Innovation Trap of SMEs: Liability of Smallness, Learning and Export

In this paper, we examine the appropriacy of the widely held positive relationship between R&D input and patent output in the SME context, and we further explore the role of how exports enhance the innovation performance of SMEs. We argue that short-term bias gives rise to the myopia of learning, and that the innovation of SMEs will be path dependent on R&D investment. We propose that path dependence creates inefficiency in innovation, which we call an “innovation trap” of SMEs in the present paper. In addition, exports, preferred internalization strategy for SMEs, can partially alleviate the innovation trap of SMEs in that it stimulates learning by providing new knowledge and motivation to innovate. We test our theory using a database covering the innovation activities of 3,400 small and medium sized Korean firms. An inverted-U shape is presented between R&D investment and the number of patents in SMEs. Furthermore, exports moderate the inverted-U shape of innovation, which means that exports increase the number of patents held by SMEs, partially solving the “innovation trap.”.