Formal vs Informal Institution in Knowledge-intensive Business Services (Kibs) as a Strategy for Diversification and Sustainability of the African Economy

Abstract

This paper aims to investigate the influence of formal and informal knowledge institutions on new market innovation in a developing economy. A framework is built in which small firms develop new market innovations through utilising knowledge from two distinct institutional sources, which are formal (e.g. research institute, universities, R&D, collaborations with firms etc.) and informal (e.g. personal contact, network of friends, families etc.) institutions. Data was collected through a survey of 510 small and medium sized enterprises (SMEs) in knowledge intensive business (KIBS) sector of Lagos, Nigeria at firm level. The findings suggest that the informal sources is more accommodating to the needs of small firms in a developing economy and serve as the primary source of knowledge resources for new market innovation. Thus, the informal system should be recognised as an important part of the institutional system influencing innovation in developing economies. The scope of the study is restricted to only KIBS SMEs in one local context, Lagos, Nigeria. The findings could assist in formulating policy frameworks for promoting innovation, based on utilisation of external knowledge resources by KIBS SMEs in developing economies. This paper contributes to the literature on new market innovation and the institutional theory of entrepreneurship in developing countries, by providing a better understanding of the influence of the formal and informal institutional sources of knowledge that are associated with new market innovation by KIBS SMEs in developing economies