Predicting Innovation in SMEs: A Knowledge-Based Dynamic Capabilities Perspective

Abstract

This study advances a knowledge-based dynamic capabilities framework to predict innovation in SMEs. We presume that SMEs can develop and renew their absorptive capacity and transformative capacity (i.e. their realized knowledge capacities) by actively implementing external knowledge acquisition and internal knowledge sharing practices (i.e. their potential knowledge capacities). These knowledge capacities form part of the basis for the firm’s knowledge-based dynamic capabilities, which enhance the firm’s innovation orientation and performance in turn. We test hypotheses on a sample of 649 Dutch SMEs, using multivariate OLS regression analysis and structural equation modeling. Results indicate that practices aimed at acquiring external knowledge foster an SME’s innovation performance, mediated by innovation orientation. This finding implies a different means for SMEs to be innovative in spite of their resource constraints. Similar predictions for internal knowledge sharing practices however are not supported. Implications for policy makers and owners/entrepreneurs of SMEs are discussed.

Keywords: absorptive capacity, innovation performance, innovation orientation, knowledge management practices, SMEs, transformative capacity

JEL Classification: M13, O31