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riad of studies in both developed and transition economy shows that previous competitive mechanisms such as low cost and price, quality, services, and flexibility are not sufficient to guarantee sustainable competitive performance in all markets of the current intense global competitive landscape (Liu, 2013; UNIDO & UNCTAD, 2011).  Currently, There is a continuous change in the business  environment  due to revolution in the inter-connectivity, rapid globalization and liberalization, and  speedily advancement of technologies (Lau, Baark & Sharif 2013; Raymond, St-Pierre, Uwizeyemungu & Le Dinh, 2014) and customers'  strong demand  for new product development (Bruch et al., 2014; Schrettle, Hinz, Scherrer-Rathje, & Friedli,  2014).  The time has come for new way of doing business, networking, and reliability, establishing effective technology and developing capability on innovation especially on flexible manufacturing sectors (Hung & Lin, 2014; Lau et al., 2013; Liu, 2013; Raymond et al., 2014; Yam, Tang & Lau, 2011).  For sustainable competitiveness in the global business SMEs needs new markets for new products. This can be achieved through innovation since it is a key driver of business achievements. The business successes obtained as the result of innovation include improved goods and services, strong market demand, achieved market expectations, and increased shareholders' wealth. Nowadays, developing dynamic manufacturing sectors enables the country to undertake effective innovation and creativities. Therefore, this study particularly focuses on Ethiopian manufacturing sectors since manufacturing is the main engine of economic growth and wealth creator for a country. It creates sustainable economy, encourage investments, create jobs and build nation (Agrawi, Dewangan & Sharman, 2015).


Generally, innovation is a tool that helps entrepreneurs to capture and utilize opportunities for their businesses effectively and efficiently (Weber, 2011). Innovation is further distinguished on the basis of extent (i.e. incremental, radical or revolutionary) and the focus (i.e. product, process, marketing or organization) thereof.

1.3. Innovation Performance Measure

 Global Innovation Index (GII) is an assessment run every year for the last seven years to capture facts on innovation performance of different countries and analyse the trends how innovation has been undertaking globally. More importantly, it serves as tool for action for decision makers to improve innovation performances of a country (Cornell University, INSEAD & WIPO, 2014). According to 2014 Global innovation Index report, the innovation performance of Sub-Saharan African countries is low because of low creative outputs like intangible assets, creative goods and services and online creativity. Institutions such as political, business and regulatory are poorly function to support innovation. In term of human capital including general, tertiary education research and development as prerequisite of innovation is poorly functioning implying that science, and technology capability is weak in Sub-Saharan countries. The general infrastructure, Information communication technology and ecological infrastructure that support innovation is poor to support innovation in such countries.  Business sophistication such as knowledge workers, innovation linkages and Knowledge absorption is less to support innovation. Market sophistication that includes credit facility, investment and trade and competition is weak. Knowledge and technology outputs including knowledge creation, knowledge impact and knowledge diffusion is low. Similarly, current innovation performance of Ethiopia is even lower than Sub- Saharan countries due to insignificant gross expenditure on research and development, low loaning capacity to the private sector, fewer scientific publications, weak industry university linkage, little exports volume and poor information communication technology(infrastructure to support innovation) and weak capacity building in science and technology (Dutta, 2011).

In line with weak innovation performances in Sub-Saharan Africa in general and Ethiopia in particular, a little is known about innovativeness of small firms and its effect on the performance of these enterprises on this continent.  Previous few studies focused mostly on the identification of determinants of innovation performances and the characteristics of innovativeness in informal sectors (Oyelaran-Oyeyinka, 2006; Robson, Haugh & Obeng, 2008; Van Dijk, 2002). The lack of empirical evidence is even more apparent when it comes to the effect of innovation activity on firm growth. Mahemba and de Bruijn (2003) reported only a weak association (r = ?) between innovativeness in small firms and growth in Tanzanian manufacturing sector.  Moreover, there are very few empirical studies concerning innovation adoption model peculiar to Small and Medium Enterprises (SMEs) found in developing countries (Lee, Yoon & Park, 2010). Thus, we still know little about the nexus between innovativeness and SMES job creation in Africa in general and Ethiopia in particular (Acquah, Robson & Haugh, 2012; Nichter & Goldmark, 2009).

Therefore, this empirical study is intended to fill lack of knowledge on the nexus of innovation and SMEs performance in developing countries particularly the employment growth in small and medium manufacturing enterprises found in Addis Ababa city administration.

1.4. Statement of the Problem

The promotion of SMEs as economic and social development tool is getting due attention in both developed and under-developed economy. Congruent to this notion, governments, donors, and businesspersons are applying different types of growth theories to promote entrepreneurship, enhance SMEs' growth and competitiveness in both domestic and global markets (Collins & Troilo, 2015). Since early 1931, there have been three leading theories to explain SMEs' growth and competitiveness. These include:  firstly, the law of proportionate growth (Gibrat, 1931). This theory explained that growth rate of a firm is independent of its size- size does not affect the growth of firms. However, scholars criticized this theory because of its impracticalities to current firm growth phenomenon. Several research finding proved that the size of a firm affects its growth, i.e. smaller firms grow faster than the larger counterparts because of their easy flexibility and lesser bureaucratic structure (Daunfeldt & Elert, 2011). Secondly, Resource -based theory (Penrose, 1959) which explains SMEs with   unique, valuable and non-imitative resources and/or distinctive capabilities can grow and survive. According to this theory firms with better access to resource can grow and likely to be larger company. Thirdly, Theory of ‘noisy' selection Jovanovic's (1982), the notion of this theory was that firm with enough resource may not grow because there are firms which are inefficient to utilize their resource and unable to grow and survive. This theory criticized the resource based growth theory in such way that having ample resource alone cannot guarantee the performance of the firm but the ability of management to manage these resources is needed for adequate growth and competitiveness of any business (Dumbu, 2014).  Thus, this theory focus on efficiencies of small business and these efficiencies come from their manager's capabilities. Even though the two firms have enough resources the one that has superior efficiency can grow to larger company than inefficient one. This theory also assumed that managers' capabilities were in born not acquired through time. As above other theories criticized, this theory also criticized for managers' only in born capabilities since manager's capability is both inborn and acquired through time.  Finally, Storey (1994) developed a comprehensive framework from different factors associated with SMEs growth and competitiveness. These factors broadly classified to entrepreneur characteristics, firm strategy and firm resources. More recently, this framework further refined  by Hitt, Ireland, Sirmon and Trahms( 2011) to include tools, techniques and concepts emanated from entrepreneurship and strategic management. Framework consists of leaders' capabilities (knowledge, information, experience and qualification), investment in research and development (R&D), innovation, networks, internationalization, organizational learning, the performance of senior management teams and governance. From this firm's growth framework components, innovation adoption/generation is one of the critical contributors for sustainable competitive advantage for SMEs in the current local and global markets (Yanadori & Cui, 2013). Thus, the accumulations of existing knowledge and talent as innovation capabilities are the foundation for SMEs to undertake different kinds of innovation adoptions (Forsman, 2011; Martín-de Castro, Delgado-Verde, Navas-López & Cruz-González, 2013).  These innovation capabilities enable SMEs to offer a better product, service, and or to become acquainted with a new technology enabling them to adapt the dynamic market environments, perform well and become a sustainedable operator for a long time (Brem & Voigt, 2009). This in turn leads them to grow and graduate to the large-scale enterprises status offering a range of outcomes such as new job creation in the industries, poverty reduction, wealth creation, fair income distribution and reduction in income disparities, economic liberalization and strongly competing in the global markets (Ayanda & Laraba, 2011).  

However, SMEs as being an engine of economic growth, development and a critical catalyst of innovation adoption performance, they need to examine their innovation adoption performance to bring a long-term success in all market performances. Rosil and Sidek (2013) argued that the fiery competition in the global market leads SMEs to carryout evaluation on their competitive position against their rivals through innovation.

So far, there are a number of studies carried out by different researchers and practitioners on the factors affecting innovation in the developed countries. Government, policy makers, donors and business organizations utilize these research findings to formulate their policies and strategies (Radas & Bozic, 2009). However, due to the socioeconomic structure and economic policies of the developing countries, the relevance of existing studies is questionable in a developing economy context.  There is little significantly impacting research on less developed countries, which examines the antecedents of innovation to formulate atypical model that shows the relation in a developing countries setup (Murat Ar & Baki, 2011).

Similarly, there is hardly any empirical evidence on the nexus between innovation adoption and SMEs job creation in African countries. The existing few studies in Africa mainly examined the determinants of innovative activities and the attributes of innovations in a fragmented manners (Robson, Haugh & Obeng, 2008, Oyelaran-Oyeyinka, 2006 and Van Dijk, 2002). The lack of empirical evidence is even more apparent when it comes to the effect of innovation activities on the SMEs performance. Thus, the level of innovation and SMEs' performance relation has not yet been empirically confirmed in Africa.  Furthermore, Rosli and Sidek (2013) confirmed that there has been a little attention paid to examine the impact of the different types of innovation adoption on the SMEs job creation in the developing countries situation. Little availability of study on nexus between SMEs' innovation adoption performances and job creation mainly due to most African countries undertook private/individual entrepreneurship lately. For example in 1980s there was dominantly state capitalism--state-owned enterprises (Jolly, 2009; Ziaul Hoq and Che Ha, 2009). Thus, most African countries SMEs are young inexperienced in both domestic and international markets.

Ethiopia, one of the sub-Saharan African countries has a relatively short history in SME development that goes back to 1991 when the transformation from the planned to a market economy started. Because of this, there were too few privately owned businesses in the country for a long time. The existing few SMEs are at the infancy stage and very young. Innovations of all types have not sufficiently practiced for a long time. However, due to changes in the economic policy and strategy, which enhance privatization and globalization, Ethiopia currently has given due attention to micro, small and medium enterprise establishment and development for the last two decades. Current open market economy allows large companies to come to Ethiopia to invest tremendously in special areas that need high capital and skilled work force, which is not covered by local business. Although, nowadays Ethiopia is undertaking open economic system and encouraging the establishment of small and medium enterprises, there is no significantly impacted study on the factor of innovation and its impacts on the business performance in the Ethiopian context (Hailemichael & Raju, 2015). Mulu (2009) studied the determinant of innovation only on informal enterprises (micro-enterprises). Similarly, Sileshi (2014) studied the barriers of innovation focusing on only the technological innovation in small and medium enterprises in Addis Ababa.

To conclude, there is a lack of comprehensive understanding on the antecedents of innovation adoption as result there is no innovation adoption framework that shows the relation between antecedents of innovation and innovation adoption in developing countries context. Though Ethiopia is showing a fast growing economy in the world, it is one of the ideal countries where the contribution of innovation for the growth of SMEs has not yet been explored. Furthermore, the typologies of interaction and the level of connection between innovation and SMEs have not yet been examined in Ethiopia. Therefore, the study is intended to contribute in resolving such scientific and policy gaps by examining the antecedents of innovation to draw innovation adoption framework and the link between innovation and business performance particularly on the employment growth in Addis Ababa city administration.


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