Influence of innovation and firm competitiveness on business performance: the moderating role of dynamic capabilities in Low-Tech Small and Medium Enterprises

Abstract

Amidst accelerating technological change and intense global competition, innovation and dynamic capabilities have become critical for the survival and growth of Small and Medium Enterprises (SMEs). This is particularly true in South Africa, where manufacturing SMEs are pivotal to job creation and inclusive economic growth yet face severe structural impediments, including infrastructure deficiencies, regulatory inefficiencies, and intense import competition. Despite their importance, low-tech manufacturing SMEs remain disproportionately vulnerable, suffering from high failure rates and stagnant productivity. This study examines the impact of innovation on firm competitiveness and business performance, as well as the moderating role of dynamic capabilities, within a context that is both critically challenged and under-researched. The study adopted a positivist research philosophy, a deductive approach, and a cross-sectional survey design. Data were collected via a structured questionnaire from 304 owners and managers of low-tech manufacturing SMEs across Johannesburg, Ekurhuleni, and Tshwane metropolitan municipalities in Gauteng, South Africa. The data were analysed using Structural Equation Modelling (SEM) to test the hypothesised relationships. The findings reveal a nuanced hierarchy of innovation drivers. Organisational innovation emerged as the strongest predictor of firm competitiveness (β = 0.240, p < 0.001), followed by product innovation (β = 0.177, p = 0.003) and process innovation (β = 0.136, p = 0.015). Notably, market innovation alone had no significant direct effect. A strong, significant positive relationship was confirmed between firm competitiveness and business performance (β = 0.690, p < 0.001). Crucially, the study provides a key insight into the role of dynamic capabilities; while they did not moderate the relationships for product, process, or organisational innovation, they exhibited a significant positive moderating effect on the link between market innovation and competitiveness (β = 0.147, p = 0.015). This suggests that dynamic capabilities are crucial for translating marketoriented ideas into tangible competitive advantages. This research concludes that for low-tech manufacturing SMEs, superior performance is achieved strategically by focusing on foundational internal innovations (organisational, product, and process). In contrast, the potential of market innovation is unlocked only when supported by a firm’s ability to sense, seize, and transform opportunities. The thesis offers a significant theoretical contribution by empirically validating an integrated model and ranking innovation drivers within a resource-constrained environment. For practitioners and policymakers, it provides an evidence based roadmap, advising SME leaders to prioritise organisational and operational improvements and cultivate dynamic capabilities to navigate complex challenges and build sustainable competitive advantage.