The Collaboration Paradox: Why Small Firms Fail to Collaborate for Innovation

Firms can benefit from innovation-focused collaborations. However, while many firms are already deriving benefits from innovation strategies based on collaboration, others, especially small firms, lag in adopting this practice despite the greater added value of external knowledge to smaller firms. Low levels of cooperation between smaller firms reflect their lack of internal capability to appropriate the benefits of collaboration effectively. This gives rise to the collaboration paradox—small firms have more to gain from innovation-focused collaboration but may find collaboration more difficult to implement. In this chapter, we examine the barriers to innovation collaboration in two UK SME dominated manufacturing sectors, using a mixed-method approach. Focussing specifically on small firms, we examine three market failures, which may limit the extent of collaborative innovation in small firms; a firm’s inability to recognise the potential benefits of innovative collaboration; a lack of information for assessing the suitability of partners and; difficulty in determining the trustworthiness of a prospective partner. Our findings indicate that uncertainty about trust and knowledge about a potential partner’s capability are essential factors in the decision whether or not to collaborate.