Drivers of innovation in agro-based and non-agrobased small and medium enterprises in Uganda

Abstract

Sustainable contribution of SMEs to economic development in Uganda is hampered by their low rate of survival. Innovation is generally seen as one of the most important drivers of SME growth. Thus understanding innovative behavior of SMEs in Uganda can guide the design and implementation of appropriate and targeted policy interventions to spur SME growth in the country. This study utilized the 2006 and 2013 Uganda enterprise survey datasets collected by the World Bank to understand the drivers and constraints to innovation among agro-based and non-agro based SMEs in Uganda. The study addressed three specific objectives including: 1) to determine the level and intensity of innovations among SMEs, 2) to analyze the interrelationships between the innovations undertaken by SMEs, and 3) to determine the factors that influence the type and intensity of innovations undertaken by SMEs. The study analyzed five types of innovation including product, logistical, marketing, technological and organizational innovation. Descriptive statistics were used to compute the level and intensity of innovation among the SMEs whereas interrelationships between the different types of innovation were analyzed using correlations. A multivariate probit model was used to analyze the factors that influence an SME’s decisions to undertake a given type of innovation whereas an ordered probit was fitted to understand the factors that influence the intensity of innovation. Descriptive results show that medium scale enterprises were more innovative than the small scale enterprises and that agro-based SMEs lag behind the Non-agro based SMEs with respect to most of the attributes. The summary statistics also revealed that the highest percentage of SMEs (31.2%) engaged in all the five innovation types but an almost equal proportion of SMEs (29.9%) did not venture into any of the five innovation types during the same period. Most of the SMEs ventured into product innovations (62%) followed by technological innovations (58%), marketing and logistics (53%) and organizational (39%). Results from correlation analysis revealed complimentary relationships between all the different innovations types implying that a firm venturing into one innovation type increases its probability of venturing into another innovation type. Findings from the econometric models show that the SMEs are more likely to innovate if they have access to credit, provide additional training to their staff, invest in research and design, have product innovated in the past, have audited books of accounts, have more permanent workers (this influences the size of SME), and have good past financial performance. However, the probability to innovate reduces with the number of years in business and managerial experience of the top manager. Based on the findings, the study recommended that there is a need for financial inclusion such that all SMEs have access to affordable credit. Government needs to provide support to SMEs by making ICT services cheaper and more accessible to SMEs through tax reduction and also create linkages between SMEs and research institutions to offer additional training to employees in the SME sector to build their innovative capacity.