Assessing the impact of firm attributes on the adoption of innovations in Sri Lankan SMEs

Abstract

Introduction

Small and Medium Enterprises (SMEs) are widely acknowledged as the engine of sustainable economic development in both developed and developing economies. They play a crucial role in utilizing local resources efficiently, mobilizing savings, providing workforce training and supporting multinational and transnational corporations in many ways, including tired supply, subcontracting and service outsourcing. SMEs also contribute to building local technological capacity and globally account for 95% of all businesses. They represent 90% of all enterprises, including microenterprises in Asia.

Despite these strengths, SMEs are often highly vulnerable. In developing Asian countries, 60% of SMEs failed in their first year and around 70% of them were closed shortly after starting. This fragility is largely attributed to global competition, rapid technological changes, and sustainability challenges within the globalized economy (Noe et al., 2017). To survive and grow, SMEs must adopt appropriate strategies—among them, innovations take first place. Schumpeter (1934) recognized that innovations have been as central to the long-term success of SMEs, and Kotler (2003) warned that firms neglecting innovation face high risks. SMEs not only rely on innovations for survival but also contribute significantly to their diffusion. SMEs are more active than larger firms in introducing new products, processes, and organisational methods. According to the ILO (2007), SMEs stimulate local economies by introducing innovations that drive growth and development.

This study explores the determinants of SME innovation using the OECD Oslo Manual (2005) framework, which defines innovation in four aspects: product, process, marketing, and organizational. Drawing on Abderrezzak et al. (2016) and Hue (2017), the study classifies determinants into organizational (firm characteristics and owner characteristics), institutional and geographical factors. Using a resource-based approach (Soon et al.,2017), the analysis attempted to investigate the impact of firm attributes on adopting innovations.