Impact of innovation on firm performance: a case of small and medium enterprises (SMES) in Pakistan

Abstract

The Small and Medium Enterprises (SMEs) play a pivotal role for the promotion of an economy in terms of poverty reduction, employment generation and social integration. In least developing economies like Pakistan, the promotion of SME sector may require the application of innovation in their process and products. Despite having potential natural and human resources, the contribution of SMEs sector is not up to the mark because of persistent negligence by the public sector. It has been observed from empirical evidences that the use of modern technology and innovative methods, particularly in SME sector around the globe, have drastic impact on the economic growth of the country. The innovative firms are more inclined to using new technologies and modern methods to improve their processes and products to gain competitive edge in the market. The key objective of the present study is to analyze the impact of process innovation on firm performance, in terms of operative financial and competitive, of small and medium enterprises, listed on Karachi Stock Exchange, Pakistan. The data, collected from secondary sources, comprises of 69 small and medium enterprises for the period of 1999 to 2009. Based on the discovery and support of the argument, a conceptual framework has been developed to draw testable hypotheses to answer the central research questions. Three key hypotheses have been formulated to achieve the objectives of the study. The present study has used balanced panel data collected from secondary source. The model was estimated through Fixed Effect Method (FEM) estimation technique with the help of E. Views 6.1 (Software). The findings of the present study have shown positive impact of process innovation on the performance of small and medium enterprises. In the present study, innovative activities of the firms were measured through number of patent statistics (PAT) which are granted annually to the firms by the patent office, Karachi, Pakistan. One of the significant results of the present study was positive and significant impact of size of the firm, which has been measured through natural log of total assets (NLTA), on all three types of performance of small and medium enterprises in Pakistan The findings of the present study have also indicated a significant relationship between time consistent risk and operating performance of SME firms. Another interesting finding of the present study has shown a significant relationship between cash flow ratio (CFR) and financial performance of small and medium enterprises. In the present study, the competitive performance has been measured through net profit margin (NPM) of the enterprises. Based on these findings, it could be inferred that there is positive relationship between innovation and performance of SMEs. The Pakistani government must concentrate on the significance of innovation in SMEs to promote economic growth in the country. The present study has highlighted a number of potential areas (impact of innovation on sectoral performances like agriculture sector, industrial sector) that might be explored in future studies in the same context.