Innovation and the Operational
Performance of Newly Established
Small and Medium Enterprises in Taiwan
Small Business Economics
23: 99–113, 2004.
2004 Kluwer Academic Publishers. Printed in the Netherlands.
ABSTRACT. New Enterprises have been sprouted out pros-
perously in Taiwan. According to business income tax data,
143 thousand new enterprises were established between
1996–1998, which accounts for about 25% of total number
of enterprises, and 98.68% of these new enterprises are
In this research, a randomly sampled 1,047 new enterprises
which established after 1996 were surveyed through telephone.
The survey discovered that three-quarters of these new enter-
prises adopted at least one out of nine types of innovative
activities which were listed in the questionnaire.
The logistic regression results of this study show that three
main areas of innovation which were grouped from the nine
activities by principal component analysis all had a positive
relationship with operational performance of new enterprises.
Innovative action had the biggest impact on sales growth,
whilst the cultivation of an innovative atmosphere and the
ability to innovate within the organization had the biggest
impact on profits. In short, entrepreneurs in Taiwan are
actively innovating, and this innovation is reflected in the
performance of their enterprises.
The number of Taiwanese business enterprises has
increased steadily year by year. By 1995 there
were in excess of one million enterprises in
Taiwan, and in recent years, about 80,000 new
enterprises added to the total each year. Taiwan is
currently going through a period of economic
transformation wherein many enterprises in the
traditional industries are now finding that the
pressure from the rapid changes in the external
environment are forcing them to reduce their
scales of operation, move their production pro-
cesses overseas, or, in a worst case scenario, shut
down their operations completely. Since 2000 in
particular, widespread concern has arisen from
frequent news reports of large enterprises either
closing factories or going out of business com-
pletely. However, in sharing the concerns over
these closures, we should not overlook the
turnover effect from the establishment of new
enterprises in Taiwan on a constant basis.
The constant establishment of these new enter-
prises provides an infusion of new blood and also
acts as a stimulus for economic activity in general.
This is of course very important for the continuing
growth and strengthening of the economy. We are
not yet in a position to know whether the number
of new enterprises established in 2001 so far is
greater than the number of enterprises which have
closed down; however, up until 2000 it was clear
that the number of new enterprises being estab-
lished in Taiwan was consistently greater than the
number of enterprises going out of business,
although the difference between them has getting
smaller in the last three years.
Whenever new enterprises are established,
regardless of whether they are large or small, the
entrepreneurs responsible for their inception
invariably believe that they have found a niche in
which they can survive. It may be that an existing
market has not yet reached saturation point, or that
new demand may have been created, or emerged.
They may have created a new management model,
or possess an innovative new production or mar-
keting technology, enabling them to offer new
products or services. Of course, we often see a
situation in which innovation attracts a host of
imitators, and once these have gobbled up the
Final version accepted on April 8, 2002
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