Journal of Science and Technology Policy in ChinaThe impact of technological innovation capabilities on innovation performance: Anempirical study in Hong KongAntonio K.W. Lau Richard C.M. Yam Esther P.Y. Tang

Article information:To cite this document:Antonio K.W. Lau Richard C.M. Yam Esther P.Y. Tang, (2010),"The impact of technological innovationcapabilities on innovation performance", Journal of Science and Technology Policy in China, Vol. 1 Iss 2 pp.163 - 186Permanent link to this document:http://dx.doi.org/10.1108/17585521011059893

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The impact of technologicalinnovation capabilities

on innovation performanceAn empirical study in Hong Kong

Antonio K.W. LauDivision of Social Science,

The Hong Kong University of Science and Technology, Hong Kong, China

Richard C.M. YamDepartment of Manufacturing Engineering and Engineering Management,

City University of Hong Kong, Hong Kong,People’s Republic of China, and

Esther P.Y. TangDepartment of Management and Marketing,

The Hong Kong Polytechnic University, Hong Kong,People’s Republic of China

Abstract

Purpose – Recent studies have advocated the impact of technological innovation capabilities (TIC)on firms’ competitive performances. This paper adopts a study framework of innovation auditto examine the relevance of TIC on the innovation performance of the electronics industry in HongKong (HK)/Pearl River Delta region.

Design/methodology/approach – Empirical data were acquired through a recent survey ofelectronics firms in the region. Pearson correlation and regression analysis were employed to examinethe relationship between TIC and innovation performance.

Findings – The results verify that R&D, resource allocation, learning, and strategy planningcapabilities can significantly improve the innovation sales. R&D and resource allocation capabilitiescan also significantly improve new product introduction.

Research limitations/implications – The paper contributes to existing literature by studying theimpact of TIC on innovation performance in HK. It also explores two out of seven TIC – R&D andresource allocation capabilities – to improve firms’ innovation performance in the region.

Originality/value – This paper is one of very few that provide empirical evidence of the TIC andinnovation performance in HK. It also revisits the audit framework proposed by recent innovationstudies, which helps theoretical development.

Keywords Innovation, Technology led strategy, Electronics industry, Hong Kong

Paper type Research paper

1. IntroductionInnovation has always played a critical role in predicting the long-term survival oforganizations (Ancona and Caldwell, 1987), in determining an organization’s success(Higgins, 1995), and sustaining its global competitiveness (Porter, 1990). Extensiveresearches in innovation management had descriptively linked innovation with

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Journal of Science and TechnologyPolicy in China

Vol. 1 No. 2, 2010pp. 163-186

q Emerald Group Publishing Limited1758-552X

DOI 10.1108/17585521011059893

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competitive and economic outcomes at national level (Carlsson et al., 2002; Carlssonand Stankiewicz, 1995; Organization for Economic Cooperation and Development(OECD), 1997; Edquist, 1997; Nelson, 1993; Lundvall, 1992; Freeman, 1987), as well asat regional level (Fritsch and Stephan, 2005). Freeman (2002) illustrates this fact byanalyzing the economic growth of Britain in the eighteenth century, USA in the secondhalf of the nineteenth century and catching up countries in the twentieth century. TheIfo Institute in Germany collected annual innovation data from 1979 to 1992(Schmalholz and Penzkofer, 1993). Italy’s survey on national innovation system wasone of largest studies in the field and it covered 24,000 businesses with an independentlegal status (Evangelista et al., 2001; Archibugi et al., 1991). In collaboration with theNordic Fund for Industrial Development, OECD (1992) proposed guidelines forcollecting and interpreting technological innovation data, i.e. the OSLO manual (1992)and its revised version (1997). Eurostat used the OSLO manual for the CommunityInnovation Survey (CIS). Since then, major progress has been made towards collectinginnovation data in several European countries and even in Mainland China. Based onthe OSLO manual, a survey on innovation activities in Mainland China was conductedat large-scale in 1996, supported by the Chinese Science and Technology Ministry,National Natural Science Foundation of China, and State Statistic Bureau. Thesesurveys have produced positive impacts on public both in China (Guan, 2002) andabroad (OECD, 1997).

Drawing on the above literature, Yam et al. (2004) conducted an empirical survey ontechnological innovation for manufacturing firms in Beijing region (Guan et al., 2005,2006; Guan and Ma, 2003). That study integrated the findings of innovation capability’sstudies (OECD, 1997) and measured the technological innovation capabilities (TIC) thateach technological capability represents a separate business function of an organization(i.e. R&D, manufacturing, and marketing capabilities) or a cross-functional businessprocess (i.e. learning, organizing, strategic planning, and resource allocationcapabilities). However, Yam et al. (2004) did not propose propositions or researchhypotheses that weakened its theoretical supports on the survey findings. FollowingYam et al.’s (2004) study, this paper proposes seven hypotheses to investigate therelationship between TIC and innovation performance in manufacturers in Hong Kong(HK)/Pearl River Delta (PRD) region.

The present study contributes to existing knowledge in twofold. First, this studyrevisits the audit framework proposed by recent innovation studies (Yam et al., 2004; Guanand Ma, 2003). As suggested by the authors of that framework (Yam et al., 2004), themeasures of innovation capabilities have to be further refined and cross-validated onadditional samples. As the framework was verified by state-own enterprise data(Yam et al., 2004), additional data from private enterprises may help generalize theframework. Re-verifying existing study from one region to another one helps accumulateknowledge in the academic development (Singh et al., 2003). Recent literature has testedthe associations between innovation capabilities and performance in western countries(Freeman, 2002), but a few studies use HK/PRD region as a data source to re-verify theseassociations. HK/PRD region is one of the largest and fastest growing manufacturingregions in the world with over HKD 225 billions of total exports in 2003 of which over50 percent of the export come from electronics sectors, such as finished electronicsproducts, household electrical appliances, and electronic parts, and components(Hong Kong Census and Statistics Department (HKCSD), 2005). The innovation

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performance of this region should be important for academics to further analyze (Yu, 2005;Hobday, 1995).

Second, this study is one of very few studies that provide empirical evidence of theTIC and innovation performance in the region. Many studies show that, as most HKmanufacturers have relocated their plants to China taking advantage of labor and landcost, they are weak at technological innovation (Yu, 2005; Federation of Hong KongIndustries (FHKI), 2003; Lo et al., 2001; Tummala et al., 2000; Tien, 1999). According toannual Global Competitiveness Report 2004 published by OECD, in the ranking ofinnovation and technology capabilities, HK is significantly lower than the other NewlyIndustrialized Economies (NIEs) such as Taiwan, Singapore, and Korea. Being a majorpartner in the region (FHKI, 2003), HK has developed different technologicalinnovation patterns and is plainly weak to upgrade their TIC against other NIEs(Yu, 2005; Chiu and Wong, 2004). Using economic analysis approach, Han et al. (2002)found that HK electronics industry is deficient in applying existing technologyefficiently and facilitating the acquisition of foreign technology against other NIEssuch as Singapore and Korea (Lam and Kwok, 2004). It is indispensable for themanufacturers in the region to improve their innovation performance in order tosustain the competitiveness of the region. This study contributes to the region byraising the awareness of the importance of technology innovation and identifying keyTIC that should be further cultivated in the region.

2. Literature review2.1 Technological innovation capabilities (TIC)Burgelman et al. (2004) defines TIC as a comprehensive set of characteristics of anorganization that facilitates and supports its technological innovation strategies. TIC isa kind of special assets or resources that include technology, product, assets,or knowledge, experience, and organization (Guan and Ma, 2003). Lall (1992) defines TICas the skills and knowledge needed to effectively absorb, master, and improve existingtechnologies, and to create new ones. Evangelista et al. (1997) regards R&D activities asa central component of the technological innovation activities of firms and as the mostimportant intangible innovation expenditure. Not only does successful technologicalinnovation depend on technological capability, but it also requires other innovationcapabilities in the area of manufacturing, marketing, organization, strategy planning,learning, and resources allocation (Yam et al., 2004; Romijn and Albaladejo, 2002).According to Adler and Shenbar (1990), four types of TICs are identified, including:

(1) The capacity of satisfying market requirement by developing new products.

(2) The capacity of manufacturing these products by using appropriate processtechnologies.

(3) The capacity of satisfying future needs by developing and introducing newproducts and new process technology.

(4) The capacity to respond to an unanticipated technology activity brought aboutby competitors and unforeseen circumstances.

These capabilities exist in a firm.According to Peteraf (1993), a firm’s heterogeneous resource portfolios (including

human, capital, and technology resources) are responsible for observed variability in

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its financial returns. These are a firm’s specific competencies that contributesubstantially to the sales growth and competitive advantage. There would have to be acausal connection between a firm’s resources and performance. Dierickx and Cool(1989) argue that firms should attempt either to imitate high-performing resources or todevelop alternative resources that could produce similar benefits. Thus, theimprovement of TIC as key firm’s resources can be beneficial to a firm (Guan andMa, 2003). For example, Lawless and Fisher (1990) found that successful technologicalinnovation helps firms to gain market position and realize more long-term returns.Yam et al. (2004) found that TIC is positively related to new product introduction andinnovation sales.

2.2 A study framework for innovation auditThis study follows an audit framework proposed by Yam et al. (2004) to investigate theTIC and their impacts on innovation performance in electronics manufacturers. Theframework was developed by reviewing existing literature in innovation capabilities(Burgelman et al., 2004; Chiesa et al., 1996; Cooper, 1996; Christensen, 1995; Rothwell,1992), conducting a focus group discussion of senior executives from innovative firmsin Beijing region, and then statistically testing the framework through a large-scaledquestionnaire survey in Beijing (Yam et al., 2004).

Recent literature shows that TIC involves a vast variety of characteristics(Burgelman et al., 2004). Christensen (1995) classified TIC into science research asset,process innovation asset, product innovation asset, and esthetics design asset. Theseassets correlate with internal accumulation, experimental acquirement, and disquisition.A firm’s competitiveness roots in its possession of special assets and resources that arevaluable, heterogeneous, and difficult to be imitated and substituted. These wouldsafeguard the firms’ position in the areas of strategy and technology management. Bobeand Bobe (1998) adopted a checklist method for measuring TIC practices in threeEuropean Union countries, namely, Germany, the UK, and France. Similarly OSLOmanual (OECD, 1997) proposed the following measurements, such as the nationalinnovation systems context; innovation and firms strategy; organizational structuresand the organizational moves linking production, marketing, and design; origin oftechnological resources; management of human resources; global innovation trends.

Chiesa et al. (1996) developed a technical innovation audit framework encompassingseveral main parts, such as product innovation, product development, processinnovation, technology acquisition, leadership, and resourcing. That frameworkfocused on core processes and enabling processes to delineate technologicalinnovation. However, as Chiesa et al.’s (1996) suggest, more evidences are needed totest the validity of the framework (e.g. overlapping between product innovation anddevelopment). Other areas such as learning, organizing, and strategic planning thatwere important for a firms’ innovation capability should also be stressed.

The innovative capabilities audit framework proposed by Burgelman et al. (1988)included five audit dimensions resource availability and allocation; capacity tounderstand competitor innovative strategies and industry evolution; capacity tounderstand technological developments; structural and cultural context; strategicmanagement capacity.

Thus, an innovation audit framework for evaluating a firm’s innovationperformance and competitiveness is shown in Figure 1.

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Technological innovation capabilities (TIC). The framework measured TIC in sevendimensions:

(1) Learning capability is the capacity to identify, assimilate, and exploit newknowledge essential for a firm’s competitive success.

(2) R&D capability refers to a firm’s ability to integrate R&D strategy, projectimplementation, product portfolio management, and R&D expenditure.

(3) Resource allocation capability is the firm’s ability to mobilize and expand itstechnological, human, and financial resources in the innovation process.

(4) Manufacturing capability refers to the ability to transform R&D results intoproducts, which meet market needs, in accordance with design request and canalso be manufactured in batches.

(5) Marketing capability indicates the capacity to publicize and sell the products onthe basis of understanding consumer’s current and future needs, customer’saccess approaches, and competitors’ knowledge.

(6) Organizing capability is the capacity to constitute a well-establishedorganizational structure, cultivate organizational culture, coordinate the workof all activities towards shared objectives, and influence the speed ofinnovational processes through the infrastructure it creates for developmentalprojects.

(7) Strategic planning capability is the capacity to identify internal strengths andweaknesses and external opportunities and threats, adopt different types ofstrategies that can adapt to environment changes for the excelling in the highlycompetitive environment.

Technological innovation performance. A review of literature shows that the study oftechnological innovation performance indicators has attracted considerable attention.Traditional indicators of a firm’s technological innovation activity tend tomeasure the financial terms of innovation, R&D expenditures ( Jacobsson et al., 1996;

Figure 1.The relationship between

TIC and innovationperformance

Innovation performancesales performance

Technological innovationcapabilities (TIC)

Innovation performance

Strategic planning capability

Organizing capability

Marketing capability

Manufacturing capability

Resource allocation capability

R&D capability

Learning capability

H2

H1

H3

H4

H5

H6

H7

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Kleinknecht, 1987) and patent data (Patel and Pavitt, 1997, 1991; Jacobsson et al., 1996;Archibugi, 1992; Griliches, 1990). However, firms would not easily reveal anyconfidential financial information and different firms adopt varied accountingconventions in their inventory valuation, depreciation, and salaries computation.

Besides, patent data are only a reflection of invention rather than innovation (Flor andOltra, 2004). Technological innovation is a commercially successful invention (Betz,2003). A patent can only reflects on the invention but cannot guarantee that the inventionis successful (Coombs et al., 1996). Different patents also have different technologicallevels and economic values, making comparisons more difficult (Griliches, 1990). Evenmany technological innovations cannot be patented and companies resort to othermethods to protect their technological advantage (Coombs et al., 1996). Thus, alternativemeasures are used to secure adequate responses to our investigation. We follow existingliterature (Yam et al., 2004; OECD, 1997) to use two innovation performance indicators inthis study are innovation performance and sales performance.

Innovation performance is measured in terms of the number of commercialized newproducts expressed as a percentage of all products in the company over the last threeyears (Yam et al., 2004). According to OSLO manual (OECD, 1997), the number ofinnovations along is not a good indicator for innovation performance because there aresignificant differences in such numbers across industries. Innovation rate is a bettermeasure as it shows the relative innovative strength of the firms surveyed. A firm’scompetitive advantage could come from the efficiency and capability of new productdevelopments (Guan, 2002; Lawless and Fisher, 1990). The increase in productinnovation rate is rooted in the accumulation of capabilities and contributes toinnovation outputs. In most circumstances, high performance firms have strongercapabilities compared to low performance firms.

Sales performance is measured in terms of the average annual sales growth rate dueto technologically innovative products over the last three years (Yam et al., 2004). Salesgrowth rate represents one dimension of a firm’s market advantage. It shows whetherthe innovation has had market impact or been financially successful.

2.3 Research hypothesesFollowing Yam et al. (2004) approach, this paper proposes seven hypotheses betweeneach TIC and innovation performance. The findings of the study thus test therelationship between TIC and innovation performance with better theoreticalbackground.

Learning capability and innovation performance. Learning capability was defined as“the capacity to generate ideas with impact, across multiple boundaries, and throughspecific management initiatives” (Yeung et al., 1999); “the ability of an organization tolearn the lesson of its experience and to pass those across boundaries and time”(Ashkenas et al., 1995). Learning is one of the most valuable assets that providessustainable competitive advantage and a key element for access, acquisition, anddevelopment of new knowledge from external boundaries (Caloghirou et al., 2004). Manyliteratures have reflected that firm-level technological advancement is conceptualized asa learning process. Learning results in generation of knowledge and skills needed forfirms to choose, install, operate, maintain, adapt, improve, and develop technologies(Lall, 1992). Freeman (2002) argues that the innovative performance is closely relatedwith active learning. The capacity to sustain innovation has found to be associated with

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organization learning (Leonard-Barton, 1992; Senge, 1990). Thus, the followinghypothesis is proposed:

H1. Learning capability is positively related to technological innovationperformance.

R&D capability and innovation performance. R&D capability is defined as a firm’sability to integrate R&D strategy, project implementation, and R&D expenditure.In general, R&D activities are being regarded to closely relate to innovation as R&Daim at creating something new. Evangelista et al. (1997) regards R&D activities as acentral component of the technological innovation activities of firms. In fact, manyinnovation studies employed R&D inputs as the indicators of technological innovationactivity level, such as R&D budget ( Jacobsson et al., 1996), existence of formalizedR&D in the company and participation in R&D projects with other organizations(Flor and Oltra, 2004). Therefore, R&D is considered to be a key part of innovationactivities. Caloghirou et al. (2004) found that the higher the level of the R&D efforts andtraining within a firm is, the more the firm will be able to create and exploit novelty.Bougrain and Bernard (2002) found that R&D capacities would enhance the firm’sability to cooperate and carry innovation projects to success. Many researchersalso argue that the intensity of R&D was strongly associated with innovation(Souitaris, 2002; Zairi, 1996). Based on the above discussion, we propose that:

H2. R&D capability is positively related to technological innovation performance.

Resource allocation capability and innovation performance. Resource allocationcapability is defined as a firm’s ability to mobilize and expand its technological,human, and financial resources in the innovation process. Resource is always a criticalfactor for all kinds of activities and processes. Evangelista et al. (1997) proposes thattechnology resources are going to increase its importance as a strategic factor for firm’sperformance in near future. Human resources are other crucial issues for innovationperformance. Jacobsson et al. (1996) put forward the use of statistics on company staffwith higher education in engineering and science as a technological innovationperformance indicator. In addition, technological innovation activities cannot becarried out if there is no support of finance. Italian survey found that the majorobstacles for introducing technological innovation are of an economic nature (i.e. lackof appropriate sources of finance, and cost of innovation is too high). A few studies alsofound that resource allocation capability enables firm to sustain globalcompetitiveness (Yam et al., 2004; Guan and Ma, 2003). Therefore, we propose thefollowing hypothesis:

H3. Resource allocation capability is positively correlated with technologicalinnovation performance.

Manufacturing capability and innovation performance. Manufacturing capability isdefined as a firm’s ability to transform R&D results into new products which meetmarket needs, and to attach importance to overall quality control and continuousimprovement of manufacturing systems. Technological innovation is thetransformation of an idea into a new or improved saleable product or operationalprocess in industry or commerce (OECD, 1997). Following this definition of innovation,successful innovation involves saleable product. An outstanding and creative R&D

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output alone cannot lead to good innovation performance. It must be processed bymanufacturing in the innovation process. The capacity of manufacturing may not onlyguarantee the success of the transformation of R&D outcome into product, but alsoensure its quality suits customer’s needs. Evangelista et al. (1997) found that most ofthe manufacturing firms in Italy rely on the investment in manufacturing machinery asthe most important innovation source and the improvement of product quality is a keyelement in Italian manufacturing firm’s innovation strategies, all of which aimed atenhancing innovation performance through advancing manufacturing capability.Besides, some researchers found that the intensity of quality control is stronglycorrelated with innovation (Zairi, 1996) and manufacturing capability was found to beeffective in enhancing firm’s competitive advantage (Yam et al., 2004). Thus, thefollowing hypothesis is proposed:

H4. Manufacturing capability is positively related to technological innovationperformance.

Marketing capability and innovation performance. Marketing capability indicates afirm’s capacity to publicize and sell the products on the basis of understandingconsumer’s current and future needs, customer’s access approaches, and competitors’knowledge. For a new product to hit the targeted customers, it is essential for the firmto be capable of keeping connected with the market in order to promote new productsand to understand customers’ needs and their feedbacks of the products. The OSLOmanual has identified marketing as a key innovation activity (OECD, 1997). Variousauthors have found that innovation was positively associated with acquisition andscan of market information (Tidd et al., 2001), effective marketing programs (Cooper,1984) and broad distribution systems (Maidique and Zinger, 1984). The rate oftechnological innovation was also associated with marketing competency (Souitaris,2002). Hence, we propose that:

H5. Marketing capability is positively correlated with technological innovationperformance.

Organizing capability and innovation performance. Organizing capability is defined asa firm’s ability in securing organizational culture and adopting good managementpractices. Ability to manage internal cooperation among departments and externalcommunication with suppliers and customers are also included. Wan et al. (2003)indicated that innovation is positively correlated with organizational structure andculture. Interactions with customers and suppliers are thought to be beneficial toinnovation (von Hippel, 1988; Lundvall, 1988). Some researchers, such as Rothwell(1992), Rogers and Shoemaker (1971), and Burns and Stalker (1961), have identified apositive association between internal communication and technological innovation.The researchers found that, the more the firm uses formal mechanisms to scan externalinformation and cooperate with external organization, the more is its openness toexternal sources of knowledge with successful innovative performance (Caloghirouet al., 2004). Souitaris (2002) argued that a firm’s ability to communicate with thestakeholders, develop external networks, formulate interdepartmental teams workingon innovation projects, and work on internal communication system is associated withtechnological innovation performance. Hence, the following hypothesis is proposed:

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H6. Organizing capability is positively associated with technological innovationperformance.

Strategic planning capability and innovation performance. Strategic planning capabilityis defined as a firm’s ability to identify internal strengths and weaknesses and externalopportunities and threats, and to formulate plans in accordance with corporate visionand missions. Strategic management literature views strategy as a network of choicesto position the firm according to its environment. Porter (1990) made a majorcontribution to the analysis of innovation on corporate strategy. His approach impliesthat managers have to analyze the internal and external environment and, based onthis analysis, to determine a definite course of action. Cooper (1984) identifies anassociation between corporate strategy and innovation performance. Well-definedbusiness strategies as well as plans for new technology were found to be positivelycorrelated with innovation rate (Swan and Newell, 1995; Rothwell, 1992). Owing to itssignificant effect, Souitaris (2002) includes this strategic planning capability in hismodel of innovation. Therefore, we propose that:

H7. Strategic planning capability is positively correlated with technologicalinnovation performance.

3. MethodologyThe purpose of the present study is to identify the impact of the TIC on innovationperformance. A survey questionnaire was designed. The results give empiricalevidences on the TIC and its relationships with innovation performance.

3.1 SamplingTechnological innovation is critical for the competitiveness of all types ofmanufacturing industries. The difference lies on the variation in the degree and paceof utilization of technologies in different industry sectors. Under the technology-drivenworld in the twenty-first century, a study on innovation is believed to be based ontechnology-intensive manufacturing industry.

Judging from this way of thinking, we verify the applicability of Yam et al.’s (2004)framework in electronic industry sector. The electronics industry is very sensitive totechnology advancement (Betz, 2003). Electronic industry ranked the top of the list offast growing innovation rate industry (Mahmood and Singh, 2003) and this industryaccounts for 9.9 percent of total gross output in manufacturing industry, according tothe report on the 2003 Survey of Industrial Production.

The electronics industry has representative output share in the HK manufacturingindustries (FHKI, 2003). HK electronics industry is highly involved in one of China’skey manufacturing regions, i.e. the PRD region in China (FHKI, 2003; Hong KongTrade Development Council (HKTDC), 1998). A survey of Federation of HK Industryclaims that there are over ten-million people working for HK manufacturers in PRDregion (FHKI, 2003). Electronics industry is representative of the PRD region as theleading export industries in the world with an export value of approximately HKD225 billion (HKCSD, 2005). Management decisions of practitioners in this industry havea significant impact upon the region as well as being markedly relevant to Chinesebusiness environment.

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To select the sample population, we used the Directory of HK Industries publishedby HK Productivity Council. The council led by HK Government aims to improvemanufacturers’ capability to quality and innovation performance (Hobday, 1995). Thedirectory is comprehensive as it covers all the major industry sectors of HK’s economyand has over 15-year publishing history. Thus, it is believed that the directory canprovide reliable information for the survey.

The targeted respondents of the survey were senior product developmentmanagers, vice presidents, or directors listed on the directory. They were requested tofill out the questionnaire. Follow-up faxes and phone interviews were conducted by atrained interviewer to ensure data quality.

Of the 1,012 firms selected from the directory, 934 were reached (78 letters wereundelivered because of a change of address or the contact person having left the firm).The firms were selected as the directory noted that they were classified in the electronicindustry with production facilities in China and offices in HK. They were alsocontacted to know that they had production facilities in PRD. Of the 934 targeted firmssuccessfully contacted, 81 effective responses were collected. This is a response rate of8.7 percent. The sample profile is shown in Table I.

3.2 Questionnaire design and reliability testA questionnaire was designed according to OECD (1997) and previous researches(Yam et al., 2004; Guan and Ma, 2003; Guan, 2002). The wordings of the questionnaire

Number %

Type of sub-industryElectrical appliances and house and electronics toys 14 17.3Electronic parts and components 28 34.6Office, accounting, and computing machinery 21 25.9Radio, TV, and communication equipment andapparatus 17 21Others 1 1.2Company size1-99 10 12.3100-500 24 29.6500-999 16 19.81,000-3,000 17 21.3,000 14 17.3Have developed technological improved products in the past three yearsYes 74 91.4No 7 8.6Have developed technological improved manufacturing processes in the past threeyearsYes 72 88.9No 9 11.1Novelty of the technological improved products or processesNew to organization 44 54New to industry in PRD 24 30New to industry in the world 13 16

Note: n ¼ 81

Table I.Demographiccharacteristics of the firms

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were slightly modified to reflect the understanding of technological innovation in theregion according to our pilot test discussed below.

The scales of the TIC and innovation performance were directly adopted fromYam et al. (2004). A total of 50 items of measurement were developed to measure the TIC.The respondents were asked to give opinions on to what extent do they agree with thestatements regarding to firm’s TIC by selecting on continuum between “Stronglydisagree” (rating 1) and “Strongly agree” (rating 7). Innovation performance is measuredby two items, i.e. percentage of sales due to technologically new or improved product,and percentage of number of commercialized new products in company per year(see Appendix, Table AI.). The respondents were asked to identify the percentages ofsales due to new products and number of new product launched per year.

Two control variables were used in this study, i.e. company size and type ofsub-sections of the industry. By controlling for company size, potential economies, anddiseconomies of scale of different sized companies are accounted for Devaraj et al.(2004) and Swan and Allred (2003). This reduces any performance measurement biasdue to company size. By controlling the sub-sectors of the industry, this study controlsthe extent to which unexpected changes in the industry sectors may have altered theinnovation activities in the sampled industries (Kotler, 2003).

Perceptual measurements have been used as firms were reluctant to share objectiveperformance data because of confidentiality issues (Ward et al., 1996). Pagell andKrause (2004) argue that where survey studies are cross-industry in nature, theindividual objective performance might vary in different industries, which wouldaffect the survey results. Ledwith (2000) argues that subjective measurement allowsrational comparisons among companies operating in different market situations. It isinappropriate to use objective measurements of sales volume, return on investments,or profitability to rate the performance of companies differing in size and marketsegment as resources are different in each case (Ledwith, 2000).

In order to improve the comprehensibility of the draft questionnaires, a pilot studywas conducted. Three academic staff and five practitioners were interviewed to discussthe content and wordings of the questionnaire. On average, interviews lasting an hourwere conducted for each expert to verify the questionnaire. The academic staffs wereprofessors in the field of innovation management and manufacturing strategy. Thepractitioners are senior staff in the sampled industry.

Construct reliability was tested by using Cronbach’s alpha reliability test ( Johnsonand Wichern, 1998). Cronbach’s alpha (a) was used to assess the scale reliability ofeach construct in the model (Figure 2). The reliability of all factors is reported in theAppendix. a of every factor was .0.70, which is a very good statistical result ( Johnsonand Wichern, 1998).

4. Results4.1 Sample profileTable I shows that, by size, 12.3 percent of the companies have less than 100 employees,29.6 percent of the companies are of 100-500 employees, 19.8 percent of them have500-999 employees, 21 and 17.3 percent of them have 1,000-3,000 and more than 3,000employees, respectively.

The table also shows the sub-sectors of the industry. About 17.3 percent of therespondents are of “Electrical appliances and house and electronics toys”, 34.6 percent

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of them are of “Electronic parts and components”, 25.9 percent of them are of “Office,accounting, and computing machinery” and 21 percent of them are of “Radio, TV,communication equipment and apparatus”.

More importantly, the table shows that 74 (91.4 percent) of the respondents havedeveloped technologically improved products in the past three years; 72 (88.9 percent)of them have developed technologically improved manufacturing processes in thatperiod. It is interesting that all firms who developed innovative manufacturingprocesses also developed innovative products in the past three years. It is possible thatprocess innovation always follows product innovation (Betz, 2003). As our targetedsamples were innovative manufacturers, only those who developed technologicallyimproved products (i.e. 74) were qualified and then selected in the following analyses.

4.2 Data analysisAfter refining the sample sizes, the correlation analysis was used to investigate thelinkages between TIC and innovation performance. Table II represents means,standard deviation, and Pearson correlation of them. It is found that, for the sampledindustry, the technological innovation performance is highly and positively correlated

Figure 2.TIC of the electronicsindustry in HK/PRDregion

4

4.2

4.4

4.6

4.8

Learning

R&D

Resource allocation

ManufacturingMarketing

Organizing

Strategy planning

Innovation performanceVariables Mean SD Percentage of sales Percentage of new product

( H1 ) Learning capability 4.51 1.54 0.78 * * 0.56 * *

( H2 ) R&D capability 4.48 1.67 0.86 * * 0.74 * *

( H3 ) Resource allocation capability 4.47 1.61 0.84 * * 0.72 * *

( H4 ) Manufacturing capability 4.50 1.40 0.72 * * 0.66 * *

( H5 ) Marketing capability 4.69 1.40 0.76 * * 0.70 * *

( H6 ) Organizing capability 4.51 1.28 0.78 * * 0.68 * *

( H7 ) Strategy planning capability 4.54 1.53 0.85 * * 0.71 * *

Firm sizeþ 3.01 1.31Type of sub-industrya 2.54 1.05

Notes: n ¼ 74; *p , 0.05; * *p , 0.01; acontrol variables

Table II.Correlation analysis onthe relationship betweenTIC and innovationperformance

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with TIC ( p , 0.01). All of the seven capabilities – learning, R&D, resource allocation,manufacturing, marketing, organizing, and strategy planning – are significantlycorrelated with the percentage of sales income due to technological improved productsand the percentage of commercialized new products as shown in Table II. Table IIshows that two control variables – firm size and nature business – do not show anysignificant relationship with the innovation performance.

As shown in Table III, regression analysis shows that learning, R&D, resourceallocation, and strategy planning capabilities are very significantly correlated with thepercentage of sales incomes due to new or improved products (adjusted R 2 ¼ 0.358).Among these four capabilities, strategy planning is the most influential (b ¼ 0.289,p , 0.01), followed by R&D (b ¼ 0.253, p , 0.05), resource allocation (b ¼ 0.241,p , 0.05), and learning (b ¼ 0.193, p , 0.05). The findings also show that bothorganizational size and nature of business as the control variables do not exhibit asignificant relationship with innovation performances.

Table III shows the relationship between TIC and percentage of commercializednew products. The results show that only R&D (b ¼ 0.407, p , 0.01) and resourceallocation (b ¼ 0.368, p , 0.05) are significantly correlated with the percentage ofcommercialized new products. Both firm size and nature of business as the controlvariables are insignificantly correlated with the innovation performance. In summary,the above analyses support H1-H3 and H7, but not H4-H6.

5. DiscussionThis study verifies new ideas and relationships beyond existing literature. The resultsof this study have implications for management and future research opportunities. Wewill discuss these results in two sub-sections: the relationship between TIC andinnovation performance and TIC in the region.

Innovation performanceRegression coefficient ( b ) Regression coefficient ( b )

TIC Percentage of sales Percentage of new products

Control variablesFirm size ns nsType of sub-industry ns nsMain constructs ns ns( H1 ) Learning capability 0.193 *

( H2 ) R&D capability 0.253 * 0.407 * *

( H3 ) Resource allocation capability 0.241 * 0.368 *

( H4 ) Manufacturing capability ns ns( H5 ) Marketing capability ns ns( H6 ) Organizing capability ns ns( H7 ) Strategy planning capability 0.289 * * nsF 74.54 * * 43.61 * *

R 0.611 0.558R 2 0.373 0.312Adjusted R 2 0.358 0.295

Notes: n ¼ 74; *p , 0.05; * *p , 0.01; ns, not significant

Table III.Regression analysis of

TIC and innovationperformance

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5.1 The relationship between TIC and innovation performanceConsistent with the hypothesized model, the findings of this study show that R&D,resource allocation, learning, and strategy planning capabilities directly improveinnovation performance. The results support literature that these four TICs have abeneficial impact on overall product performance (Burgelman et al., 2004). For example,learning is one of the most valuable assets that provides sustainable competitiveadvantage (Caloghirou et al., 2004) and active learning is closely associated withinnovation performance (Freeman, 2002). R&D capacities would enhance the firm’s abilityto cooperate and carry innovation project to success. Resource allocation and strategyplanning capabilities are positively associated with innovation rate and enable firms tosustain global competitiveness (Yam et al., 2004; Guan and Ma, 2003; Wan et al. (2003)).

These findings are consistent with Yam’s study that learning, R&D, resourceallocation, and strategy planning capabilities are important to innovation performance.However, our findings are inconsistent with Yam et al.’s (2004) study that marketingcapability is not correlated with innovation performance. This finding shows thatChinese firms in HK/PRD region are different from that in Beijing. It is possible that mostof the manufacturers in HK/PRD region are perceived that they are competent on theirexisting marketing capability that does not draw distinctive advantage on innovationperformance. In fact, the mean value of the marketing capability is the highest amongthe others (Table II).

Furthermore, recent literature noted that HK is strong in marketing knowledge to buildclose relationship with major customer (Yu, 2005; Hobday, 1995). Yu (2005) argue that HKmanufacturers are able to acquire and adopt foreign technological and marketingknowledge within their own institutional settings effectively through close customerrelationship. Under original equipment manufacturing (OEM) business, HK electronicsmanufacturers can work closely with the customers in order to manufacture a variety ofgoods. In order to take advantage of low-cost production, overseas buyers are willing tosend quality control engineers to help ensure quality, delivery, and productivity of themanufacturers and to assist with purchase of materials of them as well. The customersalso provide the manufacturers information on product design, cost accountingprocedures, marketing, and technology (Chiu and Wong, 2004; Hobday, 1995). HKmanufacturers have to effectively serve the customer in the production line in a lower cost.With limited resources and small-sized, HK manufacturers also look for businessopportunities actively and efficiently (Yu, 2005). Instead of designing on their own, HKmanufacturers have good knowledge of different market segments and sales forces so thatthey can modify existing products in various markets at a lower cost such as VTech’seducational toys and cordless telephones (Yu, 2005). Manufacturers in this region arecommon in strong marketing capability so as to efficiently transform the marketknow-how in product innovation. This study thus argues that, in this region, firms withmerely strong in this capability cannot lead to distinctive innovation performance.

Inconsistent with the hypothesized model, the findings of the study show thatmanufacturing and organizing capabilities are not correlated with innovationperformance. This result is similar to Yam et al.’s (2004) study that manufacturing andorganizing capability was found to be unrelated to innovation performance. Despite itsclose association with product quality, time-to-delivery and production cost,manufacturing capability cannot significantly influence a firm’s innovationperformance because of the firm’s inability to identify areas of improvements in

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innovation (Bessant and Bucking ham, 1993), and its failure in integrating theimprovements with quality control (Deming, 1982). It may stem from the failure instrategizing the manufacturing sector, and its inability in matching the process capabilitieswith the market requirements in a timely fashion (Hayes and Wheelwright, 1984).

On the other hand, the insignificant relationship between organizing capability andinnovation performance may be due to the negative impact of external coordination ininnovation process. Some argue that manufacturers may fail to develop innovativeproducts because they are attentive to the needs of current customers (Hamel andPrahalad, 1994). Katz (2003) argues that customers sometimes ask for familiar productsand encourage the manufacturer not to innovate, as new products usually require thecustomer to put in new supporting resources for the product and this would lead to awaste of some customers’ existing resources. Similarly, suppliers may provide familiarideas to manufacturers for product development in order to protect the value of theirexisting resources, such as production capacities and engineering knowledge.By limiting themselves to the coordination of current customers and suppliers,manufacturers might restrict their capabilities to develop highly innovative products ina competitive environment. Depending on the existing customers for new ideas maystem from the traditional nature of OEM/ODM business in HK manufacturers.

5.2 Current TIC in HK/PRD regionThis study employed a tested audit framework to measure the TIC – learning, R&D,resource allocation, manufacturing, marketing, organizing, and strategy planning – inthe HK/PRD region (Guan and Ma, 2003; Guan, 2002). By calculating the mean valuesof these capabilities, the TIC for the sampled industry is shown in the Figure 2.

Figure 2 shows that the sampled manufacturers are strongest at marketingcapabilities. Most of them agreed that they have built good relationships with theirmajor customer, provided good performance of after-sale services and known differentproduct market segments very well. This result is similar to the finding of a previousstudy that HK companies are good at marketing (HKTDC, 2000).

However, it is important to note that the resource allocation capability is weakestamong the other TIC elements. This results show that manufacturers in this region are notgood in exploiting resources, such as human resources, capital and technologies/technique, for technological innovation. In particular, firms strongly agreed that theycannot provide steady capital supplement in innovation activity. This finding is similar toother technological innovation studies identified the lack of financial and human resourcesas key constraints for innovation (Guan, 2002; Sirilli and Evangelista, 1998).

The electronics industry in the region is also weak at R&D capability, as shown inFigure 2. The surveyed companies do not have high percentage of R&D personnel intheir company. This can be explained by the fact that many manufacturers are doingOEM business, which traditionally does not require many R&D personnel. Facing thechanging environments, the manufacturers should migrate from OEM to ODM andfinally to OBM by enhancing their R&D capability.

6. Conclusion6.1 Academic and managerial implicationsTechnological innovation plays a critical role in predicting the long-term survival oforganizations (Ancona and Caldwell, 1987). Many well-known leading authorities alike

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have discussed the importance of innovation in determining an organization’s successand global competitiveness (Higgins, 1995; Porter, 1990). Traditionally, only R&Dactivities are considered by practitioners to be a major focus of innovation. Recently,other previous researches have found that emphasizing R&D alone by investing onR&D activities heavily cannot sustain innovation performance and firm’scompetitiveness (Yam et al., 2004; Guan and Ma, 2003; Souitaris, 2002; Romijn andAlbaladejo, 2002). Empirical studies in it are insufficient in HK and PRD region,although the region is being recognized as one of leading manufacturing areas aroundthe world. This study theoretically and empirically verifies that some TIC do improveinnovation performance while some do not in the region. These more specific findingsprovide empirical supports to the field of technology innovation and give new insightsto the managers in the region.

Consistent with the literature, the findings of this study indicate a direct, positiverelationship between TIC and innovation performance. In particular, this study verifiesthat learning, R&D, learning, resource allocation, and strategy planning capabilitiesdirectly improves the percentage of sales due to product innovation. R&D and resourceallocation capabilities also improve the rate of new products. This finding providesspecific evidence to support the importance of TIC on innovation (Yam et al., 2004),especially in a Chinese manufacturing context.

For managers in the region, this finding is important as it identifies that a morebalanced development of multiple TIC is required. While R&D capability is essential tothe success of innovation, our findings show that firms should also emphasize otherinnovation capabilities (i.e. learning, resource allocation, and strategy planning) forbetter coordination of R&D activities. For example, in order to enhance the percentageof sale due to technologically innovative products, manufacturers should strengthentheir strategic planning capability, which helps them to identify their internalstrengths and weaknesses as well as external opportunities and threats for formulatingand implementing effective innovation plans. For those manufacturing firmslaunching many new products into the market, they should play more efforts onresource allocation capability. Not only can the capability allow a firm to exploit theirtechnology resources, including the acquisition of external technologies, technologyinformation about competitors’ core technology competence and the prediction of newtechnology trends, but it also enables the firm to attach and allocate sufficient humanresources for innovation processes.

6.2 Study limitationsThis study had a number of limitations as specified below which also help to identifypotential areas for future studies.

This study used a single key informant for data collection. The underlyingassumption behind this method is that a senior manager, by virtue of his or herposition in the company, is capable of providing opinions and perceptions that canreflect the company’s behaviour (Philips, 1981). In future research, a multiple informantapproach could be adopted. However, the complications of conducting research usingmultiple informants and the practical difficulties of using information from thisresearch should not be underestimated (Philips, 1981).

The cross-sectional data used in the present study may not be useful for identifyingfundamental relationships among the variables. However, as stated by Kenny (1979), the

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careful study of cross-sectional relationships is commonly accepted for testingfundamental relations. For improving future research, multiple cross-sectional analysesin different time frames would be used to generalize the findings of this study.In particular, the relationship between external integration and product innovationwould be a good research topic for the future.

On top of the selected TIC and performance examined in this study, othercapabilities should be investigated as well. For example, absorptive capability,referring to the ability of firms to acquire, assimilate, and exploit information andknowledge (Cohen and Levinthal, 1990), has been found to affect innovationperformance (Caloghirou et al., 2004). The absorptive capability thus is a possibledimension to be added in the study of TICs. Future research will identify more TIC andexamine how these capabilities affect innovation performance, which may contributesignificantly to the field of technological innovation management.

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Appendix

Variables Mean SD a, if item deleted

Learning capabilityYour company systematically monitors technology developmenttrends 4.33 1.80 0.95Your company assesses technologies relevant to firm’s businessstrategy 4.46 1.64 0.95Your company encourages work teams to identify opportunitiesfor improvement 4.69 1.73 0.94Your company assimilates accessed knowledge 4.54 1.65 0.94Your company understands firm’s core capabilities and match itwith market needs 4.58 1.80 0.94Your company passes lessons learned across boundaries andtime 4.54 1.67 0.94Your company promotes learning culture and invests onlearning 4.32 1.80 0.95Overall 4.49 1.73 0.95R&D capabilityMulti-functional departments are involved in conceptdevelopment and screening of new product 4.35 1.86 0.97Your company has highly efficient communication among R&Dpersonnel 4.48 1.94 0.96Your company apply advanced designing methods, such asconcurrent engineering 4.33 1.89 0.96Your company has high quality and quick feedback frommanufacturing to design and engineering 4.46 1.84 0.96Your company has good mechanisms for transferringtechnology from basic research to new product development 4.54 1.84 0.96Your company has great extent of market’s and customer’sfeedback into innovation process 4.62 1.72 0.96Your company has high level of investment in new products 4.69 1.81 0.96Your company has high level of investment in new process 4.69 1.79 0.97Your company has high percentage of R&D personal in firm’stotal employment 4.15 2.09 0.96Overall 4.48 1.86 0.95Resource allocation capabilityYour company can attach importance to human resource 4.48 1.90 0.96Your company plan human resource in phase 4.37 1.81 0.95Your company can select appropriate personnel in eachfunctional department in innovation process 4.54 1.72 0.96Your company can provide steady capital supplement ininnovation activity 4.36 1.80 0.96Your company fully use external technologies 4.43 1.65 0.96Your company understand competitor’s core technologies 4.62 1.71 0.96Your company adapt its technology level to changes in externalenvironment 4.51 1.83 0.96Overall 4.47 1.77 0.97Manufacturing capabilityYour manufacturing department has great contribution duringthe conceptual design stage in innovation process 4.05 1.63 0.94

(continued )

Table AI.Result of reliability test(n ¼ 81).

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Variables Mean SD a, if item deleted

Your manufacturing department transforms R&D output intoproduction 4.41 1.66 0.94Your company has effectively applied advance manufacturingmethods 4.21 1.50 0.94Your company has capable manufacturing personnel 4.62 1.60 0.94Your company has great extent which is continuously improvemanufacturing system 4.64 1.65 0.94Your company has high level of importance of overall qualitycontrol 5.06 1.69 0.94Your company has high degree of manufacturing costadvantage 4.54 1.51 0.94Overall 4.50 1.61 0.94Marketing capabilityYour company has good relationship management with majorcustomers 4.95 1.66 0.94Your company has good knowledge of different marketsegments 4.77 1.57 0.94Your company has highly effective marketing intelligencesystems 4.35 1.68 0.94Your company has high sales-force efficiency 4.53 1.61 0.94Your company provides good performance of after-sale services 4.74 1.61 0.94Your company closely tracks customer satisfaction level 4.72 1.45 0.94Your company well maintains brand image and corporate image 4.79 1.64 0.94Overall 4.69 1.60 0.95Organizing capabilityYour company can flexibly adjust the organization structure 4.93 1.50 0.92Each sub-units in your company gain entity 4.54 1.27 0.93Your company can handle multiple innovation projects inparallel 4.51 1.53 0.92Your company has good coordination and cooperation of R&D,marketing, and manufacturing department 4.32 1.67 0.92Your company has good communication between majorsuppliers and major customers 4.65 1.60 0.92Your company has high-level integration and control of themajor functional departments with company 4.33 1.53 0.93Your company has effective mechanisms to track progress ofinnovation process 4.31 1.42 0.93Overall 4.51 1.50 0.94Strategy planning capabilityYour company has great extent of contingency thinking andplanning 4.22 1.70 0.96Your company is able to identify internal strengths andweaknesses 4.53 1.75 0.95Your company is able to identify external opportunities andthreats 4.65 1.66 0.95Your company has clear goals 4.78 1.68 0.95Your company has clear plan – a road map of new product andprocess with measurable milestones 4.62 1.67 0.95Your company is highly adapted and responsive to externalenvironment 4.49 1.53 0.96Overall 4.55 1.67 0.96 Table AI.

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About the authorsAntonio K.W. Lau is a PhD graduate of the Department of Manufacturing Engineering andEngineering Management at the City University of Hong Kong. His current research interests arein the areas of supply chain management and new product development. Antonio K.W. Lau isthe corresponding author and can be contacted at: solkwa@ust.hk

Richard C.M. Yam is an Associate Professor in the Department of ManufacturingEngineering and Engineering Management, the City University of Hong Kong. Yam is thefounder program leader of the Master of Science and Engineering Doctorate programs inengineering management at City University. His current research interests are in the areas ofproduct innovation and technology management and engineering asset management.

Esther P.Y. Tang is Associate Professor of the Department of Management and Marketing,Hong Kong Polytechnic University. Tang has carried out consultancy work for both public andprivate organizations. Her current research interests are environmental impacts of businessactivities, and interface between marketing and manufacturing.

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