Technovation 21 (2001) 45–54

www.elsevier.com/locate/technovation

Product innovation and competitive advantage in an area of

industrial decline: the Niagara region of Canada
*
Sharmistha Bagchi-Sen
Department of Geography and Canada United States Trade Center, 105 Wilkeson Quad, State University of New York–Buffalo, Buffalo, NY
14261, USA

Received 22 December 1999; received in revised form 6 January 2000; accepted 29 January 2000

Abstract

This paper examines similarities and differences between small and medium-sized enterprises (SMEs) with different levels of
reported product innovation. These SMEs are located in an area (the Niagara region in southern Ontario) that has suffered industrial
decline during the last three decades. Furthermore, SMEs in this region are in traditional or late-cycle manufacturing sectors (e.g.,
fabricated metal). The research findings show that SMEs claiming to pursue product innovation are better performers in terms of
total and export sales. SMEs with higher levels of product innovation rated the following strategies as significantly more important
compared with SMEs with lower levels of innovation: the expansion of R&D efforts, incremental innovation, new product develop-
ment, and new export market development. In contrast, SMEs with lower levels of product innovation emphasized the importance
of cost-based pricing and their market development is focused on Canada. Both groups of product innovators have adopted similar
types of process innovation, but the SMEs with higher levels of product innovation note higher levels of benefit from process
changes compared with manufacturers with lower levels of product innovators. In a similar fashion, SMEs with higher levels of
product innovation use external service inputs for problem-solving and business development in the face of a multitude of competi-
tive problems within the local economy (such as the lack of skilled or specialist labor, tax burden, etc). In sum, SMEs pursuing
innovation in traditional sectors in peripheral regions are showing better possibilities of adjustment in a dynamic global environment.
 2000 Elsevier Science Ltd. All rights reserved.

Keywords: Small and medium-sized enterprises; Product innovation; Competitive advantage; Export market development

1. Introduction focusing on branch plants stifled entrepreneurship, which

Research interest in small and medium-sized
enterprises (SMEs) and entrepreneurship in manufactur-
ing has resurged in the past 15–20 years (Birch 1979,
1987; Cross, 1981; Storey 1982, 1994; Curran and
Blackburn 1991, 1994; Karlsson et al., 1993). Such
resurgence is attributed to industrial restructuring–down-
sizing and the rapid growth of new businesses with spec-
ialized product/technology strategies or niche markets.
From local policy perspectives, a renewed interest in sti-
mulating local entrepreneurship and a recognition of the
role of SMEs in local development have been observed
(Malecki 1994, 1997; Shapira, 1990). Such interest was
preceded by the realization that regions or localities
* Tel.: +1-716-645-2722 ext. 21; fax: +1-716-645-2329.
E-mail address: geosbs@acsu.buffalo.edu (S. Bagchi-Sen).
in turn stunted development and rendered localities vul-
nerable to the negative impacts of restructuring (e.g.,
plant closures, retrenchment and cutbacks). Current
research on small firms, therefore, focuses on a variety
of issues such as the characteristics of small firms, the
location of small firms, regional variations in the rate of
new firm formation, survival strategies, and local devel-
opment implications (Hayter, 1997; Storey, 1994). The
development implications (e.g., employment, inno-
vation, exports) of SMEs are quite important for
localities situated in the periphery of a large industrial
agglomeration, as well for localities with a long history
of struggle for industrial development.
This paper examines the relationship between inno-
vation and business performance in SMEs in manufac-
turing industries. The discussion in this paper is centered
on two questions: What is the relationship between inno-
vation and business performance? What is the associ-

0166-4972/01/$ - see front matter  2000 Elsevier Science Ltd. All rights reserved.
PII: S 0 1 6 6 - 4 9 7 2 ( 0 0 ) 0 0 0 1 6 - X
46 S. Bagchi-Sen / Technovation 21 (2001) 45–54
ation between competitive strategies and product inno-
vation? In addressing these questions, the paper will also
address the characteristics of process innovation, export
behavior and the importance of services (e.g., producer
services) in product development. The study sample is
drawn from 12 municipalities (excluding Toronto and
the Greater Toronto metropolitan area) in southern Onta-
rio. This region is called the Niagara region — it has
suffered from industrial decline because most firms in
this region are in traditional or late-cycle industries,
including metal fabricating, primary metals, furniture
and textiles (among others), but there is considerable
local entrepreneurial and policy efforts to improve busi-
ness performance in this region. The paper will show
that not all SMEs in this region are in poor shape — in
fact, the innovative firms have good performance records
and are outward-looking.
2. Research context
SMEs in manufacturing are often characterized in
terms of their “small (absolute and market) size, inde-
pendence, owner-management and risk taking…these
defining characteristics of the entrepreneurial firm reflect
its ambiguity” (Hayter, 1997, p. 216). For example,
some enterprises may have a small share of a regional
or product market but their role in local development
may be quite satisfactory (e.g., employment generation).
Some enterprises may control a substantive portion of a
product niche but are threatened by competition from
foreign imports (note that small entrepreneurial firms
frequently operate in markets that are strongly regulated
by competition and markets that have low entry
barriers). In a similar manner, some SMEs establish their
own customer base and some are satellite subcontractors.
“Thus, the (market) independence of ‘loyal opposition
firms’ which have established their own customer base
in competition with large corporations is substantially
different from ‘satellite subcontractors’ which service
large firms” (Hayter, 1997, p. 217).
Finally, SMEs are often characterized by owner-man-
agement and risk-taking, whereby the entrepreneur has
a strong personal motivation to be innovative in some
sense in order to improve efficiency, productivity and
performance. It is not unusual to stress the importance
of “innovativeness” in defining entrepreneuralism. How-
ever, in reality, SMEs can have a bureaucratic structure,
SMEs can be risk-averse, and be hardly innovative by
any standards available to the industrial analyst. The
above arguments and counter arguments regarding the
implication of the nature of small and medium-sized
enterprises show that it is hard to predict the innovation
performance of SMEs based on their size, inde-
pendence/dependence (market characteristics), owner-
management relationships and risk willingness. Further-
more, their innovative performance is complicated by the
regional context: What is the regional environment of
the firm? Is it located in a science/industrial park or is
it located in a peripheral area? Is it located in an innov-
ative part of the country or is it located in a
laggard/industrially struggling region? Such evaluations
of the regional context is important because it is a source
of competitive advantage to the firm: the availability,
costs and quality of factors of production; the presence
and quality of suppliers, distributors and producer ser-
vices; the structure of competition; market character-
istics, as well as the role of government and other semi-
private organizations in industrial development.
In addition to the above conditions (firm-specific,
external environment), there is general evidence that
firm-level strategies (e.g., product and process strategies,
marketing strategies) are crucial in determining success
or failure for both large firms and SMEs (MacPherson,
1995). Product and process strategies, as well as market
strategies, have been researched to show that product
innovation promotes better performance in high-tech
industries and it can also counteract decline in import-
sensitive and/or traditional, late-cycle sectors (Cole,
1989). Studies conducted in the US region of Western
New York, which is adjacent to the Canadian Niagara
region, show that both product development and process
improvement benefited the food processing and forest
product industries (Cole, 1989), and excellent product
design capabilities improved performance of firms in
apparel, toys and hand-held machine tools — sectors
suffering from import competition. Many researchers
have studied the effects of process improvements and
the adoption of flexible manufacturing methods (Gertler
1993, 1995). The adoption of new processes as well as
the implementation of these methods is crucial because
firms often encounter difficulties during implementation,
which hinders business performance. A central theme in
industrial research has also been the role of external
inputs and the interplay of internal and external expertise
(e.g., in-house R&D and external technical advise) in
product and process development (MacPherson, 1997;
Sinkula, 1990; Smallbone et al., 1993). Finally, others
have devoted their work towards understanding the
relationship between innovation strategies and market
development, especially export market development
(Britton, 1993; Kleinschmidt and Cooper, 1990). In a
study of small and medium-sized firms (SMFs) in manu-
facturing in New York state, MacPherson (1995) showed
that SMFs that design new products with foreign clients
in mind are more successful exporters. Furthermore,
these SMFs preferred internationally standardized out-
puts despite the availability of flexible production tech-
nologies.
Most often industrial studies focus upon growth sec-
tors and innovative regions (Saxenian, 1994; Scott,
1988), with few exceptions such as the studies men-
 S. Bagchi-Sen / Technovation 21 (2001) 45–54
tioned above in Ontario and New York. Florida (1996,
p. 315) questions the central assumption of industrial
research that “new forms of production organization are
the province of newly emerging regions, while tra-
ditional manufacturing regions are essentially trapped in
older, outmoded forms of production organization”. He
argues that older regions “can function as incubators of
new ideas and innovations…older regions can be sites
of deeper and more fundamental changes in production
organization — changes which run to the core of the
industrial, organizational, and institutional fabric of
those regions”. The study of industrial recovery in the
Midwest (stretching from Buffalo, New York, adjacent
to the Canadian Niagara region, and Pittsburgh, Pennsyl-
vania to Ohio, Illinois, and Illinois, Michigan and into
Minnesota and Wisconsin) shows substantial improve-
ment in regional output, manufacturing investment and
productivity between 1982 and 1987 and 1987–1990, a
shift in production organization (e.g., the use of work
teams, continuous improvement, the integration of sup-
pliers into product development) and the global inte-
gration of regional economies through the spread of
foreign direct investment. The influx of foreign compe-
tition induced some large establishments (e.g., Motorola,
Steelcase, Xerox) to not only transform their production
organization but to suggest the implementation of new
practices along their supply chains. In addition, foreign
firms themselves have transferred state-of-the-art manu-
facturing technology, production organization (e.g., just-
in-time delivery) and management practices
(empowering workers in continuous improvement)
through suppliers and joint ventures (e.g., in auto and
steel industries). These observations refute the assump-
tion that industrial/sectoral shift (for example, to service
and high-tech) and retrenchments are the answers for
regional adjustment. The research presented below
focuses on the Niagara region in southern Ontario. The
Niagara region with all its locational attributes, in terms
of its proximity to major industrial agglomerations
(Toronto and the US Midwest), has suffered from
decline mainly because of its dependence on traditional
sectors. While the other traditional sectors such as agric-
ulture (e.g., grape production and wine industry) and
tourism have transformed into profitable sectors by
focusing on specialized products (special grapes and
higher quality wines) and diversification (tourism indus-
try added casinos and enhanced the attractiveness of Nia-
gara Falls) over the last two decades, manufacturers are
now realizing that the answer to survival may be hidden
in revitalizing existing sectors rather than planning for
high-tech, flexible manufacturing industries. With plant
closure and the general apathy of manufacturers to relo-
cate in this region, the focus is now on local SMEs and
their survival, as well as on retaining branch plants of
large domestic and foreign firms (Freshwater, 1994).
47
3. Methodology and findings
3.1. Survey description and firm profile
This study is based on a standardized questionnaire
survey of SMEs in the Niagara region of Canada. The
Niagara region in southern Ontario falls within the
Windsor–Montreal industrial corridor; the towns in this
region are to the south east of metropolitan Toronto. The
sample of SMEs is drawn from the following places in
the regional municipality of Niagara: Fort Erie, Grimsby,
Lincoln, Niagara Falls, Niagara-on-the-Lake, Pelham,
Port Colborne, St. Catherines, Thorold, Wainfleet, Wel-
land, and West Lincoln. The Niagara region has similar
employment distribution across manufacturing industries
compared with other municipalities in southern Ontario
(e.g., Toronto, Peel and York municipalities of the
Toronto metropolitan region) (Bagchi-Sen, 1999). The
Niagara region has a larger share of workers in food,
textiles, lumber, stone, clay, glass, concrete, primary
metals, fabricated metals and transportation equipment
compared with the averages based on employment distri-
bution in eight regional municipalities in southern Onta-
rio. The share of workers in apparel, furniture, paper,
chemicals, rubber and plastics, electrical and nonelectri-
cal machinery, and scientific instruments is below aver-
age considering eight municipalities in southern Ontario.
The manufacturing base of the Niagara region thrived
until the mid 1970s. Deindustrialization, especially plant
closures (e.g., branch plants), reversed the fortune of
these economies, and despite policy efforts in reviving
traditional sectors, attracting new investments and the
emphasis on new processes in manufacturing, the results
have not been as encouraging as observed in Toronto or
the industrial Midwest in the United States. However,
the reversal of fortune in other sectors such as tourism
and agriculture continues to encourage manufacturers
and most SMEs in this study show efforts in improving
their performance such as through product development,
export market development, and the recognition of the
importance of external service inputs and networks in
enhancing business performance. Furthermore, the Nia-
gara region SMEs show better business performance
than the SMEs across the border in the Niagara–Buffalo
region in the United States (Bagchi-Sen and MacPher-
son, 1999).
A random sampling of 250 manufacturers in the Nia-
gara region followed by a questionnaire survey yielded
a sample of 54 firms (28 questionnaires could not be
delivered; therefore, the response rate was 24%). In the
final sample, 38.8% of SMEs were in fabricated metals
and the rest were distributed across 14 other industry
sectors. The survey was conducted at the end of 1996
(December) and, during this time, one-third of 54 SMEs
employed less than 10 employees and one-third reported
a sales volume of less than one million Canadian dollars.
48 S. Bagchi-Sen / Technovation 21 (2001) 45–54
Approximately 81.5% of the respondents are Canadian-
owned and 26 out of 54 SMEs responding to the survey
have been operating in the Niagara region for more than
20 years. Only six SMEs have started their operations
in this region in the last 1–5 years; eight SMEs in the
last 6–10 years; and 14 during the last 11–20 years.
Therefore, the bulk of the respondents are operations that
survived the era of rapid deindustrialization in the mid
1970s and the early 1980s. Approximately 46% of the
respondents introduced new/redesigned products during
the 1991–1996 time period — the number of new/ rede-
signed products ranged between one and 25 products/
designs.1 Between 3 and 90% of sales are derived from
these new/redesigned products (mean = 32.6% of sales
from new/redesigned products; median=25%). Between
1 and 100% of export revenues are derived from these
new/redesigned products (mean=37.4% of export rev-
enue from new and redesigned products; median=25%).
These SMEs are export-intensive — their average export
intensity is 30.2% (that is, 30.2% of their total sales is
derived from exports) with a median value of 20%. Over
one-quarter (27.7%) of all respondents derived 50% of
their sales from exports (note: 33 SMEs consider them-
selves to be successful exporters to the United States and
seven export sporadically to the United States). When
asked to rate the importance of barriers/competitive
problems to exporting, three factors were rated as major
barriers by over 20% of the respondents: strong domestic
(Canadian) competition, government regulations, and
strong competition from foreign producers (mainly from
the United States). Most of the respondents (72.2%) are
suppliers to other manufacturers (e.g., transportation
company). Only a handful sells directly to retailers,
government organizations and utilities.
All respondents are grouped into two categories of
innovators based on the average number of product inno-
vation for the group as a whole (average number=2
new/redesigned products): firms with up to two
new/redesigned products in 1991–1996 are termed as
firms with “low” levels of product innovation, and firms
with more than two new/redesigned products in 1991–
1
The survey questions were as follows: (1) Over the last five years,
did you introduce any new or significantly redesigned products?
Yes/No; if yes, how many? (2) What proportion of your current sales
comes from new or significanlty redesigned products introduced over
the last five years? (3) What proportion of your current export revenue
comes from new or significantly redesigned products? Barriers/ com-
petitive problems: size of firm, financial requirements, risk willingness,
lacking in-house expertise, management time requirements, licensing
requirements, right of establishment, immigration issues, cultural dif-
ferences, strong domestic competition, ineffective management, poor
labor–management relations, outdated plant/equipment, employee
recruitment difficulties, rising cost of production, government
controls/regulations, declining product demand, lack of operating capi-
tal, shortage of production materials, strong competition from
foreign producers.
1996 are termed as firms with “high” levels of product
innovation. In the following section, the similarities and
differences in R&D, innovation, business performance,
competitive strategies and competitive problems
between “low” and “high” product innovators are dis-
cussed.
3.2. Innovation and performance
Innovators (in this case, firms with new/redesigned
products) in the Niagara region perform better in terms
of sales and exports. In the face of competition from
domestic (Canadian) and foreign producers, Canadian
SMEs must boost their exports (Rugman and Verbeke,
1990). The Niagara region respondents were asked to
estimate the direct effect of new/redesigned products on
sales and exports. The median values (percentages) of
total sales and export sales derived from the sale of
new/redesigned products are as follows for “low” and
“high” product innovators: (1) 15% of total sales and
20% of export sales were derived from the sale of
new/redesigned products by “low” product innovators,
and (2) 27.5% of total sales and 45% of export sales
were derived from new/redesigned products by “high”
product innovators. It has been shown that firms are suc-
cessful as exporters if they pursue product development
by considering the needs of foreign users/buyers (Dicht
et al., 1990; Christensen, 1991). Kotabe (1992) and
Rothwell and Whitson (1992) note that standardized pro-
ducts with possibilities of improvement (incremental
innovation) fair better in global markets. Although
Rosenfeld (1992) notes that flexible specialization
allows producers to customize their products according
to buyer needs, the association between flexible speciali-
zation and business performance has not been widely
supported through empirical investigation (Knudsen et
al., 1993). Table 1 shows the frequency distribution of
firms across four categories of performance measures
(growth rates). Firms with “low” levels of product inno-
vation are compared with firms with “high” levels of
product innovation across four growth indicators.
Approximately, two-thirds of all firms in the “high”
innovation category experienced 15% or more growth in
sales volume compared with a little over one-quarter of
all firms in the “low” innovation category. One-half of
all firms in the “high” innovation category recorded over
15% growth in export sales as opposed to approximately
one-third of all respondents in the “low” innovation cate-
gory. Such contrasts are also noted in the third growth
category, i.e., growth in R&D expenditure (16.7% of
“high” innovators experienced over 15% growth rates
compared with only 9.7% of “low” innovators). In terms
of growth in value-added, differences are noted in the
first three categories of growth rates. For example, a little
over one-fifth of all firms in the “low” category experi-
enced less than 1% growth in value-added compared
 S. Bagchi-Sen / Technovation 21 (2001) 45–54
Table 1
Business performance
Performance Innovation Percentage growth
Measures Categoriesa ⬍1%
Sales Low 5.3
High 8.3
Exports Low 24.1
High – 25.0
R&D expenditure Low 58.1
High 8.3
Value added Low 26.7
High 9.1
a
Low=0–2 new/redesigned products; High=⬎2 new/redesigned products.
with only 9% of all firms in the “high” category. Further
differences can be noted between “low” and “high” inno-
vators in the 5.1–10% category of growth in value-
added. Growth in R&D output (value-added), total sales
and export does differentiate the “low” innovators from
the “high” innovators. Such relationships have been
noted in previous research. “R&D as an ongoing com-
pany activity may be especially vital for firms in stagnant
industries; those whose product life-cycles are longer
and less numerous,… (Clark et al., 1984; Linn, 1984)
…R&D is often for product improvements to increase
quality…the innovation process in these industries may
be even more important than in rapidly growing indus-
tries, because innovations are less frequent and more piv-
otal (Hammermesh and Silk, 1979; Tellis and Golder,
1996)” (Malecki, 1997, p. 97).
The manufacturers responding to the Niagara survey
are not defined as industries with high R&D intensity
(Organisation for Economic Co-operation and Develop-
ment (OECD) considers firms as R&D-intensive if over
10% of total sales are devoted to R&D). The average
level of R&D intensity of Niagara manufacturers
responding to the survey is 5.2% and the median value
is 1%. In this study, the median value of 1% is used as
the cut-off point to define “low” and “high” R&D inten-
sity (please note that only four firms from the “high”
R&D intensity group reported investing more than 10%
of total sales on R&D). Previous research on product
innovation shows that innovation and technological
change also occur where no formal or minimal R&D is
conducted “through modifications, learning-by-doing or
other informal means of technological learning”
(Malecki, 1997, p. 84). Bar-El and Felsenstein (1989)
recognize that technological intensity may be reflected
by the degree of industry investment in new products
and processes and not just by measuring R&D intensity.
Although Niagara SMEs are not all R&D-intensive
based on OECD standards, some of them are quite suc-
cessful in developing new/redesigned products and pro-
cesses.
49
1–5% 5.1–10% 10.1–15% ⬎15%
21.1 28.9 15.8 28.9
– 8.3 16.7 66.7
17.2 20.7 6.9 31.0
8.3 16.7 50.0
22.6 6.5 3.2 9.7
41.7 16.7 16.7 16.7
23.3 16.7 13.3 20.0
9.1 45.5 18.2 18.2
The relationship between R&D intensity and product
innovation, growth in R&D expenditure and product
innovation, as well as innovation and export intensity,
is shown in Table 2. Only 38.5% of “low” innovators are
R&D-intensive compared with 90% of “high” innovators
(chi-square is significant at p=0.004). Similarly, almost
92% of “high” innovators experienced a high level of
growth in R&D expenditure. The “low” innovators are
more or less equally distributed across R&D growth cat-
egories (18 firms in “low” and 13 firms in “high” R&D
growth categories, respectively). This suggests that
growth in R&D expenditure may not always translate
into product innovations. In contrast, 91.7% of “high”
product innovators have “high” growth in R&D expendi-
tures (chi-square is significant at p=0.003). The relation-
ship between R&D intensity (percentage of total sales
devoted to research and development) and innovation is
far more straightforward: R&D-intensive firms are more
innovative than others. Table 2 confirms that innovative
firms are outward-looking and have high levels of export
intensity (that is, greater than 20% of their total sales are
derived from export sales). Two-thirds of “high” product
innovators have “high” export intensity compared with
38% of all “low” product innovators (chi-square is sig-
nificant at p=0.07).
3.3. Process innovation among product innovators
Table 3 shows that the types of process innovation did
not differ among “high” and “low” product innovators.
A large percentage of firms from both groups introduced
new processes during 1991–1996. These processes
include new industrial machinery (NC/CNC equipment)
and new office technology (information technology).
The use of CAD and CAM was not widespread. In a
similar fashion, a small percentage of firms from both
groups of innovators adopted automated materials hand-
ling or just-in-time inventory control. The respondents
were asked to evaluate whether or not such process inno-
vations increased export sales. Approximately, three-
50 S. Bagchi-Sen / Technovation 21 (2001) 45–54

Table 2
Relationship between product innovation, R&D and export intensity

Product innovationa Growth in

R&D intensityb R&D expenditurec Export intensityd

Low High Total Low High Total Low High Total

Low (24) (15) (39) (18) (13) (31) (26) (16) (42)
61.5 38.5 100 58.1 41.9 100 61.9 38.1 100
96.0 62.5 79.6 94.9 54.2 72.1 86.7 66.7 77.8
49.0 30.6 79.6 41.9 30.2 72.1 48.1 29.6 77.8
High (1) (9) (10) (1) (11) (12) (4) (8) (12)
10.0 90.0 100 8.3 91.7 100 33.3 66.7 100
4.0 37.5 20.4 5.3 45.8 27.9 13.3 33.3 22.2
2.0 18.4 20.4 2.3 25.6 27.9 7.4 14.8 22.2
Total (25) (24) (49) (19) (24) (43) (30) (24) (54)
51.0 49.0 100 44.2 55.8 100 55.6 44.4 100
100 100 100 100 100 100 100.0 100.0 100
51.0 49.0 100 44.2 55.8 100 55.6 44.4 100%
Chi-square 8.46 8.68 3.09
(probability) (0.004) (0.003) (0.07)

a
Product innovation: number of firms are shown in parentheses followed by column, row and total percentages. Low=0–2 new/redesigned
products; Highⱖ2 new/redesigned products.
b
R&D intensity: Lowⱕ1% of sales on R&D; Highⱖ1% of sales on R&D.
c
Growth in R&D expenditure: Lowⱕ5% growth in R&D expenditure; Highⱖ5% growth in R&D expenditure.
d
Export intensity: Lowⱕ20% of total sales from exports; Highⱖ20% of total sales from exports.

Table 3 make the best use of newly acquired machinery. Pre-

Process innovation vious research found that physical proximity, common
Types of process innovation Product Process innovation language, shared code of communication, trust, the use
innovation (% of firms) of advanced telecommunications, reformed work prac-
tices and regulations are some of the requirements for
No Yes effective user–producer interaction which in turn
improves innovation and business performance (Block,
New industrial machinery Low 26.1 73.9
(e.g., NC/CNC equipment) High 18.2 81.8 1990; Britton and Gilmour, 1978; Lundvall, 1988;
Automated materials handling Low 82.6 17.4 Rosenberg, 1982).
High 81.8 18.2
Just-in-time inventory control Low 65.2 34.8 3.4. Competitive strategies
High 81.8 18.2
New office technology Low 30.4 69.6
High 27.3 72.7 A comparison of “high” and “low” innovators with
Computer-aided design (CAD) Low 60.9 39.1 regards to competitive strategies (product and pricing)
High 54.5 45.5 show that, on average, the “high” innovators differ sig-
Computer-aided manufacturing Low 86.4 13.6 nificantly from the “low” innovators in their efforts
(CAM) High 72.7 27.3
towards incremental innovation (continuous improve-
ment of existing products) and the development of new
products, as well as their emphasis on expanding
quarters of “high” (product) innovators mentioned that research and development (Table 4). On average, both
they experienced higher levels of sales, especially groups place equal importance on innovations in pro-
exports, following process improvements/innovations. duction processes. Approximately, 50–60% of SMEs in
However, only one-half of all firms in the “low” both groups regard new and/or improvement in process
(product) innovation category noted an increase in technology as extremely important. Although “high” and
sales/export sales after they adopted new processes in “low” (product) innovators do not significantly differ
production, inventory control, office technology and from each other based on their average rating of pricing
others. This suggests problems encountered with with (cost leadership), a much higher percentage of “low”
the implementation of new process technology. Some of product innovators (25%) compared with “high” inno-
the users of new processes involving complex techno- vators (8.3%) regard pricing/cost leadership as an
logies may lack effective user–producer interaction to extremely important strategy. On the other hand, 63.7%
 S. Bagchi-Sen / Technovation 21 (2001) 45–54 51

Table 4 analysis of SME-level competitive strategy is beyond the

Competitive strategies scope of this paper. Porter (1990) notes four levels of
Product innovationa strategies — cost leadership, differentiation, focused dif-
ferentiation and stuck-in-the-middle. The “low” inno-
Low High t (probability)b vators rely more upon cost-based pricing strategies than
“high” innovators. SMEs belonging to the latter group
Product and pricing strategies have a larger number of new and/or redesigned products
Continuous development of 2.69 4.33 ⫺4.51 (0.000)
new products and are therefore much more differentiated than the
Continuous improvement of 3.51 4.42 ⫺3.16 (0.083) “low” innovators. Furthermore, they derive close to 27%
existing products of their sales from innovations whereas the “low” inno-
Expansion of product line 2.97 3.33 n/s vators derive only 15% of total sales from the sale of
Introduction of new process 3.13 3.66 n/s new/redesigned products. These “high” innovators are to
technology
Improvement of existing 3.60 3.92 n/s some extent focused, especially in export market devel-
production processes opment — most export the bulk of their products to the
Expansion of R&D efforts 2.20 3.33 ⫺2.74 (0.01) United States. Such close ties are a function of the physi-
Price-based competition 2.59 2.33 n/s cal proximity of Niagara region firms to the US Mid-
Non-price based competition 3.07 3.55 n/s west, which has a similar industrial base, and the trade
(e.g., quality, unique technology)
Market strategies agreements facilitating improved relationships between
Find new markets in Canada 3.35 3.00 n/s Canada and the United States.
Find new export destinations 2.85 4.08 ⫺3.77 (0.001) All SMEs note the severity of location-specific prob-
Defend against imports 2.48 2.50 n/s lems hampering innovation and business performance in
Enter new markets before 3.31 3.00 n/s the Niagara region (tables are not shown here). These
competitors move in
Fight competition from 2.38 2.50 n/s problems are the shortage of skilled labor inputs, compe-
imports by exporting more tition from other Canadian and foreign producers, import
Leadership 3.77 4.08 n/s penetration, and high level of taxes. As a result, SMEs
a
seek external service inputs to exacerbate some of the
Mean values based on 1–5 Likert scale (1=not important and competitive problems. The next section shows how
5=critically important).
b
n/s=statistically not significant. “high” and “low” product innovators evaluate the impor-
tance of these service inputs in innovation.

of “high” product innovators perceive non-price based
factors such as quality, specialization, speed of delivery
and after-sales services as extremely important, while the
comparable figure for “low” innovators is 42.5%.
An evaluation of market strategies shows that the
“low” innovators are relatively more inward-looking
(they place more importance on searching for new mar-
kets within Canada compared with the “high”
innovators) whereas the “high” innovators, on average,
rank “find new export destinations” as a very important
strategic consideration. Approximately one-half of “low”
innovators emphasize a strategy of finding new home
markets compared with one-third of all “high” inno-
vators. Similarly, only 40% of “low” innovators regard
new export markets as a critically important marketing
strategy while almost 75% of all “high” innovators list
“finding new export destinations” as an important inter-
national marketing strategy. Both groups consider the
timing of entry into new markets and competitive leader-
ship as very important elements of strategic decision-
making. However, their export market development
strategy is not necessarily a response to competitive
pressures from a free trade environment. Only a small
number of respondents noted that their interest in
exporting is a defensive strategy stemming from the
competitive pressures from imported goods. A detailed
3.5. The role of external services
The Niagara SMEs have sought inputs from special-
ists and consultants for improving their innovation and
business performance. The “high” innovators, on an
average, find several external service inputs as signifi-
cantly more important for business development and
problem solving (Table 5): market research, advertising,
software, legal, banking, accounting, insurance, techni-
cal support from other manufacturers, customers, dis-
tributors, and suppliers. The mean rating by “high” inno-
vators exceeded 3 on a five-point Likert scale (where
1=not important and 5=critically important) for eight out
of 12 services listed in Table 5. Only customers and sup-
pliers receive ratings that are comparable for both “high”
and “low” innovators. Customers/buyers and suppliers
provide direct feedback. This further emphasizes the
producer–user interaction: on one hand, the Niagara
SMEs are suppliers (recall that 72.2% sell to other
manufacturers) and on the other hand, these SMEs also
purchase parts and equipment; therefore, they are also
customers/users. Advanced producer services such as
banking help with financing, especially trade financing
for “high” innovators who are also export intensive
firms. Other sources of information/services regarded as
of moderate importance to “high” innovators are local
52 S. Bagchi-Sen / Technovation 21 (2001) 45–54

Table 5 tance of services to their business as important — a rat-

The relative importance of services to product innovation ing of 3 or below on a 1–5 Likert scale) because the
Services Product innovationa region is not well endowed with producer services com-
pared with Toronto. Furthermore, these SMEs may be
Low High t (probability) generally reluctant to access service providers outside
the Niagara region because of the lack of information
Market research 1.56 2.33 ⫺1.87 (0.06) regarding reputable specialists and their cost of consul-
Advertising 1.70 2.44 ⫺2.15 (0.04)
Software 2.10 3.00 ⫺1.86 (0.08) tation. Finally, SMEs may perceive that non-local
Legal 2.31 3.18 ⫺3.37 (0.002) specialists may not have an interest in long-distance con-
Banking 2.65 3.82 ⫺3.23 (0.004) sultation and may not have a full understanding of the
Accounting 2.43 3.09 ⫺1.78 (0.09) problems encountered by these SMEs within their local
Insurance 2.29 2.91 ⫺1.71 (0.10) context (MacPherson, 1997).
Unions 1.54 1.00 3.00 (0.005)
Technical support from other 2.50 3.20 ⫺1.80 (0.07)
manufacturers
Customers 3.40 4.45 ⫺3.42 (0.002) 4. Conclusion
Distributors 2.68 3.40 ⫺1.72 (0.10)
Suppliers 3.38 4.00 ⫺2.06 (0.05) This study illustrates how manufacturing SMEs, in
a
Mean values based on 1–5 Likert scale (1=not important and industrial peripheries with a traditional focus on heavy
5=critically important). manufacturing (e.g., fabricated metals), struggle to sur-
vive in a highly competitive global environment where
big businesses continue to have a stronghold. Not all
colleges (e.g., internship programs), local networks of SMEs in these peripheries (e.g., the Niagara region of
businesses, competitors, family and friends. Both “high” Ontario) are stagnating — in fact, there are some distinct
and “low” innovators found engineering consultants and differences among SMEs based on product innovation.
repair services to be of moderate importance. Previous In this study, two levels of innovators are designated
research on the importance of services in innovation and based on the introduction of new/redesigned products
performance lends support to the findings from the Nia- during a 5 year period: “low” and “high” product inno-
gara survey. For example, Sinkula (1990) and Coffey et vators. These manufacturers have adopted some process
al. (1994) showed that marketing consultants and adver- innovations such as the use of new industrial machinery;
tising services directly improve sales performance often however, only a few have gone forward with com-
by locating new customers. Specialized and high-quality puterization (CAD/CAM), automated materials handling
software services are usually obtained at a lower cost or just-in-time delivery. Most SMEs have taken advan-
from consultants and these services improve manage- tage of the information technology revolution and have
ment efficiency (Philipps, 1995; Yap et al., 1992); legal– invested in new office technology. More “high” product
banking–accounting–insurance services provide finan- innovators have adopted new processes compared with
cial, fiscal and other services regarding regulations in “low” product innovators. “High” innovators are better
domestic markets and abroad; technical support from performers in terms of total and export sales, as well as
other manufacturers provides engineering advice R&D expenditure. As a result, it is not surprising to note
(Lipparini and Sobrero, 1994); suppliers provide new a significant association between “high” levels of pro-
ideas (Soni et al., 1993; Gertler, 1995); and distributors duct innovation and the following measures: R&D inten-
provide information on customer/market needs sity, growth in R&D expenditure, and export intensity.
(Glasmeier, 1990). Public services (e.g., government The “high” product innovators note the importance of
agencies, colleges and universities) may also offer mar- incremental innovation and the development of new
ket information and business planning services. In the export markets mainly in the United States. The “low”
Niagara study, very few SMEs rated private services product innovators on the contrary are not complete fail-
such as technical services as very important or critically ures. Despite the adoption of new processes and some
important (a value of 4 or more on a 1–5 Likert scale) similar strategic choices/responses like the “high” inno-
despite the fact that external service inputs are known vators, the “low” product innovators have lagged behind
to assist innovation efforts and business performance of in business performance. This suggests that these SMEs
manufacturers (Smallbone et al., 1993). Several authors may have encountered difficulties with process
have also suggested that if regions are weakly endowed implementation; furthermore, their focus toward the
with these services, these regions may not provide the domestic (Canadian) market may have limited their
right context for industrial expansion, innovation or job scope of knowledge accumulation about other markets,
growth (Coffey and Bailly, 1993; Hitchens et al., 1994). both in the United States and elsewhere. Future research
Therefore, the Niagara SMEs may not fully appreciate may focus on the role of internal decision-making and
the role of service inputs (most SMEs rate the impor- the interaction between internal (e.g., ownership-
 S. Bagchi-Sen / Technovation 21 (2001) 45–54
specific) and external (e.g., location-specific) conditions
of SMEs in defining their long-term viability in a
dynamic global environment.
Acknowledgements
I thank the Canadian Embassy, Washington, DC for
research funding under the Faculty Research Grant,
1995–1996.
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Sharmistha Bagchi-Sen received her Ph.D. from the University of Geor-
gia, Athens, GA (USA) in 1989. She is an associate professor in the
Department of Geography at the State University of New York at Buffalo.
Her research interests are in industrial location, innovation strategies,
multinationals and foreign direct investment, service industries, and
labor markets.