Innovation capability, strategic flexibility and SME performance: the roles of competitive advantage and competitive intensity

Small and medium-sized enterprises (SMEs) occupy a strategic position in the Nigerian economy. They contribute to the country’s economic growth, employment and productivity (Agwu and Emeti, 2014). For example, in Nigeria, SMEs contribute about 50% and 70% to employment and gross domestic product (GDP), respectively (Otache and Usang, 2021). Despite these contributions, SMEs face challenges due to their vulnerability and limited resources (Otache, 2020). Today’s business environment has become highly dynamic and competitive. Undoubtedly, the recent global economic crisis (the COVID-19 pandemic) adversely affected many SMEs in Nigeria (Otache, 2020). Some SMEs have collapsed, whilst many are still struggling to survive (Otache, 2020). Research shows that only 20% of SMEs survive in Nigeria (Olaore et al., 2020). In addition, globalisation and technological advancements have made the business environment highly competitive (Xiu and Chen, 2017). Consequently, many SMEs in Nigeria find it difficult to compete with large firms that possess greater resources (Agwu and Emeti, 2014).

To cope with today’s dynamic and competitive business environment and achieve superior performance, SMEs must be innovative, flexible and competitive. They must develop innovation capability (IC) and strategic flexibility (SF) to respond quickly to environmental changes (Bashir, 2021; Otache and Usang, 2021). Firm performance refers to a firm’s ability to achieve its expected objectives in terms of profitability, growth and market share. According to Tajvidi and Karami (2015), IC is the capacity of firms to continually improve their capabilities and resources for discovering opportunities to engage in new product or process development. On the other hand, Aaker and Mascarenhas (1984) defined SF as “the ability of the organisation to adapt to substantial, uncertain, and fast-occurring (relative to required reaction time) environmental changes that have a meaningful impact on the organisation’s performance” (p.74). Additionally, businesses globally should develop IC and SF to gain competitive advantages and achieve superior performance. IC and SF are critical organisational capabilities that make firms proactive and competitive, particularly in a highly dynamic and competitive business environment (Bashir, 2021; Saunila, 2014).

In light of dynamic capabilities theory, businesses that possess and continually develop core capabilities gain a competitive advantage, leading to superior performance (Otache and Usang, 2021; Teece et al., 1997). Thus, this study argues that SMEs that possess and continually develop IC and SF will likely gain competitive advantages in terms of new and quality product development and quick adaptation to changing environments and achieve superior performance (Kolbe et al., 2022). Besides, research evidence suggests that IC and SF improve firm performance in times of economic crisis (Bashir, 2021; Guo and Cao, 2014; Otache and Usang, 2021).

Several studies have explored the IC–firm performance relationship (Ilmudeen et al., 2020; Otache and Usang, 2021) and the SF–firm performance relationship (Bashir, 2021; Guo and Cao, 2014) and reported positive relationships. However, the underlying mechanisms are yet to be fully understood. Also, despite acknowledging IC and SF as sources of competitive advantage, which improves firm performance (Exposito and Sanchis-Llopis, 2018), studies that explore the mediating role of competitive advantage in the relationship between IC and SME performance and between SF and SME performance are scarce. In a highly competitive market, firms must innovate and become flexible to succeed and achieve superior performance (Tariq et al., 2022). This suggests that competitive intensity moderates SME performance (Kankam-Kwarteng and Donkor, 2019). Nevertheless, there is a paucity of studies on the moderating effect of competitive intensity on the relationship between IC, SF and SME performance, particularly in emerging economies such as Nigeria. Against these backdrops, this study draws on the dynamic capabilities theory to explore the mediating role of competitive advantage and the moderating role of competitive intensity in the relationship between IC and SME performance and between SF and SME performance in an emerging economy such as Nigeria.

The present study enriches the existing literature in several ways. To the best of the author’s knowledge, this is one of the few studies that provide empirical evidence of the mediating role of competitive advantage and the moderating role of competitive intensity in the relationship between IC, SF and SME performance in the context of emerging economies such as Nigeria. First, the study demonstrates that competitive advantage is an underlying mechanism through which IC and SF positively impact SME performance. Second, the study demonstrates that the impact of IC and SF on SME performance is contingent on the intensity of competition in the market. Third, the study validates the dynamic capabilities theory by demonstrating that IC and SF are organisational capabilities that give SMEs a competitive edge and improve their performance. Overall, the study provides a better understanding of how IC and SF positively impact SME performance.

The remainder of this paper is structured as follows: Part 2 explains the study’s underpinning theory and develops the study hypotheses, whilst Part 3 explains the methodology. Whilst Part 4 presents the findings, Part 5 discusses the findings and concludes. Part 6 describes the implications of the results, whilst Part 7 highlights the study’s limitations and suggests future research avenues.

Today’s business environment is highly dynamic and competitive, thus requiring multiple capabilities to deal with it. The dynamic capabilities theory is a theory of comparative advantage. Dynamic capability, according to Teece et al. (1997), refers to “the ability [of firms] to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments” (p. 516). Organisations with capabilities quickly adapt to changing business environments. Dynamic capabilities give firms a competitive advantage, leading to superior performance (Pisano, 2017). The dynamic capabilities theory argues that organisations can use their basic capabilities to create short- and long-term competitive positions for themselves (Teece et al., 1997).

It has been argued that IC is a source of competitive advantage and superior firm performance (Exposito and Sanchis-Llopis, 2018). Likewise, SF reflects the dynamic capabilities of a firm and gives it a competitive advantage (Guo and Cao, 2014; Herhausen et al., 2020). The dynamic capabilities theory is relevant to this study because IC and SF are viewed as dynamic organisational capabilities that give SMEs a sustainable competitive advantage, leading to superior performance even in a highly dynamic and competitive business environment.

Innovating is critical to a firm’s performance and success (Saunila, 2016). The phrase 'innovate or die' emphasises the importance of innovation (Otache and Usang, 2021). According to Otache and Usang (2021), innovation is “the process of creating something new with significant value.” It is the process by which businesses introduce new products, services, processes and systems required to adapt to changing markets and technologies. Innovation has been acknowledged as a source of business competition (Exposito and Sanchis-Llopis, 2018). Today’s businesses compete based on innovative products, processes, services, technologies and systems. In a highly dynamic and competitive business environment, SMEs that innovate are significantly more likely to succeed than those that do not (Saunila, 2014). According to Tajvidi and Karami (2015), IC is the capacity of firms to continually improve their capabilities and resources for discovering opportunities to engage in new product or process development. IC allows a firm to meet market needs and swiftly respond to the changing environment (Ilmudeen et al., 2020).

Firm performance is important to the owners and managers. SME owners and managers want their businesses to perform. According to Hussaini and Muhammed (2018), firm performance is the ability of a business to survive, grow and perform efficiently and profitably. Firm performance shows whether or not a business is achieving its objectives or making progress. IC helps SMEs achieve financial and nonfinancial benefits (Shafi, 2020). It has been argued that IC helps firms reduce costs and increase profits (Ilmudeen et al., 2020; Shafi, 2020). According to Saunila (2020), IC enhances new product development. Besides, research evidence suggests that IC is a source of competitive advantage and superior firm performance (Kolbe et al., 2022; Matekenya and Moyo, 2022). In light of the dynamic capabilities theory, this study argues that IC is regarded as a dynamic capability that enhances SME performance (Exposito and Sanchis-Llopis, 2018). Based on the above premise, it is hypothesised that:

SF is one of the essential features of SMEs (Exposito and Sanchis-Llopis, 2018; Zahoor and Lew, 2022). It is defined as the ability of the firm to proactively respond to changing environmental conditions and, thereby, develop and maintain a competitive advantage (Bashir, 2021; Brozovic, 2016; Xiu and Chen, 2017). Also, a firm can proactively deal with uncertainties in the changing business environment (Zhang et al., 2014). In the context of SF, firms can be either proactive or reactive (Bashir, 2021). In this regard, proactive firms can sense and respond to changes in the environment even before they happen, whilst reactive firms only react to changes in the environment after they have happened. A firm’s SF depends on the inherent flexibility of its resources and its flexibility to apply them to alternative courses of action (Bashir, 2021). SF enables firms with resource constraints to quickly change or reconfigure their strategic direction (Bashir, 2021).

SF and its impact on firm performance are well documented in the extant strategic management literature (Bashir, 2021; Zhang et al., 2014). SF is acknowledged as one of the most vital enablers of a firm’s competitiveness (Bashir, 2021; Brozovic et al., 2023; Zhang et al., 2014). It helps a firm navigate a turbulent business environment (Bashir, 2021). SF makes it easier for firms to deal with ever-changing customers' needs and preferences and competitor activities (Bashir et al., 2023; Zhang et al., 2014). Firms depend on SF to create new products, enter new markets and develop new business models. According to Nadkarni and Herrmann (2010), SF allows firms to take advantage of different market opportunities, enhancing their performance. In light of the dynamic capabilities theory, SF is regarded as a dynamic organisational capability that helps a firm maximise the potential of the available resources (Bashir, 2021). SF is vital for firms in emerging markets with limited resources, which need to be reconfigured for survival and growth (Zahoor and Lew, 2022). In light of the dynamic capabilities theory, SF is regarded as a dynamic firm capability that gives firms a competitive advantage and enhances performance. Thus, it is hypothesised that:

Competitive advantage is one of the prominent concepts in strategic management. Today’s business environment is highly competitive. Thus, every business strives to gain a competitive advantage. Competitive advantage is the superiority of a firm over others in the market (Tu and Wu, 2020). It reflects a firm’s unique capacities and helps improve its position in the market. Competitive advantage implies that a firm gains more than its rivals in the market in terms of cost, brand, technology,(Tu and Wu, 2020) etc. SMEs that aim to achieve superior performance must develop strategies and capabilities that would enable them to gain a competitive advantage (Keskin et al., 2021). The dynamic capabilities theory argues that firms with core competencies will likely gain a competitive advantage and achieve superior performance (Otache and Usang, 2021). Similarly, this study argues that IC and SF are organisational capabilities that give SMEs a competitive edge and lead to superior performance.

The extant literature generally suggests that IC and SF are sources of competitive advantage (Exposito and Sanchis-Llopis, 2018) and competitive advantage leads to better firm performance (Kiyabo and Isaga, 2020). This suggests that competitive advantage could serve as the mechanism that helps transfer the positive impacts of IC and SF to SME performance. Remarkably, there is a paucity of studies exploring the mediating role of competitive advantage in the relationship between IC, SF and SME performance. Besides, previous studies have tested and confirmed the mediating effect of competitive advantage in different contexts (Keskin et al., 2021; Kiyabo and Isaga, 2020). From the above discussion, it is hypothesised that:

Competitive intensity is one of the dimensions of the external business environment that increasingly influences firm performance and success (Keskin et al., 2021). Many competitors in the market are trying to outsmart one another with different strategies. Competitive intensity is defined as the extent of competition in the market in terms of the number of firms competing and the number of areas where competition exists (Keskin et al., 2021). Firms compete based on prices, product quality, service delivery, product differentiation and technology (Keskin et al., 2021).

Additionally, the intensity of competition could motivate firms to take strategic actions (Guo and Cao, 2014; Kankam-Kwarteng and Donkor, 2019). Firms must be active in a highly competitive business environment. As competition intensifies, firms become more aggressive in countering rivals (Kankam-Kwarteng and Donkor, 2019). Different firms have developed various strategies and capabilities to withstand competition in the market. Firm capabilities such as IC and SF enable firms to respond to the actions of competitors in the market.

Furthermore, the existing literature acknowledges that IC and SF improve firms' competitiveness (Guo and Cao, 2014). Thus, IC and SF are considered sources of competitive advantage (Xiu and Chen, 2017). They enable firms to respond to dynamic and competitive business environments. Research suggests that IC and SF positively impact firm performance (Otache and Usang, 2021; Xiu and Chen, 2017). Similarly, it has been reported that competitive intensity positively affects firm performance (Kankam-Kwarteng and Donkor, 2019). Therefore, this study argues that the impact of IC and SF on SME performance depends on the intensity of competition in the market. It means that at a higher level of competition in the market, SMEs are likely to develop greater IC and SF to gain a competitive advantage and achieve more excellent performance. Moreover, competitive intensity has been widely acknowledged as a moderator in different studies that involve the links between SME performance and its explanatory variables (Kankam-Kwarteng and Donkor, 2019). Hence, this study hypothesises that:

Figure 1 (the conceptual framework) diagrammatically illustrates the relationships amongst the study variables. From the figure, IC and SF are hypothesised to impact SME performance directly (H1 and H2). Also, competitive advantage is modelled to mediate the relationship between IC and SME performance (H3) and SF and SME performance (H4). Lastly, competitive intensity is hypothesised to moderate the relationship between IC and SME performance (H5) and SF and SME performance (H6).

The study sample consisted of 159 SMEs conveniently selected from the six geopolitical zones of Nigeria. The study of SMEs is important because they are the backbone of Nigeria’s economy. SMEs play an increasingly critical role in the country’s economy, providing job opportunities for the teeming youths and contributing to Nigeria’s GDP (Agwu and Emeti, 2014). The SMEs in the manufacturing and services sectors were studied. The SMEs studied were those whose employees were between 10 and 200 and whose capital was between 5 and 500 million naira. The study employed a convenience sampling technique because of the difficulty of obtaining a comprehensive list of all SMEs in the country to perform a random sampling procedure. The author performed the Kaiser–Meyer–Olkin (KMO) test to examine sampling adequacy, and the results indicated a KMO value of 0.858, exceeding the threshold of 0.50 (Hair et al., 2010). The result confirms the adequacy of the study sample. Of the 159 SMEs selected, 91 (57%) had 10–50 employees, 31 (20%) had 50–100 employees, 29 (18%) had 100–150 employees and 8 (5%) had 150–200 employees. Also, 82 (52%) had existed for 0–10 years, 47 (30%) had existed for 11–20 years and 30 (18%) had existed for more than 20 years.

This study adopted a survey research design, and the data were gathered from the selected SMEs using a self-reported questionnaire. The questionnaire was personally administered to the SME managers or owners knowledgeable about their business operations. The SME managers or owners completed the questionnaire after being assured of the confidentiality of the information provided and their anonymity. The data collection lasted three months (from January to March 2023), with the help of four research assistants.

This study adopted a quantitative approach. Thus, mediation and moderation analyses were performed to test the study hypotheses using Hayes' (2013) PROCESS macro v3. The PROCESS macro “simplifies the implementation of mediation, moderation and conditional process analysis of observed (i.e. manifest) variables” with a regression path analysis modelling tool using ordinary least squares (OLS) (Hayes et al., 2017, p. 2). Besides, Hayes et al. (2017) argue that for models that are entirely based on observed variables, it does not matter whether the researchers use PROCESS macro or structural equation modelling (SEM) because the results will not be significantly different. The study applied a bootstrapping technique (5,000 resamples) to test the hypotheses' significance level. Model 4 of the PROCESS macro was used to perform the mediation analysis, whilst model 1 was applied to perform the moderation analysis. The hypothesised relationships were deemed significant if the confidence interval excluded zero.

This study used previously validated scales to measure its variables. A five-point Likert scale was used to measure the variables, where 1 represents strongly disagree and 5 means strongly agree.

1. SME performance was operationalised as the extent to which an SME achieves its set objectives relating to profitability, growth and market share. The SME performance scale consisted of five items, e.g. “We have a high market share growth” and was adapted from Abeysekara and Wang (2019). The study used subjective performance measures. According to Vij and Bedi (2016), subjective and objective performance measures do not produce significantly different results.

2. IC was operationalised as the ability of an SME to identify and transform new ideas into new or improved products, services, or processes. The IC scale comprised five items, e.g. “Our firm can develop a new product/service” and was adapted from Shafi (2020).

3. SF was operationalised as the ability of an SME to respond and adapt to environmental changes. The SF scale consisted of five items, e.g. “We have a high degree of flexibility to redefine existing strategies” and was adapted from Zhou and Wu (2010) and Sanchez (1995) as used by Bashir (2021).

4. Competitive advantage was operationalised as any factors or attributes that give an SME an edge over its competitors. The competitive advantage scale comprised five items, e.g. “We have a strong reputation for quality” and was adapted from Abeysekara and Wang (2019).

5. Competitive intensity was operationalised as the degree to which an SME faces competition in its market. The competitive intensity scale consisted of five items, e.g. “There are many promotion wars in our industry” and was adapted from Jaworski and Kohli (2013).

6. The control variables in this study are firm age and firm size. Firm age was measured on how long an SME has been operating: 0–10 years, 11–20 years and 20 years and above. Also, firm size was measured based on the number of employees: 10–50 employees, 51–100 employees, 101–150 employees and 151–200 employees.

A t-test was performed to check for the nonresponse bias in the collected data. The early respondents (85) and the late respondents (74) were compared. There was no significant difference between the two groups (p > 0.05), indicating that there was no nonresponse bias (Bashir, 2021).

Also, Harman’s single-factor test was performed to establish whether the data gathered suffered from common method bias (Podsakoff et al., 2003). Results showed that no single factor emerged. From the four-factor solution that occurred with an eigenvalue greater than 1, explaining 80.3% of the total variance, the first factor explained only 25.3%, less than the critical value of 50% (Podsakoff et al., 2003). The results imply that there was no common method bias issue.

Cronbach’s α, composite reliability (CR), convergent validity and discriminant validity (DV) were used to evaluate the validity and reliability of the measurement instruments using SmartPLS 3.0. The results (Table 1) show that Cronbach’s α and CR values for all the variables were above the recommended value of 0.70 (Guo and Cao, 2014; Hair et al., 2014), suggesting a high internal consistency amongst the items measuring the variables.

Additionally, the average variance extracted (AVE) was used to assess the convergent validity of the items measuring the variables. Results (Table 1) indicate that all the variables' AVE values exceeded the recommended values of 0.50 (Guo and Cao, 2014; Hair et al., 2014), implying that the variables passed the convergent test criteria.

Furthermore, DV measures the extent to which a variable significantly differs from other variables (Hair et al., 2014). DV is achieved when the square root of a variable’s AVE is greater than the highest correlation that the variable has with other variables (Fornell and Larcker, 1981). From the results (Table 1), the square root of each variable’s AVE is greater than the variable’s correlation with other variables, suggesting that all the variables passed the DV test (see Table 2 for the correlations amongst the variables).

Table 2 shows the descriptive statistics and correlation coefficients amongst the study variables. From the table, IC (r = 0.45, p < 0.01) and SF (r = 0.37, p < 0.01) had a positive and significant correlation with SME performance. Also, competitive advantage (r = 0.45, p < 0.01) and competitive intensity (r = 0.24, p < 0.01) had a positive and significant association with SME performance. For the control variables, firm size (r = 0.06, p > 0.05) and firm age (r = 0.09, p > 0.05) did not have strong correlations with SME performance.

Based on two-stage least squares (2SLS) regression, the study conducted the Durbin-Wu-Hausman test to check for a potential endogeneity problem (Lu et al., 2018). The results showed that the endogeneity tests on IC and SF are nonsignificant (χ² = 0.021, p = 0.638). Thus, the null hypothesis that IC and SF are exogenous should be accepted, suggesting that endogeneity is not an issue in this study.

This study tested the direct effects of IC (H1) and SF (H2) on SME performance. The results (Table 3) showed that the effect of IC on SME performance was positive and significant (β = 0.449, t = 3.742). Also, the effect of SF on SME performance was positive and significant (β = 0.357, t = 3.188). The positive β values suggest that a 1 standard deviation unit increase in IC will result in 0.449 standard deviation unit increase in SME performance. Likewise, a 1 standard deviation unit increase in SF will result in 0.357 standard deviation unit increase in SME performance. The higher the IC and SF of SMEs, the greater their performance. These findings validated the results of the correlation analysis reported earlier. From the findings, H1 and H2 are supported.

The study tested the mediating effect of competitive advantage on the relationship between IC and SME performance (H3) and SF and SME performance (H4). The results (Table 3) showed that IC (β = 0.382, t = 3.604) and SF (β = 0.336, t = 3.429) were positively associated with a competitive advantage. Further examination of the results revealed that competitive advantage had a strong positive impact on SME performance (β = 0.451, t = 3.637) and significantly mediated the relationships between IC and SME performance (β = 0.172, t = 3.185) and between SF and SME performance (β = 0.152, t = 2.452). The results mean that competitive advantage helps to transfer the positive impacts of IC and SF to SME performance. It was a complementary partial mediation because the direct and indirect effects were statistically significant, pointing in the same direction (Nitzl et al., 2016). From the results, H3 and H4 are supported.

The study tested the moderating effect of competitive intensity on the relationship between IC and SME performance (H5) and SF and SME performance (H6). The results (Table 3) indicated that competitive intensity positively and significantly impacted SME performance (β = 0.243, R² = 0.353, t = 2,761). It means that competitive intensity predicts SME performance and explains 35.3% of the variation in SME performance. Further examination of the results revealed that competitive intensity positively and significantly moderated the relationship between IC and SME performance (β = 0.264, R² = 0.494, t = 2.467). This means that the moderating effect of competitive intensity causes the impact of IC on SME performance to increase, explaining 49.4% of its variation, with an effect size (f²) of 0.28, considered moderate (Hair et al., 2014). The finding also means that the impact of IC on SME performance depends on the level of competitive intensity. That is, at a high competitive intensity, the impact of IC on SME performance will be high. In contrast, at a low competitive intensity, the impact of IC on SME performance will be low. Additionally, the moderating effect of competitive intensity on the relationship between SF and SME performance was positive but not statistically significant (β = 0.180, R² = 0.338, t = 1.835). Although the moderating effect of competitive intensity causes the impact of SF on SME performance to increase, the effect in terms of ΔR² (from 0.338 to 0.367) was not statistically significant. Thus, H5 is supported, whilst H6 is partially supported.

Drawing on the dynamic capabilities theory, this study empirically explored the mediating effect of competitive advantage and the moderating effect of competitive intensity on the relationships between IC and SME performance and between SF and SME performance in the Nigerian context. As hypothesised, the findings show that IC is positively associated with SME performance. These findings suggest that IC predicts SME performance. As a firm’s innovative capacity increases, its performance will also increase (Otache and Usang, 2021). IC is regarded as an essential prerequisite for value creation. The results are consistent with previous studies (Exposito and Sanchis-Llopis, 2018; Otache and Usang, 2021). For example, Otache and Usang (2021) reported that IC positively impacts SME performance in times of economic crisis.

The results also reveal that SF positively influences SME performance, suggesting that SF predicts SME performance. The greater the SF of an SME, the better its performance (Bashir, 2021; Guo and Cao, 2014). The ability of SMEs to reconfigure flexible resources will allow them to capture value from new opportunities in the external environment, resulting in superior performance (Bashir, 2021). This finding agrees with previous studies (Bashir, 2021; Guo and Cao, 2014), which demonstrated that SF affects firm performance, particularly in a highly dynamic business environment. SF allows SMEs to develop learning capabilities owing to the detachment of organisational routines and practices that lead to organisational lethargy (Bashir, 2021).

Additionally, the findings reveal that competitive advantage strongly impacts SME performance and significantly mediates the relationships between IC and SME performance and between SF and SME performance. First, these findings suggest that IC and SF increase firms' competitiveness. The results are consistent with previous studies (Exposito and Sanchis-Llopis, 2018; Xiu and Chen, 2017). Second, the findings imply that competitive advantage positively impacts SME performance. The results agree with previous studies that demonstrated that competitive advantage leads to superior firm performance (Kiyabo and Isaga, 2020). Third, the findings further suggest that competitive advantage is an underlying mechanism through which IC and SF positively impact SME performance. Overall, the results establish that competitive advantage helps to strengthen the positive relationship between IC, SF and SME performance.

Furthermore, the findings show that competitive intensity positively impacts SME performance and significantly moderates the relationship between IC and SME performance. These findings suggest that the impact of IC on SME performance is contingent on the intensity of competition in the marketplace. IC is more effective in performance improvement when the business environment is highly competitive. Consistent with the existing literature (Guo and Cao, 2014), the findings also mean that competitive intensity enhances SME performance and can cause IC to impact SME performance significantly. In other words, the intensity of competition in the market can motivate SMEs to develop higher IC, which will, in turn, lead to more excellent performance. Unfortunately, competitive intensity does not significantly moderate the relationship between SF and SME performance in this study. This finding should be interpreted with caution because the results show that the moderating effect of competitive intensity on the relationship between SF and SME performance is positive but non-statistically significant. The findings suggest that competitive intensity potentially moderates the relationship between SF and SME performance. As the environment becomes more dynamic, SMEs are expected to be more flexible to adjust and adapt their operations and processes to the changing climate. Environmental dynamism could significantly moderate the relationship between SF and SME performance because firms are expected to be more flexible in a highly dynamic environment than in a highly competitive one.

From the above discussions, this study concludes that IC and SF enhance SME performance. The study concludes that competitive advantage could be an underlying mechanism through which IC and SF positively impact SME performance. Finally, the study concludes that competitive intensity positively moderates the relationship between IC, SF and SME performance.

The findings have managerial implications for SME owners and managers. This study has demonstrated that IC and SF positively impact SME performance. The findings suggest the need for SMEs to develop more IC and increase their SF. In other words, SME owners and managers should invest more in developing IC and SF. More specifically, they should invest more in research and development, the development of intellectual capital (consisting of human capital, structural capital and relational capital) and new technologies, products, services and processes. Also, they should nurture an innovation culture, encourage creative and innovative acts and allow employees to experiment with new ideas without hindrances. The environment in which SMEs operate is usually dynamic and competitive, particularly in emerging economies such as Nigeria, thus making IC and SF more important (Ferreira and Coelho, 2019). Therefore, developing greater IC and SF would enable SMEs to sense and act quickly on emerging and entrepreneurial opportunities often induced by tremendous environmental changes, gain competitive advantages and achieve superior performance (Exposito and Sanchis-Llopis, 2018).

Additionally, the study has demonstrated that the relationship between IC, SF and SME performance can be explained through the lens of competitive advantage. The findings suggest that SME owners and managers should understand that IC and SF are sources of competitive advantage in dynamic and turbulent business environments, leading to greater SME performance (Guo and Cao, 2014; Saunila, 2016). Thus, SMEs should rely on their small size and flexible structures to develop innovative capacities and SF that would give them competitive advantages in terms of the introduction of new and quality products, general improvements to existing processes and practices and quick adaptation to changing environmental conditions (Sulistyo and Ayuni, 2020).

The findings of this study have theoretical implications. From the dynamic capabilities theory perspective, this study demonstrates that IC and SF are firm dynamic capabilities that give SMEs competitive advantages, leading to better performance. The dynamic capabilities theory argues that a firm’s superior performance depends on its ability to integrate, build and reconfigure its internal and external capabilities (Teece et al., 1997). This study has demonstrated that IC and SF are internal capabilities that SMEs can develop and reconfigure to gain competitive advantages and achieve superior performance in highly dynamic and competitive business environments. Additionally, the study enriches the literature by providing empirical evidence of the mediating effect of competitive advantage and the moderating effect of competitive intensity on the relationship between IC, SF and SME performance in an emerging economy. Overall, the study provides a better understanding of how IC and SF impact SME performance.

This study has some limitations, which simultaneously provide future research directions. First, the study used a non-probability sampling technique (convenience sampling), so the extent of generalising its findings to the SMEs not included in the study is limited. Besides, the sample size (n = 159) is small compared to the total number of SMEs in Nigeria. Second, the study collected and analysed cross-sectional data. Thus, cause-and-effect inferences cannot be made about the study variables (Aguinis et al., 2016). Future studies should collect and analyse longitudinal data to make cause-and-effect inferences about the variables (Aguinis et al., 2016). Third, this study measured SME performance subjectively. There may be a need to inject some elements of objectivity into the study. Thus, future researchers replicating this study’s model should measure SME performance objectively by extracting performance indices such as profitability ratios from the financial statements of the SMEs. Lastly, in this study, competitive intensity could not significantly moderate the SF–SME performance relationship. However, the author argues that environmental dynamism could have significantly moderated the SF–SME performance relationship because SMEs should be more flexible in a highly dynamic environment than in a highly competitive one (Bashir, 2021; Saunila, 2014). Therefore, in replicating this study’s model, future researchers should retain competitive intensity to moderate the IC–SME performance relationship and introduce environmental dynamism to moderate the SF–SME performance relationship.

The author is indebted to the editor and the anonymous reviewers for their valuable comments and suggestions. This research received no specific grant from any agency in the public, commercial, or not-for-profit sectors.