An empirical investigation into the significance of intellectual capital and strategic orientations on innovation capability and firm performance in Malaysian information and communications technology (ICT) small-to-medium enterprises (SMEs).

This study examines the impact of intellectual capital and strategic orientations (market orientation, learning orientation and technology orientation) on innovation capability and firm performance of small-to-medium enterprises (SMEs) in the Information and Communications Technology (ICT) industry in Malaysia. Despite calls for greater innovative actions, the level of innovation in Malaysia is still low. In addition, the country’s weak position in terms of research and development (R&D) and innovation capability poses major challenges. Although studies on innovation are in abundance, there is still little empirical evidence relating to how ICT firms improve their innovation capability and virtually no research in the context of ICT SMEs in Malaysia. Drawing upon the Resource-Based View (RBV) of the firm and Dynamic Capabilities view, a conceptual framework is developed. A quantitative approach is employed to achieve the objectives of the study. A survey technique is used to collect data from owners, Chief Executive Officers (CEOs) or managers of ICT SMEs. 213 responses were received and further analysed. The research models and proposed hypotheses were assessed using the Partial Least Squares (PLS) technique. The empirical results demonstrate that the model explains 67% of the variance in innovation capability and 53% of the variance in firm performance, providing strong evidence of its explanatory power. While market orientation has a direct negative relationship to firm performance, market orientation is positively related to performance through the mediating effect of innovation capability. Learning orientation and technology orientation are fully mediated by innovation capability, while intellectual capital is partially mediated by innovation capability. Findings indicate that innovation capability is positively and significantly related to firm performance and that market orientation, learning orientation, technology orientation and intellectual capital are all significant and positively related to innovation capability. The main findings of this study highlight innovation capability as a strong determinant of firm performance through its direct and indirect effects, indicating its importance as a dynamic organisational capability. This indicates that improving innovation capability is crucial in order to achieve high performance. Market orientation, learning orientation and technology orientation in combination with intellectual capital have similar explanatory power in explaining the variance in innovation capability. The power of these factors when combined makes a more significant contribution to enhanced innovation capability and firm performance. For Malaysian ICT SMEs, the challenges for channelling their resources and capabilities (intellectual capital and strategic orientations) towards the improvement of firm innovation capability rely upon management ability to develop and deploy an appropriate mix of crucial resources. The empirical results provide strong evidence of the explanatory power of the model developed indicating that Malaysian ICT SMEs would perform better with greater emphasis on developing innovation capability through enhancement of intellectual capital and the strategic orientations measured in this study. It also shows that greater benefits for firms in terms of performance will be achieved with higher innovation capability as there is a more substantial impact from intellectual capital and strategic orientations when higher innovation capability is achieved.