Drivers and Effects of Internationalizing Innovation by SMEs

This paper investigates the drivers and effects of the internationalization of innovation activities in Small and Medium Enterprises (SME), based on a large data set of German firms, covering the period 2002-2007. The paper looks at different stages of the innovation process (R&D, design, production and sales of new products, and implementation of new processes) and explores the role of internal resources, home market competition and innovation-related location advantages for an SME's decision to engage in innovation activities abroad. By linking international innovation activities to firm growth in the home market, the authors attempt at identifying likely internationalization effects at the firm level. The results show that experience in both export and knowledge protection is highly important for international innovation activities of SMEs. Fierce home market competition turns out to be an obstacle, rather than a driver. High innovation costs stimulate the internationalization of non-R&D innovation activities, and shortage of qualified labor expels the production of new products. R&D activities abroad and the export of new products spur firm growth in the home market, while there are no negative effects on home market growth from shifting the production of new products abroad. [PUBLICATION ABSTRACT]