This comparative study explored the process by which SMEs innovate in embedded and arm’s length relationships. In particular, this research asked how the nature of problem-solving, knowledge creation, innovation drivers and innovation outcomes differ in arm’s length and embedded (collaborative) ties. Contemporary strategy research recommends organizations manage close collaborative relationships to innovate and achieve a competitive advantage; however these relationships are resource intensive, prone to failure and often fail to provide an adequate return on investment. By investigating the under-researched innovative potential of low maintenance arm’s length relationships this research aimed to inform more sustainable SME innovation strategy, as these organizations are especially vulnerable to the perils of close collaboration.\ud
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This thesis followed a qualitative research design utilizing a mono-method strategy of enquiry and conducted 21 semi-structured interviews with senior engineers, designers, MDs and management level staff across 10 north east-based manufacturing SMEs.\ud
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The main findings based on thematic analysis of the data highlight that knowledge creation occurs via externalization, combination and internalization modes in arm’s length ties, whilst embedded ties also facilitate socialization knowledge creation. Incremental process innovation was most typically associated with collaborative relationships which often tended to be driven by isomorphic pressures, these pressures also manifest during initial problem-solving activity. In contrast, arm’s length ties were associated with both radical and incremental product innovation and the identification of new markets; this activity was exploratory in nature and primarily explained via organizational learning theory.\ud
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These findings provide an alternative solution to addressing the challenges of networked SME innovation and help orientate future research into more sustainable innovation strategy