Connecting the Dots: How Business Model Innovation Bridges Innovation Capability and MSMEs' Performance?
Main Article Content
Abstract
Micro, small, and medium enterprises (MSMEs) significantly underpin Indonesia’s economy, yet sustaining their business performance remains a critical challenge. While extensive literature emphasizes the strategic role of innovation capability in enhancing SMEs’ performance, many studies have concentrated on narrow, industry-specific contexts, limiting their generalizability. Moreover, the mechanisms through which innovation capability translates into tangible performance gains remain insufficiently explored, particularly the mediating role of business model innovation. Addressing this gap, this study explores the relationships among innovation capability, business model innovation, and MSMEs’ performance. Structured questionnaires were disseminated among MSME owners and managers engaged in business model innovation. Data were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM). Findings reveal that innovation capability significantly improves MSMEs’ performance, with business model innovation acting as a crucial pathway in this relationship. Theoretically, the current study enriches the dynamic capabilities framework by clarifying how business model innovation serves as a mediating mechanism in the innovation–performance relationship. Practically, the insights offer MSME owners and managers actionable strategies to leverage innovation capability and business model innovation to sustain growth in dynamic markets. In light of prior studies, this study is among the first empirical studies exploring the mediating role of business model innovation in the link between innovation capability and performance within MSMEs context. This contribution also resonates with Sustainable Development Goals (SDGs), which emphasizes fostering inclusive and sustainable SME growth in emerging economies.
Downloads
Article Details
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
https://creativecommons.org/licenses/by-sa/4.0/
References
Abeysekara, N., Wang, H., & Kuruppuarachchi, D. (2019). Effect of supply-chain resilience on firm performance and competitive advantage. Business Process Management Journal, 25(7), 1673–1695. https://doi.org/10.1108/BPMJ-09-2018-0241
Alegre, J., Ferreras-Méndez, J. L., Fernández-Mesa, A., & Strange, R. (2022). Innovation capabilities and export performance in manufacturing SMEs. Tec Empresarial, 16(3), 55–71. https://doi.org/10.18845/te.v16i3.6367
Arshad, M. Z., Arshad, D., Lamsali, H., Ibrahim Alshuaibi, A. S., Ibrahim Alshuaibi, M. S., Albashar, G., Shakoor, A., & Chuah, L. F. (2023). Strategic resources alignment for sustainability: The impact of innovation capability and intellectual capital on SME’s performance. Moderating role of external environment. Journal of Cleaner Production, 417, 137884. https://doi.org/10.1016/j.jclepro.2023.137884
Aspara, J., Hietanen, J., & Tikkanen, H. (2010). Business model innovation vs replication: financial performance implications of strategic emphases. Journal of Strategic Marketing, 18(1), 39–56. https://doi.org/10.1080/09652540903511290
Athiyah, F., & Darmawan, B. A. (2025). Analysis of the of Customer Orientation on MSMEs’ Performance: Testing the Mediating Role of Innovativeness. Management and Economics Journal, 9(1), 81–96. https://doi.org/10.18860/mec-j.v9i1.30071
Bahta, D., Yun, J., Islam, M. R., & Ashfaq, M. (2021). Corporate social responsibility, innovation capability and firm performance: evidence from SME. Social Responsibility Journal, 17(6), 840–860. https://doi.org/10.1108/SRJ-12-2019-0401
Balboni, B., Bortoluzzi, G., Pugliese, R., & Tracogna, A. (2019). Business model evolution, contextual ambidexterity and the growth performance of high-tech start-ups. Journal of Business Research, 99, 115–124. https://doi.org/10.1016/j.jbusres.2019.02.029
Bashir, M. (2023). The influence of strategic flexibility on SME performance: is business model innovation the missing link? International Journal of Innovation Science, 15(5), 799–816. https://doi.org/10.1108/IJIS-06-2021-0110
Bashir, M., Alfalih, A., & Pradhan, S. (2022). Sustainable business model innovation: Scale development, validation and proof of performance. Journal of Innovation & Knowledge, 7(4), 100243. https://doi.org/10.1016/j.jik.2022.100243
Bashir, M., Alfalih, A., & Pradhan, S. (2023). Managerial ties, business model innovation & SME performance: Moderating role of environmental turbulence. Journal of Innovation & Knowledge, 8(1), 100329. https://doi.org/10.1016/j.jik.2023.100329
Bekata, A. T., & Kero, C. A. (2025). Modeling the significance of strategic orientation for innovation capabilities and enterprise performance: evidence from Ethiopian SMEs. Cogent Business & Management, 12(1). https://doi.org/10.1080/23311975.2024.2440122
Borah, P. S., Iqbal, S., & Akhtar, S. (2022). Linking social media usage and SME’s sustainable performance: The role of digital leadership and innovation capabilities. Technology in Society, 68, 101900. https://doi.org/10.1016/j.techsoc.2022.101900
Cheng, C. C. J., & Chen, J. (2013). Breakthrough innovation: the roles of dynamic innovation capabilities and open innovation activities. Journal of Business & Industrial Marketing, 28(5), 444–454. https://doi.org/10.1108/08858621311330281
CNN Indonesia. (2024, November 13). BRI Soroti Geliat UMKM Melemah: Omzet hingga Tenaga Kerja Turun. CNN Indonesia. https://www.cnnindonesia.com/ekonomi/20241113121954-78-1166081/bri-soroti-geliat-umkm-melemah-omzet-hingga-tenaga-kerja-turun
Cohen, S. K., & Caner, T. (2016). Converting inventions into breakthrough innovations: The role of exploitation and alliance network knowledge heterogeneity. Journal of Engineering and Technology Management, 40, 29–44. https://doi.org/10.1016/j.jengtecman.2016.03.002
Colovic, A. (2022). Leadership and business model innovation in late internationalizing SMEs. Long Range Planning, 55(1), 102083. https://doi.org/10.1016/j.lrp.2021.102083
Darmawan, B. A. (2022). Improving MSMEs Operational Performance: the Role of Knowledge Management and Product Innovation. In M. M. Rahman (Ed.), Proceedings of the International Conference on Industrial Engineering & Operations Management (pp. 2369–2376). IEOM Society International .
Darmawan, B. A., & Anugrahani, R. M. D. (2025). Play the Second Fiddle: Examining the Role of Innovation in Knowledge Management-Operational Performance Relationship. In A. Ullah & S. Anwar (Eds.), Lecture Notes in Networks and Systems (Vol. 1248, pp. 699–709). Springer. https://doi.org/10.1007/978-981-96-1758-6_58
Demil, B., & Lecocq, X. (2010). Business Model Evolution: In Search of Dynamic Consistency. Long Range Planning, 43(2–3), 227–246. https://doi.org/10.1016/j.lrp.2010.02.004
Fahmi, M., Andi Prayogi, M., Taufik Lesmana, M., Citra Kencana, M., & Syahnita. (2025). Business network accessibility: Innovation capability as a connecting factor between Customer Relationship Management and market orientation on SMEs’ performance. Innovative Marketing, 21(2), 40–56. https://doi.org/10.21511/im.21(2).2025.04
Fainshmidt, S., Pezeshkan, A., Lance Frazier, M., Nair, A., & Markowski, E. (2016). Dynamic Capabilities and Organizational Performance: A Meta‐Analytic Evaluation and Extension. Journal of Management Studies, 53(8), 1348–1380. https://doi.org/10.1111/joms.12213
Foss, N. J., & Saebi, T. (2017). Fifteen Years of Research on Business Model Innovation. Journal of Management, 43(1), 200–227. https://doi.org/10.1177/0149206316675927
Futterer, F., Schmidt, J., & Heidenreich, S. (2018). Effectuation or causation as the key to corporate venture success? Investigating effects of entrepreneurial behaviors on business model innovation and venture performance. Long Range Planning, 51(1), 64–81. https://doi.org/10.1016/j.lrp.2017.06.008
Gambardella, A., & McGahan, A. M. (2010). Business-Model Innovation: General Purpose Technologies and their Implications for Industry Structure. Long Range Planning, 43(2–3), 262–271. https://doi.org/10.1016/j.lrp.2009.07.009
Hair, J. F. , Jr., Hult, G. T. M., Ringle, C. M., & Sarstedt, M. (2022). A Primer on Partial Least Squares Structural Equation Modeling (PLS-SEM) (3rd ed.). SAGE Publications, Inc.
Hamidah, H., Putra, H. R., & Putri, R. (2024, September 28). Daya Beli Masyarakat Menurun, Teten Masduki: UMKM Ikut Terdampak. Tempo. https://bisnis.tempo.co/read/1921925/daya-beli-masyarakat-menurun-teten-masduki-umkm-ikut-terdampak
Haryanti, D. M. (2024, January 31). Potret UMKM Indonesia: Si Kecil yang Berperan Besar. UKMINDONESIA.ID. https://ukmindonesia.id/baca-deskripsi-posts/potret-umkm-indonesia-si-kecil-yang-berperan-besar
Heikkilä, M., Bouwman, H., & Heikkilä, J. (2018). From strategic goals to business model innovation paths: an exploratory study. Journal of Small Business and Enterprise Development, 25(1), 107–128. https://doi.org/10.1108/JSBED-03-2017-0097
Henseler, J., Ringle, C. M., & Sarstedt, M. (2015). A new criterion for assessing discriminant validity in variance-based structural equation modeling. Journal of the Academy of Marketing Science, 43(1), 115–135. https://doi.org/10.1007/s11747-014-0403-8
Hogan, S. J., Soutar, G. N., McColl-Kennedy, J. R., & Sweeney, J. C. (2011). Reconceptualizing professional service firm innovation capability: Scale development. Industrial Marketing Management, 40(8), 1264–1273. https://doi.org/10.1016/j.indmarman.2011.10.002
Hussaini, U., & Muhammed, U. D. (2018). The effect of internal control on performance of commercial banks in Nigeria. International Journal of Management Research and Review, 8(2), 13–32.
Ilmudeen, A., Bao, Y., Alharbi, I. M., & Zubair, N. (2021). Revisiting dynamic capability for organizations’ innovation types. European Journal of Innovation Management, 24(2), 507–532. https://doi.org/10.1108/EJIM-06-2019-0144
Jalil, M. F., Ali, A., & Kamarulzaman, R. (2022). Does innovation capability improve SME performance in Malaysia? The mediating effect of technology adoption. The International Journal of Entrepreneurship and Innovation, 23(4), 253–267. https://doi.org/10.1177/14657503211048967
Kamalrulzaman, N. I., Ahmad, A., Ariff, A. M., & Muda, M. S. (2021). Innovation Capabilities and Performance of Malaysian Agricultural SMEs: The Moderating Role of Strategic Alliance. International Journal of Business and Society, 22(2), 675–695. https://doi.org/10.33736/ijbs.3751.2021
Keiningham, T., Aksoy, L., Bruce, H. L., Cadet, F., Clennell, N., Hodgkinson, I. R., & Kearney, T. (2020). Customer experience driven business model innovation. Journal of Business Research, 116, 431–440. https://doi.org/10.1016/j.jbusres.2019.08.003
Khoiri, A. R., & Darmawan, B. A. (2024). It Takes Two to Tango: How Customer Orientation and Innovation Behavior Synergize to Drive MSMEs’ Performance. Journal of Business and Management Review, 5(12), 1123–1136. https://doi.org/https://doi.org/10.47153/jbmr.v5i12.1193
Kolbe, D., Frasquet, M., & Calderon, H. (2022). The role of market orientation and innovation capability in export performance of small- and medium-sized enterprises: a Latin American perspective. Multinational Business Review, 30(2), 289–312.
Latifi, M.-A., Nikou, S., & Bouwman, H. (2021). Business model innovation and firm performance: Exploring causal mechanisms in SMEs. Technovation, 107, 102274. https://doi.org/10.1016/j.technovation.2021.102274
Lawson, B., & Samson, D. (2001). Developing Innovation Capability In Organisations: A Dynamic Capabilities Approach. International Journal of Innovation Management, 05(03), 377–400. https://doi.org/10.1142/S1363919601000427
Le, H. M., Nguyen, T. T., & Hoang, T. C. (2020). Organizational culture, management accounting information, innovation capability and firm performance. Cogent Business & Management, 7(1), 1857594. https://doi.org/10.1080/23311975.2020.1857594
Limanseto, H. (2025, January 30). Pemerintah Dorong UMKM Naik Kelas, Tingkatkan Kontribusi terhadap Ekspor Indonesia. Kementerian Koordinator Bidang Perekonomian. https://www.ekon.go.id/publikasi/detail/6152/pemerintah-dorong-umkm-naik-kelas-tingkatkan-kontribusi-terhadap-ekspor-indonesia
Muchtar, Y. C., Muchtar, M. A., & Putra, A. F. (2024). Sustainable Performance of SMEs Through Social Media Usage and Innovation Capabilities. Quality-Access to Success, 25(203), 144–151. https://doi.org/10.47750/QAS/25.203.15
Nuryakin, N. (2024). Entrepreneurial orientation and SME export performance: Unveiling the mediating roles of innovation capability and international networking accessibility in the brass industry. Journal of Entrepreneurship, Management and Innovation, 20(1), 30–46. https://doi.org/10.7341/20242012
Octaviano, A. (2025, April 7). Tak Hanya Pertumbuhan yang Mini, Kualitas Kredit UMKM Juga Menurun di Awal 2025. Kontan.Co.Id. https://keuangan.kontan.co.id/news/tak-hanya-pertumbuhan-yang-mini-kualitas-kredit-umkm-juga-menurun-di-awal-2025
Olsson, A., Wadell, C., Odenrick, P., & Bergendahl, M. N. (2010). An action learning method for increased innovation capability in organisations. Action Learning: Research and Practice, 7(2), 167–179. https://doi.org/10.1080/14767333.2010.488328
Otache, I. (2024). Innovation capability, strategic flexibility and SME performance: the roles of competitive advantage and competitive intensity. African Journal of Economic and Management Studies, 15(2), 248–262. https://doi.org/10.1108/AJEMS-06-2023-0221
Otache, I., & Usang, O. U. E. (2022). Innovation capability and SME performance in times of economic crisis: does government support moderate? African Journal of Economic and Management Studies, 13(1), 76–88. https://doi.org/10.1108/AJEMS-08-2021-0362
Quintero Sepúlveda, I. C., & Zúñiga Collazos, A. (2025). Innovation capabilities, innovation strategies and performance: an empirical analysis in SMEs. Technology Analysis & Strategic Management, 37(1), 19–34. https://doi.org/10.1080/09537325.2023.2280523
Raithel, S., Sarstedt, M., Scharf, S., & Schwaiger, M. (2012). On the value relevance of customer satisfaction. Multiple drivers and multiple markets. Journal of the Academy of Marketing Science, 40(4), 509–525. https://doi.org/10.1007/s11747-011-0247-4
Ritter, T., & Lettl, C. (2018). The wider implications of business-model research. Long Range Planning, 51(1), 1–8. https://doi.org/10.1016/j.lrp.2017.07.005
Rumanti, A. A., Rizana, A. F., Septiningrum, L., Reynaldo, R., & Isnaini, M. M. (2022). Innovation Capability and Open Innovation for Small and Medium Enterprises (SMEs) Performance: Response in Dealing with the COVID-19 Pandemic. Sustainability, 14(10), 5874. https://doi.org/10.3390/su14105874
Sari, D., Kusuma, B. A., Sihotang, J., & Febrianti, T. (2023). The role of entrepreneurial marketing & innovation capability in the performance of SMEs during covid-19 pandemic: Evidence of MSMEs in West Java. Cogent Business & Management, 10(1). https://doi.org/10.1080/23311975.2023.2194091
Sekaran, U., & Bougie, R. (2016). Research Methods for Business: A Skill-Building Approach (7th ed.). Wiley & Sons.
Shafi, M. (2021). Sustainable development of micro firms: examining the effects of cooperation on handicraft firm’s performance through innovation capability. International Journal of Emerging Markets, 16(8), 1634–1653. https://doi.org/10.1108/IJOEM-11-2019-0989
Siahaan, D. T., & Tan, C. S. L. (2020). Antecedents of Innovation Capability and Firm Performance of Indonesian ICT SMEs. Asian Journal of Business Research, 10(2). https://doi.org/10.14707/ajbr.200083
Simanjuntak, S. D. A. (2024, November 13). Daya Beli Masyarakat Turun, BRI: Omzet UMKM Turun hingga 60%. Bisnis.Com. https://ekonomi.bisnis.com/read/20241113/9/1815729/daya-beli-masyarakat-turun-bri-omzet-umkm-turun-hingga-60
Sobir, R. (2020). Micro-, Small and Medium-sized Enterprises (MSMEs) and their role in achieving the Sustainable Development Goals (SDGs). https://sdgs.un.org/publications/micro-small-and-medium-sized-enterprises-msmes-and-their-role-achieving-sustainable
Spieth, P., & Schneider, S. (2016). Business model innovativeness: designing a formative measure for business model innovation. Journal of Business Economics, 86(6), 671–696. https://doi.org/10.1007/s11573-015-0794-0
Stremersch, S., Gonzalez, J., Valenti, A., & Villanueva, J. (2023). The value of context-specific studies for marketing. Journal of the Academy of Marketing Science, 51(1), 50–65. https://doi.org/10.1007/s11747-022-00872-9
Tajvidi, M., & Karami, A. (2015). Innovation Capacity. In Product Development Strategy (pp. 125–146). Palgrave Macmillan UK. https://doi.org/10.1057/9781137501394_5
Teece, D. J. (2007). Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319–1350. https://doi.org/10.1002/smj.640
Teece, D. J. (2010). Business Models, Business Strategy and Innovation. Long Range Planning, 43(2–3), 172–194. https://doi.org/10.1016/j.lrp.2009.07.003
Teece, D. J. (2018). Business models and dynamic capabilities. Long Range Planning, 51(1), 40–49. https://doi.org/10.1016/j.lrp.2017.06.007
Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509–533.
World Bank. (2019, October 16). Small and Medium Enterprises (SMEs) Finance: Improving SMEs’ access to finance and finding innovative solutions to unlock sources of capital. World Bank. https://www.worldbank.org/en/topic/smefinance
Zhang, C., & Conrad, F. G. (2014). Speeding in Web Surveys: The tendency to answer very fast and its association with straightlining. Survey Research Methods, 8(22), 127–135.