Innovation Climate as a Source of Competitive Advantage

1. IntroductionSudies show that there is a high correlation between business results and innovation (IFP, 2003). New products, either modifications or radically new products enable to capture new market or retain the existing market share (Tidd, 2006). In case of existing products, competitiveness and growth of revenues comes not only from price reductions but also from various nonfinancial factors as better design, customization and enhanced quality (Govindarajan and Gupta, 2001). Life cycle of products is becoming ever so short and life cycle of mobile phones and MP3 players are now measured in months. Slightly more complex products such as cars have life cycles measured in a year. It is important to launch a new product before the competition; because that creates a temporary monopoly that will bring additional revenues until the competition catches up. That means that it is vital to launch new products but also to launch them before the competition. This puts a tremendous pressure on today's companies (Tidd et al, 2005, p.5; BCG, 2010). When talking about innovation usually it is assumed that the term means new modified products or radically new products. However, process innovations are of equivalent importance. Process innovations enable companies to work more efficiently, of better quality and more productively (OECD, 2005). Studies show that incremental innovations may cumulatively bring better efficiency and gains in the long run than sporadic radical innovations (Hollander, 1965; Hammer, 2004). The current literature does not provide comprehensive frameworks for the measurement of innovation capability and its effects. Input measurement evaluates how the innovation activities have been arranged and how resources are allocated to them. It includes the funds used in R&D activities and education. Input measurement is problematic, because it tells how much is devoted, not if anything has been accomplished. Output measurement mainly includes the organization's patents and licenses. The problem of output measurement is that they are only suitable for certain types of innovations and organizations (Tura et al., 2008). Becheikh et al. (2006, p. 649) on grounds of works of Archibrugi and Pianta (1996), Coombs et al. (1996), Hagedoorn and Cloodt (2003), Kleinknecht et al. (2002), Michie (1998) and Patel (2000) list pros and cons of indirect and direct measurement of innovation. Becheikh et al. (2006, p. 649) propose direct methods, via questionnaires, asking for number of new products, revenues form new products, time to market and level of R&D investments in order to bypass the negative sides of indirect measurement of innovation. The aim of this work is to analyze in what way organizational climate for innovation (Tidd et al., 2005, pp. 566-568) influence direct measures of innovation defined by Becheikh et al. (2006, p. 649). Furthermore, it will be analyzed how each of the five dimensions of innovation climate (strategy, processes, organization, ties and learning) influence direct measures of innovation.2. Innovation climateEven from the time of Schumpeter it is known that new products represent potential for growth of companies but also better living conditions for population in general. Therefore in the nineteen sixties it was very popular to heavily invest in R&D departments. Unfortunately, after ten years or so, it was found out that higher level of investment in R&D does not yield more new products. Research has shown that innovation depends on number of factors, such as economy, organizational culture, management etc. To illustrate the complexity of innovation Trott (2009, p. 8) stresses three important steps in the innovation process:* Generation of new knowledge for innovation,* Usage of acquired knowledge for generating new products and processes,* Economically benefit from new products launched on the market.The three steps depict that innovation and its commercialization is indeed an interdisciplinary process. …