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This paper explores the dynamic complementary interaction between investment in technological capability and investment in specific innovation projects based on a decision model of innovation, using Vietnamese MSME data. The empirical results show that firm size, technological capability and current specific R&amp;D investment have a positive impact on innovation. Firm age was positive but not significant, implying that conscious technological effort may be more important for innovation than passive learning by doing. The combination of significant economies of scale and technological capability imply that government assistance for firms with low technological capability maybe important, but government assistance is shown to be either insufficient or ineffective. Results from this paper suggest that government policy aimed at facilitating increases in firm size and providing technical extension services would be more constructive than merely providing R&amp;D subsidies to MSMEs.

The impact of technological capability on MSME innovation: a case study of Vietnam