A study of factors influencing the innovation activity of enterprises

Purpose – To reveal the main factors that effect innovative activity of enterprises in Kazakhstan with the use of statistical data: costs of process and product innovation, interrelation of scientific and research funds.

Methodology – In this study used scientific methods such as the analysis of the study, comparison and observation

Originality / value – This research provides a definition of external and internal factors that effect innovative activity of Kazakhstani enterprises. Data determines current state and the main problems of companies.

Findings – Exploring the factors affecting the innovative activity, necessary to pay attention to both the incentive and the deterrent elements. Activity of Kazakhstani enterprises is affected by such factors as the lack of adequate state support of commercialization of innovations, enterprises weak receptivity to innovations. Enterprises are forced to fund the development of innovation on their own, but they are often not radical and the period of implementation is extended.

Enterprises operate under certain conditions of micro and macro environment, which influence their innovative behavior. Important element for the analysis and evaluation of innovation activity of enterprises is identification of factors reasons and prerequisites of innovation, defining its character or certain features [1].

In order to understand the term innovative active enterprises it is necessary to define it. There are a lot of definitions for innovation in the literature, thus highlighting again the importance of innovation. In our article we have decided to define innovation as defined by OECD [Guidelines for Collecting and Interpreting Innovation Data, OECD, Third Edition], the implementation of a new product or the significant improvement brought to a new product (good or service) or process, a new marketing strategy, an organizational strategy or a new business strategy, workplace organization or external relations management [2]. According to Kabalina B., C. Clark innovation activity is management activities, taking into account the need of the market economy in the continuous upgrading of goods, services and technologies [3]. In dictionary terms of economic terms innovation activity is described as complex characteristic of innovation actions undertaken by the organization, which is focused on the degree of intensity, timing and ability to use the existing potential. Therefore innovative activity of the organization describes how organization reflects susceptibility to innovation and its ability to use the available resources, to evaluate the intensity of the innovation process and its rationality, and has reasonable organizational and management methods of the innovation. 

Disclosure of the factors influencing innovation active enterprises allow us to determine what hampers the implementation of novelty, to identify the area where programs for support and develop of this activity on enterprises are required. It should be noted that the innovation-active enterprises are more flexible compared to the organizations engaged in the development and introduction of innovations, it is due to the fact that modern technology is not standing still, they are in constant motion. Moreover market suggests new opportunities thereby responsiveness to changes in the external environment and the implementation of innovative activity is the most effective way to minimize possible threats of economics. Another advantage of innovation-active organizations is the quick response to possible threats from competitors, whose products can have a number of advantages. In the presence of experts specializing in the research and development in the field of innovation, the organization can react quickly to changes in the market of goods and use of the discoveries made by competitor.

In the economic literature there are different approaches to determining the factors affecting the development of innovation in enterprises. One of the approaches relates to the separation on the external and internal factors. By studying them, it should be noted that they are closely interrelated and affect the strategic management process in different ways. Under the factor in this article we understand the causes, the driving force of the process of strategic innovation management, the phenomenon, which determines its character or individual features.

External factors are associated with the state of the surrounding macroeconomic environment in which the innovation activity is conducted. Internal factors are caused by the peculiarities of ongoing innovation processes. A.N. Folomiev considers that external factors reflect the general economic conditions of the organization activity [4], and Avdonina S.G. to the external factors include supply and demand, the nature of competition; innovation policy of the state; cyclical nature of economic development, which causes the connection of business with a particular phase of the cycle [5]. Among the authors who separate the factors that influence innovation activity on external and internal, we can highlight the work of M.E. Cash and Y. Firsov, as they suggested possible methods for evaluating the innovation and development of a system of requirements for its indicators [6]. Among the advantages of classification J. Dey is possible to note the separation of internal and external factors into three groups: organizational structure, culture and market. At the same time it introduced the time factor and identifies the main challenges that occur in the absence of interaction and high dynamism of the environment[7]. External macro environment of the enterprise is indirectly affecting of enterprise’s macroeconomic, political, social, environmental and other factors.

Governmental support as external factor is another important environmental characteristic for technological innovation. Government through regulation can both encourage and discourage the adoption of innovation [8]. In Kazakhstan government adopted the State program of industrial-innovative development (SPIID) and "Business Road Map 2020" in order to maintain innovative activity. Thus according to a report by SPIID share of innovation active enterprises by number of active enterprises was 8.1% in 2014. However, the activity of innovative oriented enterprises is associated with various financial difficulties, as the main source of financing among such companies is own budget. For example, in 2014 the cost of product and process innovations were funded mainly from its own funds. In the interaction with the state enterprises have such problems as a lack of clear structure of state support of innovation and effective feedback mechanism, the unpredictable actions of the government, administrative barriers and distortion of competition.

The share of sources such as credits, loans and leasing in the total volume was 25.88% in 2014. However, much of the innovation projects involve high uncertainty and risk, in connection with which such financial instruments as credit and leasing, provided to enterprises by bunks on terms of repayment, urgency, serviceability, security may not be suitable and bear a loss (Table 1).

In Kazakhstan, the financing of innovation through its own resources as shown in the Table 1 is a necessary measure due to lack of developed forms and instruments of state support of enterprises’ innovation activity and mechanisms of venture capital. Self-financing of enterprises in the sphere of development and introduction of innovations has negative consequences: the absence of implemented novelty with radical criteria; the gradual nature of the financing of innovative projects, delay of their realization; inability to simultaneously convert all types of activities [10]. 

Table 1 – Structure of costs on product and process innovations in enterprises by source of funds in dynamics for 2009-2014 in Kazakhstan, in % 

It should be noted that 30.58% of main assets for research and development is in state property, and 41% in higher professional education sector, while the availability of R&D funds for business is 21% and according to official statistics, 38.4% of the business sector conducts research. In addition, to the barrier of direct finance is the underlying issue of cash flow. Cash starvation is a common reason for SMEs getting into financial difficulties when trying to attain growth, adopt new systems and achieve comparative success. Incorrect assumptions and forecasts made about future orders and investments can stifle the growth of the enterprise. This can lead to a snowball effect in operational problems, when money is in short supply the enterprise can become unable to finance its component suppliers and ultimately cannot purchase the components needed to produce its products. Depending on the nature of the sales contracts, the enterprise may not receive payment until its manufactured products have been delivered. In this case, the enterprise would enter a cycle of excessive lead-times, high inventory and work in progress, low throughput and shrinking cash flow [11].

In order to understand the innovation behavior of firms it is essential to place emphasis on the different information and knowledge sources for innovation and the complementarities as well as substitutability between them [12]. It is also important to acknowledge the influence of firms’ prior information and knowledge resources, external networks and information and knowledge utilization capabilities on the different information and knowledge sourcing activities. This opens up for path-dependency and the possibility that different firms will follow different innovation paths even if they belong to the same industry [13].

Internal environment of enterprise contains the potential for its development and operation. In contrast to the external environment, internal includes elements for which the company can influence directly. The internal environment of the enterprise begins to function properly if there are problems in the organization of the relationships between its elements. Discovered in the internal environment of the enterprise contradictions are partly due to the dual nature of internal factors or structural elements of the organization. Firstly, this technology, tools, material resources which are elements forming the technical and production structure of the enterprise. And secondly, they are people with their abilities, shareholders, various social groups, and so on. They relate to economic and social factors of the enterprise.

The group of factors that characterize the internal resources of the organization, may include [14]:

• financial viability of the organization
• potential of the organization in terms of scientific and technological progress;
• production capacity of the organization

As well as the factors that combine to form an internal economic relations, and methods of interaction with external factors:

• the organizational structure
• scope of the organization ("small", "medium", "large");

The first group of factors linked to the production. This so-called factors of production. These include research and development, the scale of production, capacity utilization, the life cycle of the enterprise. The second group – financial factors. These include the provision of financial resources, cost control system. The third group – market factors. They include reputation and image of the company, product range and the range of goods, distribution system, advertising campaigns, market research, pricing. The fourth group – organizational factors. These include strategy and the company's mission, organizational structure, legal form, corporate culture, socio-psychological climate in the team. The fifth group – human factors. They include a variety of features related to personnel: sex and age structure, level of qualification, motivation system, remuneration system, bonuses, employee turnover, the frequency of violations of internal regulations of the day.

According to research organizational culture is often intrinsic to the way an organization functions and the values it engenders within its operation. It is also the most commonly discussed factor relating to an organizations’ ability to manage innovation identified within this study [15]. P.K. Ahmed goes as far to say that it is the ‘primary determinant’ of innovation [16]. The competing values framework developed by Quinn and Rohrbaugh has been a very important tool for assessing the effectiveness of organizations on many dimensions including innovation and flexibility[17].

The model formed the basis for Cameron and Quinn typology of culture which included; clan, hierarchy, adhocracy and market cultures. According to the authors the adhocracy culture stresses external positioning combined with a high degree of flexibility and presents a dynamic, highly creative and entrepreneurial environment in which individual initiative and risk taking is highly recommended. In such an environment, visionary leadership combined with innovation and risk taking is desirable. These organizations are held together by a commitment to experimentation and innovation while success is measured by the production of unique, innovative products and services [18].

Other internal factor is potential of innovate active enterprises which in Kazakhstan firms can be traced in relations with R&D. One of the most common indicators used to evaluate the commitment of an organization with the R&D is the level of expenditure dedicated to this activity [19]. Generally, most innovation studies focus on the role of R&D as the determinant of innovation [20]. In Kazakhstan, the production potential of innovation oriented enterprises for product and process innovation was 12.2% in 2015 (Table 2). According to statistics in 2016 only 8.1% can be referred as innovative oriented enterprises. 

Table 2 – Key indicators of R&D costs 

Innovations are closely related to a scientific base and scientific knowledge growth. A strong scientific base focuses innovational activities in the most productive direction. This basis can provide a conjunction of potential technologies, which enhances the possibility of finding technological efficiency in connection with some specific company objectives (or objectives of an industry). Although R&D is not enough for a success of an innovation, the authors found that the probability rises for 60% in the case of its existence [21]. Among the common problems with the scientific sphere are distinguished: low motivation of researchers; the high price of scientific developments; low level of development completion.

Production potential defines a perspective and horizon of the industrial development of the enterprise. As practice shows, the majority of Kazakhstani industrial enterprises were created on the basis of the Soviet state-owned enterprises, with previous existing material and technological base. Most of these companies do not have the possibility to introduce innovative processes, renew basic assets, improve the process, increase production capacity, and this is all due to the lack of sufficient funds. The result of these circumstances is the low quality of the products and a reduction in demand for these products. Therefore it should be noted that, companies that do not have the possibility to update the process are ineffective, often the pace of spending growth exceeds the rate of revenue growth. The market value of such enterprises can be reduced in a short period of time by a significant amount [22]. Thus modern domestic enterprises have a low susceptibility to all types of innovation (product, process, organizational and marketing innovations). In 2015, only 8.4% of the Kazakhstan enterprises engaged in the development and implementation of technological innovation [23]. For comparison, this figure is significantly lower than the values typical for the Czech Republic (36.6%), Estonia (55.1%), Ireland (56.7%), Belgium (59.6%), Germany (69.7%) [24]. Moreover, the share of the purchase costs on new technologies (patents, licenses) in industry is very small only 3% in 2011. Also, there is a need to mention that the amount of expended funds for product and process innovations by ownership in 2015 year was 655 361 million tenge.. However, the returns from the sale of innovations produced in 2015 amounted to only 377 196,7 million tenge.

A new technological breakthrough could have a profound influence on the organization’s competitive environment. If the organization developed the new technology, it could mean a new competitive advantage for itself. The onus is then on the competition to play catch-up, but if the competition developed the new technology, then the organization has to play catch-up. Practitioners must therefore do an effective analysis of its macro environment to identify and monitor the pace of technological change within its own industry. Aspects such as product and process innovation, marketing methods, human resource attraction and developments in R&D are all telltale signs of incumbent technological changes in the environment [25]. The variables that influence this, such as whether or not a firm has an R&D department, or whether or not it maintains cooperative relationships for innovation, are affected by the long-run strategic choices made by the firm. These factors are referred to as the ‘innovation strategy’ of the firm [26]. Strategy is a tool of vigilance and foresight, a primary key to surviving the transformation widespread global change brings, and if necessary, transforming oneself [27].

Innovations are the result of new combinations of innovation inputs in the form of resources, ideas, information, knowledge and/or technologies, which to a varying degree are generated in-house in firms using in-house capabilities and often in-house R&D. Due to an increasing competition; innovations increasingly are dependent upon a diverse set of specialized innovation inputs and capabilities. This implies that we shall expect that firms in general no longer can perform all parts of the innovation process in-house relying only on in-house innovation capabilities and inputs [28]. Even the largest innovative firms cannot rely solely on internal innovation inputs for the innovation process, and thus need external innovation inputs in the form of ideas, information, knowledge and/or technologies to develop innovations [29]. An important issue is that innovating firms must decide on how to distribute their limited innovation resources on product, process, organizational and market innovations including different combinations of these basic types of innovation, and how to adjust this distribution over time as internal and external conditions change. What decisions that are taken are influenced by the internal characteristics of firms as well as by the characteristics of the external context within which they operate. While firms over time partly can change their internal characteristics, they have to accept that the external context is shaped by factors that they cannot influence. The general conclusion we can draw is that to analyze the determinants of innovation behavior of firms we in principle need a theoretical framework able to grasp the complexity, multidimensionality and interaction of the factors governing decisions to innovate or not to innovate as well as the choice of innovation strategy.

Naturally, different explanatory variables have different impacts on the various innovation strategies and might interact in different ways. Unfortunately, no such theoretical framework exists as far as we know. Instead, we have to fall back on explanatory variables found significant for product and process innovation in earlier research, such as size of firms, firm strategies, technological opportunities, technological learning, sources of technology, appropriability conditions and market structures and complement them with variables that can be assumed to influence market and organizational innovation [30]. It seems natural to assume that innovative activities need to focus many aspects related to new products, new production processes, and new market and organizational practices simultaneously [31]. Furthermore, it might be the case that a simultaneous introduction of more than one type of innovation might be more effective in preserving or improving a firm’s competitive position than implementing one type of innovation alone [32]. Strategy of innovative development of the organization represents an enlarged plan for its behavior in the field of innovation, ensuring the achievement of the objectives of the operation in the relevant strategic management area. It shows what kind of the innovative activities of the organization should have, how this activity should be intense, and what kind of innovations should be predominant. Important in the creation of innovative development strategy is formulation of objectives of innovation process, defining phases and timing of implementation, evaluation of the results in the form of specific practical purposes, the shortening of the introduction of new products. 

Conclusion

The analysis and evaluation of innovation activities it is important to identify not only the stimulating factors and constraints. Studies have revealed that the main internal factors hindering innovation activity of enterprises are: a lack of funds, low potential of the company to develop and implement novelty and lack of qualified personnel. Among the common problems with the scientific sphere are distinguished: low motivation of researchers; the high price of scientific research; low level of development completion. Therefore here, innovation activity represents the continuous improvement of existing characteristics of economic categories in order to achieve its goals on the basis of external and internal factors. Innovative development of enterprises is a set of procedures of processing of external and internal sources in the activity of enterprises, which lead to a qualitative improvement of its condition by increasing of innovative potential.

The main problems arising from the nature of innovation activity are: high economic risks and payback periods, as well as the value of innovations and the costs of innovation projects and others. Nowadays becomes obvious the need for developing specific tools and methods of state support and stimulate the implementation of enterprise’s innovative developments. In Kazakhstan, the work on creation of a favorable innovation environment was started with introduction of the "State program of industrial innovative development" and "Business Road Map 2020". In big cities was established number of objects of innovation infrastructure, such as technoparks.

It should also be noted that under the budget limitations it is advisable to segment the enterprises in order to develop measures of state support of innovation activity for each segment that can improve the efficiency of budget spending and better contribute to the achievement of strategic goals of enterprise development in the innovation sphere. It is clear that nowadays creativity and innovative development strategies around the world have become important and play an significant role in the international competition. The development strategy is the core of innovation and business development, which determines the level of the enterprise survival and sustainable development. During acceleration process of economic globalization, intense international and domestic changes in the competitive environment, innovative companies are forced to endure an unprecedented competitive pressures and different problems. Thus it forces the innovative enterprises relate to innovation as a driving force for development, integrating internal and external resources, as well as creating value for the customer.

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