The influence of intellectual capital factors on innovation

Investigation of intellectual capital in small and medium-sized enterprises in the conditions of the emerging market. The role of innovation potential in the activities of little and average-sized concerns. Transition to a higher level of introduction.

17.10.2016
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(THE IMPACT OF INTELLECTUAL CAPITAL ON INNOVATIONAL ACTIVITY OF SMALL AND MEDIUM ENTERPRISES)

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Contents

Introduction

1. Literature review

1.1 Intellectual capital in small and medium enterprises under emerging market conditions

1.2 The role of innovation capability in the activity of small and medium enterprises

1.3 The influence of intellectual capital on innovation progress

2. Methodology

2.1 Analytical model

2.2 Variable definition and measurement

2.3 Survey sample and data description

2.4 Data analysis

Conclusion

References

Appendices

Abstract

Introduction

In 2013 Russia was ranked as the 32nd country in the industrial competitiveness ranking. This position reflects both the reduction in innovative capacity of the country and decline in share of output produced by manufacturing industry (UNIDO,2016).During the recent years a huge lag in the innovative development between Russian small and medium enterprises (SMEs) and foreign neighbors was noticed (EIB, 2013). Compared with small and medium enterprises in OECD countries half of which undertake any type of innovation, only 5% of SMEs in Russia launch innovative projects. Consequently, thrilling discussions about possible ways to increase the level of innovation of Russian SMEs have been raised (OECD, 2015).

Russian government understands an urgent need to address the problem. Nowadays there are five federal programs which focus on small and medium enterprises such as programs promoted by the Ministry of Economic Development, Russian Bank for Small and Medium Enterprises support, The Fund of Assistance to Development of Small Forms of Enterprises in Scientific-Technical Sphere. Speaking about innovative small and medium enterprises these institutions set such goals as creation and development of infrastructure to provide support to small and medium sized businesses, which carry out activity in the field of industrial production, development and introduction of innovative products. More than that they offer material support, including business incubators, industrial and technological parks. Hopefully, soon all attempts to create highly innovative enterprises will yield excellent results.

Nevertheless, contemporary the innovation development process in Russia is at an extremely uncompetitive level. Despite the fact that among BRICS countries Russia stands as one with strong higher educational system and extensive pool of scientists, usually it is characterized as country with relatively weak focus on R&D and innovation. This problem is complicated by the fact that the Russian market is an emerging market that has a lot of peculiarities and difficulties (OECD,2015). The common external problems of SMEs in Russia are lack of financial resources, lack of qualified workers, weakness in external information, inadequacy of management and marketing, undeveloped capital market, and limited market competition (Michailova et al.,2014; Pissarides et al., 2003; Kogut et al.,2002; UNESCO,2015).Besides that, authors of OECD (2015) add some issues, including heavy administrative and tax burden, tough competition, and weak employment of the Russian science base. Moreover, they shed the light on such internal difficulties as scared employment in SMEs, low percentage of business starts-up, low growth performance and feeble innovation activity. The figures of the following characteristics in Russia cannot be compared with ones in OECD or emerging economies as well (OECD, 2015). Russian enterprises try to cope with these odds in order to survive and to continue its activity. Nevertheless, since the competition on the emerging market is growing fast, firms should be ready to pursue unique characteristics following the purpose to have the priority on the market.

Today innovation is recognized all over the world as the principal factor that helps small and medium enterprises which operate within emerging market to gain the competitive edge and to expand its market share (Marvel et al.,2007). Jansen et al. (2006) claim that this goal can be achieved by means of competencies which have already been exploited by the company or introduced as radically new ones. The success of the companies depends on its ability to integrate innovation actions into everyday strategy. According to the explicit number of research, intellectual capital allocation creates the basis which stimulates innovation capability of small and medium enterprises (Costa et al., 2014; Dumay et al.,2013; Jansen et al.,2006; Subramaniam et al., 2005; Delgado-Verde et al.,2015).

Empirical findings concerning the impact of intellectual capital on the product innovation are mixed. Several points which are clear: the majority of intellectual capital components increases the ability of both small and medium business to develop innovative capability of the company; the influence of intellectual capital components in SMEs differs much from the effect of these factors in large firms; the level of market maturity plays a significant role (Costa et al., 2014; Daou et al., 2014; Escribano et al., 2009). The theoretical argument in favor of these points is formulated due to the fact that the vast majority of SMEs in emerging market don't have access to financial resources (OECD, 2010). As a result, it leads to poor availability of tangible resources. In order to have competitive edge the main purpose is emerging: to compete by means of knowledge accumulation and intangible assets storage.

Thus, we set research question of the current paper: Do the components of intellectual capital influence the probability of transition to the higher level of product novelty for small and medium enterprises?

In order to achieve the main goal and to answer the research question which has been set by the author, we employ econometric model and analyze data on the disposal. The observed dataset RuFIGE is a part of the research project Russian Firms in a Global Environment has been provided by International Institute for Marketing and Social Research GfK Rus. The author anticipates proving the state that intellectual capital components stimulate small and medium enterprises to develop their innovation activity and help to increase the level of product novelty.

Since the government of the Russian Federation put SMEs at the priority of contemporary reforms and encourages companies to innovate, this topic is highly relevant. The following paper is topical for managers of Russian companies who are responsible for innovative activity of the enterprises. Pursuing the purpose to balloon the level of product novelty, they may easily understand what are the key components which stimulate innovativeness inside enterprise's strategy.

1. Literature review

In this section we will firstly focus on specific features of all three types of intellectual capital in small and medium enterprises under emerging economy conditions. Secondly, we will discuss the definitions product innovation and level of product novelty in SMEs. Finally, we will give a more detailed look at the innovation process from An Intellectual Capital - Based View of the Firm.

Before proceeding to the main part of the theoretical justification, one thing should be noted. Not each author of articles which have been analyzed and taken as the basis for further research, uses such terms as intellectual capital, human capital, structural capital or relational capital. Nevertheless, since all papers are dedicated to intangible resources, the author has decided to categorize all factors which were employed and to classify each of them to a particular type of intellectual capital.

1.1 Intellectual capital in small and medium enterprises under emerging market conditions

The concept of intellectual capital has become widely spread in literature over the past 20 years. From Edvinsson and Malone (1997) perspective, intellectual capital is the combination of hidden resources which are not indicated in the balance sheet. The main attributes of IC are: possession of knowledge; professional skills and experience; organizational technology; relationships with stakeholders (Edvinsson et al., 1997). The academic literature provides huge number of various classification schemes. However, usually these factors are divided into three groups: human, structural and relational capital (Sveiby, 2001).

Speaking about the components of intellectual capital of small and medium enterprises within emerging market some remarks should be made.

Human capital is the key contributor to a company's competitive advantage (Edvinsson et al., 1997; Bontis et al., 2002). It represents a set of individual skills of employees. Human capital cannot be considered as the property of the organization (Schultz, 1981).

The performance of organization reflects the quality of individual capacity or an ability of employees to create capital of the organization relying on their skills and knowledge. Cabrita et al. (2006) suppose that quality of human capital depends greatly on employees' willingness and motivation to create resources for sustainable growth. The scale of small and medium enterprises makes it possible for managers to pay attention to the needs of each employee or to delegate the duties according to their qualification and skills. Thus, it stimulates the core feature of motivation. For the last decade this principle has become the point of great importance in emerging markets. After the privatization in Russia which was characterized by inadequately association of workers' earnings with their education managers and owners realized that both motivation and specialization would play a significant role (Linz, 2000). Tough competition forced managers and owners to reassess the principles of human resources management; they realized that human capital was an explicit resource which might be used as one of the factors that constructed competitive advantage of the company. Nevertheless, today the quality of professional individual knowledge of enterprisers in developing countries, such as Russia or China, is low and even cannot be compared with ones in developed economies. The main core of this issue is based on premise that these countries have followed marketing orientation for less than three decades. That means that labor market of highly qualified employees is relatively young. Additionally, the vast majority of programs related to professional education and training are very expensive and available only in large cities. That puts overwhelming constrain on SMEs which wish to have an access to well-trained staff (Wang et al., 2009).

The second component of intellectual capital is structural capital. Ya-Hui Hsu et al. (2009) define the structural capital first of all as knowledge, experience and skills of employees that have been codified, clearly defined and recorded in the database, formalized by means of patents, regulations, copyrights and know-how. Thus, all non-human factors which facilitate the process of knowledge transfer between employees are included into this component: all information systems, routines, procedures or databases (Cabrita et al., 2006). This point is related to explicit elements of structural capital. Besides, there are implicit structural capital elements which refer to corporate culture or leadership (Subramanian et al., 2005).

Structural capital of small and medium enterprises has its own peculiarities. It happens because SMEs' structural capital, in opposite to structural capital of large firms, is more sensitive to the quality of human resources and cooperation between employees. Small scale of SMEs enables colleagues to establish close relation between each other and improve working condition (Keeble et al., 1999). Structural capital provides the company with an environment that encourages staff to invest their intellectual capital in order to create new ideas and knowledge for making a benefit for the company (Yitmen, 2011; Hsu et al., 2009; Telbani, 2013).

If we draw attention to some features of structural capital in companies operate within emerging market, we will see that a lot of reasons that can be a real problem for implementing of new knowledge equipments. Usually SMEs in such countries as Brazil, India, China, Russia, South Africa and others face with tremendous number of external challenges: lack of financial resources, lack of skilled workers, weakness in external information and linkages, difficulty in coping with government regulations, etc. (Michailova et al., 2014). Therefore, the following statement should be clear: in the condition of immature market tacit knowledge plays the most important role in the process of knowledge transferring during business operations (Wang et al., 2009) In that case, the competitiveness can be tougher than it is on developed market. Therefore, the most successful enterprises are always ready to pick up all important information from the market and turn it into the business opportunities (Li et al., 2002).

The third component of intellectual capital is known as relational capital that comprises relationships which are developed by the company with various stakeholders (Gupta et al.,2001). This type of intellectual capital is more individual than institutional, as based on relationships between individuals outside the company (Mertinz et al., 2009). The concept of relational capital represents connection between the enterprise and environment it operates in. It encompasses the level of customers' and partners' loyalty, the extent of familiarity with brand, etc.

Several authors limit their studies and take into account customer relationships as the key component of relational capital (Castro et al., 2013; Tseng et al,2005; Bontis et al., 2002). Improving the quality of relations with customers is a top priority for small and medium businesses. As a result of small scale, these businesses usually have more densely contact than their large counter partners. Moreover, very often small and medium enterprises prefer to focus on reliable clients. Deals with that type of clients can repeat more than once, therefore small and medium enterprises try to accomplish all requests as effectively as they can in order not to lose their reputation. Besides that, usually costs of finding reliable partners exceed the costs of carrying out high-quality transaction. However, the efficiency of value creation through intellectual capital depends not only on relationships with customers, but also on relationships with shareholders, suppliers, partners and other parties interacting with the company. (Delgado-Verde et al.,2015; Telbani,2013; Subramanian et al,2005; Hsu et al., 2009; Yitmen,2011; Zerenler et al., 2008).

The behavior of small and medium enterprises that operate in the condition of emerging market is the point for intriguing disputes. The main characteristic of relational capital in SMEs under emerging market conditions is explained by lack of resources and comprises presence of strong incentives to collaborate with partners (Peng et al., 2000). The reason is clear: if the firm is strongly individual, it wastes the potential of synergies and the benefits of external relationships. Thus, soon it will lead to the limited development of SMEs (Jardon et al., 2012). Nevertheless, despite the fact that huge fraction of small and medium enterprises tries to establish ties with stakeholders, their relationships are full of distrust (Renzl, 2008).

1.2 The role of innovation capability in the activity of small and medium enterprises

In all probability, the company which is able to implement creative destruction into its everyday strategy has huge chance to receive the competitive edge on the market it operates (Schumpeter, 1942). Innovation is considered as a basis of competitive advantage and high profitability under the conditions of fast evolution of economic institutions, the emergence of new industries, businesses, and technological processes (Subramaniam et al., 2005). Due to innovation, the company has a possibility to capture new markets or just reinforce leading position.

According to the definition given by Organization of Economic Co-operation and Development, innovation refers to introduction of the significantly improved or new good or service (OECD, 2010). Authors of OSLO Manual figure out one minimum requirement of an innovation which is related to the boundaries of innovation. They add that the manufactured product or process which is called innovation should be at least new for the firm. Here we should refer to the concept of novelty given by OSLO Manual. All innovation must contain the particular degree of novelty: new to the firm; new to the market; new to the world. Despite the fact that product or process may already have been implemented by another firm, it still can be new for the firm. Then it is called innovation for the firm. Oppositely, the concepts new for the market, new for the world are related to economic impact of innovation and on its adoption by the other firms. Companies which were the first developers of innovation can be considered as drivers (OECD, 2015).

Products or processes are regarded as new for the market after the first introduction on the market. The point that should be noted is referred to the geographical scope of new to the market. Usually it is subject to the firm's own view and thus may include either domestic or international firms. Eventually, innovation has new for the world degree of novelty when it was introduced for the first time for all markets and industries (OECD, 2015).

Four types of innovations within companies are distinguished by OECD, 2010: product and process; marketing and organizational innovation. The way of defining innovation in the present work involves employing product framework. Product innovation implies the process of introduction of extremely new goods and services or significantly improved one. It can either employ new knowledge or utilize storage which has been generated before (OECD, 2010). In that sense OECD identifies two levels of product novelty. Incremental level of novelty is type of innovation activity that implies exploiting the existing competencies or conventional and simple extensions. Conversely, the effect of the radical innovation is significantly more dramatic as it refers to introduction of extremely new product either to the market or to the firm itself (OECD, 2010). Following the purpose to expand the market share and to be highly competitive, firms need to make a choice whether the prior aim is to create new knowledge or to exploit newly acquired knowledge. From the one hand, without any doubts radical innovation brings novelty and diversity, provides the company with tools to open knowledge perspectives. From the other hand, incremental innovation puts constraints on the knowledge expansion by means of exclusion useless and outdated knowledge and selection of actual information (Castiaux, 2007).

Nevertheless, companies should always be careful. Failed radical innovation may cause great loses as it requires huge money investments at the initial stage of introduction. In particular, SMEs have much more difficulties than large companies while trying to obtain an access to external funding (OECD, 2010). Since the financial resources of small and medium enterprises are constrained, they are more sensitive to missed radical product (Herrmann et al., 2007).

In spite of all restrictions which have been mentioned above, SMEs remain the main force which triggers the creation of more innovations per employee than large companies do. Although more than two-quarters of R&D expenditures in developed countries refer to large companies, small and medium enterprises can be regarded as rapid innovators without any doubts (Baumol, 2006; Marvel et al., 2007). Flexibility, small scale, and high-qualified resources enable to adapt consistently to the rapid changes within the market.

Truth to be told, Russian small and medium enterprises cannot be described as real contributors of innovation development. Statistics show that only 1,6% of Russian SMEs have made significant expenditures on any type of innovation. More than that, the vast majority of companies are regarded as adopters but not as innovators, 70% of them introduced products that were not new. Only a small fraction (roughly 6%) of enterprises employed new technology in their everyday business activity (OECD, 2015).

The omission of the analyzed articles about innovation development in developed and emerging markets is as follows: the authors do not mention the conditions of the market companies operate in, whether is stable of turbulent. The authors of OECD point out the necessity to separate companies which operate within prosperous conditions from small and medium-sized enterprises under unsustainable environment. Usually the companies which operate in the framework of the emerging market operate with higher unit costs and at suboptimal production scales. They have to make even more effort to produce radical innovations, as the competition is based on the effectiveness of natural resources employment and on cheap labor force. Undoubtedly, it leads to fewer number of R&D projects (OECD, 2010). Moreover, economic turbulent conditions set additional complications. Firstly, the company should be ready to face with higher uncertainty and as the consequence with greater risks (Herrmann et al., 2007). Initial reason of risk is increasing because of the interaction between evolving technology and needs of the market (Lynn et al., 1996). Moreover, the high level of macroeconomic uncertainty and instability makes the problem more urgent (OECD, 2010). Secondly, the same problems stand while speaking about long-term orientation. The radical innovation demands a long-term orientation for the purpose of observing the transformation of markets and competencies. Thus, companies have to estimate their operating possibilities in accordance with increased time requirement. Thirdly, companies suffer from poor quality of innovation systems. Fragmented flow of external information, an absent of link between science and enterprises, weak linkage with international partners, high barriers to accumulate capabilities - these are the problems companies try to cope with. Finally, the majority of developing areas such as China, Latin American countries, Arab states is characterized by the prevalence of large state-owned enterprises which become technological leaders. Thus, it destroys competition which tends to encourage innovation (OECD, 2010). As for Russia, more than 80% of sales are produced by top ten firms (OECD, 2015). These companies become the largest innovators supported by the government.

1.3 The influence of intellectual capital on innovation progress

The recent studies reveal that there is no absolute agreement between authors while regarding the factor of innovative activity. Costa et al (2014) unite the most frequently utilized factors. They use the notion of innovation very broadly to refer both to inputs and outputs. Instead of speculating on these common elements of innovation the author of the present research paper employs another approach. We contribute to the literature by studying new indicator of innovation growth of SMEs proposed by Laursen et al. (2003). We have evaluated the probability of transition to higher innovation level of the main product, but in contrast to the previously mentioned model, we add one more category which regards the introduction of the product which is new for the region. Moreover, we apply it for the small and medium enterprises under emerging market conditions.

Little advance has been achieved in the studying of the relationship between intellectual resources and the level of product novelty in small and medium enterprises within emerging market. Most research is dedicated to studying of innovation activity from the output perspective, for instance, the amount of revenue from new product introduction. Therefore, additional efforts for revealing the relation between intellectual capital and innovation performance are worthwhile.

Regardless the presence of positive influence of intellectual capital components on innovational capability which have revealed by previous study, there is no clear evidence towards the key elements of IC.

Some authors claim that human capital represents the principal type of IC which has the strongest direct influence on level of product novelty, in particular, on radical innovation (Delgado-Verde et al., 2015; Laursen et al., 2003). What especially important is economic development of the market and size of the observed companies in the sample. While Laursen et al. (2003) study SMEs in Denmark, the work of Delgado-Verde et al. (2015) is dedicated to large and medium enterprises in Spain. Nevertheless, their assumptions are based on the same view according to which knowledge is a raw material of innovation. This point is true for each innovative company no matter what its size is. The main source of innovation activity is its employees (Delgado-Verde et al., 2011; Laursen et al., 2003). Since the relevance of IC components may vary in accordance with number of employees and revenue value, we cannot be sure that their findings are reliable for Russian SMEs. Traditionally Russians have demonstrated authoritative and charismatic leadership style. Human capital has always been underestimated resource. Employees have had very little power (Fey et al.,2011). It makes some challenges while speaking about the willingness to create innovative and well-informative environment (Vries et al., 2004). The readiness to innovate comes from motivation.

All SMEs, in particular which operate within emerging market, should set the following purpose: to encourage managers and workers for passing some training courses and exams, to acquire new skills and knowledge (Jardon et al., 2012). According to the report of OECD, in 2012 only 20% of employees in Russian SMEs were the participants of formal or informal training. At the same time companies in OECD countries pay much more attention to this point: approximately 50% of adults participated in such courses (OECD, 2015). High-qualified employees become the key assets with unique knowledge for exposing the company to technological boundaries, for the intake and storage of information and its evolution (Subramaniam et al., 2005; Roberts et al., 2004). Such employees help the company to absorb new information about needs of existing and potential customers more precisely, consequently, to react on market changes faster than its rivals (Wang et al., 2009). It contributes to the breakthrough insights which lead to radically new product (Marvel et al., 2007). The duty of the senior part is to accumulate all tacit knowledge from employees, to support their innovative ideas and to motivate each employee for internal discussions. They should try to increase the level of innovation in the company by allowing the tacit knowledge to spread among the employees.

Since the scale of SMEs is not so large compared with big corporations, usually it means that managers are familiar with skills and qualification of employees. In that sense they are willing to delegate the duties and integrate functions more efficiently. If they are willing to double the effect from innovative activity, they have to create the decent environment in the company: frequent training and investing in the acquisition of skills; motivation and satisfaction of employees (Daou et al., 2014). Helena Santos-Rodrigues et al. (2011) concluded that the establishment of a creative environment around employees is one of the ways to achieve a high level of innovation in companies of developing economies. This is especially true for small and medium enterprises, since in this case the scale of the company allows the manager to encourage employees for finding new ideas, to inspire and support it, to help employees to develop and refine the idea and to help them to fix it. Small scale organizations provide communication between employees; in consequence, it improves the working environment of the company and creates team spirit.

More than that, conditions of emerging markets under which SMEs operate put additional restrictions and prove the necessity of human capital for successful development of product novelty. Immature market, in particular Russian one, implies the principle according to which regulations and rules may be changed overnight without explicit knowledge. Russian workers have strong resistance to changes (Michailova et al., 2014). Consequently, the success of innovation activity and business operations depends on tacit knowledge of employees who are ready to pick up marketing information and transfer it into new product (Wang et al., 2009).

Nevertheless, some authors follow the view according to which human capital components may lead to radical innovation enacting (Herrmann et al., 2007; Subramaniam et al., 2005; Corbett, 2007). This point is true either for emerging or developed economies. One of the most considerable obstacles the firms try to cope with today is high turnover of employees (OECD, 2015). The abundance of the working place by an employee means not only the loss of investments which have been spent on his training and education, but what is more important is the waste of unique ideas (Subramaniam et al., 2005). This problem has become more urgent while an observation of companies which operate under conditions of the emerging market. More than that, such enterprises more frequently have a fear of destroying their competences which have been absorbed before. They are not ready to change their strategy and tend to block out external information and knowledge (Herrmann et al., 2007).

On the basis of the above discussion, we set the hypotheses which will be tested in the empirical part of the research in order to assess the importance of each component and to reveal which factor of IC is able to balloon the level of product innovation:

H1a: An amount of money earned by the employee does not influence the probability of transition to the higher level of product novelty.

H1b: The more qualified employees work in the company, the higher probability of transition to the new level of product novelty.

Others assume that structural capital plays the most significant role among three types of IC. But there are a lot of debates even within the framework of structural capital. Empirical findings which explore the pattern of relation between structural and radical or incremental innovation generate mixed results (Costa et al., 2014; Jansen et al., 2006; Subramaniam et al., 2005). Ones again, the results obtained vary in accordance with the level of economic maturate and size of the company. Despite the fact, that organized knowledge cannot substitute human experience and skills, it may considerably boost the company's capability to fill knowledge gaps which exist within the company (Adamides et al., 2006). From the one hand, formalization constraints the number of proposals and develop the quality of the existing routines. Thus, it reduces the likelihood of radical explosion (Jansen et al.,2006). From the other hand, formalization facilitates the procedure of knowledge appliance and implementation (Benner et al., 2002). In this vein, since incremental innovation is based on the existing knowledge, human capital accumulated through databases, patents, and systems influences it positively. If these points can be applied to all companies, Caner et al. (2013) and others pursue the view according to which the amount of R&D expenditures in small and medium enterprises has strong correlation with the level of innovation intensity. They propose that research and development costs are crucial input which allows the company to have an access to the updated technical information, unique opportunities.

Nevertheless, the authors of recent research are absolutely sure that such principle is doomed to failure. B. Jaruzelski, C. Mainardi (2011) and other authors (Dumay et al.,2013; Subramaniam et al.,2005; Santos-Rodrigues et al., 2011) subscribe to the point that the company which is willing to build the decent innovation capabilities should focus not on the amount of R&D spending but on the overall business strategy which contains healthy corporate culture, high-quality databases, technical processes which enable the company to understand the costumers' needs and to assess market potential and risks. There is no difference between companies, whether they are large or small and where they set their activity.

Since the competition on markets is growing fast, companies with effective corporate strategies know the capacity of their working storage. Thus, it helps them to give the dust to rivals, to generate higher innovative capacities and to create radical products. Now we can develop the second set of hypotheses:

H2a: Investments into innovation development influence positively the probability of transition to the new level of product novelty.

H2b: Focus on instruments of quality improvements enables the company to increase the probability of transition to the higher level of innovative product.

The rest of the authors subscribe to the point that the strategy of relying on the components of relational capital may yield strong and continuous development of product innovation. There is no doubt that increased sensitivity towards market needs, which can be gained while dealing with suppliers and customers, turns the innovation activity to more effective process. This is especially true for SMEs of immature economies (Costa et al., 2014). Social networks are essential for firms' growth perspectives. It can be explained by the presence of pervasive market failures. Extensive social network enables Russian companies to obtain access to information. Moreover, it helps firms to overcome such problems as transition costs, contract enforcement, and regulation (Michailova et al.,2014).

The acceptance of external knowledge flows necessity provides the company with enormous number of opportunities. Since the absorptive capability of the company mainly depends on knowledge stock that has been generated before, companies which operate under emerging conditions face with inability to recognize the value of external knowledge (Cohen et al., 2007). Regardless this fact, Escribano et al. (2009) conclude that external knowledge has become more valuable in turbulent knowledge environment than in stable one, because a great volume of relevant information required for radical innovation is mainly stored outside the company's boundaries. Thus, the investments in the absorptive capacity pay dividends.

The vast majority of authors narrows the scale of investigation and adds that only vertical relationships which refer to the cooperation with customers and suppliers are associated with product innovation (Costa et al., 2014). Improving the quality of relations with costumers is a top priority for small and medium businesses, because these businesses try to establish the contact with customers more densely. Clients are considered as a source of new ideas and innovation. Constant observation and surveys with the purpose of identifying the level of customer satisfaction provides regeneration process knowledge (Santos-Rodrigues et al., 2011). Moreover, those firms which try to concentrate on consumers' needs usually pay much attention on the quality of their product; as a consequence, they obtain customers' loyalty and improve the level of their innovative products. Besides, customers and suppliers are not the sole forces which trigger the company to enhance its innovative activity. Herrmann et al. (2007) conclude that customer orientation influence may be different for radical innovation. Reliance on the customers' needs may be devastating for the operational results of the company, since their requirements for the completely new product are ambiguous and the responses can hardly be predicted.

In contrast to large companies, small and medium enterprises are less dependent on competitors and partners' behavior and participation in business associations. Very often researchers add that company's relationships within emerging market are characterized by the lack of institutional trust (the most important assumption of decent and yield relationship) in order to support their empirical conclusions. That means the lack of enthusiasm and incentive to cooperate and to share ideas with the partners. In that sense the individuals are not willing to take the risk of cooperation (Ayios et al.,2004). And it even may slow down the innovative process of the company. Nevertheless, Castiaux (2007) denies this view by the fact that in emerging market radical innovation depends on the ability of the company to establish alliances with the partners which operate under the same conditions. Knowledge building stimulates the absorptive capacity of each company and contributes to the development of new product greatly. An innovation may be acquired from other firms by means of diffusion (OECD,2015). External ties enable the company to go beyond its technical boundaries and beyond local market.

However, all statements mentioned above which observe the influence of relational capital on the possibility to obtain higher level of product novelty need additional empirical testing:

H3a: The presence of foreign strategic partners enhances the probability to transit to the new level of product novelty.

H3b: The presence of domestic strategic partners enhances the probability to transit to the new level of product novelty.

In conclusion, the following statement should be noticed: intellectual capital comprises resources which can either create the competitive advantage of the company or facilitate the process of product innovation development. Despite the proved fact that components of IC can be a real assist for small and medium enterprises within emerging market, the author tries to clarify more profound view according to which intellectual capital both stimulate innovation activity and increase the probability of transition to the higher level of product novelty.

2. Methodology

In order to empirically examine the effect of intellectual capital components on the level of product novelty at SMEs which operate within the emerging market, we will now focus on the research methodology that guided our field work.

Initially, the author will establish the indicators that measure intellectual capital and product innovation, and then the sample of the research will be defined. Eventually, empirical analysis with using of econometrical methods will be conducted. We will explain the methods used in carrying out the study and after that we are eager to explain in details the results obtained.

2.1 Analytical model

Since intellectual capital is a multidimensional concept, the focus on one component of intellectual capital does not have any exploratory power for the observed phenomena (Figure 2). Intellectual capital concept represents factors which should be at different levels of the organization. In order to manage it more successfully the owner has to take into consideration that intellectual capital components are interconnected. From the side of theoretical background, the consideration of each element of intellectual capital enables the researcher to evaluate the impact of the particular component on product innovation success, consequently, more accurate recommendations are made. In the present work we try to address this issue.

The framework which is proposed in the following research is based on the inputs-output approach which has been described in the previous section. Intellectual capital components are considered as inputs which stimulate innovation activity of the company and, consequently, influence the level of product novelty.

Therefore, the model considered in this work, analytically might look as follows:

,

where: i - human capital components, j - relational capital components, k - structural capital components.

Figure 2. Theoretical framework

2.2 Variable definition and measurement

The first step is to determine factors that measure key constructs of the work: intellectual capital aspects and an appropriate level of product innovation. The presented indicators were chosen subject to the previous literature (Appendix 1). Both quantitative and qualitative variables are applied within the following study. Appendix 2 presents the indicators for intangible resources, the description and references to previous works.

Besides that, appendix 2 indicates some information about dependent variable. According to the ideas mentioned above, the key target of this research is to investigate the affect which is caused by intellectual capital on the development of innovative product. We understand the concept of innovative product as product which was introduced by the firm that declared that it is innovative either in process or in product.

Delgado-Verde et al. (2015) assumes that the best indicator for the evaluation of the way intellectual capital elements influence innovation activity of the company is to calculate the degree of novelty, from incremental to radical ones. Since our questionnaire does not provide such information, we pursue the view that the degree of product novelty related to the market will be relevant.

Moreover, authors of OECD offer to utilize three types of novelty degree: new for the firm, new for the market, and new for the world. Since the second degree of novelty new for the market is related to products or processes which were introduced for the first time either within domestic or international market, we have decided to split it by geographical locations, its home or neighboring region. We observe the following levels of product novelty: 1 - new for the company; 2 - new for the region; 3 - new for the country; 4 - new for the world. There is one point about dependent variable that should be taken into consideration. If the manager of the company highlighted that the product might be characterized as new for several categories, we have chosen the highest one.

What essential to mention is that we do not focus on the type of innovation activity, whether it is incremental or radical. Since the questionnaire does not highlight if managers consider their products as radical or incremental and we do not know if the company employs totally new knowledge or create its product relying on ones that have already been collected, accomplishment of this may be highly debatable. One good produced by the particular company may be either incremental or radical even if it is new for the company only. These characteristics are used in order to show the dynamics of the company.

In order to avoid unwanted effects, other variables, not included in the model, were chosen as controls: industry, the region of location of the enterprise, and the size of the company. According to the number of research, these three variables may cause the biasness of estimators. Firstly, after years of investigation of manufacturing industry researchers from the HSE found out that the most prosperous branches of manufacturing industry in Russia are food processing industry, chemistry and wood processing. At the same time mechanical engineering and transport look as absolutely backward areas (Govorun, 2014).

Therefore, it is obvious that innovation activity of the most prosperous industries is expanding with the growth rate which exceeds the rate of increase of lagging industries. In addition, some small and medium enterprises do not intend to generate their innovative capabilities due to the fact that there is no demand for new products. Secondly, the region of the location should be noticed as one of the most significant factors which put an impact on the competitive edge of the company and on its ability to create innovative product. Undoubtedly, the greatest fraction of innovators is concentrated in the Central regions of Russia, such as Moscow and Saint Petersburg. Finally, the bigger the company, the more free resources, both tangible and intangible, it has in order to develop the quality of its innovative product. Additionally, companies with the number of employees more than 100 face the economical and political challenges not so frequently as small companies do.

2.3 Survey sample and data description

The author has analyzed cross-sectional data (RuFIGE database) which include Russian manufacturing enterprises. The study was conducted in 2013 as a part of the research project Russian Firms in a Global Environment, compiled by the International Institute for Marketing and Social Research GfK Rus accompanied by the National Research University Higher School of Economics. Chief executive officers, their deputies, financial or commercial directors of 1506 manufacturing enterprises of small and medium-sized business and of 586 large companies were participants of the survey. SMEs of nine industries have been the objects of the sample. The biggest fraction of companies are related to the industry of food production (Figure3).

Figure 3.Share of companies by industry*

*Constructed based on the source: RUFIGE database (2013)

According to the Russian Federal Law, there are two criteria for the classification of small and medium enterprises. Firstly, the companies with an amount of turnover less than 400 million of rubles tend to be small while companies that generate less than 1 billion are regarded as medium enterprises. Secondly, small enterprises are ones which have the average number of employees less than 100; companies are considered to be medium enterprises if they have less than 250 employees. Since the majority of Russian manufacturing companies which are included into our sample do not reveal the amount of turnover, the average number of employees is the only criterion according to which the selection has been accomplished [1].

Descriptive statistics indicates characteristics of SMEs in Russia. Appendix 3 presents statistical analysis for independent variables.

The first variable is related to the salary costs for three categories of employees: managers or white collars, skilled workers or skilled blue collars, and unskilled workers or unskilled blue collars. According to descriptive statistics, on average the salary cost for each of three groups does not exceed the average value of salary cost for the company. Obviously, the lower level of labor force, the less value of company's expenditure on salary cost for particular category of employees. It is worth to notice the existence of SMEs where level of managers' salary surpluses the average amount of money gained by the employee in the company by almost three times. It may be connected with the fact that despite some scientific assumptions, owners of the companies are still sure that an amount of the salary earned by the manager is the principal incentive to generate new ideas, to take part in internal discussions about new product. In the following paper we will try to indicate whether it is true or not.

The presence of employees with foreign experience is an important indicator of the workforce quality. On average small and medium enterprises have 8% of employees who have ever worked abroad. Usually Russian large companies offer higher level of salary therefore, there is no doubt that such corporations are more attractive for employees with foreign experience. The quality of the labor force can be revealed both by looking on previous experience of the staff and by analyzing the percentage of employees with higher education.

The Russian Federation is the 26th in Human Capital ranking, climbing up for 25 items since 2013. Authors of OECD (2015) point out the problem of lack skilled labor. That's happened because of the type of tertiary education offered by Universities where it is more theoretical than practical. Despite the fact that Russia has achieved decent position due to its main strength which is associated with availability of higher education at any age, the average percentage of employees with university degrees in small and medium-sized enterprises remains at relatively low level 32.8%, respectively.

Following the purpose to develop professional skills and to broaden knowledge of employees, foreign companies seek to send them to various training courses. Such practice is not so popular in our country. It can be verified by descriptive statistics for Russian companies within manufacturing industry. On average, less than 2,5% of employees in small and medium enterprises were the participants of training programs (retraining programs, refresher courses, internship, etc.) with a separation from manufacturing process.

Since small and medium enterprises in Russia face with numerous problems, they bear high risks of loss. Consequently, they are not able to invest much of their profit for the measures which can facilitate their innovation activity and the processes for new product introduction. Approximately 20% of all small and medium enterprises in our sample have ever made research and development expenditures. Russian companies do not pay much attention to information systems which help to plan and manage available resources or sales and purchase processes, 17% and 16%, correspondently, use these systems.


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