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EBRD Transition Report 2014 – Box 3.4. Consultants as conduits for firm-level innovation

TRANSITION REPORT 2014 Innovation in Transition

Box 3.4. Consultants as conduits for firm-level innovation

Consultancy firms can play a vital role in facilitating innovation by acting as conduits for external know-how and providing information about customers’ preferences.37 They can help a firm adapt its organisational structure and management practices to changing industry needs, help it refine its design and packaging in order to appeal more effectively to its target groups, or provide market research underpinning the development of new products that better satisfy customers’ needs. For instance, consultants have helped a Swedish bank to introduce internet banking.38 Consultants can also help firms’ managers to analyse the pros and cons of developing new products and processes.39

While the percentage of firms using consultants varies greatly across the countries of the transition region – ranging from just 4 per cent in Azerbaijan to 54 per cent in Ukraine – consultants are more likely to be used by innovative firms in almost all countries (see Chart 3.4.1).

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Across the region as a whole, 61 per cent of firms that have introduced a new product in the last three years also hired a consultant during that period, compared with 20 per cent of firms that did not innovate. Consultants also assisted 63 per cent of firms that introduced new or improved organisational management practices.

These relationships do not appear to be driven by particular industries or specific types of firm. Even when firm-level characteristics are taken into account, there remains a positive and highly significant correlation between the use of consultants and all types of innovation – product, process, organisational and marketing innovations. This is consistent with evidence that external consultants can help small and medium-sized firms to improve their productivity.40

Despite these apparent advantages, many firms choose not to use consultants when developing new products or processes. One reason for this is that every consultancy contract involves transaction costs, which may take resources away from the innovation itself. Firms may also be concerned about leaking information regarding new products and processes, particularly in countries where intellectual property rights are poorly enforced.41

However, the main reason why firms in the transition region do not hire consultants is that they simply see no need for them. Interestingly, exposure to consultancy services seems to change this belief: once firms have employed consultants once, they typically do so again. Indeed, BEEPS firms that use external consultants have done so an average of four times in the last three years. Moreover, where clients of the EBRD’s Small Business Support team have never worked with a local consultant before, nearly half of these clients then undertake a second consultancy project independently within a year. Since firms that hire consultants also tend to be more innovative, their exposure to external know-how seems to be an important channel in the fulfilment of their innovation potential.

CHART 3.4.1

Source: BEEPS V and authors’ calculations.
Note: The percentage of innovative firms is calculated using cleaned data for product and process innovation.