Innovation types, dynamic capabilities and business performance of manufacturing SMEs in Nairobi, Kenya

Abstract

Business performance of Micro and Small Enterprises (MSEs) not only play a significant role in a country's economy but are essential to the economic stability of the country. However, many challenges affect MSEs and as a result, they perform dismally leading to high mortality rates. Despite the many studies already done in this area, little is still known concerning the interplay of innovation types, dynamic capabilities and business performance of SMEs, thus the need to interrogate the link between these variables. Therefore, the focus of this study was to examine the moderating effect of dynamic capabilities on the relationship between innovation types and business performance of manufacturing SMEs in Kenya. Specifically, the study sought to examine the effect of product innovation, process innovation, marketing innovation and organizational innovation on business performance. The study examined the moderating role of dynamic capabilities on the relationship between innovation types and business performance. The study was anchored on Resource Based View theory and Dynamic Capabilities Theory. The study utilized the explanatory research design and targeted 987 respondents consisting of medium and small enterprises managers and owners. Cluster sampling, stratified random sampling and simple random sampling technics were used to select a sample size of 284 respondents for the study. Questionnaire was used as the data collection instrument. Data analysis was done using descriptive statistics of frequencies and percentages, and inferential statistics which included Pearson’s Correlation Coefficient that was used to find out the association between innovation types constructs and business performance. Simple Linear Regression was used to analyze the first four objectives. Multiple Regression was tested for statistical significant effect between innovation types and business performance. Hierarchical Regression Analysis was used to find out the moderating effect of dynamic capabilities on the relationship between innovation types and business performance. Data is presented in form of tables and figures. The study found a negative and insignificant relationship between product innovation and business performance (β = -0.030, t=-0.322, ρ = 0.748) while process innovation (β = 0.412, t= 6.413, ρ = 0.000), market innovation (β = -0.495, t= -6.690, ρ = 0.000) and organizational innovation (β = 0.230, t= 3.167, ρ = 0.002) had significant effect on business performance. The moderator (dynamic capabilities) was found to have a positive and insignificant effect on business performance (β = 0.271, t =1.49, p = 0.137). The interaction effects indicate that dynamic capabilities moderate the relationship between product innovation and business performance (β = 1.120, t = 6.038, p = .000) indicating an enhanced moderation. The interaction between dynamic capabilities on the relationship between process innovation and business performance (β = 0.105, t = 0.714, p = 0.476) is insignificant indicating an antagonistic moderation. Moreover, the interaction effects indicate that dynamic capabilities moderate the relationship between market innovation and business performance (β = -1.321, t = - 11.126, p = .000) thus, indicating an enhanced moderation. The interaction effect shows that dynamic capabilities moderate the relationship between organizational innovation and business performance (β = 1.128, t = 4.269, p = .000) thus indicating an enhanced moderation. Therefore, the moderating effect of dynamic capacities gives new insights into literature and theory in relation to the research variables. These new insights have consequences for managers and policy makers. The study recommends that SMEs consider implementing innovations to boost their competitiveness. Specifically, managers of SMEs should encourage innovation within their companies by optimizing their operations by adopting innovations that create a competitive edge in the performance of the organization. This study contributes to the growing body of research on how innovation uptake and organizational performance are affected by the context of developing markets.