Reconsidering Innovation Policy for Small and Medium Sized Enterprises: The Canadian Case

Abstract

The innovation process links technology generation with product commercialization, a connection involving a myriad of activities such as applied research, industrial design, and design for manufacture. The incremental aspects of innovation are defined and, with use of Canadian examples, situations are identified in which policy interventions may be justified because of unmet goals of national (or regional) industrial performance and because of knowledge-market imperfections encountered by small and medium sized enterprises (SMEs). Use is made of the concept of transaction costs to explain the problems some SMEs encounter in being innovative. Survey evidence confirms the theoretical arguments: Some successful SMEs establish input linkages with specialists but many more are impeded from establishing relevant contacts with consultants in the public and private producer services and with other manufacturers. The geographic and policy problem, therefore, becomes one of designing networks to assist the development of superior information connections by SMEs. The principles for policy design are discussed in the light of the theory used to identify market imperfections.