The Influence of Capabilities on Performance of Small and Medium Manufacturing Enteprises in Rwanda.

Since the rise of the resource-based view (RBV) and the dynamic capabilities theory (DCT), the origin of firm performance has shifted from the outside-in approach to the “inside-out approach” that seeks to locate the source of performance inside the firm. Grounded on the resource-based view and the dynamic capabilities theory, this study developed and tested a new model of firm performance based on capabilities and validated their applicability to small and medium-sized enteprises (SMEs) in Rwanda. The study adopted a descriptive-causal design and employed a quantitative method. Data were collected using a survey questionnaire developed and administered to a final sample of 211 owners/managers. To analyse collected data, a two-step approach to Covariance-Based Structural Equation Modelling (CB-SEM) was applied using Analysis of Moment Structures (AMOS) statistic software version 25.00. Standardised estimates and critical ratios in SEM were used to evaluate the strength of significant influence of capabilities on firm performance. The findings revealed that both ordinary and dynamic capabilities have a positive and significant influence on the performance of manufacturing SMEs and that the relationship between capabilities and performance is positive and significant. The study recommended that owners and managers assess themselves the conditions under which ordinary and dynamic capabilities could be adopted to boost SMEs’ performance. These correlated and complementary capabilities should not be considered in isolation but rather should be integrated and combined to leverage, exploit, and sustain a competitive advantage. Keywords: Performance, Capabilities, SMEs, SEM