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The purpose of this paper is to identify factors promoting innovation in the framework of R&D based on surveys conducted on firms in five ASEAN countries, Indonesia, Laos, Thailand, the Philippines, and Vietnam.

The analytical method divided sample firms into two categories, namely, “the R&D group” and “non-R&D group.” The analysis attempts to identify which of the internal capabilities, consisting of technology, human factors and organization factors, promote innovation. Ordered probit analysis is employed.

Findings from the estimations indicate that the two groups pursue product innovation differently. The R&D group promotes innovation by cross-functional teams of production, engineering, and marketing and IT use, whereas the non-R&D group promote product innovation by HRD programs for workers, group awards for suggestions or QC, and ISO9000 series.

The number of samples related to the non-R&D group is too small to conduct statistical analysis. External linkages played an important role in the authors’ previous studies. The introduction of external linkages into the model may yield different results, though the analysis would become more complex.

The results of this paper provide the solid basis of policy to promote innovation and upgrading SMEs in the region.

Many ASEAN SMEs successfully achieve innovation without owning specified in-house departments or sections to conduct R&D.

The features of this paper lie in the original firm-level survey data and rigorous estimation method using ordered probit analysis, which are new to this literature.

In the globalized economy, it is becoming increasingly necessary for firms in emerging economies to adopt advanced knowledge and technology from external sources, both domestic and abroad. This paper aims to identify knowledge flows through domestic and international customer‐supplier relationships that cause gaps in quality assurance, cost reduction, and timely delivery among firms in emerging countries.

The authors constructed an original dataset on production networks within manufacturing firms in Vietnam (including Hanoi and the surrounding region) and estimated statistical models for the relationship between face‐to‐face interactions within a supply chain and QCD (Quality, Cost, Delivery). Findings from in‐depth interviews with Japanese firms in emerging economies complement the quantitative analysis.

The incidence of face‐to‐face interactions between two firms within a production chain via resident engineers significantly explains the variation in performance of total quality management among firms in Vietnam under controlling vertical ownership within a chain. Since the authors could find no significant correlations between transactions of goods along the supply chain and QCD, it is safe to say that transfer of intangible assets among interconnected firms may cause the difference in QCD among firms in Vietnam.

This represents the first systematic quantitative research on the asymmetric gains from face‐to‐face interactions with downstream and upstream firms, and it offers a new development in the study of transfers of intangible assets within a supply chain in Asian emerging economies.