Innovation of exporting SME’s in home accessories in Yogyakarta, Indonesia

Abstract

This paper addresses two questions: is innovation by export oriented SMEs driven by the global value chain of which they form part or by local innovation system in which they participate?; do firm level characteristics and particularly the capacity to absorb external knowledge matter? The article examines all three factors and their interactions. Innovation increasingly depends on inclusion of SME’s in global value chains and their participation in mature local innovation systems, but what especially matters is their own absorptive capacity. We empirically analyze innovation in home accessory export firms in Yogyakarta, Indonesia. Firms operate in relational, modular and captive chains. Some firms are largescale exporters, others are small-scale, home-based subcontractors. The local innovation system is immature, even though knowledge is shared widely among firms. Absorptive capacity emerges as the only variable that significantly explains variation in the level of innovation.