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[Podcast] The impact of the access to finance and business environment on the innovation of Vietnamese enterprises: The moderating role of senior managers’ working experience

23 October, 2024

Keywords: Financial barriers, business environment, innovation, senior management experience, CEO

In the context of a constantly changing global economy, innovation is one key factor to help businesses develop in a challenging business environment. The impact of access to finance and the business environment plays an important role in promoting or limiting the creativity of any business. In this research article, the author group from Ho Chi Minh City University of Economics (UEH) points out the influence of financial constraints and business environment obstacles on the creativity of organizations and individuals as well as the moderating role of experience of senior managers in the organization in terms of the above relationship.

The ability to innovate is essential for businesses that target to compete with larger and more resource-rich competitors. In 2021, Vietnam’s economy ranked at 44th position, globally on the Global Innovation Index (GII), better than that of Thailand; nevertheless, approximately 5 points worse than that of Malaysia among the emerging countries. Every year, the fact that GII ranks the world’s economies in accordance with more than 80 factors demonstrates how open they have been to the new ideas. Vietnam’s global innovation index from 2018 to 2021 indicates almost no fluctuations. However, those companies face challenges in accessing capital as well as other environmental factors that can hinder their current innovation activities.

The question here is: How influential is the role of senior managers – those who directly run the business – in this process? Management experience can increase or decrease a business’s ability to adapt to the changes in the external environment and access financial resources. This study will evaluate the moderation of management experience factor in the relationship among the access to finance, business environment and innovation ability of Vietnamese enterprises.

Access to finance and business environment: A key factor for innovation

First of all, access to finance is one core factor supporting creative development in businesses. Researches present that businesses need to have stable financial resources to invest in research and development (R&D) activities, to upgrade technology and implement new business strategies. If lacking capital or having difficulties in accessing loans, businesses will face the risk of reduced competitiveness and falling behind other competitors in the market. In Vietnam, although policies supporting financial access are improving, many businesses have difficulties accessing capital from banks or venture capitalists. Capital constraints can prevent businesses from investing in innovative projects, reducing opportunities to improve business efficiency and create new value.

Some financial constraints on the business innovation process can be listed as follows:

First, the innovation process includes many stages from research and development to commercialization. Insufficient access to cash flow of businesses causes disruptions in investment for any new projects.

Second, financial risks reduce the support for improving human capital, a factor which is believed to be an important determinant of innovation outcomes.

Third, financial shortages affect businesses’ intellectual capital, making it difficult for them to expand relationships and to cooperate with internal and external partners.

The business environment which refers to the context in which businesses operate has a significant influence on the performance of the organization. The obstacles from the business environment create difficulties for business innovation. A variety of factors does create barriers, especially small and medium enterprises (SMEs). Factors affecting the external and internal environment of an operating enterprise can be listed as follows:

  • In terms of the internal environment: They are the factors arising from the business activities of the enterprise. Limited access to resources or infrastructure listed as land, transportation and electricity, all of which are major constraints on business operations or the ability to provide adequate training for human resources.
  • In terms of the external environment: This refers to the issues that businesses cannot control. Diverse policy instruments listed as business licenses, customs procedures and trade regulations, labor requirements and tax administration represent government intervention in business and innovation activities.

Both external and internal factors can be translated into business costs and create growing challenges for performance improvement and product development. However, these obstacles do encourage businesses to innovate, for example, with improved licensing and licensing systems that protect intellectual property rights, reducing sunk costs at different stages within the innovation process, resulting in a better regulatory environment and encouraging businesses to research and to develop new products. Complicated procedures, corruption and insufficient workforce require businesses to innovate existing organizational structures and to develop more efficient ones.

In Vietnam, the efforts to reform the business environment are gradually creating favorable conditions for startups and innovation. However, problems listed as complex administrative procedures, inconsistent policies and unfair competition still exist, hindering the innovation process of businesses. Most businesses tend to be flexible and innovative to adapt to market uncertainties. Those challenges will promote innovation in Vietnamese businesses.

The moderating role of senior managers’ working experiences

Senior management experience plays an important moderating role in influencing a business’s ability to innovate. An experienced senior manager will identify problems, create a budget to help resolve financial issues, find appropriate solutions to reduce costs, or meet with a consultant to discuss possible solutions. In addition, they can build political relationships to help alleviate financial obstacles at a higher level as they have political connections and will be able to solve difficult financial problems. The circumstances under which a CEO may seek help from the government, especially in research and development (R&D), can be related to the CEO’s previous experience in overcoming challenges, or results from the fact that the government pays special attention to R&D activities. Therefore, it will be easier for the CEO to solve financial problems, especially regarding business innovation efforts.

Furthermore, human capital reduces the negative impact of financial constraints on the sustainability of investment in innovation. Experienced CEOs can manage human resources to maintain consistent investment in innovation through patent forecasting and stable payment. In addition, human resource management experience contributes to achieving future patents through investment in innovation despite budget constraints. In addition to financial support, experienced managers provide the skills needed to effectively manage and to inspire individuals in the organization, helping them realize their personal contributions. In contrast, inexperienced managers may have difficulties identifying and evaluating creative opportunities. Lack of ability to predict and to manage risks causes businesses to miss innovation opportunities. This is especially important in the modern business context that businesses must constantly adjust to rapid changes in technology and markets.

Policy implications on access to finance, environment for innovation and senior management experience

This research illustrates that the impact of access to finance and business environment on the innovation of Vietnamese businesses does not occur independently. Instead, senior management experience plays a strong regulatory role, influencing how businesses access and use financial resources as well as the business environment to promote innovation.

From this finding, this research would like to propose some important implications as follows:

First, the word financial constraint is positively associated with firm innovation at any level of constraint. From the perspective of policymakers, legal support will help businesses reduce administrative procedures to access capital. The government needs to pay attention to these factors so as to be able to better support businesses and to achieve a more efficient economy.

Second, those factors from both the external and internal business environment need to be addressed. Since customs procedures have a significant influence on innovation, the governments need a close relationship between customs policies and innovative businesses.

Therefore, the moderating role of senior manager experience contributes important insights into how firms help optimize resources to promote innovation. The research results not only suggest practical solutions for businesses in improving management and innovation capabilities but also provide the foundation for supportive policies from the state to promote the sustainable development of Vietnamese businesses in the context of globalization.

Please refer to the full research titled The impact of access to finance and business environment on the innovation of Vietnamese enterprises: The moderating role of senior managers’ working experience HERE.

Author group: Dr. Nguyen Thi Hong Thu, Dr. Le Thi Hong Minh, Dr. Do Ngoc Bich, TS. Nguyen Hue Minh – University of Economics Ho Chi Minh City (UEH).

This article is part of the series spreading research and applied knowledge from UEH with the message “Research Contribution For All”. UEH cordially invites readers the upcoming UEH Research Insights issue.

News, photos: The Authors, UEH  Department of Communications and Partnerships