EMPLOYMENT CONTRACT AND SMES’ INNOVATION IN DEVELOPING AND TRANSITION ECONOMIES: THE CASE OF VIETNAM

Although the job/employment security is critical to the implementation of high performance management practices (Pfeffer and Veiga, 1999), its impact on innovation remains understudied, especially in the context of small and medium-size enterprises (SMEs) in emerging and transition economies (ETEs). This paper uses the institution-based view in entrepreneurship and strategic management to (i) analyze the relationships between the formality of an employment contract and the firm’s innovation (i.e., product innovation, product improvement, process innovation and intention of innovation); and (ii) indentify potential antecedents of the contractual formality. Based on a sample of 865 private, domestic SMEs operating in the manufacturing sector in an ETE — namely Vietnam — and by using multivariable regression techniques, we find that the formality of the employment contract significantly and positively influences some aspects of the firm’s innovation (i.e., product improvement and process innovation). Furthermore, the major factors that determine the employment contract’s degree of formality are the manager’s regulatory knowledge, the degree of industrial competition and the existence of a labor representative within the firm. Implications for policy makers, managers and future research are suggested.