Examining the role of externally oriented capabilities, slack resources, innovation and performance : A study on technology-based small firms

Innovation has been widely recognized as the key strategic activity for growth and success of small firms. However, small firms due to internal barriers (e.g. financial and human resources) and external barriers (e.g. external environment) are obstructed in developing innovation. Thus, it is critical to increase the understanding of how small firms can attain innovation. One perspective in the literature is the resource-based view of the firm. In this perspective it is generally proposed that a firms potential to be innovative lies in its ability to utilize different organizational capabilities. We follow this logic and propose two externally oriented capabilities that promote (Network capability) and facilitate (Information and communication technology capability) social networking practices. We argue these capabilities to be of importance especially in a small firm context and we hypothesize that their individual and joint effects on innovation are positive. We further acknowledge recent developments in the literature which suggest that capabilities are dependent on firm internal conditions such as flexibility and production. We therefore also include organizational slack and consider a three-way interaction effect between slack and the two proposed capabilities. Our basic argument is that capabilities will pay off for innovation when firms have slack resources. We also test howincreases in innovation influences firm performance. As such we suggest that innovation has a mediating role between capabilities and performance. We test the hypotheses based on a two year longitudinal dataset of Swedish technology-based small firms (less than 50 employees). In total 291 full responses were included out of the originally 1471 firms surveyed, for a response rate of 20%. Main analyses are lagged regression with control for the dependent variables influence at t-1. Results show innovativeness to be positively and significantly related to performance, even when performing controls for previous years of performance. We find a significant three-way interaction effect between the two suggested capabilities and slack on innovation, and support that innovation mediates the influence between capabilities and performance. As such, we find evidence that externally oriented capabilities in conjuncture with organizational slack are important for the level of firm innovation, and that their influence on renewal through innovation also help determine future performance.Godkänd; 2011; 20110629 (vinpar)CiiR-Centre for Inter-Organizational Innovation Researc