International Journal of Accounting & Business Management

Vol. 4 (No.2), November, 2016

ISSN: 2289-4519
DOI: 10.24924/ijabm/2016.11/v4.iss2/31.42 www.ftms.edu.my/journals/index.php/journals/ijabm
This work is licensed under a
Creative Commons Attribution 4.0 International License.

Research Paper

FINANCIAL AND NON-FINANCIAL FACTORS OF INNOVATIVENESS

Dr. Armin Kovai
University of Modern Sciences- CKM
Bosnia and Herzegovina
armin.kovaci@live.com

Abstract

This study focuses on financial and non-financial factors affecting the innovation environment of a
certain country and, as a result of country's innovation environment, the innovativeness of
companies operating in that country. Financial factors include GDP per capita, firms using banks,
research and development expenditure etc. On the other hand, non-financial factors include online
creativity, time to start a business, university and industry collaboration research etc. As a part of
this study, a total of 109 countries is analyzed. Among these countries, 34% of countries are from
Europe, 28% from Asia, 17% from Africa, 2% from Australia and Oceania, 10% from North
America and 9% from South America. Due to the large number of factors and countries, software
package for the interactive visual exploration of multivariate data sets was used during an
analysis phase. This study focuses on a series of questions. How different combinations of factors
affect innovativeness? Are financial factors more important than non-financial factors of
innovativeness? How important is research and development expenditure as a factor of
encouraging new ideas? How important is university and industry collaboration for the creation
process? How important is the role of government in creating innovative environment? The results
of this study show that financial and non-financial factors affect innovativeness through a series of
mutual interactions and correlations.

Key Terms: innovativeness, financial factors, non-financial factors, innovation system

1. Introduction

Inventions and innovations are changes that lead to a series of improvements for the
large number of actors in the business environment. Innovations are perceived to ensure
competitiveness of goods produced by enterprises and of sustainable success of companies or
corporations in the market on the whole (Morozov and Taskaeva, 2016). The development of
the theory of innovation is linked to J. Schumpeter. According to him, innovation is a basic factor
of technological progress and economic development. The replacement of existing technologies
to new is called creative destruction (Carol, 2006). Nowadays, management of innovation
applies to all types and forms of innovation, innovation processes and innovation. According to
Peter Drucker (1985), innovation is the specific tool of entrepreneurs, the means by which they
exploit change as an opportunity for a different business or a different service. It is capable of
being presented as a discipline, capable of being learned, capable of being practiced.
Entrepreneurs need to search purposefully for the sources of innovation, the changes and their
symptoms that indicate opportunities for successful innovation. And they need to know and to
apply the principles of successful innovation. On the other side, the innovation process is

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essential to increase public sector efficiency and for delivering quality and competitive public
services (Matei et al., 2016).

This study focuses on financial and non-financial factors affecting innovation

environment of a certain country and, as a result of country's innovation environment, the
innovativeness of companies operating in that country. In today's dynamic business
environment, there is a variety of factors that interact with each other and have different effects
on the level of knowledge and creation of new solutions. For a policy to be efcient, it is rst
necessary to analyze the innovation performance and the character of the innovation system
(itek, 2016).

Technological innovation processes do not follow a set sequence but rather emerge from
complex adaptive systems involving many actors and institutions operating simultaneously
from local to global scales (Anadon, 2016). Mutual interactions of market participants leads to
multiplication of knowledge and its usage in new products, services, technologies, processes,
organization design and so on. The government can encourage greater diffusion of new
technologies by encouraging networking. Participants of these networks exchange information,
knowledge and technology and in this way contribute to each other in achieving even better
results. On the other hand, there are many barriers to the diffusion of technology. Some of the
most important are the lack of information, lack of financial resources and lack of technological
knowledge. In addition to these barriers, it should be noted the lack of adequate managerial and
organizational skills, particularly in small and medium enterprises. Policy makers should adopt
a policy mix fostering both absorptive capacity and open innovation activities (Radii and
Pugh, 2014).

In this study, all factors affecting innovativeness are divided on financial factors and
non-financial factors. Financial factors include GDP per capita, firms using banks, R&D
expenditure, etc. On the other hand, non-financial factors include online creativity, time to start
a business, university and industry collaboration research etc. These factors do not affect the
innovation in isolation. Any combination of these factors gives different results in different
countries. Some of these factors have greater, and some others have smaller impact on the
creation of new solutions.

As part of the research, data from 109 countries from all continents has been collected
and analyzed. Due to the large number of factors and countries, software for visual data analysis
is used during the data analysis. The main advantage of this method is the possibility of visual
analysis of large amounts of data to a larger number of changing variables simultaneously.

In accordance with the above, the main objectives of this study are:
To examine the effects of financial factors on innovativeness
To examine the effects of non-financial factors on innovativeness
To examine the effects of different combinations of factors that affect
innovativeness

This paper is organized in five basic parts: introduction, literature review, research
design and methodology, results and discussion and conclusion. In first two parts, introduction
and literature review, problem of the study, objectives of the study and literature review are
presented. In the following parts, research methodology, data sources, instruments and results
of the analysis of the collected data are presented. In this paper, The Global Innovation Index is
used as the main indicator of innovativeness.

2. Literature Review

The process of creating, analyzing and implementing of innovation is a rather chaotic.

There are no two innovations that were created, analyzed and implemented in the same
conditions. This represents an additional difficulty in determining the path that must be

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followed when innovating. On the other side, innovation is not exclusively a chaotic process,
because there are certain principles that create the specified stronghold for innovations. These
principles depend on the level of competitiveness, financial resources, technology development,
product life cycle, and so on. The theory of management has historically created various models
which emphasized the factors that are at the time considered to be the most important for the
creation of new innovative solutions. Rothwell (1994) gave the classification of models of
innovative process that is shown in the following table.

PERIOD MODEL
1950-1960s Technology-push models
1970s Market pull models
1980s Coupling models
1980-1990s Interactive models
2000s Network models
Source: Rothwell, 1994
Table 1: Classification of models of innovative process

Many changes in society, technology and business have led to the creation of new
opportunities and business models. These changes have led to an increase in the population of
highly educated workforce, business networks, e-commerce, e-learning and so on. In the area of
innovation, there has been a shift in the manner in which the innovation process takes place.
During most of the 20th century, an innovative process has been implemented as an exclusively
internal process. In this traditional system, an innovative process takes place within a single
business entity. This concept is called closed innovation.

Using both internal and external sources in the innovative process is called open
innovation. In an open innovation there are several types of innovators: base innovators,
internal and external innovators. Base inventors are employees whose job it is to work on the
research and development of new products. Other internal innovators are employed elsewhere
in the company. They have ideas that can lead to innovation (accountants, employees in
production, purchasing, etc.). External innovators are all external sources of innovation.
External sources that may contribute to the greater success of innovation are: customers,
suppliers, universities, local communities, chambers of commerce, associations of innovators,
local and international training institutions, etc. Open innovation represents a new opportunity
for small and medium enterprises. Due to its flexibility in the application of innovative solutions,
small and medium enterprises have a chance to provide specialized services to large
enterprises.

Source: Adopted from Daventport, T.H. et al. (2006)

Figure 1: Open innovation process

Open innovation process has led to an increase in importance of national innovation

systems. The national innovation system is a concept that emphasizes the importance of

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understanding the relationship between the actors involved in the innovation process.
According to this concept, technological development is the result of interaction between actors
who create, distribute and implement new ideas. These actors come from business sector,
educational and research institutions, public sector and financial institutions. This concept is
designed for those who create and implement various development policies.

Source: Adopted from Yim (2006)

Figure 2: National innovation system

This concept contributes to:

economic recognition of knowledge,
increased application of systemic approach and
increased number of institutions involved in the creation process

There are several definitions of national innovation systems that are in use:
... the network of institutions in the public and private sectors whose activities and
interactions initiate, import, modify and diffuse new technologies. (Freeman, 1987)
... the elements and relationships which interact in the production, diffusion and use of
new, and economically useful, knowledge ... and are either located within or rooted inside the
borders of a nation state. (Lundvall, 1992)
... a set of institutions whose interactions determine the innovative performance ... of
national firms (Nelson, 1993)
... the national institutions, their incentive structures and their competencies, that
determine the rate and direction of technological learning (or the volume and composition of
change generating activities) in a country. (Patel i Pavitt, 1994)
.. that set of distinct institutions which jointly and individually contribute to the
development and diffusion of new technologies and which provides the framework within
which governments form and implement policies to influence the innovation process. As such it
is a system of interconnected institutions to create, store and transfer the knowledge, skills and
artefacts which define new technologies. (Metcalfe, 1995)

3. Research Design and Methodology

Subjects

As a part of this study, a total of 109 countries is analyzed. Among these countries, 34%
of countries are from Europe, 28% from Asia, 17% from Africa, 2% from Australia and Oceania,
10% from North America and 9% from South America. All countries are equally treated in the

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study, and no country has given more importance regardless of size, population, political
influence or other criteria.

Procedure and data collection

The study was conducted in three basic steps:

- data collection,
- data entry and
- data analysis.
For the purposes of this study, data were used from a various number of sources:
- Global Innovation Index Report 2016, which consists of a series of indicators that affect
innovativeness,
- World Bank Indicators and
- Global Competitiveness Report 2015-2016

The main reason for using multiple sources is that data, for specific indicators for
individual countries, did not exist from certain sources and were therefore collected from other
sources. Another reason is the mismatch-date of data in different countries. In this way, in some
countries, the latest of data for example mobile subscription was from year 2015, while the
same latest data for other countries was from year 2009. A combination of these data sources
solved most of these dilemmas. Nevertheless, for some indicators, there were no available data
for certain countries.

After data collection, data entry in Microsoft Excel is performed. Data analysis was
performed by using of software package for the interactive visual exploration of multivariate
data sets Tableau Public 10.0.

During the analysis phase, factors affecting innovativeness were divided into financial
and non-financial factors. Financial factors of innovativeness include: firms using banks, R&D
expenditure, public spending on education, information and communication technology goods
(ICT) export, information and communication technology goods import, GDP per capita, charges
for usage of intellectual property rights (IPR) and cost of living. Non-financial factors of
innovativeness include: mobile cellular subscription, online creativity, school enrollment, time
needed to start a business, university and industry collaboration research, urban population,
science and technology journal articles, political stability, government effectiveness and ease of
protecting investors. These factors are analyzed separately and in various combinations
through the aforementioned software tools.

4. Results and Discussion

In this part, the main results of the study will be presented. Presented series of
conclusions is the result of multiple iterative process of visual statistical analysis of factors of
innovativeness. Selected countries are presented with blue dots on scatter plots and box-and-
whisker plots below.

The analysis (presented in the Figure 3) shows that ICT goods imports, ICT goods
exports and high technology exports are not a good indicator of innovativeness of the country.
The most innovative countries do not achieve the highest rates of imports and exports of final
ICT products. The most innovative countries create new solutions, but mass production of these
new products is located in less innovative countries with cheaper labor force.

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 Figure 3: Comparison of ICT goods imports, ICT goods exports, high technology exports
and Global Innovation Index

Figure 4 shows that research and development (R&D) expenditure is a good factor of
innovativeness. The higher expenditure on research and development in companies further
increases innovativeness and provides a great financial support for implementation of new
solutions.

Figure 4: Comparison of R&D expenditure, charges for use of intellectual property rights
and Global Innovation Index

Other thing that is evident is that the charges for use of intellectual property rights in the
most innovative countries are mainly higher than those in less innovative countries. Therefore,
the introduction of measures to reduce charges for use of intellectual property rights would not
lead to the desired effect of increasing innovation.

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 Figure 5: Comparison of university and industry research collaboration, researchers in
R&D, science and technology journal articles and Global Innovation Index

Figure 5 shows that countries with high university and industry research collaboration
are countries that achieve higher levels of innovation. Such countries usually have a high
proportion of researchers in R&D and high number of science and technology journal articles.
Countries with greater university and industry research collaboration have high Global
Innovation Index, and mostly have a high number of researchers in R&D and science and
technology journal articles with the exception of three countries: China, Spain and Italy.

Figure 6: Position of China, Italy and Spain in comparison of university and industry
research collaboration, researchers in R&D, science and technology journal articles and Global
Innovation Index

These countries are presented with blue dots in the Figure 6. It can be seen that these
countries have a high number of science and technology articles, but do not have sufficiently
developed university and industry collaboration. Also, these countries do not have a sufficiently
high number of researchers in R&D to be one of the innovation leaders.

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 Figure 7: Comparison of online creativity, number of Internet users, mobile cell
subscriptions and Global Innovation Index

Figure 7 shows that countries with higher online creativity also have high Global
Innovation Index. Online creativity is in correlation with high number of Internet users. On the
other side, it can't be said that online creativity is correlated with mobile cell subscription. Due
to the increasing functionality of mobile phones, it is assumed that in the future, mobile phones
and other smart devices will be one of the main drivers of online creativity.

Figure 8: Comparison of ease of protecting investors, Global Innovation Index and time
to start business

Figure above presents a comparison of ease of protecting investors, Global Innovation

Index and time to start a business. In the 25% of the most innovative countries, the level of
investor protection is quite dispersed. On the other hand, the upper 25% of countries according
to innovativeness are in the top 75% of countries with the time required to start a business. It
can be said that the time of starting a business is not a decisive factor for greater development
of ideas. Ideas can be developed within existing companies, and not exclusively within start-up

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companies. In addition, countries in which it takes too long to start a new company do not
achieve high levels of innovativeness.

Figure 9: Comparison of Global Innovation Index, government effectiveness and political

stability

If the efficiency of the government is analyzed as a factor of innovativeness, it can be

said that the efficiency of the government is one of the main conditions of achieving greater
innovativeness. The top 25% of countries according to the government effectiveness is mostly
in the top 25% of the most innovative countries. Efficient government creates and supervises
the implementation of laws that are directed at increasing innovation and competitiveness. Such
government is focused on continuous improvement of performance of the economy and the
country's progress. Effective governments have lower levels of corruption and greater
accountability of elected representatives.

On the other hand, political stability is an important, but not decisive precondition for
the efficiency of the government. Stability gives the government space to be more concerned
with issues of competitiveness and innovativeness, rather than internal political problems. It
can be said that the political stability of the country can create conditions for higher
effectiveness of the government, but that further guidance and vision of the government will be
crucial in determining the direction of how the government will work in the future.

Figure 10: Comparison of GDP per capita, Human Development Index and Global
Innovation Index 1

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 Figure 10 presents a comparison in which GDP per capita is seen as a measure of wealth
in a certain country, Global Innovation Index as a measure of innovativeness and Human
Development Index as a measure of sustainable development. All of these indicators have
specific strengths and weaknesses. Countries with high Global Innovation Index are relatively
wealthier countries. These countries are in the top 25% of countries according to GDP per
capita. Exceptions are Romania, Bulgaria and Costa Rica that are in the upper 50% of the
countries according to GDP per capita. The question that arises is whether the wealthier
countries are wealthy because of their greater innovativeness or greater innovativeness is a
result of their wealth and resources they possess. The first argument would not include
Romania, Bulgaria and Costa Rica. Proving the second statement would require a special study
that would attempt to determine which resource baselines these country had in the past, so they
can generate high rates of innovativeness and GDP per capita today.

On the other hand, all countries that achieve higher innovativeness, also have high
Human Development Index. Exceptions are Romania, Bulgaria and Costa Rica, but are much
better placed compared to the previous criterion of GDP per capita. In other words, more
innovative countries are those countries whose development is more sustainable.

Figure 11: Comparison of GDP per capita, Human Development Index and Global
Innovation Index 2

Due to the great dispersion of data series, the figure 11 presents comparison in which
are excluded countries with extremely high GDP per capita and extremely low Human
Development Index. This case also led to the same conclusion as mentioned above.

5. Conclusion

Innovativeness is a function of financial and non-financial factors. All these factors affect
innovativeness through a series of mutual interactions and correlations. Financial factors are
not able to create adequate effect on innovativeness without non-financial factors. Effective
government needs to use available financial resources and create laws in order to motivate
innovators to create new solutions. This kind of government needs to combine university and
industry potentials and to motivate them to achieve higher levels of collaboration. Internet
connection needs to be available to everyone so people can be more online creative. On the
other hand, new and especially current companies needs to be motivated to give chance to their
employees to suggest and develop new and creative solutions. This paper can be used as a
baseline for new research in the field of innovativeness and especially in the field of government
role in creating innovative environment in particular country.

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