Networks are key to successful innovation

What types of networks help SMEs become more innovative – and when? A new research study shows that social capital is a crucial resource for driving innovation. But the effects vary depending on how demanding customers are.

Both informal and formal networks increase the likelihood of firms developing new products and processes. Informal networks – personal relationships with contractors, officials or other key people – are particularly helpful in more stable markets where customer needs change slowly. But when customer demands increase, everything changes.

The study shows that high customer demands reinforce the value of formal networks, such as trade associations and other inter-organizational collaborations. These networks offer resources that are difficult to obtain through personal contacts: technical expertise, specialized knowledge and the ability to quickly scale up improvements.

At the same time, the impact of informal relationships diminishes as the customer base grows and needs become more varied. In the most dynamic environments, informal contacts simply prove to lack the necessary strategic weight.

Knowledge combination – the hidden mechanism behind success

One of the main conclusions of the study is that networks do not contribute to innovation by themselves. What matters is how the company combines knowledge – that they manage to integrate internal and external knowledge and create new combinations. This combination of knowledge serves as the central link between social relations and actual innovations.

For smaller firms, which often lack internal resources and specialized skills, networks thus become a way to compensate for shortages in their own human capital. Both formal and informal networks provide access to knowledge, but they support different types of needs.

3 pieces of advice for entrepreneurs and business leaders:

1. Cultivate both formal and informal networks

Businesses need both types to access a wide range of support – from advice and information to investment and partners.

2. Adapting the network strategy to the market situation

High customer pressure: spend more time and resources on strengthening formal networks and industry connections.

Calmer market: informal contacts can be both sufficient and cost-effective.

3. invest in knowledge work

Training and other activities that build knowledge internally have a strong positive effect on innovation.

Lessons for policy makers:

The authors point out that policies that strengthen the ability of SMEs to collaborate and network – and by extension strengthen innovation and competitiveness – should be prioritized. For example:

• platforms that connect small businesses with larger players
• better access to finance
• support for knowledge sharing and technology development

More about the article and the authors
The article Social capital and SME innovations: the importance of knowledge combination and customer demands is published in the scientific journal Small Business Economics.

The authors are Hoa Do, University of Leicester, Bach Nguyen, University of Exeter Business School, and Manh Dao at Nottingham Trent University, all universities in the UK.