JOURNAL OF EASTERN EUROPEAN AND CENTRAL ASIAN RESEARCH Vol.10 No.

6 (2023)

INNOVATION DEVELOPMENT OF SMALL BUSINESS IN

INDONESIA

Intan Permana
Universitas Garut, West Java, Indonesia

Tomas Chochole
University of West Bohemia in Pilsen, Pilsen County, Czech Republic

Nizar Alam Hamdani

Universitas Garut, West Java, Indonesia

Retno Purwani Sari

Universitas Komputer Indonesia, West Java, Indonesia

ABSTRACT
This study examines the factors influencing innovation development in small businesses in Indonesia
across various sectors. Innovation is widely recognized as a critical factor in the competitiveness of
businesses. This development potential is essential for the entrepreneurs who participated in the
questionnaire survey. In fact, out of a total of 85.50% of them are already currently running a business, and
they also consider innovation very important. A sample of 400 small business owners was analyzed using
descriptive analysis to identify eight factors related to innovation development, including knowledge
exploitation, interactive processes, knowledge-intensive business process improvement, new technology-
based firms, go-to-market strategies, stricter regulation, and stimulation. The results revealed that three
factors were particularly dominant in innovation development. Specifically, knowledge exploitation was
strongly correlated with knowledge-intensive, while interactive processes were strongly correlated with
knowledge exploitation. Finally, knowledge-intensive was strongly related to knowledge exploitation.
These findings underscore the importance of knowledge and interaction in driving innovation among
small businesses in Indonesia. By prioritizing these dominant factors, small businesses can develop
strategies to remain competitive in a rapidly evolving business environment.

Keywords: innovation development; interactive process; knowledge exploitation; knowledge intensive

DOI: http://dx.doi.org/10.15549/jeecar.v10i6.1511

INTRODUCTION However, the COVID-19 pandemic has presented

significant challenges for these businesses,
Small businesses are essential to Indonesia's
forcing them to adapt and transform their
economy, playing a crucial role in creating jobs,
process to succeed in the post-pandemic
generating income, and reducing poverty.
business environment. To achieve this aim,
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 Innovation development of small business in Indonesia Intan Permana et al.

multidisciplinary teams use innovative countries) due to inadequate institutional

communication methods and involve product support, resources, capabilities, and additional
designers to drive innovation (Chochole, 2022). risks (Raghuvanshi, 2020). Meanwhile,
As a result, innovation development has become innovation development leads to the
a top priority for small businesses to ensure their degradation of all business scales (Hervas-Oliver
sustainability and growth. In fact, small et al., 2020). Innovation development is critical
businesses prioritize innovation acceleration in for firms to achieve sustained competitive
advanced nations to stay competitive (Babenko advantage and greater profitability (McDowell et
et al., 2020). Innovation refers to a deliberate and al., 2018a). Innovation has been shown to
planned renewal or change aimed at influence an enterprise’s growth regardless of
improvement. the larger economy’s macroeconomic context
Given that innovation development is a (Yew, 2021). Thus, paying attention to this
rapidly evolving field of great importance for innovation is essential because it generates
small businesses to build adequate capabilities competitiveness and improves business
(Granata et al., 2019), there is a debate about the performance (Hamdani & Susilawati, 2018).
role of innovation in increasing sustainability. Unfortunately, Indonesia's innovation
This study aims to explore the current state of performance lags behind other countries in the
innovation development in small businesses in region, as evidenced by its poor scores on
Indonesia and identify factors that encourage innovation indicators (see Table 1). At the same
and support innovation development. By doing time, the study also explored the attitudes and
so, we can better understand small businesses' experiences of a select group of small business
potential to drive Indonesia's economic growth owners to stimulate creative thinking toward
and development. innovation and new opportunities in
entrepreneurship (Smith et al., 2013).
Small businesses in developing countries face
additional barriers to innovation compared to
technologically advanced nations (hi-tech

Table 1: Indonesia Innovation Index 2022

No Indicators Score
1 Institutions 55.1
2 Infrastructure 43.4
3 Market sophistication 41.7
4 Human capital and research 22.4
5 Business sophistication 22.1
6 Knowledge and technology outputs 19.0
7 Creative outputs 18.6
Source: (Dutta et al., 2022)

According to the Global Innovation Index, business environment (Kiron & Kannan, 2018).
Indonesia ranked 87th in 2021, while other The strategic step that must be taken by
countries such as Singapore, Malaysia, Thailand, marketing managers is to identify the business
Vietnam, Philippines, and Brunei Darussalam environment first, before determining the
rank much higher, with respective rankings of 8th, strategy that will be used by the company
36th, 43rd, 44th, 51st, and 82nd. Business (Permana et al., 2023). Innovation is essential for
sophistication, a key indicator of innovation their survival, especially during the growth
performance, scored 17.5. Indonesia ranks 110th phase (Hamdani et al., 2022). Therefore, it is
due to low scores in knowledge absorption crucial to identify and address small businesses'
(23.4), relevance of innovation (20.7), and barriers to developing innovative strategies.
worker knowledge (8.0) (Global Innovation This study examines the factors that can
Index, 2021). impact innovation development in small
To improve the performance of small businesses across all sectors in Indonesia.
businesses in Indonesia must be creative and Although the study may resemble causal
innovative to remain competitive in the current research, it focuses on identifying key factors
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 Innovation development of small business in Indonesia Intan Permana et al.

influencing innovation development in small products, services, or processes (McDowell et al.,

businesses rather than establishing causal 2018b). For SMEs, focusing on incremental
relationships. However, a questionnaire survey innovation, which seeks to improve existing
further enhanced this research approach to offerings, can be more effective than pursuing
achieve a more comprehensive view of the small radical, “new-to-market” innovation (Pratono,
business sector in which some of the groups are 2018). Since SMEs represent over 90% of all active
already business owners. Therefore, it is more businesses worldwide, they have a critical role in
appropriate to use confirmatory factor analysis driving economic growth (Mellett et al., 2018).
in applied research to confirm the findings in the Small businesses can drive innovation by
social research field. constantly transforming green-focused
knowledge and concepts into fresh products,
LITERATURE REVIEW processes, and systems that enhance the
organization and its stakeholders. Building an
The innovation model and entrepreneurial
innovative culture and value system is essential
model represent two different approaches to
for fostering innovation capability (Mellett et al.,
business development. The innovation model
2018). Innovation development is now seen as a
emphasizes the generation of new ideas and
collaborative and interactive process that
technologies, while the entrepreneurial model
involves intensive moves generating and sharing
emphasizes the ability to find the right market,
ideas, information, and knowledge within and
adapt to changing circumstances, and learn from
beyond the organization (Gamidullaeva, 2018).
the environment. To support the implementation
Market mechanisms need to be expanded to
of innovation processes within small and
stimulate innovation at the micro level (Babenko
medium-sized enterprises (SMEs), universities
et al., 2020).
often rely on technology transfer offices to
disseminate research results (Camargo et al., Several factors drive innovation in small
2021). Entrepreneurs can also generate new businesses, such as improving product quality,
ideas and innovations to improve their reducing product costs, extending product range,
businesses (Setiawan et al., 2020). However, only learning about new technology, increasing
some studies have addressed the factors that market share, enhancing production flexibility,
drive innovative performance in small opening new markets, reducing energy
businesses (Abdul-Halim et al., 2018). Politicians, consumption, improving working conditions,
scientists, and the media have yet to fully and meeting regulatory requirements (Kiron &
understand the close, almost inseparable link Kannan, 2018). This study aims to help small
between research and innovation. This lack of business owners understand the driving power
understanding represents one of the barriers to and dependence of each of these factors in
effective innovation development in small developing their innovation strategies. Table 2
businesses in traditional sectors. The summarizes the literature synthesis, gaps, and
development of local innovation in the indicators for innovation development.
Indonesian economy can be promoted by Furthermore, exploiting knowledge is crucial
describing the conditions and factors that for organizations to approach contextual factors
influence the formation of competitive models of differently (Gonzalez & Melo, 2018). In this
technological collaboration between state sense, the main objective of this study is to
representatives, science, and business. In examine how five factors in the organizational
Indonesia, the poly-level complementary context (Human Resource Management,
entrepreneurial model has successfully Supportive Leadership, Learning Culture,
promoted local innovation, with most of the Autonomy, and Information Technology system)
funding coming from national and supranational are associated with the innovation process
sources. However, there is still a need to find stemming from knowledge exploration and
ways to encourage small and medium-sized exploitation in any industry. Interactive process
businesses to be more innovative and creative. discovery techniques blend manual process
Innovation is identifying a problem and modeling with data support, allowing users to
actively seeking a solution (Permana et al., 2020). incorporate domain knowledge while
It involves leveraging knowledge and expertise discovering process models (Dixit et al., 2018). By
within a company to create new or improved enabling users to specify domain knowledge

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while discovering process models with event robust, and provides valuable diagnostic
logs, interactive process discovery is faster, more information during the process.

Table 2: Literature synthesis, gaps, and indicators

Factors considered to
Empirical study Category in the current study
Innovation Development (ID)
(McDowell et al., Exploitation of knowledge Knowledge Exploitation (KE)
2018b)
(Mellett et al., 2018) Building an interactive process Interactive process (IP)
(Gamidullaeva, 2018) Intensive moves Knowledge Intensive (KI)
Intensive ideas Knowledge Intensive (KI)
Intensive information Knowledge Intensive (KI)
Intensive facts Knowledge Intensive (KI)
(Kiron & Kannan, 2018) Improvement in product quality Business process improvement (BPI)
Reduction in product cost Business process improvement (BPI)
Extension of the product range Business process improvement (BPI)
Learn about new technology New technology-based firms (NTBF)
Increase in market share Go-to-market (GTM)
Production flexibility Business process improvement (BPI)
Open of new market Go-to-market (GTM)
Reducing energy consumption Business process improvement (BPI)
Improvement in working Business process improvement (BPI)
conditions Stricter regulation (SR)
Fulfillment of regulations
(Babenko et al., 2020) Market mechanisms Go-to-market (GTM)
Stimulating Stimulating (ST)
(Camargo et al., 2021) Technological transfer New technology-based firms (NTBF)
Source: Author’s work

Knowledge-intensive innovative entrepreneu- systems, with many two-way interactions to

rship integrates theoretical building blocks from actors and institutions; 4) the performance of the
Schumpeterian entrepreneurship, evolutionary new firm in terms of innovation, profitability,
economics, and innovation systems. Knowledge- and growth; and 5) the role of the
intensive innovative entrepreneurial ventures entrepreneurial venture in selection and the
are defined as new learning organizations that dynamics of market structure (Malerba &
use and transform existing knowledge and McKelvey, 2020).
generate new knowledge to innovate within
innovation systems (Aureli et al., 2018).
METHODOLOGY
Knowledge-intensive innovative
entrepreneurship involves learning and This article presents a causal research study
problem-solving to identify, create, and exploit with a 95% confidence interval. The researchers
opportunities. These activities are influenced by collected data and used Confirmatory Factor
linkages and networks related to innovation Analysis (CFA) to analyze the research variables.
systems. A highly stylized process model of CFA is a reliable method to test the validity of a
knowledge-intensive innovative measuring instrument in psychology, education,
entrepreneurship includes 1) the origins of the and social sciences (Creswell & Creswell, 2018).
knowledge-intensive entrepreneurship (KIE) It helps to identify possible latent observable
venture; 2) the role of knowledge, opportunities, variables and determine whether a set of
and market conditions in affecting learning variables correlates with each other and whether
throughout the entrepreneurial process; 3) the they measure the intended construct. With
linkages between the management and descriptive, it can be tested (confirmed) to what
development of the new venture and innovation extent. All items from the test do measure or

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provide information about the innovation with the data. The one-factor or "unidimensional
development to be measured. If this theory is model" is used to test this principle. The study's
true, the supposed "one-factor model" will "fit" relational framework is shown in Figure 1.

Figure 1: Research propositions

Source: (Camargo et al., 2021; McDowell et al., 2018b; Pratono, 2018; Mellett et al., 2018;
Gamidullaeva, 2018; Babenko et al., 2020; Kiron & Kannan, 2018)

The configuration in Figure 1 leads to stating questionnaires (Creswell & Creswell, 2018)
the three research hypotheses of the study, distributed via email to a sample of small
which are: business owners in Indonesia. Respondents were
H1: Knowledge exploitation has a significant asked a series of questions or statements to
impact on innovation development gather data. The target population consisted of
H2: Interactive processes have a significant small business owners meeting specific criteria:
impact on innovation development a net worth of 50 to 500 million rupiah and
H3: Knowledge intensive has a significant annual sales of 300 million to 2.5 billion rupiah,
impact on innovation development as required by Indonesian government
H4: Business process improvement has a regulations. The random sampling method did
significant impact on innovation not limit any business sector, ensuring equal
development representation. The study's sample size was 400
H5: New technology-based firms have a of 798.679 small business owners (UKM, 2019).
significant impact on innovation Which falls within the recommended range of 30
development to 500 for an acceptable sample size (Roscoe,
H6: Go-to-market has a significant impact on 1975).
innovation development As a quantitative study, statistical analysis was
H7: Stricter regulation has a significant impact employed to analyze the data. It tested
on innovation development hypotheses by revealing the behavior of research
H8: Stimulating has a significant impact on variables (Creswell & Creswell, 2018). Verifiable
innovation development data analysis was utilized, with a focus on
achieving three main objectives: 1) estimating
In this study, the CFA design utilized a survey analysis with multiple factors; 2) not assuming a
as a data collection method through structured specific distribution, which allows it to be used

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for Likert scales with large sample counts of The KMO and Bartlett's test outputs help
more than 100; and 3) to confirming or determine whether a variable is suitable for
predicting an applied, middle, or grand theory. further analysis using factor analysis techniques.
The Factor Matrix within SPSS was used with the The KMO test measures the appropriateness of
CFA method to perform data analysis. the correlations among the variables in the
This study employed the interval dataset for factor analysis, while the MSA value
measurement scale, which enables researchers indicates sampling adequacy. Based on Table 3,
to perform arithmetic calculations on the the KMO-MSA value is 0.695, more significant
collected data (Creswell & Creswell, 2018). This than the acceptable value of 0.50 (0.095 > 0.50).
measurement scale does not have an actual zero This result suggests that the correlations among
value. This study used the Likert scale as a the variables are sufficient for factor analysis.
common measure of attitude in business Additionally, Bartlett's test of Sphericity (Sig)
research. Multiple items that measured the same value is 0.000, which is less than the significance
construct were combined and rephrased level of 0.50 (0.000 < 0.05). This result means that
appropriately. Respondents were then asked to factor analysis can be applied to the studied
rate each of the ten items using a 5-point Likert variable because the correlation matrix is not an
scale, ranging from 1 (not describing the owner identity matrix. In brief, the KMO and Bartlett's
adequately) to 5 (describing the owner almost test outputs indicate that factor analysis
perfectly). techniques can be used to analyze the variable
further.
DISCUSSION

Table 3: KMO and Bartlett's Test Outputs

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .695
Bartlett's Test of Sphericity Approx. Chi-Square 81.754
df 398
Sig. .000
Source: Author’s work

The Anti-image Matrix is a helpful tool for interactive process, knowledge-intensive,

identifying and determining which indicators are business process improvement, and the use of
suitable for use in confirmatory factor analysis new technology-based firms with an MSA value
(CFA). In order to confirm the factor analysis of greater than 0.50 (MSA value > 0.50), as shown in
innovation development, specific requirements Table 4.
must be met, including knowledge exploitation,

Table 4: Anti-image Correlation

KE IP KI BPI NTBF GTM SR ST
KE 0.742a
IP 0.708a
KI 0.692a
BPI 0.778a
NTBF 0.688a
GTM 0.573a
SR 0.464a
ST 0.521a
Source: Author’s work

Communalities indicate how well an indicator extraction value greater than 0.50, can explain
can account for variation in the innovation innovation development. Thus, only some
development variable under study. Only specific proposed indicators effectively explain this
indicators, such as knowledge exploitation, new variable (see Table 5).
technology-based firms, and go-to-market with

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Table 5: Communalitiesa
Initial Extraction
Knowledge Exploitation .336 .749
Interactive Process .586 .507
Knowledge Intensive .383 .464
Business Process Improvement .582 .554
New Technology-Based Firms .727 .999
Go-to-market .377 .999
Stricter Regulation .330 .204
Stimulating .274 .215
Extraction Method: Maximum Likelihood.
a. One or more communality estimates greater than 1
were encountered during iterations. The resulting
solution should be interpreted with caution.
Source: Author’s work

The "total variance explained" measures the explaining 32.799% (eigenvalue = 2.725),
value of each analyzed indicator in explaining 18.448% (eigenvalue = 1.577), and 14.821%
innovation development as a variable. The (eigenvalue = 1.287) of innovation development
analysis revealed eight initial eigenvalues, with variations, respectively. Other proposed
three extraction sums of squared loadings indicators, such as business process
representing the number of variations or improvement, new technology-based firms, go-
indicators that can be formed. An eigenvalue to-market, stricter regulation, and stimulating
value greater than 1 (eigenvalue value > 1) is a indicators, did not meet the eigenvalue condition
condition for an indicator. The first three and, therefore, cannot be used to measure
indicators are knowledge exploitation, variations in innovation development (see Table
interactive process, and knowledge-intensive, 6).

Table 6: Total Variance Explained

Extraction Sums of Squared Rotation Sums of Squared
Initial Eigenvalues Loadings Loadings
% of Cumulative % of Cumulative % of Cumulative
Factor Total Variance % Total Variance % Total Variance %
1 2.725 32.799 32.799 2.118 25.216 25.216 1.013 23.893 23.893
2 1.577 18.448 51.137 1.244 14.291 39.397 1.277 14.600 38.483
3 1.287 14.821 65.848 1.192 13.640 52.927 1.265 14.554 52.927
4 .971 10.873 76.610
5 .852 9.385 85.886
6 .598 6.107 91.983
7 .527 5.328 97.101
8 .343 2.019 100.110
Extraction Method: Maximum Likelihood.
Source: Author’s work

In Figure 2, only the indicators of knowledge measuring innovation development variations

exploitation, interactive process, and and providing meaningful insights.
knowledge-intensive can explain the variations
in innovation development, indicating their
importance in measuring innovation. On the
other hand, the total value of business process
improvement, new technology-based firms, go-
to-market, stricter regulation, and stimulating
indicators need to be more suitable for

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Figure 2: Scree Plot, Eigenvalue, and Factor Number

Source: Author’s work

Table 7 presents the component matrix, which interactive process indicator has the highest
indicates the correlation or relationship between correlation value with knowledge exploitation at
the indicators within the innovation 0.576, and knowledge-intensive has the highest
development variable. It shows that the correlation value at 0.549.
knowledge exploitation indicator correlates
highest with knowledge-intensive at 0.747. The

Table 7: Factor Matrixa

Factor
1 2 3
Knowledge Exploitation .379 -.103 .858
Interactive Process .687 .359 .432
Knowledge Intensive .212 .314 .650
Business Process Improvement .646 .482 .240
New Technology-Based Firms .873 .758 -.112
Go-to-market .860 -.761 -.112
Stricter Regulation .465 .212 -.352
Stimulating .275 -.296 .318
Extraction Method: Maximum Likelihood.
a. 3 factors extracted. 8 iterations are required.
Source: Author’s work

The rotated factor matrix in Table 8 helps to at 0.678. Similarly, knowledge-intensive still
determine the correlation values or relationships displays the highest correlation value with
between indicators within the innovation knowledge exploitation at 0.686.
development variables. The knowledge This study rejects H4, H5, H6, H7, and H8 as
exploitation indicator shows the highest business process improvement, new technology-
correlation value, with knowledge-intensive at based firms, go-to-market, stricter regulation, and
0.840. The interactive process indicator also stimulating are not indicators to measure variations
correlates highest with knowledge exploitation in innovation development in small business
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enterprises in Indonesia. However, the results of development. In order to describe the problem as
hypothesis testing show that H1, H2, and H3 are comprehensively as possible in the research study,
accepted, which means that knowledge the research team decided to conduct a
exploitation, interactive process, and knowledge- questionnaire survey among 400 small business
intensive have a significant impact on innovation owners.

Table 8: Rotated Factor Matrix

Factor
1 2 3
Knowledge Exploitation .181 .306 .840
Interactive Process .678 .297 .485
Knowledge Intensive .252 -.165 .686
Business Process Improvement .741 .162 .319
New Technology-Based Firms .992 -.148 .227
Go-to-market .312 .978 -.165
Stricter Regulation .478 .231 -.322
Stimulating -.118 .373 .297
Extraction Method: Maximum Likelihood.
Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 5 iterations.
Source: Author’s work

From the result of the questionnaire, it can be small businesses is mainly based on capital
summarized that 58.8% of the respondents were indicators. The study suggests that stakeholders
already in business at the time of their studies, should shift their attention towards supporting
and their business falls within the SME sector. the mindset progress of small business owners as
The most common businesses are catering it is crucial for the country’s economy. At the
services, retail sales of garments, and e- same time, it will be good to promote
commerce. 78% of small business owners believe entrepreneurial skills among small business
that innovation is crucial to their business owners who see implementing innovation
development. According to the respondents, the processes in SMEs as very important. It is
most critical factors influencing innovation important to note that the results of this study
processes in SMEs are leadership, human may vary in different contexts, such as business
resource development, and knowledge scales, places, and years. The authors
management. 78% of small business owners, recommend further research on the five
innovation, new ideas, and technology are indicators (business process improvement, new
essential for developing their companies. technology-based firms, go-to-market, stricter
Leadership, human resource development, and regulation, and stimulating) that were not
knowledge management influence SMEs' proven to be significant in this study.
innovation processes.
ACKNOWLEDGEMENT
CONCLUSION AND RECOMMENDATION We want to express our sincere gratitude to all
Developing innovation in small businesses, those who have contributed to the completion of
particularly regarding knowledge exploitation, this study. First and foremost, we would like to
interactive process, and knowledge-intensive, is thank the small business owners who
challenging and may require education and participated in this study for their valuable time
mentoring programs for small business owners. and insights. With their cooperation, this study
It has a strong potential, and the young was possible. We are also grateful to the experts
generation is also interested in who provided their expertise and guidance
entrepreneurship, as revealed in the throughout this research process. Furthermore,
questionnaire survey of small business owners. we thank Universitas Garut, University of West
However, the current focus on the progress of Bohemia, and Universitas Komputer Indonesia
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for their support and encouragement. Their https://doi.org/10.1007/978-3-319-93931-

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 Innovation development of small business in Indonesia Intan Permana et al.

ABOUT THE AUTHORS

Intan Permana, email: [email protected]
Intan Permana is a Lecturer in the
Entrepreneurship Program at Universitas
Garut in Indonesia. Her research interest
includes investigating how Business
Management related subjects’ innovation
development.
Tomáš Chochole loves projects and
interdisciplinary teamwork. His interests
brought him to interdisciplinary cooperation
in several international projects. He is an
independent journalist, lecturer, researcher,
and head of interdisciplinary cooperation at
Ladislav Sutnar Faculty of Design and Art,
University of West Bohemia in Pilsen, Czech
Republic. He helps to connect the world of
business and creativity. In his research and
lecture activities, he focuses on exploring
innovative ways of cooperation, problem-
solving, and creativity, using his journalistic
experience.
Nizar Alam Hamdani is a Lecturer of
Management Program at Universitas Garut in
Indonesia. His research interest includes
investigating how Strategy Management
related to subjects' innovation development.
His expertise in this area makes him well-
suited to contribute to this study on
innovation development in small business
enterprises.
Retno Purwani Sari is a Doctor of Linguistics
with expertise in analyzing language use and
communication patterns. With a research
focus on new media, she deeply understands
how language can contribute to economic
activities, particularly in Small and Medium-
Enterprise (SMEs). Her research interests
include investigating how messages,
intentions, and attitudes are expressed to
increase the value of SMEs, and her expertise
in this area makes her well-suited to
contribute to this study on innovation
development in small business enterprises.

www.ieeca.org/journal 899