| Summary: | Innovation is important as a driver of growth and a solution to deal with problems and
challenges. While innovation of high technology industry can be clearly measured
through R&D and patents, it is not the case for low technology industry like handicraft.
Due to the era of open innovation, studying innovation should not merely happen inside
the firm but should also analyse the local innovation system where the firm located. This
is the main focus of this research. The main research question is: to what extent and under
what conditions do firms� absorptive capacity and local innovation system enable firms to
innovate?
The research employed an explanatory-case study technique to answer the question. Data
was collected through semi-structure interviews, field observation and secondary data
collection. Twenty interviews were conducted which consists of fifteen interviews with
firms in Kotagede and five interviews with actors in Yogyakarta locality. All data is
analyzed qualitatively.
Innovation in silverware is an incremental process, mostly in product and marketing. On
the other hand, processes and the organisation are hardly innovated. The level of
innovation among respondents varies. For the measurement, the indicators of
entrepreneurship, structure, coordination and value of innovation are utilized. Generally,
medium and large firms are more innovative than micro and small ones. To further
understand why some innovative firms are able to meet those indicators while some
others are less innovative, this study investigates absorptive capacity of firms. There are
four dimensions of absorptive capacity: acquisition, assimilation, transformation and
exploitation. In average, respondents from medium and large firms group are able to
transform knowledge into innovation. However sometimes they still find management
capacity to transform and grow hamper their innovation. Respondents from micro and
small firm group face more constraints. Besides capacity of management to transform and
grow, they lack of education and financial that obstruct innovation. The dynamic of
absorptive capacity does not happen in isolation. Local innovation system is believed to
influence firm�s innovation. Respondents in this research posit client as the actor with
whom they interact most to acquire knowledge. The government also has a range of
policies in place to promote clusters and SMEs. Nevertheless interactions with them are
less frequent and intensive. Governance of the local innovation system is weak, with in
particular a weak system of appropriability and lack of support of innovative large firms.
This reduces trust among actors to share knowledge.
The research finally concluded that innovation of the handicraft sector is incremental.
Under the condition of high absorptive capacity, firms can achieve a high level of
innovation. Hereinafter firms can exploit externalities offered by local innovation system
to enhance innovation. To put in a nut shell, absorptive capacity is the basic need of firms
to innovate
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