Title: Tacit local alliance and SME innovation in China

Authors: Michael Murphree; Li Tang; Dan Breznitz

Addresses: Moore School of Business, University of South Carolina, Office 461-E, 1014 Greene Street, Columbia, SC 29208, USA ' Department of Public Administration, School of International Relations and Public Affairs, Fudan University, Wenke Bldg, 220 Handan Rd, Shanghai, 200433, China ' School of Global Affairs, University of Toronto, Toronto, M5S 3K7, Canada

Abstract: This paper addresses the question: why have China's SMEs managed to thrive and innovate within a national institutional environment that is arrayed against them? We find that the global fragmentation of production and a tacit alliance with local government make it possible for SMEs to innovate. The fragmentation of production creates opportunities for firms to enter the mobile handset industry in a variety of niches, each of which affords certain capabilities for innovation. The tacit alliance mitigates uncertainty, making it possible for firms to incrementally innovate in the niches provided by the global fragmentation of production. However, the tacit alliance only partially counters the condition of structured uncertainty facing SMEs. As a result, firms remain incentivised to seek short-term profits and minimise long-term R&D risks, thus limiting potential for novel-product innovation.

Keywords: China; production fragmentation; SME innovation; mobile phones; cell phones; tacit alliances; local alliances; SMEs; small and medium-sized enterprises; local government; mobile handset industry; incremental innovation; niche markets; structured uncertainty; short-term profits; R&D risks; research and development.

DOI: 10.1504/IJIRD.2016.079456

International Journal of Innovation and Regional Development, 2016 Vol.7 No.3, pp.184 - 202

Received: 26 Oct 2015
Accepted: 31 May 2016
Published online: 28 Sep 2016 *

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