The effect of innovation and dynamics capabilities on the relationship between Malaysian SMEs' business network and firm performance

Abstract

The business network that is linked to flexibility, aggressiveness and strategy has become increasingly important in recent years. Several studies suggest that such networks potentially have a profound impact on firm performance, including Small and Medium-sized Enterprises (SMEs). The role of SMEs in enhancing global and local economic growth is undeniable, particularly in the context of developing countries such as Malaysia. Although numerous researches have been conducted in this field, the majority of them limit their focus to the relationship between firm capabilities (i.e. innovation and dynamic capabilities) and firm performance in specific industries. Research on the synergy impact of business networks, innovation and dynamic capabilities on SME performance remains scarce. This has become a significant gap, which this research seeks to address. This research investigates the roles of dynamic capabilities and innovation capabilities as a moderator and mediator in the relationship between business networks and firm performance, based on the model developed from the concepts of the Resource Base View (RBV) and Dynamic Capability (DC) theories. The model was justified through the Structural Equation Modelling (SEM) technique using AMOS version 23. Taking Malaysia as a research context, the model was tested against a total of 463 SMEs across different industries and categories (i.e. micro, small, and medium SMEs) through face-to-face surveys with 130 owners, 41 CEOs, 79 managers and 213 executives. This study presents five important findings: (1) there exists no direct relationship between business network and firm performance; (2) there exists a direct relationship between innovation, dynamic capabilities and firm performance; (3) the existence of the relationship between business network and firm performance is conditioned by innovation capabilities; (4) dynamic capabilities do not moderate the relationship between business network and firm performance; however (5) dynamic capabilities moderate the relationship between business networks and innovation capabilities. To conclude, the synergy of business networks, innovation capabilities and dynamic capabilities will significantly affect SME performance. This implies that SME performance will not be affected by the business network, as a single variable. The research offers three key contributions. Firstly, it enhances our understanding of the important synergies between business networks, innovation capabilities and dynamic capabilities in elevating SME firm performance. Second, the findings provide a new perspective on how the application of RBV and DC theories can be used as a conceptual lens to analyse the factors affecting SME performance. Lastly, the result signposts practical approaches for SME decision-makers by providing assistance to boost firm performance.