The effects of innovation on the decisions of exporting and/or importing in SMEs: empirical evidence in the case of Spain

WPAE-2018-14 The effects of innovation on the decisions of exporting and/or importing in SMEs: empirical evidence in the case of Spain by Alfonso Expósito and Juan A. Sanchis-Llopis October 2018 Departamento de Estructura Económica (Economía Aplicada II), Facultad de Economía, Universitat de València Avda dels Tarongers, s/n, 46022 – Valencia, Spain Phone +34 96 382 83 49 / Fax +34 96 382 83 54 http://www.estructuraeconomica.es e-mail: [email protected] Working Papers in Applied Economics Economics ISSN 2172-3036 1 The effects of innovation on the decisions of exporting and/or importing in SMEs: empirical evidence in the case of Spain. Alfonso Expósito University of Seville, Juan A. Sanchis-Llopis Universitat de València - ERICES Abstract. This paper analyses the involvement of small firms in international trade activities by identifying the comprehensive impact of innovation. Specifically, we study how innovation introduced by these firms determines entrepreneurial decision-making process regarding whether to engage in exporting and/or importing. Moreover, we account for several innovation outputs (product, process, and organisational/managerial innovation) when estimating the potentially interrelated decisions of whether to export and/or import. Results confirm the simultaneity of firms’ exporting and importing decisions and consequently these two decisions should be estimated together when analysing the influence incurred by the introduction of alternative types of innovation on said decisions. Furthermore, findings show complementarity between types of innovation to be relevant in explaining export and import decisions made by SMEs. Specifically, cumulative effects as a result of combining product and process innovation, as well as of product, process and organisational innovation, are highly significant in explaining export decisions, while in the case of imports, the combination of product and organisational innovation is shown to be significant. These findings lead to major policy and managerial implications regarding the promotion of SMEs’ participation in international trade flows through alternative innovation strategies. Keywords: innovation, exporting, importing, SME. JEL: F14, O30, L20, M21. 1. Introduction. 2 Globalisation has engendered a knowledge-intensive economy (Teagarden and Schotter 2013), which pushes firms to explore external markets in order to expand and survive (Brenes 2000). In this context, SMEs have begun to play a critical role in overseas trade flows (i.e., export and import), and represent an important proportion of value added in international trade in most developed and industrialized countries (OECD 2017). The drivers behind SMEs’ decisions to engage in international trade have attracted increasing interest among scholars and decision-makers in recent decades (Golovko and Valentini 2011; Hollenstein 2005; Paul et al. 2017). Empirical studies show that SMEs involved in international trade (as exporters, importers, or both) are able to grow faster than their domestic counterparts (Griffith et al. 2006; Bernard et al. 2007). Nevertheless, advances in studying the internal and external factors that may explain why firms export and/or import remain scarce (Kasahara and Lapham 2013). Among these factors, innovation seems to play a significant role since innovative SMEs are expected to initiate export and/or import activities due to the competitive advantages acquired by innovating (Cassiman et al. 2010; Di Cintio et al. 2017; Love et al. 2016; Kasahara and Lapham 2013; Pickernell et al. 2016). Nevertheless, the role that innovation (both technological and non-technological) plays in explaining internal decisions to initiate export and/or import activities still presents contradictory and inconclusive findings (Martineau and Pastoriza 2016; Pla-Barber and Alegre 2007). Additionally, the literature that analyses the relationship between international trade participation and innovation decisions presents several significant gaps. The usual findings within this literature include the existence of a significant and positive link between innovation and participation in international trade (mainly in the form of exports), especially among larger firms (Roper and Love 2002; Zhao and Li 1997; Bernard et al. 2009). Most of these studies focus on examining the case of large manufacturing firms (Bernard and Jensen 2001, Roper et al. 2006), thus not considering other important sectors, such as services. In the case of smaller firms, evidence is not as concluding as for large firms, and no consensus has yet been reached regarding the explanatory factors behind the decision of SMEs to participate in international trade flows and the role played by alternative types of innovation in this process (Love and Roper 2015). Furthermore, most of the existing literature on SMEs focuses on their export performance (in line with outward internationalization theories), thus revealing that the link between innovation and importing has been insufficiently researched. 3 The analysis carried out in this research attempts to act as a nexus between the literature on international entrepreneurship, the SME exporting (outward trade) literature, and inward internationalization studies. International entrepreneurship theory presents the manager (or entrepreneur) as a key factor to explain business performance and decisions within SMEs. In this respect, evidence shows that managers of SMEs are the most relevant decision-makers in their businesses (Van Gills 2005), thus they significantly determine the firm’s strategic decisions, such as initiate international trade activities (Foreman-Peck 2013; O’Regan and Sims 2008). Our study uses a survey where the managers of SMEs are the principal decision-makers, and thereby determine the firms’ innovative and international profile. Additionally, the determinant role played by the entrepreneur is also embedded in the literature on outward (export) and inward (import) orientation of SMEs, since export and/or import decisions are usually influenced by the manager or entrepreneur (Martineau and Pastoriza 2016). Another relevant gap emerges from the innovation types considered in the existing literature. Most studies focus on the connexion between technological innovation (i.e., product and process innovation) and decisions to participate in international trade (mainly export), and fail to consider the potentially significant role played by innovation of a nontechnological nature (e.g., organisational innovation) and the complementarity and cumulative effects between these types of innovation to explain both export and/or import decisions (Becker and Egger 2013; Lewandowska et al. 2016). This paper addresses the aforementioned gaps by empirically analysing how innovation (both technological and non-technological) determine the decision of SMEs regarding whether to get involved in foreign trade by exporting (final goods) and/or importing (intermediate goods or inputs). Moreover, the complementarity among alternative innovation outcomes (product, process, and organisational innovation) are tested in the potentially interrelated decision to export and/or import. We believe that this paper contributes towards filling major gaps in the understanding of the involvement of SMEs in foreign trade by identifying the comprehensive impact of innovation on SMEs' export/import decisions. These findings would be of interest for decision makers, since they provide information on how various types of innovation explain the participation of SMEs in international trade flows. Furthermore, import and export decisions should be analysed as (potentially) interrelated decisions, since managers of innovative SMEs are usually responsible for internationalisation decisions. 4 With this aim in mind, the contribution of this research to the scarce empirical evidence is twofold. Firstly, it covers the whole private sector of the Spanish economy with a wide sample of small firms in the manufacturing, service, and construction sectors that responded to a comprehensive questionnaire. Secondly, the study is constructed on a multidimensional analysis, which accounts for complementarity links between alternative types of innovation (i.e., technical and non-technical) and SME decisions on participation in international trade flows (i.e., exporting and/or importing), and also takes other major determinants into account, such as characteristics of the entrepreneur and a set of business strategic variables, as moderating variables. The remainder of this paper is organised as follows. We start with a literature review about the association between innovation and participation of SMEs in international trade activities, followed by the proposed research hypotheses. The subsequent section presents the methodology applied in this study with a description of the dataset employed and the econometric method applied to test the research hypotheses. Section 4 presents the results, while in the final section we offer a brief discussion and some conclusions. 2. Literature review and research hypotheses. The decision of SMEs to participate in international trade and its relation with innovation has received significant academic attention from alternative theoretical frameworks in the last decade. However, the factors that explain why SMEs decide to get involved in international trade activities remain insufficiently explored, thus reflecting a significant gap in the literature (Halilem et al. 2014; Martineau and Pastoriza 2016). In this respect, international trade theories at the firm level, such as Posner’s technology-gap (Posner 1961) and Vernon’s product life-cycle (Vernon 1966) approaches, have been used to show how innovation constitutes a key source of competitive advantage, thus facilitating export performance (Roper and Love 2002). Along these lines, the literature on SME exporting has empirically confirmed this relationship by connecting the success of SMEs in foreign markets through their innovation capabilities (Autio et al. 2000; Cassiman et al. 2010; Esteve-Pérez and Rodríguez 2013; Fernández-Mesa and Alegre 2015; Ripolles Melia et al. 2010). Furthermore, studies such as that by Golovko and Valentini (2011), emphasize that firms' innovation capabilities are a prerequisite for export success. 5 Alternatively, studies based on resource-based theories have generally suggested that innovation capabilities become valuable resources for the firm to become successfully involved in international trade as exporters (López-Rodríguez and García-Rodríguez 2005; Pla-Barber and Alegre, 2007). Nevertheless, it is worth pointing out that despite the growing literature analysing the relationship between innovation and export decisions (see Roberts and Tybout 1997; Esteve-Pérez and Rodríguez 2013; Love and Mansury 2009; Love and Roper 2015; among others), the controversy surrounding the direction of causality remains unsettled, thereby leaving this as an issue of debate that requires further research (Añón Higón and Driffield 2011). 1 In contrast to the great interest devoted to the analysis of the link between innovation and the involvement of SMEs in export activities, studies analysing the impacts of innovation on inward trade (or import participation) remain scant (Halilem et al. 2014; Kasahara and Lapham 2013). In this respect, Halilem et al. (2014) find evidence that process innovation positively influences the SME decision to import, which is in line with the findings by Hessels (2007). Bøler, Moxnes and Ulltveit-Moe (2012) find that innovating SMEs are usually involved in import activities in Norway, while Amiti and Khandelwal (2013) argue that innovators enjoy higher shares of imports in total sales. Similarly, Alvarez and Robertson (2004) and Almeida and Fernandes (2008) analyse this relationship for a set of companies in developing countries, and conclude that previous innovation by the firm facilitates the assimilation of imported inputs and cooperation with external providers. In contrast to these studies, Hashmi (2013) argues that no significant relation seems to exist between innovation and import activities within SMEs, and hence further research on this issue is necessary. This study analyses the SME’s decision to participate in international trade as described by inward (import) and/or outward (export) involvement activities, and considers that these decisions (exporting and importing) might be related. Studies, such as Melitz (2003) and Kasahara and Lapham (2012), show that decisions by enterprises to import intermediate goods and to export final goods are interrelated based on productivity links, since imports may act as a significant trigger of competitive advantages (mainly 1 Models based on product-life-cycle approaches usually consider that innovation implementation causes export decisions. However, we have to bear in mind that exports may also incentivize innovation activities as predicted by endogenous growth trade models (Añón Higón and Driffield 2011). 6 through cost reduction or increase of product quality or variety). Other studies consider import involvement as a prerequisite to export initiation, since the firm’s capacity to import is influenced by its innovative profile (Damijan et al. 2010; Hessels 2007). Holmlund et al. (2007) and Aristei et al. (2012) show that importing fosters exporting within SMEs through the accumulation of new knowledge and the creation of innovative capabilities. Additionally, certain studies argue that these links between inward and outward internationalization activities (import and export), as well as the existing crosslearning process, are more likely to occur in smaller firms, since the manager is usually responsible for both decisions (Crick and Jones 2000; Halilem et al. 2014). Despite these efforts, further research is needed for the analysis of how export and/or import decisions within SMEs might be jointly affected by alternative types of innovation (Becker and Egger 2013; Halilem et al. 2014; Lewandowska et al. 2016). Although evidence shows that export and import decisions are interrelated (Melitz 2003; Kasahara and Lapham 2013), few studies have addressed the potential relationship between these decisions and their links with the implementation of alternative innovations (i.e., technical and non-technical) by the firm, which constitutes a significant gap in the related literature (Love and Roper 2015; Seker 2011). In this respect, most studies analysing the role of innovation on the decision by SMEs to get involved in international trade flows have generally focused on innovations of a technological nature, such as product and process innovation. These studies are therefore extended since both technological and non-technological innovation are incorporated into our analysis. In particular, we distinguish between three different innovation outputs: product, process, and organisational (or managerial) innovation. In the survey employed, the three types of innovation follow the definition provided by the Organisation for Economic Cooperation and Development (OECD 2010: 55): “the implementation of a new or significantly improved product (good or service), or process, or a new organisational method in business practices, workplace organisation or external relations”. Following Freeman (1974), technological innovations generate new (or significantly transformed) products and/or services in the firm’s portfolio, as well as new processes in the firm’s production activities. However, organisational innovation has a non-technological nature, since it refers to organisational changes and the introduction of new business practices. 2 2 Similar classifications can be found in other studies, such as Huiban and Bouhsina (1998) and Madrid- Guijarro et al. (2013). 7 Differentiation among innovation types is justified as their effects on the firm’s strategic decisions (e.g. whether to export and/or to import) depend on the type of innovation considered (Freel and Robson 2004; Rosenbusch et al. 2011; Wolff and Pett 2006). Regarding the participation of SMEs in international trade activities, the dominant view centres the analysis on the innovation in new products and technologies (or processes) as relevant explanatory factors (see Becker and Egger 2013; Cassiman and Golovko 2011; Love and Mansury 2009, among others). In this regard, studies such as those by Dosi et al. (2015), Lamotte and Colovic (2013) and Oke et al. (2007) argue that the impact of product innovation on SMEs’ export decisions is significantly higher than that of process innovation. Specifically, and following Cassiman et al. (2010), these studies conclude that the higher impact of product innovation is explained by the higher quality of products and/or services supplied by the firm, thereby dominating the first phases of the product life cycle. In the case of Spain, Caldera (2010) confirms this conclusion using a panel of manufacturing SMEs from Spain. Similarly, Cassiman et al. (2010) and Love and Mansury (2009) find that the firms’ propensity to export increases with product innovation and not with process innovation. Other studies, such as that by Lim et al. (2006), argue that new product innovation acts as a requirement for export involvement, while Becker and Egger (2013) and López Rodríguez and García Rodríguez (2005) find that both innovation types significantly stimulate firms to participate in international trade flows, thus suggesting the superiority of technical innovations (i.e., product and process innovation) in determining the firms’ export and/or import decisions (Di Maria and Ganau 2013; Añón Higón and Driffield 2011). Following the literature reviewed, we formulate the following research hypotheses: H1. SMEs that implement product innovation are more likely to engage in international trade activities (export and/or import). H2. SMEs that implement process innovation are more likely to participate in international trade activities. Several studies have shown evidence about the complementarity between alternative types of innovation outcomes. In this respect, Doran (2012) finds that firms may combine product and process innovation to achieve competitive advantages both in 8 internal and external markets. Other studies also suggest that firms implementing both product and process innovation enjoy a higher probability to initiate international trade activities (Becker and Egger 2013; Lamotte and Colovic 2013; Lewandowska et al. 2016; López Rodríguez and García Rodríguez 2005). Therefore, it seems there might be an increasing effect, that is, a firm that introduces both process and product innovation is more likely to participate in international trade, as compared to firms introducing only one of these activities. Hence, Hypothesis 3 can be framed as follows: H3. SMEs that jointly implement product and process (technological) innovation are more likely to become involved in international trade activities. Notwithstanding, the aforementioned studies do not contemplate the effect of nontechnical innovation (i.e., organisational innovation), which we believe may play a significant role, both by itself and in complementarity with technical innovation (i.e., product and process innovation). In fact, undertaking technical and non-technical innovation may lead to cumulative beneficial effects in the decision to export and/or import (Lewandowska et al. 2016). Since non-technological innovation is usually related to the promotion of productivity increases and cost reductions, then these innovations are associated with the exploitation of cost-based advantages, instead of differentiation advantages (i.e., product and process innovation). Although most of the studies conducted in developed economies have focused on the effects of product and process innovation, in the case of developing economies, non-technical innovation and its associated performance gains have been identified as crucial determinants of firms’ international involvement (Damijan et al. 2010; Prange and Pinho 2017). In the specific case of SMEs, this is relevant since SMEs usually lack the necessary resources (R&D, financial and human resources) to successfully develop technological innovation (e.g., new products and services). Moreover, the introduction of non-technical innovation may be easier for SMEs since this implies lower costs related to outcome failures and financial risks (Laforet 2013; Sok and O’Cass 2011). In the light of the literature review, we formulate the following research hypothesis: H4. SMEs that apply organisational innovation are more likely to start international trade activities. Despite the empirical evidence suggesting the complementarity of different types of innovation, very little research exists on complementarities between technological and 15 Since we allow that the decisions to export and import might be related, and these are dummy variables, a bivariate probit specification is employed that jointly accounts for these decisions. 7 The potential endogeneity of innovation implies that we estimate two specifications: one without accounting for endogeneity; and a second that accounts for that endogeneity by instrumenting the innovation variables. Roodman’s (2011) cmp module is used to estimate both specifications. 4.2. Estimation results. The estimation results of our study are set out in Table 3 below. The coefficients of interest are those related to the innovation variables, as we aim to analyse the effect of alternative innovation outputs (product, process and organisational innovation, and their many combinations) undertaken by firms in the last three years, on their decisions to export and import. Our framework is similar to the model by Halilem et al. (2014), where innovations determine future export and import activities. 8 In the first specification estimated (columns 1 and 2 of Table 3), the potential problem of endogeneity of our innovation variables is ignored. This specification is estimated as a bivariate probit model where the two strategic decisions are allowed to be correlated. In the second specification (columns 3 and 4), the firms’ innovation variables (product, process, and organisational innovation) are instrumented as a robustness check. An instrumental-variable (IV) bivariate probit specification is employed to account for the likely endogeneity of the alternative innovation variables considered to explain the decisions to export and import. In order to introduce these variables, three variables are constructed at the firm level that account for the proportion of businesses (in the same industrial sector and business-size group) that implement product, process, or organisational innovation. In these three new variables, the value of the firm itself is not 7 It is worth noting that the specified models do not suppose that export and import decisions are necessarily interrelated, but allows all possible decision combinations in the sense that some firms’ only export, some only import, and others decide to perform both activities. 8 In our case, given that our innovation variables capture firms' innovation within the last three years, this allows to estimate the link between innovation and international activities, considering that innovation determines future participation in foreign markets. 16 considered. 9 This instrumental procedure is performed by estimating, in terms of maximum likelihood, a scheme of five equations that contain the exporting and importing decisions, and three further equations in which the product, process, and organisational innovation variables are regressed on a set of specific instruments. The correlation tests of the errors between the three innovation strategy equations and the export and import equations indicate that our estimations might suffer slightly from endogeneity problems. 10 The specification we use for further analysis is therefore the IV specification, since an endogeneity problem is found for the process innovation equation. This problem is common in this type of study, since the likelihood of firms to innovate may be influenced by the innovative environment in which they operate (Lamotte and Colovic 2013). Before examining the results, it should be borne in mind that multi-collinearity problems might be present in models that include various innovation variables. Multicollinearity tests show that the variance inflation factors for our explanatory variables are between 1.08 and 1.41, and hence multi-collinearity does not constitute a problem in our estimated models (Neter et al. 1990). It should also be taken into account that the correlations between the export and import equations (coefficients ρ) are positive and statistically significant for each specification (Table 3). This confirms that exporting and importing decisions are related and hence it is convenient to jointly estimate both decisions when analysing the role that innovation plays therein. In order to evaluate the goodness-of-fit of our estimates, the probabilities of exporting and importing are predicted for each firm in the sample. A comparison of these predictions with the observed data yields 81.26% and 76.14% of correctly predicted export and import decisions, respectively. As regards the estimation results (see columns 3 and 4 in Table 3), alternative types of innovation developed by firms are found to have differential impacts on export and import decisions within SMEs. The implementation of process innovation or the 9 We consider these new variables to be good instruments as these are correlated with the innovation variables we use and have low correlation with the trade variables (i.e. export and import). 10 For the export equation, the p-values estimated for the tests are equal to 0.179, 0.001, and 0.749 for the product, process, and managerial equations, respectively. The values of the same tests for the import equation are 0.797, 0.564, and 0.776, respectively. 17 combination of product and process innovation has a positive and significant effect on both exporting and importing strategies. Thus, our research Hypotheses 2 and 3 are validated, while Hypotheses 1 and 4 are not validated since product and organisational innovations alone show no significant effect on export decisions nor on import decisions. Findings show that product innovation would need to be combined with process or with process and organisational innovations in order to influence a firm’s decision on export involvement, which is in partial disagreement with Cassiman et al. (2010), Dosi et al. (2015), and Love and Mansury (2009), who all highlight the superiority of product innovation in determining a firm’s involvement in exports, although these three studies fail to consider possible complementarities between technical and non-technical innovation (as discussed in Section 2). With respect to the import decision, combining of product and process innovation as well as product and organisational innovation show significant effects, thereby offering support to Hypotheses 2 and 3. Our findings also show that the combination of process and organisational innovation has no significant effect on export and import decisions, which would confirm the low relevance of organisational innovation in explaining decisions by SMEs to become involved in international trade activities. In fact, organisational innovation affects these decisions only in combination with product innovation (in the case of import decision) or in combination with both product and process innovations (for both the decision to export and import ). Finally, the combination of the three types of innovation has a positive and significant effect on both exporting and importing decisions, thereby confirming our Hypothesis 5. These findings confirm the general hypothesis that SMEs involved in innovation are more likely to participate in international trade activities (export and/or import), although the type of innovation in which the firm is involved is determinant in explaining this relationship. In fact, exporting is more likely to occur when the firm introduces process innovation, or both product and process innovation (similar to Becker and Egger 2013; López Rodríguez and García Rodríguez 2005), or the three innovation outcomes altogether. Furthermore, importing is more likely to occur if the firm implements process innovation only, or both product and process innovation, or both product and organisation innovation, or all three together. These findings are in line with those of Bøler, Moxnes and Ulltveit-Moe (2012), Amiti and Khandelwal (2013), Kasahara and Lapham (2013), and Halilem et al. (2014), who highlight the significant role of innovation in explaining 18 import decisions, although they only focus on product and process innovation, and fail to consider the cumulative effects derived from the simultaneous implementation of both technological and non-technological innovation. Our results, despite being consistent with previous estimates in the literature, highlight the importance of the combination of different innovation outcomes (i.e., technological and non-technological) to explain the involvement of SMEs in international trade activities, since the cumulative effects of innovation are crucial in explaining strategic trade decisions (i.e., export and/or import). Specifically, combining product and process innovation appears to positively influence a firm’s propensity to export and import, as found by Damijan et al. (2010), Añón Higón and Driffield (2011), Becker and Egger (2013), and Halilem et al. (2014). Furthermore, the combination of technical and non-technical innovation (i.e., product and organisational innovation in the case of import, and all three types in both export and import) is revealed to be significant in explaining SMEs’ decisions to participate in international trade flows (Lewandowska et al. 2016; Navarro-García 2016). The cumulative effects of this combination might explain this phenomenon, since organisational innovation may sustain technological innovation through the necessary changes in the organisational structures and business practices required to facilitate the decisions to export and/or import (Azar and Ciabushi 2016; Camisón and Villar-López 2011; Lam 2005). Regarding the control variables incorporated in the estimation, the following findings are worth highlighting. With respect to firm characteristics, our findings reveal that larger firms (firms between 10-250 employees) have a greater propensity to export and import, since a positive and significant coefficient is attained for the size variable. Furthermore, age also affects positively and significantly the firm export and import decisions. The firm’s business variable R&D cooperation impacts positive and significantly on the export and import decisions. However, attending business and exhibition fairs seems to exert a positive and significant effect only on the decision to import. Furthermore, the higher the predisposition of the firm is to undertake high-risk projects (and expected high performance), the higher the propensity to export becomes, since this variable has a positive and significant impact on the decision to export, but incurs no effect on the decision to import. 19 In the set of variables of entrepreneur characteristics, the age, experience, and education level of the entrepreneur are included. None of these three variables has a significant effect on export and import decisions. Finally, in all estimations, we control for regional dummy variables and sector dummy variables, although their corresponding coefficients are not reported in Table 3. Finally, to check the robustness of the findings, we have run our same regressions but have included only the innovation strategy variables as regressors. Very similar results to those presented in Table 4 are obtained. Therefore, the inclusion of further covariates to capture other variables (e.g., firm and entrepreneur characteristics, and business features and environment) reinforces our results. The sensitivity analyses show that the impacts of innovation on export/import decisions within our sample of SMEs are not affected by the incorporation of additional explanatory variables in the tested models. 5. Concluding remarks. This paper aims to analyse the link between innovation within SMEs and their decision to engage in international trade flows (i.e., export and/or import). Specifically, we study how introducing technical (product and/or process) innovation and/or non-technical (organisational) innovation determines whether firms decide to engage in the interrelated international activities of exporting and/or importing. Moreover, the complementarity between alternative types of innovation (product, process, and organisational innovation) are considered when estimating the interrelated decision to export and/or import. Our findings lead to significant policy and managerial implications since a large majority of SMEs in Spain (and other EU countries) take no part in international trade flows, neither in the flow of exports nor of imports. Despite the major efforts made by public institutions to promote the involvement of SMEs in international trade, as well as to encourage them to become more innovative, the links between innovation and export and/or import decisions seem to require readjustment. In this respect, certain recommendations can be extracted from our findings. First, in order to encourage the involvement of SMEs in international trade activities, firms should implement a multidimensional approach to innovation through seeking synergies and complementarities among different types of innovation, thereby benefitting from their cumulative effects. Second, combining product and process innovation, as well as product, process and organisational innovation, seem to present the most suitable 20 strategies for the promotion of SME participation in international trade flows. Third, other variables, such as size, the age of a firm, and R&D cooperation with external agents, also impact positively on SME participation in both export and import activities (as found in the existing literature). Furthermore, results also show that exporting requires SMEs to have a low aversion to initiate risky projects, such as to build connections to foreign suppliers and clients. Such managerial orientation gives SMEs the ability to build business relationships in foreign markets, thereby facilitating export and/or import strategic decisions. Along these same lines, SMEs that attend business and exhibition fairs are more likely to participate in import activities, since contact with other business partners may promote their knowledge regarding better and/or cheaper intermediates in import activities. Findings are relevant both for public and private decision makers. On the public side, innovation and internationalisation policies focused on SMEs should be coordinated and integrated in order to create an appropriate environment for SME innovation, which in turn constitutes an essential factor in the explanation of decisions regarding whether to participate in international trade activities. This integration should occur at national and supranational levels (e.g., at EU level). On the private side, managers should account for the convenience of discriminating between alternative innovation outputs (and their combinations) in order to guide their successful involvement in international trade flows. Specifically, our study shows that solely focusing on product and/or process innovation appears to remain an insufficient strategy for the promotion of SME participation in international trade. A better strategy consists of combining this focus with non-technical (organisational) innovation in order to benefit from the cumulative effects and complementarities derived from all these types of innovation, which, as shown by our results, might increase SME participation in export and import activities. In summary, depending on the policy and management objectives, effort should be focused on specific types of innovation (and their combinations) in an attempt to stimulate the participation of SMEs in international trade flows. These efforts should also be supplemented with other strategic initiatives to facilitate engagement in export and import flows, such as the participation in fairs and exhibitions, as well as the development of R&D cooperation with other business partners and institutions. Both these factors have been shown to be significant in explaining export and import decisions within SMEs. Nevertheless, 21 decision makers should bear in mind that innovation has, once more, revealed a key factor towards facilitating the involvement of SMEs in international trade. Finally, the reduced sample size of Spanish SMEs and the fact that we only have data on one year constitute a significant limitation of this study. This implies that only a static model can be implemented, although we do recognize the importance of dynamic effects between innovation and trade strategies at the firm level. 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International Business Review, 18, 630-642. 31 (0.240) (0.236) (0.239) (0.236) Experience -0.112 -0.066 -0.108 -0.066 (0.071) (0.072) (0.070) (0.071) Education level 0.089 0.066 0.094 0.068 (0.082) (0.082) (0.081) (0.82) Regional dummy variables YES YES YES YES Sector dummy variables YES YES YES YES Log likelihood = -1297.001 Log likelihood = -1258.179 Number of firms = 1,425 Number of firms = 1,425 ρ = 0.457*** ρ = 0.456*** (s.e. = 0.046) (s.e. = 0.046) Test ρ = 0 Test ρ = 0 Χ2(1) = 71.90 Χ2(1) = 71.57 ρ = 0.000 ρ = 0.000 Notes: 1. Standard errors are in parentheses. 2. *, ** and *** mean significant at 10%, 5%, and 1 %, respectively.