The Mediating Role of SME’s Strategic Orientation in Influencing the Relationship between Absorptive Capacity and Innovation Capabilities

Abstract

Organisational knowledge assets are essential for stimulating firm innovation. Research efforts to date have primarily concentrated on the external aspects of innovation processes, overlooking the intricate internal complexities that shape innovation dynamics. However, capability for innovation within a particular company is heavily contingent upon its intellectual assets, organisational knowledge, and proficiency in employing them. This study empirically investigates the role of the absorptive capacity of small and medium-sized enterprises (SMEs) in a transition economy, their organisational knowledge assets and the connection with their innovation capabilities. Furthermore, this study argues that although absorptive capacity is essential for firms' innovation capabilities, its ultimate influence is contingent upon the entrepreneurial orientation and market orientation of the individual SME. The research in this thesis implements a quantitative research methodology, a deductive approach, and a positivist philosophy. A survey instrument was employed to gather data from SMEs in Saudi Arabia. This study thoroughly examined the existing literature to evaluate SMEs' innovation capability and establish the most suitable criteria for measuring the four dimensions of innovation capabilities: radical product, incremental product, radical process, and incremental process innovation capabilities. The study implemented numerous data analysis procedures prior to testing the hypotheses. These were evaluations of the constructs' reliability and validity and tests of the measurement model. After confirming the reliability and validity of the measurement model, the hypotheses were tested with an actual sample size of 404 SMEs, based on a response rate of 40%. The Statistical Package for the Social Sciences (SPSS) software was employed to analyse the data. A simple linear regression analysis was implemented to identify causal relationships between the four dimensions of innovation capability and absorptive capacity. The mediating function of entrepreneurial and market orientation was validated using the Bootstrap Confidence Method. The findings suggest that all four dimensions of innovation capability are positively influenced by absorptive capacity. The results also indicate that entrepreneurial orientation mediates the relationship between absorptive capacity and innovation capability dimensions, except for radical product and incremental process innovation capabilities. Conversely, the relationship between absorptive capacity and the four dimensions of innovation capability is mediated by market orientation. The significance of absorptive capacity in the improvement of the innovation capabilities of SMEs is unequivocally supported by these findings. Additionally, the conclusions confirm the positive effects of entrepreneurial and market orientations in fostering this relationship. The study presented in this thesis contributes to the existing body of knowledge by offering a more comprehensive understanding of the relationship between absorptive capacity and innovation capabilities, utilising both the Knowledge-based and Resource-based views of the firm as theoretical lenses. Additionally, the study demonstrates the substantial influence that SMEs' strategic orientation has on the development of their innovation capabilities in transition economies. Furthermore, the research indicates that to establish a competitive edge, SMEs must allocate their investments in capabilities and knowledge resources. The empirical findings will be valuable to SME managers and practitioners in transition economies, as they will assist them in effectively utilising resources and capabilities.