The effect of external knowledge on innovation capacity of SMES: Does the source of knowledge matter?

This paper aims to analyze the effects of different sources of external knowledge (market sources, institutional sources and business network affiliation) on firms' capacity to innovate. Using cross-sectional data collected with the help of questionnaires on a sample of 514 SMEs in 2014, we employ the maximum likelihood method to estimate logistic regression models from which follow three main results: firstly, market sources significantly reduce innovative capacity; secondly, institutional sources of knowledge significantly increase innovative capacity; and thirdly, the net effect of business network affiliation, taking into account the other two sources of knowledge, is quite small. Thus, these results show that the institutional and operating environment of SMEs needs to be improved in order to discourage opportunistic behaviours and reduce information asymmetries in the hope that, in the long run, market sources can be transformed into an advantage for innovation, on the one hand. On the other hand, there is a need for a broad national coordination policy that encourages collaboration between universities and industry, as well as the commercialization of university research results. Hence, these results enrich the current understanding of the link between collaborative networks and the innovation performance of firms.