Firm agglomeration and innovation: evidence from small and medium-sized enterprises in Vietnam

Purpose Innovation is considered as a solution that small and medium-sized enterprises (SMEs) can adopt to improve their performance during the normal context and sustain their business during a crisis. There are limited studies on the association between firm agglomeration and innovation in SMEs. Therefore, this study aims to shed light on this topic by focusing on the case of a developing country. Design/methodology/approach This study uses the secondary data collected from SMEs in Vietnam for empirical analysis. The authors use propensity score matching to examine the relationship between firm agglomeration and innovation as well as to mitigate potential endogeneity. Findings This study finds that firm agglomeration is positively associated with SMEs’ adoption of new processes or technologies. Meanwhile, there is no sufficient evidence to conclude the effects of firm agglomeration on product improvement and introduction of new products. Practical implications Drawing from the findings, this study presents a set of policy recommendations some policy implications aimed at fostering innovation in SMEs, with a focus on firm agglomeration. These implications can benefit policymakers in other developing economies seeking to enhance innovation in SMEs. Originality/value This research represents one of the early attempts to examine the role of firm agglomeration in fostering innovation in SMEs in a developing country.