Formal Vs. Informal Institutions for New Market Innovation by Knowledge-Intensive Business Services as a Strategy for Diversification and Sustainability of African Economy.

Abstract

There is a shift from the enormous proliferation of informal trade to the emergence of Knowledge-Intensive Business Services (KIBS) such as telecommunications and ICT in developing countries. KIBS is a ‘knowledge-producing, knowledge-using and knowledge-transforming industry that uses knowledge-based methods to present itself as ‘drivers of knowledge dynamics in multilevel contexts. KIBS industries host diverse innovations globally. However, a number of innovations in developing countries are simply new market innovations that are necessarily not new to the world. They need external knowledge from institutions to meet the diversification and sustainability challenges in Africa. Thus, this paper investigates the influence of formal and informal knowledge institutions for new market innovation as a strategy for diversification and sustainability of the African economy. A framework is built in which small firms develop new market innovations utilizing knowledge from two distinct sources, the formal (e.g. research institute, universities, R&D, collaborations with firms, etc.) and informal (e.g. personal contact, a network of friends, families, etc.) institutions. The study employs the quantitative approach whereby data was collected through a survey of 510 KIBS small and medium-sized enterprises (SMEs) sectors in Lagos, Nigeria at the firm level. The instrument used for data collection is a self-reporting questionnaire designed along the line of variables being investigated as used in authoritative studies of innovation. The findings suggest that the informal sources are 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 recognized as an important part of the institutional system influencing innovation for diversification and sustainability in Africa. 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 the utilization of external knowledge resources by KIBS SMEs in developing economies as a means of diversification. Also, it suggests that the educational base be strengthened from the basic level to the higher end along the lines of innovation to sustain the African economy. 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.