How Information Technology Overcomes Deficiencies for Innovation in Small and Medium-Sized Enterprises: Closed Innovation vs. Open Innovation

Innovation is vital for the growth of small and medium-sized enterprises (SMEs). However, SMEs face deficiencies that hinder their innovation output. This study examines how information technology (IT) helps SMEs address two salient deficiencies: technological deficiency (deficiency in internal technical knowledge and skills) and government support deficiency (deficiency in favorable government policies and incentives). Although IT can be used in a closed manner (within the firm’s boundary) or open manner (beyond the firm’s boundary) to enable innovation, closed and open approaches to IT-enabled innovation pose advantages and challenges for SMEs, resulting in a tension regarding which approach better addresses these two deficiencies. In this study, we investigate how IT Use for Closed Innovation Activities ( ITC ) and IT Use for Open Innovation Activities ( ITO ) help SMEs overcome these two deficiencies to achieve innovation output. Drawing on the theoretical concepts of internal and external absorptive capacity metaroutines, we hypothesize that ITC and ITO reduce the harmful effects of technological deficiency and government support deficiency on innovation output. Further, we hypothesize that ITC is more effective than ITO in reducing the harmful effect of technological deficiency on innovation output. In contrast, we hypothesize that ITO is more effective than ITC in reducing the harmful effect of government support deficiency on innovation output. Our empirical analysis of a unique multiyear archival data set of 319 manufacturing SMEs in Mexico broadly supports our hypotheses. We conduct a further exploratory analysis that sheds light on several underlying mechanisms included in our theorization. Our main contributions lie in addressing the tension between ITC and ITO and highlighting that neither approach to IT-enabled innovation outperforms the other in combating the technological deficiency and government support deficiency of SMEs; rather, SMEs achieve greater innovation output by appropriately orienting their IT-enabled innovation efforts in a closed or open manner to address specific deficiencies.