SMEs' efficiency in a transitional economy: does innovation and public support schemes matter?

This paper examines the effects of innovation performance and government support schemes on cost efficiency of Vietnamese small and medium enterprises (SMEs). Financial and technical assistances are two different public instruments used to correct market failure and facilitate efficient innovation through lowering the research and development (R&D) expenditures. Although large and small firms innovate in different ways, so far limited empirical evidence has been reported with respect to the effectiveness of innovation activities and public instruments for SMEs. Using stochastic frontier approach to estimate firm efficiency scores, we find that firms with new product innovation are associated with higher efficiency, but firms with introduced actions of existing product improvement, technology innovation, and new product lines are unable to achieve a higher efficiency level compared to their counterparts. Furthermore, the results suggest that government financial assistances used alone or with technical assistances are neither able to help firms to improve efficiency, nor to reduce the cost of SMEs' innovation activities. This suggests that public instruments may have limited usefulness for SMEs in Vietnam.