The Mediating Role of Innovation Capabilities on the Relationship between Dynamic Capabilities and Firm Competitive Performance

Purpose The purpose of the study is to better understand the relationship between dynamic capabilities and firm competitive performance, and how innovation capabilities, specifically (a) product capability and (b) process capability, may play a mediating role in this relationship. Design/Methodology/Approach Simple Random Sampling technique was adopted to choose SMEs to collect data based on information obtained from Hungarian SMEs associations. A total of 565 completed questionnaires were obtained, with response rate of 65.50%. Confirmatory factor analysis (CFA) was used with AMOS 24 to assess the reliability and validity; and Cronbach’s alpha coefficient was additionally used to assess the dependability of the scales. The proposed model was put to the test using structured equation modelling (SEM). Results The study results show that dynamic capacities have a significant direct effect on innovation capabilities: product capability and process capability. The study also proves that both product capability and process capability have a significant impact on a firm’s competitive performance. Conclusion The study concludes that the relationship between dynamic capabilities and competitive firm performance is partially mediated by innovation capabilities. The study suggests that before enhancing product innovation capability, entrepreneurs should consider reorganizing and reallocating resources into process innovation capability. This study contributes to our understanding of the mediating mechanism of innovation capabilities through which dynamic capabilities enhance firm competitiveness performance.