KNOWLEDGE INFLOWS FROM MARKET- AND SCIENCE-BASED ACTORS, ABSORPTIVE CAPACITY, INNOVATION AND PERFORMANCE — A STUDY OF SMEs

Small to medium-sized enterprises (SMEs) are increasingly opening up their innovation processes in order to improve innovation outcomes. Exactly how openness influences enterprises’ ability to innovate and benefit from external sources of innovation is not well understood. Despite theoretical models explicating knowledge inflows as the antecedent and innovation as the consequence of absorptive capacity, to date, the relationships between external knowledge inflows from specific external actors, absorptive capacity, innovation and SME performance remain underexplored. We address this gap, focussing on market- and science-based knowledge flows, absorptive capacity, innovation and SME performance. Using structural equation modelling on a sample of 838 Australians SMEs, we find evidence indicating that the mechanisms by which external knowledge inflows from market- and science-based actors affect innovation differ: external knowledge inflows from market-based actors influence innovation directly or “serendipitously”, while external knowledge inflows from science-based actors influence innovation indirectly via absorptive capacity. We also find that their effect on innovation differ, with external knowledge inflows from market-based actors exerting a positive direct effect on innovation vis-à-vis external knowledge inflows from science-based actors where there is no significant direct effect. In contrast, external knowledge inflows from science-based actors influence innovation through absorptive capacity. In addition to this mediation effect, absorptive capacity has a positive direct effect on innovation, and an effect on firm performance through innovation. This research contributes to our understanding of how, and the extent to which, external knowledge inflows from specific external actors influence absorptive capacity, innovation and firm performance in SMEs.