D (Roper et al., 2008; Ganotakis & Love, 2010), customers (Laursen & Salter, 2006; Roper et al., 2008), suppliers or external consultants (Laursen & Salter, 2006; Roper, Du & Love, 2008), competitors or through joint ventures (Laursen & Salter, 2006; Roper et al., 2008), universities or other public research centres (Laursen & Salter, 2006; Bercovitz & Feldman, 2007; Segarra-Blasco & Arauzo-Carod, 2008; Todtling et al., 2009). In this study, three additional sources of external knowledge are added such as external R & D (Veugelers & Cassiman, 1999; Hagedoorn & Wang, 2012), internet and online communities (Christensen et al., 2005; Van Geenhousen & Indarti, 2005) and other linkages to exhibitions, professional associations or technical standards (Laursen & Salter, 2006).

2.5. New Ideas Conversion

Todtling et al., (2009) state that the impact of different specific knowledge on different types of innovation is remain unclear. They also argue that "the knowledge flow is regarded as an externality, where the mechanism of knowledge transmission often remain unclear" (Todtling et al., 2009, p. 60). They found that firms producing advanced innovation or radical innovation tend to rely on a higher extent on R & D or patent and they normally do collaboration with universities or research organizations. Firms that introduce less advanced innovation rely more on knowledge links with business services (Todtling et al., 2009). New ideas conversion stage consists of new ideas integration and conversion. To integrate the generated new ideas from internal and external parties into the innovation process, the firm needs to create an appropriate integration mechanism as well as effective governance mechanism (Wallin & Krogh, 2010). Subsequently, the integrated new ideas to be converted into innovation output i.e. various types of innovation.

2.6. New Ideas Exploitation

The final stage of the innovation processes in this study is new ideas exploitation that generates value for the firm. In this stage, the firm commercialises their ideas and knowledge either exclusively or using it internally trough out-licensing or strategic alliance (van de Vrande et al., 2009; Lichtenthaler, 2011). As a reward the firm receives monetary benefits (e.g. licensing revenues) and non-monetary benefits (e.g. cross-licensing agreements) (Gassmann, 2006).

Firm performance that consists of labour productivity, sales growth and employment growth has been used to measure knowledge exploitation (e.g. Roper et al., 2008; Ganotakis & Love, 2012; and Roper & Arvanitis, 2012). However, the wider effects of open innovation beyond innovative sales or number of patents is little known (Fu, 2012). Thefore, a comprehensive measurement to gauge performance will be conducted in this study and it will be divided into innovation performance and firm performance. To measure innovation performance, share of turnover from new products will be used (Berchicci, 2013). As suggested by Saunilla & Ukko (2012), firm performance in this study will be measured by employing direct and indirect, objective and subjective, and financial and non-financial indicators.

2.7. Firm Capability

In this section factors that influence the firm's ability to adopt innovation process is discussed. Cohen & Levinthal (1990) state that to fully utilize the potential external knowledge provides, the firms need to absorb and integrate the knowledge they acquire. Therefore, "successful open innovation hinges on firms' internal capacities to process acquired knowledge resources" (Lichtenthaler, 2011:88). An integrative perspective that accommodate knowledge inside and outside the firm's boundaries are relatively limited (Chesbrough, 2006). In order to capture both internal and external knowledge, Lichtenthaler & Lichtenthaler (2009) developed a framework that consists of six knowledge capacities such as inventive, absorptive, transformative, connective, innovative, and desorptive capacity. This study uses the framework developed by Lichtenthaler & Lichtenthaler (2009) and adding two capacities namely search strategy and integrative capacity. As suggested by Laursen & Salter (2006) external search breadth and depth capacity influence the innovation performance. Despite there are clear impacts of external search on innovation performance, however if firms heavy too rely on external knowledge they will have negative impact for their innovation performance Laursen & Salter (2006). Integrative capacity also will be used in order to support the integration of generated new ideas from internal and external parties into the innovation process. Table 1 shows the relevant capacities that will be used in this study. Explanation each relevant capacity is summarized in the table 2.

Table 1 Relevant the Firms' Capacities for Innovation Process

New Ideas Generation New Ideas Conversion New Ideas Exploitation

Internal (intra-firm) External (inter-firm) Inventive Capacity External Search Capacity Absorptive Capacity Transformative Capacity Connective Capacity Innovative Capacity Desorptive Capacity

Table 2 Description of the Knowledge Capacities

No_Knowledge Capacities_Description_

A firm's ability to explore new knowledge inside the firm (Lichtenthaler & Lichtenthaler,


A firm's ability to search widely and deeply external knowledge (Laursen & Salter, 2006). "A firm's ability to explore external knowledge" (Lichtenthaler & Lichtenthaler, 2009, p. 1319).

"Specifying how people, teams and other sources external and internal to the company contribute to various steps in the open innovation process" (Wallin & Krogh, 2010, p. 149). "A firm's ability to retain knowledge inside the organisation" (Lichtenthaler & Lichtenthaler, 2009, p. 1320).

"A firm ability to retain knowledge outside its organizational boundaries" (Lichtenthaler & Lichtenthaler, 2009, p. 1320).

"A firm's ability to internally exploit knowledge" (Lichtenthaler & Lichtenthaler, 2009, p. 1321).

"A firm ability to exploit externally knowledge" (Lichtenthaler & Lichtenthaler, 2009, p. 1321) to be commercial outputs._

1 Inventive capacity

2 External search capacity

3 Absorptive capacity

4 Integrative capacity

5 Transformative capacity

6 Connective capacity

7 Innovative capacity

8 Desorptive capacity

3. The Framework

Based on the aforementioned literature review, the conceptual framework of this study can be drawn and the table 3 presents the framework. The framework is developed based on the previous studies conducted by Hansen & Birkinshaw (2007), Lichtenthaler & Lichtenthaler (2009), Giuliana & Stoneman (2010, 2013), and Love et al., (2011).

Table 3 New Ideas & Capability-Based Framework for Innovation Process

_New Ideas Generation_New Ideas Conversion_New Ideas Exploitation

4. Contribution of the Study

Compared to the previous innovation process studies, this study proposes a holistic approach of the innovation process and it will be tested to large scale database from wide range of sizes and types of firm sectors in Indonesia. The approach provides the following contribution such as the integration of new ideas and relevant capacities, a wider range of external knowledge sources and types of innovation as the output of innovation activities.


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