Sources of knowledge for innovation development can be acquired through internal efforts within the firms, e.g., cross-functional teams, quality control circles, in-house training, R&D personnel development, and external efforts by collaborating with external partners, e.g., customers, suppliers, research centers, government agencies, and universities [
2]. Firms can achieve a higher level of innovation when they adopt both simultaneously because knowledge is not only created inside the firms through internal efforts but through knowledge transferred from and knowledge co-creation with partners in the supply chain networks [
7]. The absorptive capacity of the local firms is the main moderator for knowledge transfer from and knowledge co-creation with foreign firms [
8]. Being poor in absorptive capacity may cause firms to be unsuccessful in transferring and co-creating new knowledge [
9]. Thus, knowledge resides among partners in the supply chain networks, but which networks of supply chains bring firms more product and process innovation?
2.1. Firm Innovation
Innovation has been extensively studied, where it consists of product, process, marketing, and organizational innovation [
10,
11,
12]. Innovation is defined as changes in the products and/or services of a firm [
1]. The Organization for Economic Co-operation and Development [
10] redefined innovation as creating new or significantly improving products, processes, marketing, or organizational methods in business practices. Thus, innovation is a continuous process of exploring new ideas from existing or new knowledge so that these new ideas can improve the firms’ proficiency. Mangematin and Mandran [
13] and Yunus [
4] classified innovation as incremental and radical innovation. The former is the process of improving products and/or processes, including innovation in packaging, whereas the latter is the achievement of technological breakthroughs in products and/or processes [
13].
Product innovation and process innovation are the main focuses of this study because these two types of innovation are adopted by firms mainly at the early stages of their business operations [
14]. Product innovation is defined as a process of improving the quality of existing products and/or creating new products, whereas process innovation is defined as cost reduction in producing existing products and/or new products [
15,
16]. Firms that adopt product innovation tend to adopt process innovation, and vice versa [
10]. Even Petsas and Giannikos [
17] stated that firms generally try to adopt product innovation first, before switching to process innovation; these two types of innovation tend to complement one another. Firms can earn more profits and have better performance when they simultaneously adopt the product and process innovations [
16,
18,
19].
Product and process innovations can be achieved not only through internal efforts but also through external collaboration with supply chain partners. Among external partners, customers and suppliers are considered as the downstream and upstream partners, where most firms collaborate to upgrade their innovation capabilities. Firms mostly need to work with customers because they need to satisfy various standard requirements, e.g., quality controls, lean manufacturing, product design, international standards, and good manufacturing practices. To fulfill customer requirements, firms need to closely work with suppliers so that they can acquire knowledge and skills in machine operation, process design, and plant operation.
The benefits of joining supply chain networks can be found in the case of Toyota, where this company established a Toyota network to allow its suppliers to extend their dynamic learning capability beyond the firms’ boundaries [
20]. After operating this network, Toyota found that its suppliers, including local firms, could learn faster and achieve more innovation. Thus, Toyota’s network created space for knowledge sharing among suppliers and helped them to improve innovation performance [
21]. The greater the diversity of cooperation networks, the higher the benefits of innovation development [
22]. In other words, global supply chain integration helps firms to acquire new knowledge for innovation in their products and processes [
23].
2.2. Global Value Chain and Innovation Development
During the age of globalization, firms need to understand the global value chain (GVC)—a phenomenon in which firm production is expanded globally through outsourcing and offshoring to other countries—because it provides firms with various benefits, e.g., allows firms to access global markets, allows firms to access low labor costs during business operation, enables firms to free up their internal resources to focus on business core values, and enables firms to access knowledge and resources from supply chain partners. In addition, joining the GVC also pushes firms to have diverse thinking on interactivity, partnerships, business operation, and governance, which are likely to upgrade or downgrade the growth of a firm [
24,
25]. Thus, the GVC helps in knowledge transfer from and knowledge co-creation with partners in the supply chain networks [
7]. With the active support of leading firms (customers), the local firms (suppliers) tend to upgrade their governance and innovation capability [
26].
There are two main holistic approaches in the GVC, i.e., the governance approach and the upgrading approach [
27]. The governance approach is defined as the top-down process by which leading firms integrate economic activities geographically and organizationally. The governance approach also refers to the process by which particular players in the chain exert control over other participants and to how these leading firms (chain drivers) distribute knowledge and values to local firms [
28]. However, an upgrading approach is defined as the bottom-up process that is adopted by local firms to improve their business positions in the global economy [
25]. The upgrading approach also refers to knowledge dynamics, which is transferred from leading firms to upgrade the local firms’ innovation capabilities [
29]. Hence, the governance and upgrading approaches of GVC identify how knowledge flows for innovation development among partners in the supply chain networks [
30].
2.3. Cluster Theory and Innovation Development
The external sources of knowledge are also found in the clustering theory, where an industrial cluster is defined by Porter [
31] as “a geographically proximate group of firms and associated institutions in related industries, linked by economic and social interdependencies.” The industry cluster linkages provide firms with opportunities to access external sources of knowledge to improve their innovation capabilities, e.g., producing value-added products and improving production processes [
32]. Cluster linkage, governmental regulations, and high commitment from the top executive can also help firms to achieve green manufacturing [
33]. The higher the absorptive capacity of a firm, the stronger and denser will be the cluster linkages, and this leads to the possibility of innovation development [
34]. Local firms, especially small and medium-sized enterprise (SMEs), have limited financial resources, low technological capabilities, insufficient infrastructure, and a low level of managerial skills [
35]. To handle these obstacles, firms need to join linkages with other supply chain partners, e.g., other firms, customers, and suppliers in the cluster, because cluster linkages help firms to achieve, align, and mobilize resources effectively and efficiently for innovation development [
36].
2.4. Supply Chain Ownership Structures and Innovation Development
Supply chain ownership structures are ownership structures in whole supply chain networks. The ownership structure is defined as the distribution of equity concerning votes and capital [
37]. Bragoli, Cortelezzi, and Marseguerra [
38] and Boeing, Mueller, and Sandner [
39] defined two groups of ownership structures: Privately Owned Enterprises (POEs) and State-Owned Enterprises (SOEs). In this paper, only the ownership structures in the POE group are considered, and they consist of 100% locally owned (Domestic), Joint Venture (JV), and 100% foreign-owned (MNC). Meanwhile, the supply chain network is defined as a collaboration of firms with upstream (suppliers) and downstream (customers) partners across extensive enterprises [
3]. Thus, the firm’s main customer, the firm itself, and the firm’s main supplier are regarded as the three partners in the supply chain network, where each partner in the supply chain network possesses only one type of ownership structure.
Across ownership structures and supply chain networks, five types of supply chain ownership structures are defined, i.e., Pure Domestic Chain (Domestic, Domestic, Domestic), Pure JV Chain (JV, JV, JV), Pure MNC Chain (MNC, MNC, MNC), Export Chain (Domestic/JV/MNC, Domestic/JV/MNC, JV/MNC), and Import Chain (Domestic/JV/MNC, Domestic/JV/MNC, Domestic). The Pure Domestic Chain means that the ownership structures of the supply chain partners, i.e., customer, firm, and supplier, are all Domestic firms. This is the same for the case of the Pure JV Chain and Pure MNC Chain, where the customer, firm, and supplier of these two chains are JV and MNC, respectively. The Export Chain refers to one type of supply chain ownership structure where the ownership structure of the customer is either a JV firm or an MNC firm, and ownership of firm and supplier can be any type. Two cases need to be excluded from the Export Chain because the Export Chain (JV, JV, JV) and Export Chain (MNC, MNC, MNC) are already categorized as the Pure JV Chain (JV, JV, JV) and Pure MNC Chain (MNC, MNC, MNC), respectively. The Import Chain, similarly, refers to one type of supply chain ownership structure, where the ownership structure of the customer is a domestic firm, and the ownership structures of the firm and supplier can be any type. There is one case that needs to be excluded from the Import Chain because the Import Chain (Domestic, Domestic, Domestic) is already categorized as the Pure Domestic Chain (Domestic, Domestic, Domestic).
From our interview, domestic firms generally do not have policies or plans to expand their production outside the country, so they generally have no plan to join the global supply chain for innovation development. Their innovation mostly occurs through internationalization and technology education from customers and suppliers [
40]. If the local firms have international suppliers, they tend to send their engineers to learn how to operate and maintain machines, and if the local firms have international customers, the country of destination requires the local firms to adopt higher standards. Hence, internationalization helps the local firms in the supply chain networks to enhance innovation performance [
41], where internationalization relies highly on firms’ internal capabilities [
42] and the types of their ownership structures [
43]. Firms that are 100% foreign-owned (MNC firms) tend to have higher internationalized capabilities, compared with 100% locally owned firms (Domestic firms) [
44]. Thus, internationalization helps in knowledge creation and knowledge transfer among partners in the supply chain networks.
To benefit from internationalization, firms need to improve their absorptive capacity and build trust with partners in the supply chain networks [
45]. The greater the absorptive capacity, the higher the knowledge transfer among partners in the supply chain networks [
46]. The knowledge transfer from foreign firms does not equally spill over into local firms [
47]. Firms may not achieve adequate benefits if their internationalization with supply chain partners is below a threshold level [
41]. Customers are likely to be important for knowledge transfer in product innovation, whereas suppliers are likely to be important for knowledge transfer in process innovation [
48]. From the literature review, researchers have mainly studied knowledge transfer and knowledge spillover among partners in the supply chain networks for innovation development, e.g., from leading firms to local firms [
8,
49,
50]. However, there is no precise empirical evidence to show types of supply chain ownership structures that bring firms more innovation. Thus, this study investigates innovation development among different types of supply chain ownership structures.
H1: There is a significant difference in product innovation among firms with different supply chain ownership structures.
H2: There is a significant difference in process innovation among firms with different supply chain ownership structures.