Int. J. Technology Management, Vol. 53, No. 1, 2011 1 Copyright © 2011 Inderscience Enterprises Ltd. The effect of intellectual capital on product innovativeness in SMEs Karl-Heinz Leitner Foresight and Policy Development Department, Austrian Institute of Technology, Donau-City-Strasse 1, 1220 Vienna, Austria E-mail: karl-heinz.leitner@ait.ac.at Abstract: This paper examines the relationship between intellectual capital and different product innovation strategies based on a longitudinal study of Austrian firms assuming that intellectual capital is an important complementary asset for innovation activities. The data was collected in 1995 and 2003 using the same questionnaire among a firm sample of 91 small and medium-sized firms in manufacturing industries. The study delivers evidence for a positive association between human capital and product innovativeness. Moreover, firms, which have strength in both human and structural capital have a higher likelihood to be highly innovative. In addition, the research reveals that intellectual capital discriminates more strongly between highly and less innovative firms while the traditional measure of R&D expenditure has a stronger explanatory power in differentiating between not innovative and less innovative firms. Keywords: small and medium-sized enterprises; SMEs; innovation strategies; innovativeness; intellectual capital; human capital; structural capital; product development; longitudinal study. Reference to this paper should be made as follows: Leitner, K-H. (2011) ‘The effect of intellectual capital on product innovativeness in SMEs’, Int. J. Technology Management, Vol. 53, No. 1, pp.1–18. Biographical notes: Karl-Heinz Leitner is Senior Researcher at the Foresight and Policy Development Department of the Austrian Institute of Technology. His research interests include the valuation of intangible assets, strategic management and innovation policy. 1 Introduction Innovation has become a necessity for survival and sustaining competitive advantage for small and medium-sized enterprises (SMEs) in highly industrialised economies. However, many SMEs still fail to introduce product innovations successfully or to adjust their product portfolio to changing customer demands and competitive conditions. Traditionally, investments in R&D, customer orientation and planning are regarded as crucial for successful innovation. However, scholars increasingly argue that innovation is a knowledge creating process and the capability to be innovative is hence closely related to a firm’s intellectual capital (e.g. Nelson, 1991; Nonaka, 1994; Teece, 2000;