An Empirical Investigation into the Significance of Intellectual Capital and Strategic Orientations on Innovation Capability and Firm Performance in Malaysian Information and Communicati
INTRODUCTION
Background of the Research
The increasing uncertainty in global business markets presents significant challenges for firms operating in both developed and developing countries, driven by fierce competition (Mateev & Anastasov, 2010) Rapid technological advances, demanding customers, and intense competition characterize the dynamic environment companies face daily To maintain a competitive edge, organizations must continuously build, integrate, and reconfigure their skills and capabilities to adapt effectively to changing market conditions (Teece, Pisano & Shuen).
Innovation is crucial in high-technology industries, where firms encounter intense uncertainty and fierce competition for market share of new products (Lisboa, Skarmeas & Lages, 2011) This pressure drives companies to continuously adapt, develop, and innovate in order to achieve organizational success in a highly competitive environment (Hadjimanolis, 1999; Karagouni & Papadopoulos, 2007).
Innovation is essential for Malaysia to achieve developed nation status and high-income levels by 2020 The presence of innovative and competitive SMEs is vital for national prosperity and future growth Developing innovation capability is increasingly important for firms' survival and growth, as those better at managing innovation and leveraging new ideas tend to have superior innovation capabilities.
2005) Researchers (e.g., Calantone, Cavusgil & Zhao 2002; Keskin 2006; Panayides 2006)
Research supports the proposition that innovation capability has a positive and significant impact on firm performance Developing and sustaining innovation provides firms with a strong foundation for achieving superior performance and maintaining a competitive advantage As Barney (1991) emphasizes, innovation is a key driver of long-term organizational success and competitive differentiation.
Problem Identification
The development and prosperity of SMEs in the global ICT sector are critically important to any economy, including Malaysia, as they drive national growth and innovation Malaysian ICT SMEs face intense global market competition, requiring continuous innovation to achieve sustainable growth and improved business performance Innovation capability enhances a company's potential for effective innovation, which is vital for maintaining competitiveness Research from Terziovski (2007), Calantone, Cavusgil, and Zhao (2002), and Hurley and Hult (1998) underscores that innovation and the ability to innovate are among the most significant factors influencing an organization’s success and market performance.
Despite facing internal and external innovation barriers, SMEs must develop higher-quality products and services to leverage new technologies and gain competitive advantages (Hadjimanolis, 1999) Although resource constraints pose challenges, successful innovation is common among SMEs, which are key drivers of technological advancement and economic growth (Rosenbusch, Brinckmann & Bausch, 2010) Firms unable to build and sustain their innovation capabilities often experience weak competitiveness and poor performance, highlighting the critical need for innovation to remain market-relevant (Capaldo, Landoli, Raffa & Zollo, 2003) Enhancing innovation capability is essential for SMEs to stay competitive in dynamic markets (Wallin, Isaksson & Larson, 2010) While numerous studies explore innovation processes, there is limited empirical evidence on how firms improve their innovation capabilities, especially within the Malaysian context (Balan & Lindsay, 2010a; Romijn & Albaladejo, 2002; Tang & Chi, 2011).
Despite calls for increased innovation, Malaysia's overall innovation level remains relatively low According to the Ministry of Science, Technology and Innovation (MOSTI), Malaysia lags behind its closest neighbor, Singapore, in innovation performance This is corroborated by the 2012 Global Innovation Index (GII) released by the World Economic Forum, which shows that only four Asian economies—Singapore, Hong Kong, South Korea, and Japan—rank within the top 25 for innovation.
3 which comprises 141 countries Malaysia was ranked at 32 in this list (Ministry of Science Technology and Innovation Malaysia (MOSTI) 2012)
Saleh and Ramasamy (2013) emphasize that despite over two decades of efforts to promote ICT development in Malaysia, the country has yet to reach global standards comparable to Korea and Japan These countries are renowned for creating internationally recognized brands with high-quality, innovative ICT products and services The researchers highlight the importance for Malaysian firms to strengthen their organizational capabilities in critical areas such as research and development, innovation, patenting intellectual properties, registering trademarks, branding, and establishing a successful commercialization track record to achieve global competitiveness.
Malaysia faces significant challenges due to its weak research and development (R&D) and innovation capabilities, despite numerous efforts to promote innovation The country’s national innovation agenda has not achieved the desired progress, with R&D indicators indicating that Malaysia is lagging behind many other nations and not innovating at the frontier R&D expenditures as a percentage of GDP from 1996 onward highlight Malaysia's ongoing struggle to advance its innovation system and compete globally.
In 2000, Malaysia's innovation index was only 0.4%, significantly lower than Korea at 2.4%, Singapore at 1.9%, and India at 1.2% (Chandran, Rasiah & Wad, 2009) Recognizing this gap, the Malaysian government emphasizes the importance of supporting innovation-led growth and capacity building in SMEs through economic reform programs These initiatives aim to transform Malaysia into a knowledge and technology-driven economy, fostering sustainable development and global competitiveness (National Economic Advisory Council, 2010).
Rationale for the Current Research
There are six reasons for undertaking this study which are presented following:
There is a growing interest in understanding the characteristics that enable firms to sustain ongoing innovation, as highlighted by researchers like Damanpour (1991) and Slater (1997) Recent studies (e.g., Balan & Lindsay 2010b; Wallin, Isaksson & Larson 2010) emphasize the importance of assessing a firm's innovation capability to support its continuous growth and adaptability Understanding these capabilities is crucial for developing strategies that enhance innovation, helping firms survive and thrive in rapidly changing environments Further research is needed to explore the factors that influence and strengthen a firm’s innovation potential.
In today’s highly competitive business environment characterized by rapid technological advances and shorter product life cycles, SMEs must accelerate product development and expand product varieties to stay ahead Creating and maintaining a competitive advantage relies on a firm’s ability to continuously innovate (Tidd & Bessant, 2009) Despite the importance of innovation, there are limited empirical studies on how ICT companies enhance their innovation capabilities (Tang & Chi, 2011) Therefore, this research aims to identify the key factors that can either facilitate or hinder the innovation capacity of ICT SMEs in Malaysia.
Malaysia is advancing towards sustainable economic growth by emphasizing knowledge and know-how as key drivers, with intellectual capital playing a crucial role in shifting from a traditional industrial economy to a knowledge-based economy Despite this, research linking intellectual capital to firm innovation capability, especially within SMEs and the ICT sector, remains limited—highlighted by scholars like Hayton (2005) and Cohen & Kaimenakis (2007) In the Malaysian context, most existing studies focus on intellectual capital's impact on accounting and corporate performance rather than its influence on SME innovation and growth This article aims to explore the relationship between intellectual capital, innovation capability, and the performance of ICT SMEs in Malaysia, filling an important research gap.
Strategic orientations are essential for firms to survive and thrive in competitive markets (Zhou & Li, 2007) While previous research has explored the link between strategic orientations and organizational performance (Cano, Carrillat & Jaramillo, 2004; Narver & Slater, 1990; Wiklund & Shepherd, 2005), there is limited evidence on how these orientations influence innovation capability (Akman & Yilmaz, 2008) Understanding this relationship is crucial for firms aiming to strengthen their innovative strengths and competitive edge.
Research has extensively examined the effects of individual strategic orientation dimensions, such as customer orientation and technology orientation (Hillebrand, Kemp & Nijssen, 2011; Narver & Slater, 1990) However, studies exploring the combined impact of these strategic orientations remain limited (Hakala & Kohtamaki, 2010) Understanding how different strategic orientation combinations influence organizational performance is crucial for developing effective competitive strategies.
5 of market, learning and technology orientations are examined far less frequently (Hakala
Venkatraman (1989) argued that focusing on a single area of the business does not accurately reflect the company's strategic orientation Hakala (2011) emphasized that existing research suggests firms should simultaneously develop multiple strategic orientations, including market, learning, and technology orientations This thesis aims to provide a comprehensive understanding by examining how these combined orientations impact innovation capability and overall firm performance.
Recent studies on innovation in Malaysia predominantly focus on the manufacturing sector, emphasizing its critical role in firm competitiveness Key research topics include the impact of firm resources on product innovation performance, the relationship between knowledge management and technological innovation, and how technological innovation enhances competitiveness Notable works by Bakar & Ahmad (2010a, 2012, 2013), Tan & Nasurdin (2010), Ibrahim et al (2008), and Fitriah (2007) highlight these areas, underscoring the importance of innovation for business success in Malaysia.
Recent literature review reveals that most studies on market orientation, learning orientation, and innovation focus on large companies in developed Western countries like the United States and the United Kingdom, largely neglecting SMEs in developing nations Additionally, existing research highlights a gap in understanding the relationships between intellectual capital, strategic orientations, innovation capability, and firm performance, especially within Malaysian ICT SMEs.
Given these reasons, this study seeks to provide a comprehensive understanding of firm innovation capability and its determinants and what if any significance this may have on firm performance
Objectives and Research Questions
This study explores the critical relationship between intellectual capital and strategic orientations—specifically market orientation, learning orientation, and technology orientation—in influencing innovation capability and firm performance among Malaysian ICT SMEs The research aims to identify how these strategic factors and intellectual assets contribute to enhancing innovation and overall business success in the competitive ICT sector Understanding these dynamics can help SMEs leverage their intellectual capital and strategic directions to achieve sustainable growth and improved performance The findings offer valuable insights for policymakers and business leaders seeking to foster innovation and competitiveness within Malaysia's ICT industry.
RQ1: Does intellectual capital significantly impact innovation capability and firm performance in Malaysian ICT SMEs?
RQ2: Do strategic orientations (market orientation, learning orientation and technology orientation) significantly impact innovation capability and firm performance in Malaysian ICT SMEs?
Thesis Structure
This section outlines the structure of the present thesis This thesis is organised into seven chapters The following are brief explanations of each chapter
Chapter 1 addresses the research problems and the rationale of this study It introduces the study by providing a background to the importance of innovation for the survival and growth of firms in rapidly changing environments and how innovation capability becomes critical for innovation Six drivers generated as rationales of this study are presented This chapter also briefly discusses the objectives of the research and the research questions
Chapter 2 provides an overview of the ICT industry and SMEs in Malaysia by examining economic transformation as well as the structure and contributions of the ICT industry towards the Malaysian economy The definition of SMEs employed in the Malaysian context is presented The importance of SMEs and ICT SMEs and the challenges facing SMEs are explained The chapter then discusses the theoretical foundation for this study comprising the RBV and Dynamic Capabilities view of the firm
Chapter 3 presents review of extant literature related to the conceptualisation of the key constructs examined in this study, innovation capability, intellectual capital, strategic orientations (market orientation, learning orientation and technology orientation) and firm performance Each dimension forming the constructs is explicated The development of a
This study's conceptual framework starts with an analysis of the reflective and formative specifications of constructs It explores how intellectual capital and strategic orientations influence innovation capability and firm performance in Malaysian ICT SMEs The framework is grounded in theorized relationships, providing a foundation for testing related hypotheses that assess the impact of these factors on business success.
Chapter 4 describes the research philosophies and research design employed in this study The survey methodology that includes the development of the constructs’ measurement, expert evaluation, pilot test and data collection procedures are presented Partial Least Squares (PLS) is introduced as the structural equation modelling technique used to analyse the data The ethical considerations following guidelines set by RMIT University are also presented
Chapter 5 presents the data analysis and empirical results The sampling size requirement, participant characteristics and preliminary evaluation are explained prior to the assessment of the measurement and structural model SmartPLS 2.0 is used to evaluate the measurement and structural models The validity and reliability of the survey instrument are highlighted The results of hypotheses testing are then discussed
Chapter 6 discusses the findings from Chapter 5 The research questions are answered and the thirteen hypotheses tested are discussed by comparing and contrasting results with the existing literature
Chapter 7 provides the conclusion and contributions from the research findings The final research model based on the research findings is presented The methodological and theoretical contributions are discussed Following this, managerial implications including the recommendations and strategies to enhance innovation capability and firm performance are elaborated Finally, limitations of the study are outlined and directions for future research are proposed
OVERVIEW OF ICT INDUSTRY AND SMEs IN MALAYSIA
Introduction
Chapter 2 begins with providing an overview of the ICT industry and SMEs in Malaysia by discussing the economic transformation aspired to by Malaysia The importance of knowledge base, innovation and ICT are examined This is followed by discussion on the ICT industry that includes the structure of the industry and its contributions to the Malaysian economy This chapter then narrows it scopes to describe Malaysian SMEs focusing on the definition, the importance of SMEs to the economy and the challenges they face Subsequently, the theories underpinning the research are explained.
Malaysia and the Economic Transformation
Malaysia has consistently worked towards economic transformation over the past 50 years, shifting from a resource-based economy to one centered on production and services This development has been driven by strategic investments in infrastructure, skilled labor, and capital, positioning Malaysia as a growing emerging market Through ongoing efforts, the country aims to strengthen its economic diversification and sustain long-term growth.
2007) Malaysia aspires to achieve fully developed nation status by the year 2020, a vision well known as Vision 2020, which was proposed by the then Malaysian Prime Minister, Tun
In 1991, Dr Mahathir bin Mohamad emphasized the importance of strategic national development (Hassan & Omar, 2010) The Malaysian government has implemented various plans and strategies to realize its vision, focusing significantly on transitioning to a knowledge-based economy In such economies, knowledge is the key driver of growth and value creation, with information technology (IT) serving as a critical enabling tool and human capital being essential for fostering innovation (Kefela, 2010).
Malaysia emphasizes the importance of innovation across all sectors of its economy to drive growth and competitiveness (Ministry of Science, Technology and Innovation Malaysia, 2006) Innovation is crucial not only for developed nations to produce competitive products and services but also for developing countries like Malaysia It plays a critical role in enhancing the performance of SMEs, which are vital to Malaysia’s economic development (National SME Development Council, 2012b) The country's growth strategy focuses on developing a knowledge-based economy through fostering innovation and technological advancement.
Malaysia is reliant on knowledge, human capital, innovation and investment in ICT (Khin, Ahmad & Ramayah 2010)
The knowledge-based economy is a key focus of Malaysia’s National Vision Policy, outlined in the Third Outline Perspective Plan (OPP3: 2001-2010), serving as the country’s long-term development strategy (Ramasamy, 2011) To achieve this, Malaysia is actively developing the necessary tools and nurturing industries to become knowledge-intensive, with a strong emphasis on leveraging ICT as the fundamental foundation for transitioning from a production-based economy to a knowledge-based one (MOSTI, 2007) The ICT Services industry has been identified as a critical strategic enabler in this economic transformation (Ariff, 2008) In contrast, earlier development efforts during the first (1971-1990) and second (1991-2000) outline plans primarily focused on agro-industrial activities (Ramasamy, 2011).
MSC Malaysia, established in 1996 as a key national initiative, aims to transform Malaysia into an IT-driven and knowledge-based economy by fostering a competitive ICT industry Covering a dedicated corridor from Kuala Lumpur City Centre to KLIA, this initiative focuses on accelerating technology transfer and increasing ICT adoption across the country Its goal is to develop a robust cluster of local ICT companies and ensure sustainable growth within Malaysia's digital landscape.
The MSC’s programs aim to transform local ICT companies into global industry leaders through innovative R&D and serve as a test bed for the international ICT sector It provides cutting-edge ICT and multimedia facilities in 'Cybercities' like Cyberjaya to support various ICT enterprises The successful implementation of the MSC project requires significant government funding, exemplified by the RM1.8 billion allocated during the 8th Malaysia Plan Additionally, ICT has been designated as a key sector in Malaysia’s National Key Economic Areas (NKEA), laying the foundation for the 10th Malaysia Plan (2011–2015).
In line with Vision 2020 goals, Malaysia introduced the New Economic Model (NEM) in 2010 to drive the country’s transformation into an advanced, high-income nation through sustainable economic growth The NEM aims to enable its people to achieve high-income status by implementing strategic reforms across eight key categories known as Strategic Reform Initiatives (SRI).
1 SRI 1- Reenergising the private sector
One of the policy purposes of this initiative is to promote SME growth by supporting SMEs in innovative and technologically advanced areas
2 SRI 2- Developing a quality workforce and reducing dependency on foreign labour This initiative focuses on improving the talent base of the workforce by, among others, reviewing the education system to nurture skilled, inquisitive and innovative workers
3 SRI 3- Creating a competitive domestic economy
In this initiative, enhanced social safety net and special transformation funds are provided
4 SRI 4- Strengthening the public sector
Public institutions are planned to be re-engineered to ensure the efficient and effective delivery of government services
5 SRI 5- Transparent and market-friendly affirmative action
This initiative aims to reduce income disparity among different ethnic groups in Malaysia by promoting equitable access to opportunities It encourages performance-based rewards and strives to create a fair and inclusive environment, ensuring everyone has equal chances to succeed.
6 SRI 6- Building the knowledge base and infrastructure
This particular initiative focuses on promoting an environment for innovation, technological advancement and entrepreneurial drive for the industrial, agricultural and also services sectors which include the ICT sector
7 SRI 7- Enhancing the sources of growth
This initiative emphasizes harnessing innovation potential as a key policy objective by providing targeted support to facilitate the rapid transformation of innovative SMEs.
8 SRI 8- Ensuring sustainability of growth
For this initiative, sustainability of public finances through stringent fiscal policies is given priority
Supporting innovative SMEs and fostering a conducive environment for innovation across all economic sectors, including ICT, are key priorities in current initiatives This thesis explores how factors such as intellectual capital and strategic orientations influence SMEs' innovation capabilities and overall performance, aligning with strategic research indicators SRI 1, SRI 6, and SRI 7 Following an overview of Malaysia's economic transformation, the subsequent sections focus on the Malaysian ICT industry and its SMEs, highlighting their vital role in the country's growth.
Structure of ICT Industry
Prior to 2011, Malaysia’s ICT industry was divided into two main sub-sectors: ICT Manufacturing and ICT Services, with the latter further classified into ICT Telecommunications and ICT Computer services, based on the Malaysia Standard Industrial Classification 2000 (MSIC 2000) Recently, this industry classification was updated to reflect the principal activity of establishments, aligning with the MSIC 2008, which adheres to the latest UN International Standard Industrial Classification of All Economic Activities (ISIC) Revision 4, with modifications to suit local Malaysian conditions.
The ICT industry in 2011 is classified into four main sub-sectors: programming and broadcasting activities, telecommunications, computer programming, and consultancy and information services activities (Department of Statistics Malaysia, 2011) Appendix A provides a detailed list of activities within these key sub-sectors, offering comprehensive coverage of the industry’s components.
Contributions of ICT Industry in the Malaysian Economy
The contributions of the ICT industry are significant to Malaysia’s economy An empirical examination on the impact of ICT on Malaysian economic growth over the period of 1975-
Research by Kuppusamy and Santhapparaj (2005) highlights that ICT has significantly contributed to Malaysia's economic growth Their study reveals that investments in ICT generate increasing returns to scale, underscoring the long-term positive impact of technology on the nation's economic development.
As reported in the Tenth Malaysia Plan (2011-2015), the ICT sector accounted for 9.8% of the Gross Domestic Product (GDP) in 2009 It is targeted to reach 10.2% by 2015 (Kumar 2010),
12 while the contribution of the ICT Services sector to GDP has increased dramatically from 28.8% in 2000 to 41.5% of total ICT:GDP (9%) in 2007 (Ramasamy 2011)
MSC Malaysia has been pivotal in boosting ICT trade services, with ICT exports growing by 30% between 2003 and 2007, highlighting its significant contribution to the industry In contrast, local sales experienced only an 18% increase during the same period, indicating different growth dynamics within the sector (Ramasamy, 2011) Despite steady industry expansion, the demand for ICT professionals remained relatively low, with a growth rate of just 4.3% from 2001 to 2009 However, the number of computer professionals grew at a faster pace than electronics and telecommunication engineers, increasing by 3.9% and 2.1% respectively during that period, reflecting a shifting skill demand in the ICT sector.
ICT is extensively utilized by all sectors in the nation, including businesses, government, NGOs, and consumers, highlighting its integral role in modern society The ICT Services sector is a key driver of high-income growth in the new economy, emphasizing innovation and creativity Between 2000 and 2007, the share of value added in ICT Services increased from 40% to 47% in telecommunications and from 5% to 12% in computer services, driven by key initiatives like e-government and online banking under the MSC Malaysia flagship programs.
SMEs and its Definition
In Malaysia, SME development has been a top priority, as outlined in the 3rd Industrial Master Plan (IMP3) spanning from 2006 to 2020 The establishment of the National SME Development Council (NSDC) in June 2004 signifies the government's commitment to formulating policies and strategies to support SMEs across all sectors Key strategic initiatives include fostering SME growth through technology, innovation, and knowledge enhancement, as well as increasing SMEs' contribution to the services sector, driving overall economic development.
Various measures have been established worldwide to define SMEs, considering factors such as the number of employees, invested capital, assets, sales volume, and production capacity (Bank Negara Malaysia, 2005) In Malaysia, the National SME Development Council defines SMEs across industries based on either the number of employees or annual sales turnover These definitions are widely used across the country to facilitate SME classification and support.
13 government agencies and other organisations related to SME development in formulating more effective policies and strategies Table 2.1 details the definitions
Table 2.1 Definitions of SMEs in Malaysia
Micro-enterprise Small enterprise Medium enterprise
Sales turnover of less than RM250,000 or full time employees less than 5
Sales turnover between RM250,000 and less than RM10 million or full time employees between
Sales turnover between RM10 million and RM25 million or full time employees between 51 and 150
Sales turnover of less than RM200,000 or full time employees less than 5
Sales turnover between RM200,000 and less than RM1 million or full time employees between 5 and 19
Sales turnover between RM1 million and RM5 million or full time employees between 20 and 50
The Importance of SMEs and ICT SMEs
SMEs are vital to Malaysia’s economy, as they generate more jobs per unit of capital compared to larger firms (UNDP, 2006) They play a key role in workforce skills development through employee training and upgrading Additionally, SMEs foster strong interfirm linkages that boost the domestic economy, complement the activities of large companies, and facilitate the transfer and development of technical expertise (Abdullah, 2002).
Comprehensive information on the status and performance of SMEs is essential for governments to effectively plan and strategize their development Malaysia's Department of Statistics has conducted two SME Censuses to date: the Baseline Census of Establishments and Enterprises 2005 for the 2003 reference year, and the SME Census 2011-Profile of SMEs for 2010 The 2011 Census reveals that 97.3% of Malaysian businesses, totaling 645,136 establishments, are SMEs, representing a 17.7% increase or 100,000 more SMEs compared to 2003 The services sector dominates with 90% of SMEs, including ICT companies, highlighting its vital role in Malaysia’s SME landscape.
Table 2.2 Profile of SMEs by Sectors
Percentage (%) of SMEs over Total
Percentage (%) of SMEs over Total SMEs
Small and medium-sized enterprises (SMEs) significantly impact the economy, with their contribution to GDP increasing from 29.4% in 2005 to 32.7% in 2012 at an annual growth rate of 6.3%, surpassing the overall economic growth rate of 4.5% (National SME Development Council, 2013) The services sector within SMEs is a primary driver of this growth, with its contribution to GDP rising from 17% in 2005 to 20.2% in 2012, highlighting the crucial role that SME services businesses play in boosting the domestic economy.
SMEs are major contributors to the labor market, accounting for 57.1% of total employment in 2010, which increased to 57.4% in 2012 (National SME Development Council, 2013) The SME Census 2011 reveals that within the services sector, micro SMEs comprise 46.7% of employment, while small and medium enterprises account for 38.4% and 14.9%, respectively (SME Corp Malaysia, 2011) The distribution of total employment in the services sector by firm size highlights the significant role of SMEs in providing jobs and supporting economic growth.
Table 2.3 Distribution of Total Employment for SMEs in Services Sector by Firm Size
Firm Size Employment Share of
The government has also encouraged SMEs to enter external markets for wider business opportunities About 19% of the nation's total exports are contributed by SMEs each year (Hashim 2010)
Focusing on ICT SMEs within the services sector has been identified as a new driver of economic growth, according to IMP3 (The Star, 2006) The number of ICT SMEs has significantly increased from 300 in 1995 to 1,880, highlighting the sector's expanding contribution to the economy (Ministry of International Trade and Industry, 2006).
According to the SME Census 2011, there were a total of 1,880 ICT SMEs in 2010 Small enterprises made up the largest group with 873 firms, followed by micro enterprises with 722 firms, and medium enterprises accounting for 285 firms.
The ICT sector, particularly ICT services, plays a crucial role in driving ICT product and service companies while enabling various industries such as banking, insurance, healthcare, education, and logistics The internet era has sparked the development of modern applications like online banking, telemedicine, distance learning, e-commerce, and cloud computing, transforming everyday life and business operations Additionally, there is a growing market for innovative green ICT products and services that promote sustainability, with new offerings emerging more frequently than before (Saleh, 2012).
Challenges Facing SMEs in Malaysia
To thrive amid global economic uncertainties and intense competition, Malaysia must adopt innovative strategies to achieve a high-income economy The SME Masterplan 2012-2020, launched in July 2012, provides a new framework focused on accelerating SME growth through increased productivity and innovation The National SME Development Council is primarily responsible for implementing Malaysia's SME development agenda, ensuring strategic support for sustainable economic growth.
The National SME Development Council (NSDC), bringing together 15 ministries and 60 agencies, aims to promote sustainable economic growth Small and Medium Enterprises (SMEs) play a vital role as drivers of domestic growth and private sector activity, making them essential contributors to national development SMEs foster innovation and serve as an economic shock absorber during periods of economic slowdown, supporting overall financial stability and resilience (National SME Development Council, 2012b).
In the SME Masterplan 2012-2020, six focus areas known as performance levers are identified to facilitate the growth of SMEs The six performance levers are:
Legal and regulatory environment; and
The SME Annual Report 2011/2012 highlights that SMEs struggle to achieve high performance due to challenges across six key areas The SME Masterplan 2012-2020 was developed to address these challenges and unlock the growth potential of SMEs, aiming for a high-income economy by 2020 (National SME Development Council 2012b) Figure 2.1 illustrates the strategic targets set within the SME Masterplan to be achieved by 2020, supporting sustainable SME development and economic growth.
Source : National SME Development Council (2012b)
Figure 2.1 Targets Set in SME Masterplan 2012-2020
The SME Masterplan aims to promote the development of small and medium enterprises by focusing on six strategic areas aligned with four key goals These goals include increasing business formation, expanding the number of high-growth and innovative firms, boosting productivity, and promoting formalization of SMEs Each goal has specific targets to achieve, with the overarching objective of helping SMEs contribute more significantly to the economy By 2020, the plan seeks to elevate SMEs' contribution to GDP from 32% in 2010 to 41%, increase employment from 59% to 62%, and raise exports from 19% to 25%, supporting sustainable economic growth and job creation.
SMEs are vital to Malaysia’s economic development, with ICT SMEs playing a crucial role as key knowledge-enabling industries essential for economic transformation Despite recent positive performance, Malaysian SMEs still have significant potential to improve and reach the levels seen in high-middle income countries, where SMEs contribute over 40% to GDP Enhancing ICT SME innovation capabilities is critical, as it can boost firm performance and support Malaysia’s goals for higher GDP, employment, and exports.
Theoretical Framework
This study leverages the Resource-Based View (RBV) (Wernerfelt, 1984) and the Dynamic Capabilities perspective (Teece, Pisano & Shuen, 1997) to emphasize the critical role of unique resources and organizational capabilities in enhancing firm performance By integrating these frameworks, the research highlights how valuable, rare, inimitable resources combined with dynamic capabilities can provide a sustainable competitive advantage Understanding the interplay between resource management and adaptive abilities is essential for businesses aiming to improve performance and long-term success These insights underscore the importance of strategic resource development and agility in today's competitive environment.
The Resource-Based View (RBV), established over 20 years ago, has become one of the most influential frameworks in strategic management and innovation research Pioneered by scholars like Barney (1991) and Wernerfelt (1984), the RBV emphasizes the crucial role of unique firm resources in attaining sustained competitive advantage Its foundational ideas trace back to Edith Penrose's 1959 work, which first highlighted the importance of organizational resources for firm growth and competitive positioning Today, the RBV continues to significantly impact fields such as strategic management, intellectual capital, and economics, shaping both academic research and practical strategies for business success.
18 opportunities yielded from the exploitation of the bundle of resources possessed and controlled by the firms using the administrative framework developed in the firm
The resource-based view (RBV) saw significant development between 1984 and the mid-1990s, beginning with Wernerfelt’s foundational article in 1984 that aimed to formalize the RBV framework (Kraaijenbrink, Spender & Groen, 2010; Newbert, 2007) Influential scholars such as Barney (1991), Dierickx and Cool (1989), Prahalad and Hamel (1990), and Priem and Butler (2001) advanced the conceptual foundation of the RBV The widespread adoption of the RBV took off following the publication of Prahalad and Hamel’s (1990) seminal article, with Barney’s (1991) work being particularly notable as the first formalization of the resource-based literature into a comprehensive theoretical framework (Newbert, 2007).
The Resource-Based View (RBV) explains that a firm's competitive advantage stems from its unique internal resources and capabilities, which can be sustained over time (Barney, 1991; Peteraf, 1993; Wernerfelt, 1984) This perspective emphasizes the importance of acquiring valuable and rare resources, as possessing such resources enables firms to achieve superior performance and a competitive edge For sustained advantage, resources must also be inimitable and non-substitutable, known as VRIN attributes, which are critical drivers of long-term success (Barney, 1991; Eisenhardt & Martin, 2000; Barney, 1986) The RBV assumes that resources are imperfectly mobile and heterogeneously distributed across firms, and these long-term resource differences lead to persistent competitive advantages (Barney, 1991).
(2007) article is illustrated in Figure 2.2
Figure 2.2 Barney’s (1991) Conceptual Framework of the RBV
Firm resources, according to Barney (1991), encompass all assets, capabilities, organizational processes, attributes, information, and knowledge controlled by a company that enable it to develop and execute strategies to enhance efficiency and effectiveness These resources are essential for a firm's competitive advantage and strategic success Effectively managing and leveraging firm resources allows organizations to innovate, adapt to market changes, and outperform competitors.
Resources are categorized into physical capital, human capital, and organizational capital, each vital for a firm's success According to Barney (1991), firms that achieve or maintain a competitive advantage employ unique strategies not simultaneously adopted by their competitors Leveraging these distinct resources and strategies enables organizations to stand out and sustain their market position over time.
The Resource-Based View (RBV) has been widely applied in academic studies but faces several notable critiques It is often regarded as a static framework inadequate for explaining competitive advantage in dynamic environments, as highlighted by Priem and Butler (2001) Additionally, the RBV is criticized for its inability to elucidate how resources are developed and leveraged to generate sustained competitive advantage Kraaijenbrink, Spender, and Groen (2010) identified eight key criticisms in the literature, including its lack of managerial implications, the implication of infinite regress, limited applicability, the challenge of achieving superior competitive advantage, its classification not qualifying as a comprehensive theory of the firm, the questionable necessity and sufficiency of VRIN resources and organizational arrangements for sustained competitive advantage, the indeterminacy of resource value for theoretical utility, and the unworkability of its resource definition.
According to Spender and Groen (2010), the Resource-Based View (RBV) effectively addresses five key critiques, but the three remaining criticisms pose significant challenges to its validity Additionally, the RBV has been criticized for its limitations in dynamic markets, where achieving sustained competitive advantage is considered unlikely, as argued by D'Aveni (1994) and cited by Eisenhardt and Martin (2000).
Advancing the Resource-Based View (RBV) requires clear definitions of resources and capabilities to ensure conceptual clarity (Kraaijenbrink, Spender & Groen 2010) While many researchers adopt a broad definition of resources as outlined by Barney (1991), Priem and Butler (2001) argue that this broad scope creates problems, as it risks categorizing all strategically useful elements as resources (Kraaijenbrink, Spender & Groen 2010) It is essential to distinguish between resources and capabilities, with resources identified as firm inputs that can be tangible, intangible, or personnel-based (Grant 1991) Tangible resources include physical assets like equipment and financial capital; intangible resources encompass brand reputation and firm image; and personnel-based resources refer to technical know-how and knowledge assets Tangible resources are mainly acquired through external transactions, whereas intangible assets develop internally over time and are considered more enduring sources of competitive advantage due to their difficulty to imitate (Bakar & Ahmad 2010b; Peteraf 1993; Galbreath).
Firm resources or assets differ from capabilities, as assets are not processes (Amit & Schoemaker, 1993) Capabilities refer to an organization’s ability to assemble, integrate, and deploy resources effectively (Amit & Schoemaker, 1993) Resources alone do not provide a competitive advantage unless they are utilized to enhance knowledge or drive innovation (Grant, 1996) While resources are owned or controlled by firms, capabilities involve utilizing these resources to develop, integrate, and transform them into valuable solutions for customers (Grant, 1996).
The VRIO framework, introduced by Barney (1997, cited in Newbert 2007), emphasizes the importance of organizing resources alongside their possession for sustainable competitive advantage According to the RBV, firms must not only possess resources with VRIN attributes but also effectively organize them to absorb and utilize these resources efficiently Well-implemented strategies that deploy resources effectively are crucial for achieving superior performance and maintaining a competitive edge (Collis & Montgomery, 1994).
In today's highly demanding business environments, relying solely on hard-to-duplicate resources may not provide a sustainable competitive advantage (Teece, Pisano & Shuen, 1997) The Resource-Based View (RBV) has been extended to dynamic markets; however, it has often fallen short in explaining how and why certain firms succeed in rapidly changing environments (Eisenhardt & Martin, 2000; Teece, Pisano & Shuen, 1997).
Shuen 1997) The ability to achieve new forms of competitive advantage in fast changing business environments is known as the Dynamic Capabilities view (Teece, Pisano & Shuen
1997) and it is further explained in the following section
The Resource-Based View (RBV) provides a solid theoretical foundation for this research by emphasizing firm-specific resources that, when combined innovatively, can create sustainable competitive advantages However, RBV’s focus is limited to internal firm resources and does not account for external factors such as market dynamism To address this gap, the study incorporates the theory of Dynamic Capabilities, which extends RBV by integrating external environmental changes and emphasizing the importance of adapting and reconfiguring internal and external competencies to sustain competitive advantage in a dynamic market environment.
In the early 1990s, the Resource-Based View (RBV) faced criticism for being static and overlooking the impact of high market dynamism (Eisenhardt & Martin, 2000; Priem & Butler, 2001) Recent literature emphasizes that maintaining competitive advantage solely through unique resources and capabilities is increasingly challenging, especially as the average duration of such advantages shortens over time (Hewitt-Dundas, 2006; Barreto, 2010) Resources and capabilities are often heterogeneous and 'sticky,' making them difficult to change quickly and sustain in value amid rapid market shifts (Galunic & Eisenhardt, 2001) Highly specialized, inimitable, and non-substitutable resources tend to lose their value when market demand drops, highlighting that focusing only on resource advantages is insufficient for long-term competitive advantage Firms must adapt their resources to evolving competitive environments, as rigid resource advantages may hinder their ability to respond effectively to rapid market changes (Leonard-Barton, 1992).
Firms can achieve a competitive advantage by developing dynamic capabilities, which enable them to adapt and reconfigure their competencies in response to changing business environments (Teece, Pisano & Shuen, 1997) The dynamic capabilities perspective offers a framework to understand how companies can sustain their competitive edge amidst rapid market shifts The term ‘dynamic’ reflects a firm’s ability to renew its resources and respond swiftly to environmental changes (Winter, 2003) Ultimately, possessing strong dynamic capabilities allows organizations to remain competitive and thrive in volatile industries.
Summary
This chapter provides an analysis of the Malaysian ICT industry, focusing on SMEs, highlighting their significance to the national economy and the key challenges they face It establishes a theoretical foundation based on the Resources-Based View (RBV) and Dynamic Capabilities, essential for understanding firm competitiveness The subsequent literature review explores critical concepts such as innovation capability, intellectual capital, and strategic orientations—including market, technology, and learning orientations—and their impact on firm performance The chapter also details the development of the study's conceptual framework and presents the formulated hypotheses to guide further research.
LITERATURE REVIEW, CONCEPTUAL FRAMEWORK AND
Introduction
This chapter reviews key theoretical domains from three research streams—intellectual capital, strategic management, and innovation—to establish a solid foundation for formulating research questions and hypotheses It develops a conceptual framework that explores how intellectual capital and strategic orientations influence innovation capability and overall firm performance in Malaysian ICT SMEs Additionally, the chapter discusses factors affecting innovation capability within the context of the Resource-Based View (RBV) and dynamic capabilities theories, providing a comprehensive understanding of the factors driving innovation and success in the industry.
This chapter provides a comprehensive review of the key variables that establish the conceptual framework, ensuring clarity and depth in understanding It then introduces the specific conceptual framework developed for this thesis, detailing the construct definitions and their interrelationships This structured approach lays the foundation for formulating the research hypotheses, highlighting how these variables interact to address the study's objectives.
Innovation Capability
Over the past decade, disruptive innovations in the ICT industry have transformed the business landscape, market structures, and consumer behavior, with technologies like cloud computing, mobile social commerce, and content as a service gaining widespread adoption The rise of the knowledge economy, rapid technological advances, and fierce global competition make innovation essential for firm competitiveness, especially as product and technology life cycles shorten Traditional strategies suited for agricultural or industrial eras are no longer effective in the information age, posing significant challenges for SMEs, which must accelerate new product development and explore product extensions Ultimately, sustained competitive advantage relies on the continuous ability of firms to produce innovative solutions in a rapidly evolving digital environment.
Innovation and SMEs are increasingly recognized as vital drivers of a nation's economic competitiveness (Hilmi, Ramayah & Mustapha, 2011) Innovation involves the creation, acceptance, and implementation of new ideas, processes, products, or services, essential for adapting to technological, market, and competition changes (Perdomo-Ortiz, Gonzalez-Benito & Galende, 2009) SMEs, despite resource constraints, are proven to be successful innovators and contribute significantly to groundbreaking inventions and innovations (Rosenbusch, Brinckmann & Bausch, 2011; Wonglimpiyarat, 2011) Developing strong innovation capabilities is now fundamental for the survival and success of SMEs in today's dynamic business environment (Lawson & Samson, 2001).
Innovation capability plays a critical role in the study of innovation, serving as a vital factor that enables firms to deliver superior value to customers in a dynamic global marketplace Recognized as a key driver of growth and wealth creation, innovation capability is considered a subset of dynamic firm capabilities that enhance innovation performance According to researchers like Calantone, Cavusgil & Zhao (2002), Lawson & Samson (2001), and Nasution & Mavondo (2008), it is essential for firms seeking sustained competitive advantage and long-term success.
According to Perdomo-Ortiz, Gonzalez-Benito, and Galende (2009), a firm's capacity to innovate is essential from both RBV and Dynamic Capabilities perspectives Innovation capability enables companies to achieve and sustain superior performance and a competitive advantage (Barney, 1991; Panayides, 2006; Saunila, Ukko & Rantanen, 2012; Yang, 2012b) Research shows that firms with high innovation capabilities are, on average, twice as profitable as their competitors (Tidd & Bessant).
2009) Therefore, developing innovation capability is crucial as innovation is viewed as fundamental for the survival and growth of organisations (Hurley & Hult 1998)
A review of the literature indicates that researchers have been utilising the innovation capability terminology interchangeably with innovativeness (e.g., Cakar & Erturk 2010; Calantone, Cavusgil & Zhao 2002; Panayides 2006), innovative capacity (e.g.,
Wonglimpiyarat 2010), innovative capability (e.g., Akman & Yilmaz 2008; Guan & Ma 2003; Wallin, Isaksson & Larson 2010) or innovation capacity (e.g., Romijn & Albaladejo 2002; Szeto 2000) As an illustration, compare the following examples Cakar and Erturk
Research by 2010 highlights the focus on innovativeness but emphasizes analyzing how organizational culture and empowerment influence innovation capabilities Guan and Ma (2003) specifically explore the relationship between innovation capability and export performance in Chinese firms Wonglimpiyarat (2010) discusses developing an innovation capability index for Thai firms, despite the title referencing national innovation capacity Romijn and Albaladejo (2002) investigate factors affecting innovation capability in small electronics and software firms in England, using terms like innovation capacity and innovativeness interchangeably Calantone, Cavusgil, and Zhao (2002) examine the link between learning orientation, innovation capability, and firm performance, often conflating the terms with innovativeness These varied definitions highlight the need for clearer conceptualization, as some scholars argue that inconsistent terminology hampers the development of innovation theory (Dewett et al., 2007), while others believe the differences have minimal impact (Damanpour, 1991).
In the realm of innovation research, scholars distinguish between key concepts such as innovation capability, innovativeness, and innovative capacity Forsman (2011) emphasizes that a small enterprise's innovation capacity depends on its overall innovation capabilities, highlighting differences between the terms Hurley and Hult (1998) conceptualize innovativeness as a cultural trait related to openness to new ideas, whereas innovative capacity refers to the actual number of innovations an organization has produced or adopted Conversely, Hult, Hurley, and Knight (2004) define innovativeness as an organization’s ability to introduce new processes, products, or ideas, though Woodside (2005) critiques this interpretation by pointing out conceptual inconsistencies in these definitions.
In their 2004 publication, researchers confused the concept by conflating innovativeness with innovative capacity However, in their original 1998 article, Hurley and Hult clearly distinguished between these two concepts Addressing this confusion, Hurley, Hult, and Knight (2005) clarified that innovativeness should not be mistaken for the capacity to introduce innovations, thereby correcting the earlier misinterpretation.
Innovativeness, as defined by Wang and Ahmed (2004), is a company’s overall ability to introduce new products or access new markets by combining strategic orientation with innovative behavior and processes, driven by a corporate culture rooted in values and beliefs Gilbert (2007) expands this understanding by describing innovativeness in Japanese SMEs as a dynamic concept that includes newness in systems, processes, products, and services, as well as behavioral change, environmental adaptation, and continuous learning and knowledge development over time.
Innovation capability has been defined in various ways within the literature, emphasizing its importance at different organizational levels and contexts According to Guan and Ma (2003), it should be understood broadly to align with a firm’s strategies and market conditions Some researchers associate innovation capability with organizational culture, internal processes, and the firm's ability to adapt to environmental changes (Akman & Yilmaz, 2008), highlighting its role in helping firms compete effectively Lawson and Samson (2001) describe innovation capability as an "ability to continuously transform knowledge and ideas into new products, processes, and systems for the benefit of the firm and its stakeholders," noting that it is distinct from innovation itself and plays a crucial role in generating innovation outputs Strong innovation capability is linked to enhanced innovation performance, as it encompasses the actions firms can take to improve innovation activities.
Innovation capability refers to the skills and knowledge required to effectively absorb, master, and enhance existing technologies, as well as to develop new ones Cakar and Erturk (2010) define firm innovation capability as the ability to mobilize and combine employee knowledge to generate new insights, leading to product and process innovations While these definitions highlight the importance of developing new products, processes, and technologies, they also emphasize a firm’s capacity to leverage internal knowledge for continuous innovation.
Innovation capability is often linked to specific types of innovation rather than overall innovation capacity, as highlighted by Ibrahim, Zolait, Subramanian, and Ashtiani (2009) It is commonly distinguished into categories such as incremental and radical innovation capability, with studies by Prihadyanti, Surjandari, and Dianawati (2012), Subramaniam and Youndt (2005), and Wang, Yen, and Tsai emphasizing this classification.
Research by Forsman and Annala (2011) indicates that small enterprises in Finland predominantly focus on developing incremental innovations in products, services, and processes, rather than pursuing radical innovations Studies have also explored innovation capability through the lens of exploitative and explorative innovation, highlighting different strategic approaches within organizations (Hortinha, Lages & Lages, 2011; Lisboa, Skarmeas & Lages, 2011) Additionally, technological innovation capability remains a crucial factor for small firms aiming to enhance their competitive advantage (Capaldo et al., 2003; Yam).
Research by Lo, Esther & Antonio (2010) and Yam, Lo, Tang & Lau (2011), along with studies on market innovation capability such as Capaldo et al (2003), highlight the importance of understanding innovation capability in different contexts However, due to the diverse perspectives and definitions surrounding innovation capability, there is no universal method of analysis, as noted by Perdomo-Ortiz, González-Benito & Galende (2009).
Recent studies have broadened the understanding of innovation capability, emphasizing its broad scope and strategic importance Ngo and O'Cass (2009) define innovation capability as the integrative process of leveraging a firm's collective knowledge, skills, and resources to execute both technical (products, services, production processes) and non-technical (managerial, market, marketing) innovation activities Hogan et al (2011) propose a more holistic view, describing innovation capability as a firm’s ability—relative to competitors—to apply these resources across various innovation activities, including new products, processes, and management systems, to generate added value for the firm and stakeholders Their comprehensive definition accounts for a wide array of activities and considers performance outcomes, supported by rigorous multi-stage scale development Consequently, this article adopts Hogan et al.'s broad conceptualization of innovation capability to provide a deeper analytical framework.
Recent research on innovation capability highlights the importance of analyzing specific capability dimensions and their influence on critical outcomes These studies emphasize examining how individual or combined capability facets impact dependent variables such as firm performance and competitive advantage The key dimensions constituting innovation capability are thoroughly discussed in the following section to provide a comprehensive understanding of their roles in driving organizational innovation.
3.2.2 Innovation Capability and its Dimensions
Intellectual Capital
The term ‘Intellectual Capital’ was first introduced by an economist, John Kenneth Galbraith, in 1969 (Bontis 1998; Edvinsson & Sullivan 1996; Hsu & Fang 2009; Huang & Wu 2010)
Intellectual capital is more than just pure intellect; it encompasses intellectual action, making it a vital component in modern economic development As the knowledge-based economy emerged, research into intellectual capital gained prominence due to its role in driving innovation and growth (Petty & Guthrie, 2000) It is widely regarded as a collection of intangible resources, capabilities, and competencies that significantly enhance organizational performance and facilitate value creation (Bontis, 1998; Bontis, Keow & Richardson, 2000; Roos & Roos, 1997; Subramaniam).
Empirical studies over the years have highlighted the significance of intellectual capital in driving firm success, including sustainable competitiveness and enhanced performance (Youndt, Subramaniam & Snell 2004; Abdulai, Kwon & Moon 2012; Roos & Roos 1997) Recognized as a vital organizational resource, intellectual capital contributes to value creation and economic growth (Marr, Schiuma & Neely 2004; Huang & Liu 2005) Innovation, closely linked to intellectual capital, serves as a key driver of productivity and economic development, as investments in intangible assets foster innovative capabilities (Mention 2012; Chang & Lee 2008) According to Subramaniam and Youndt (2005), an organization’s ability to innovate hinges on its knowledge resources and intellectual assets, underscoring the integral relationship between intellectual capital and innovation capabilities.
Intellectual capital is a vital resource for SMEs, as their success hinges on the knowledge, experience, and skills of owners and employees (Hilmi et al., 2011; Man & Lau, 2002) Despite resource constraints in land, labor, and finance, SMEs possess valuable knowledge in the form of know-how, expertise, ideas, and insights that they can leverage to compete effectively (Desouza & Awazu, 2006) Successfully harnessing this knowledge enhances operational efficiency, drives innovation, improves customer service, and helps SMEs identify market trends (Hsu, 2007) Since SMEs often lack the ability to hire top-tier talent, they prioritize motivating and training less qualified employees to transfer existing knowledge within the organization, which is essential for sustained growth and competitiveness (Tovstiga & Tulugurova).
In 2009, it was posited that a firm's internal resources, especially its intellectual capital, serve as key drivers of competitive performance in small and medium-sized enterprises Research indicates that intellectual capital enhances innovation capabilities, boosts overall firm performance, and positively impacts knowledge transfer and organizational capability (Chen, Shih & Yang, 2009; Reed, Lubatkin & Srinivasan, 2006; Subramaniam & Youndt, 2005).
The literature on intellectual capital explores two main streams: one examining the effects of overall intellectual capital and its components through a multidimensional perspective, and another analyzing the impact of individual components such as human, organizational, and social capital The first stream emphasizes understanding the combined influence of all aspects of intellectual capital, recognizing that these components rarely function independently within firms This study aligns with the first approach by assessing the comprehensive effects of intellectual capital on innovation and firm performance, highlighting the importance of considering all dimensions simultaneously for a more accurate understanding of their collective impact.
Even though many researchers agree with the importance of intellectual capital to firms, the differences in determining and defining the dimensions still exist Intellectual capital has been
Research by Hsu and Fang (2009) categorizes intellectual capital into 35 different groups based on study objectives and researchers' backgrounds The varying definitions of intellectual capital highlight the diversity of perspectives among researchers, influenced by their backgrounds, whether they are academics, practitioners, or consultants, and their disciplinary interests (Mention, 2011).
The concept of intellectual capital has multiple definitions and components, leading to a lack of consensus among researchers (Huang, Tayles & Luther, 2010) Notable frameworks by Edvinsson (1997), Stewart (1997), and Bontis (1998) offer different perspectives, with Edvinsson emphasizing measurement and reporting at Skandia He categorizes intellectual capital into human capital, which encompasses employees’ skills, experience, and know-how, and structural capital, which includes organizational and customer capital Structural capital further divides into organizational systems, tools, procedures, customer relationships, and the supportive infrastructure that underpin human assets These components collectively provide a competitive advantage and influence a company's market position.
Stewart (1997) defines intellectual capital as the intangible assets including knowledge, information, intellectual property, and experience that can be leveraged to generate wealth He conceptualizes it as comprising human capital, structural capital, and customer capital, with customer capital positioned at the same level as structural capital Human capital pertains to the skills and capabilities of employees to deliver solutions to customers, while structural capital encompasses organizational knowledge, databases, and best practices that remain within the firm when employees leave Customer capital involves the relationships and networks the company develops with stakeholders and business partners, crucial for driving competitive advantage Incorporating these components enhances understanding of a firm's value beyond traditional financial metrics, aligning with SEO strategies emphasizing intellectual property, organizational knowledge, and stakeholder relationships.
Bontis (1996) introduces relational capital as the third core component apart from human and structural capital Relational capital is a broader conceptualisation of customer capital and
Relational capital encompasses the knowledge embedded in a firm's relationships with customers, competitors, suppliers, industry associations, and government, aligning with the social capital component outlined by Youndt and Snell (2004) Although definitions of intellectual capital vary, experts agree that it is a multi-dimensional construct that includes both individual knowledge and organizational assets like databases, processes, systems, and networks (Eren & Kocapinar, 2009; Youndt, Subramaniam & Snell, 2004).
Researchers such as Hsu & Sabherwal (2011), Nahapiet & Ghoshal (1998), Simsek & Heavey (2011), Subramaniam & Youndt (2005), and Youndt, Subramaniam, & Snell (2004) define intellectual capital as the overall knowledge assets or knowledge capital that firms utilize to gain a competitive advantage This concept comprises three key components: human capital, organisational capital, and social capital According to Subramaniam and Youndt (2005) and Youndt, Subramaniam, & Snell (2004), intellectual capital is viewed as a knowledge resource that includes knowledge at various levels—individual, network, and organizational—both internally and externally It encompasses not only tacit knowledge possessed by employees but also codified knowledge stored in databases, systems, business processes, and relationships Importantly, knowledge must be utilized effectively to convert it into intellectual capital that provides competitive advantage to organizations This framework is based on the classification by Youndt, Subramaniam, and Snell (2004), with detailed explanations of the three dimensions of intellectual capital provided subsequently.
Intellectual capital is conceptualized as a valuable resource rather than a capability, emphasizing its foundation in knowledge, which includes human, social, and organizational capital These three components illustrate diverse methods by which firms acquire and leverage knowledge to enhance performance The knowledge-focused perspective on intellectual capital is predominantly supported by empirical research, highlighting its significance in gaining competitive advantage In the existing literature, knowledge is regarded as a more critical source of sustainable competitive advantage than other intangible assets.
The Resource-Based View (RBV) highlights the strategic importance of knowledge and other unique resources, such as 37 physical assets (Hsu & Sabherwal, 2011), which are costly for competitors to replicate, thus offering sustained competitive advantage (Barney, 1991) Recent research utilizing the concept of intellectual capital emphasizes its role in enhancing or constraining firm innovation capabilities; notably, the study by Subramaniam and Youndt (2005) provides a comprehensive analysis from a knowledge perspective, making it highly influential and widely cited (Aramburu & Saenz, 2011; Carmona-Lavado et al., 2010; Martin-de-Castro et al., 2011).
& Navas-Lopez 2011) The knowledge perspective of intellectual capital is appropriate for this study as Malaysia emphasises knowledge and human capital (Khin, Ahmad & Ramayah
In 2010, the country's strategic shift from a production-based economy to a knowledge-based economy aimed to achieve fully developed nation status (Kefela, 2010) The ICT SMEs analyzed in this study primarily operate within the service industry, which depends heavily on knowledge-driven work Key components of intellectual capital—human capital, organizational capital, and social capital—are crucial for understanding the growth and competitiveness of these SMEs.
Human capital, the primary component of intellectual capital, encompasses the knowledge, skills, and abilities of individual employees (Bontis 1998; Edvinsson & Sullivan 1996; Subramaniam & Youndt 2005) Knowledge is intrinsic to human capital and is vital for driving continuous innovation within organizations (Lepak and Snell, 1999; Hsu & Wang 2012) Developing human capital by enhancing employees' skills and knowledge is essential for improving firm performance and maintaining a competitive advantage in today’s dynamic business environment.
To remain competitive and adaptable in a volatile business environment, firms seek human capital that is creative, bright, skilled, and expert in their roles, contributing innovative ideas and knowledge (Snell & Dean, 1992) Employees who are knowledgeable and skilled can challenge existing norms and drive innovation (Tushman & Anderson, 1986) In technologically advanced industries, possessing high problem-solving abilities is essential for making effective decisions, while accumulating specific knowledge and skills enhances communication efficiency and overall organizational performance.
38 lessen the mistakes in decision making and result in enhanced quality and high firm performance (Hsu & Wang 2012)
Strategic Orientations
Strategic orientation has been a focal point of extensive scholarly debate across disciplines like management, marketing, and entrepreneurship (Hakala, 2011) Despite ongoing discussions, a universal definition remains elusive as different literature streams offer varied perspectives on the concept Fundamentally, strategic orientation encompasses the principles that guide and influence a firm's activities, shaping behaviors essential for achieving and sustaining superior performance over time (Gatignon & Xuereb).
Strategic orientation is viewed either as an adaptive mechanism that actively guides a firm's activities or as an organizational culture that shapes interactions with customers and competitors Noble, Sinha, and Kumar (2002) highlight strategic orientation as a sub-dimension of organizational culture, embedding values and beliefs that influence marketplace interactions and strategy formulation This culture-like perspective of strategic orientation emphasizes its role in shaping firm behavior more deeply than the definitions by Gatignon and Xuereb (1997) and Hakala (2011) Moreover, strategic orientations facilitate the generation and dissemination of information, transforming it into valuable knowledge that drives learning and innovation capabilities within firms (Gatignon & Xuereb, 1997; Narver & Slater, 1990; Atuahene-Gima, Slater & Olson, 2005) These capabilities are crucial for fostering sustained competitive advantage and long-term growth.
Strategic orientations have been extensively studied in various academic streams, with prior research demonstrating their significant impact on organizational performance (Cano, Carrillat & Jaramillo, 2004; Narver & Slater, 1990; Wiklund & Shepherd, 2005) Among these, market orientation is particularly prominent, consistently identified as a key driver of firm success and competitive advantage (Cano, Carrillat & Jaramillo, 2004; Grinstein, 2008) Additionally, studies have examined the interactions between multiple orientations—including market, entrepreneurial, technological, and learning orientations—and their combined influence on company performance (Hakala & Kohtamaki, 2010; Wang, 2008) Researchers have also explored the roles of mediators like innovativeness, organizational learning, and relationship quality, alongside moderators such as managerial capabilities, in shaping the relationship between strategic orientations and organizational outcomes (Hortinha, Lages & Lages, 2011; Lisboa, Skarmeas & Lages, 2011; Noble, Sinha & Kumar, 2002; Tajeddini, Trueman & Larsen, 2006; Tan, Mavondo & Worthington, 2011).
43 power, environmental dynamism and firm strategy (e.g., Davis, Bell, Payne & Kreiser 2010;
Research by Mu and Benedetto (2011) and Wang (2008) explores the link between specific strategic orientations and firm performance However, there is limited research examining how these orientations influence innovation capabilities, as noted by Akman and Yilmaz (2008).
Hakala (2011) conducts a comprehensive review of 67 articles focused on strategic orientations, highlighting that research examining two or more orientations within a single study is prevalent The review indicates that studies exploring two strategic orientations are common, whereas research investigating three or more orientations simultaneously remains limited Notably, only one paper, by Zhou, Yim, and Tse, addresses three or more orientations concurrently, underscoring the need for further exploration in this area.
Hakala (2011) reviews four key orientations—market, entrepreneurial, learning, and technology—and proposes a comprehensive framework to analyze existing literature on multiple orientations This framework highlights three distinct approaches: sequential, alternatives, and complementary The sequential approach treats orientations as evolving cultural elements studied one at a time, while the alternatives approach considers orientations as strategic choices available to management In contrast, the complementary approach emphasizes the simultaneous adoption of multiple orientations by firms to enhance their strategic capabilities Each approach offers a unique perspective on the relationships between multiple orientations, guiding research directions and strategic implementation.
The sequential approach suggests that firms develop their orientations over time in response to environmental changes, typically progressing from product orientation to selling orientation and eventually to market orientation (Hakala, 2011) In contrast, the alternatives approach assumes firms have the freedom to choose the most suitable orientation based on contingency factors such as goals, industry sector, and environmental uncertainty (Hakala, 2011) Numerous studies, including those by Kaya & Seyrek (2005), Noble, Sinha & Kumar (2002), Voss & Voss (2000), and Zhou, Yim & Tse (2005), have examined strategic orientations through this lens For example, Voss and Voss (2000) found that customer orientation negatively impacts performance in non-profit theatres, recommending product orientation as the optimal strategy in that context While market orientation is generally associated with positive performance outcomes, its effectiveness can vary depending on specific circumstances.
44 orientation may not be significant Hence, the fit between market orientation and performance is concluded by researchers as depending upon the context under examination (Hakala 2011)
The complementary approach emphasizes the connection between various orientations and their developed patterns, where different orientations are believed to correlate and influence desired outcomes in the dependent variable Research has documented significant relationships, including correlation, mediation, and moderation, among market, learning, and technology orientations (e.g., Atuahene-Gima & Ko, 2001; Baker & Sinkula, 1999a, 1999b; Hult & Ketchen, 2001; Zhou, Yim & Tse, 2005).
This thesis explores three key strategic orientations—market, technology, and learning—that significantly impact a firm's innovation capability and performance Modeled as independent variables following Hakala (2011), these orientations help to analyze their individual influence on organizational success Understanding how different combinations of these strategic orientations can achieve similar objectives is crucial for strategic decision-making Furthermore, examining the specific configurations of these orientations within various industries enhances insights into the most effective strategies tailored to different industry contexts.
This study focuses on three key strategic orientations, identified as crucial dimensions for firms aiming to achieve long-term success These orientations are selected based on their significance in strategic management literature, particularly in relation to innovation and firm performance Prior research has consistently demonstrated the widespread use and relevance of these orientations, with studies by Li (2005), Yang et al (2012), and Hakala et al (2010, 2011) highlighting their impact on driving innovation and enhancing overall business performance.
Market and technology orientations are essential for navigating the competitive environment, with market orientation focusing on customers and competitors, and technology orientation centered on products, services, or technological offerings Learning orientation plays a critical role by influencing behavioral change and fostering adaptability Strategic orientations serve as vital resources that help firms develop dynamic capabilities in rapidly evolving markets Exploring these orientations—market, technology, and learning—is crucial for understanding their impact on innovation capabilities and overall firm performance.
Market orientation has been a key focus in marketing literature for decades, emphasizing the importance of understanding and responding to customer needs In recent years, its significance has grown across various disciplines due to increasingly competitive global markets The foundational work of researchers Narver and Slater established essential frameworks for understanding how market-oriented strategies can enhance organizational performance in a highly dynamic environment.
Kohli and Jaworski (1990) significantly contributed to the development of the market orientation concept by distinguishing two key perspectives: the behavioral stream and the cultural stream They adopt the behavioral view, defining market orientation as an organization-wide effort to generate, disseminate, and respond to market information related to current and future customer needs In contrast, Narver and Slater (1990) characterize market orientation as a cultural aspect focused on the organization's collective values and behaviors that prioritize customer satisfaction and market intelligence These perspectives highlight different dimensions of how companies understand and implement market orientation to improve strategic decision-making and competitive advantage.
Market orientation is a strategic approach that focuses on creating organizational behaviors and culture to deliver superior value to customers and ensure continuous business performance Kohli and Jaworski (1990) define market orientation as an organizational process and response, emphasizing the importance of organizational behaviors, while Narver and Slater (1990) view it as rooted in organizational culture that influences employee conduct Both perspectives highlight that understanding customer needs and expectations is central to market orientation, with stakeholders playing a key role in shaping these customer insights In essence, effective market orientation aligns organizational actions and culture around customer-centricity to drive competitive advantage.
Market orientation has been defined using various variables by researchers, with Kohli and Jaworski (1990) emphasizing three dimensions: intelligence generation, dissemination, and responsiveness Conversely, Narver and Slater (1990) proposed customer orientation, competitor orientation, and inter-functional coordination as key components Criticisms of traditional market orientation measures highlight their focus on expressed customer needs while neglecting unexpressed (latent) needs (Berthon, Holder & Pitt, 1999) To address this gap, Narver, Slater, and MacLachlan (2004) introduced the concept of total market orientation, encompassing both responsive and proactive approaches, with responsive orientation aiming to satisfy expressed needs and proactive orientation targeting latent customer needs.
Firm Performance
Firm performance has been a key focus of academic research for decades, emphasizing the importance of accurate and reliable measurement methods Reliable performance metrics are essential for advancing theory, as inaccurate measures can hinder meaningful insights (Murphy, Trailer & Hill, 1996) For firms, performance reflects the analysis and comparison of achievements against specific goals, highlighting its strategic significance (Yang, 2012a) Despite its acknowledged importance, the literature shows a diversity of definitions and varying variables used to measure performance across studies (Murphy, Trailer & Hill, 1996; Venkatraman & Ramanujam, 1986) This article reviews the empirical approaches researchers utilize to assess firm performance effectively.
Initially, firm performance was viewed solely from a financial perspective, but it has since expanded to include multiple dimensions such as operational factors According to Venkatraman and Ramanujam (1986), firm performance can be assessed through both financial and operational measures, where financial performance focuses on accounting metrics like sales growth, earnings per share, and profitability indicators such as return on investment, sales, and equity In contrast, operational or non-financial performance emphasizes aspects like product quality, market share, and marketing effectiveness While traditional performance assessments primarily rely on financial metrics, recent research stresses the importance of incorporating multiple performance indicators to provide a more comprehensive evaluation of firm success (Demirbag, Koh, Tatoglu & Zaim, 2006; Shoham, Rose & Kropp).
2005) Accordingly, to ensure firm performance is measured accurately, Dess and Robinson
In 1984, it was recommended that firms adopt a composite measure of performance instead of relying on a single indicator Utilizing multiple indicators allows companies to assess performance more comprehensively and accurately, capturing complex and informative metrics Additionally, this approach helps in evaluating the contribution of each indicator to the underlying latent variable, leading to a more nuanced understanding of overall performance (Hagedoorn & Cloodt, 2003).
Firm performance can be assessed through two main approaches: the objective approach and the subjective approach The objective approach relies on absolute performance metrics such as sales growth and profitability, which are obtained either through respondent-reported data or by analyzing secondary sources (Greenley, 1995; Vorhies & Morgan, 2003) Performance data collected directly from firms provide concrete insights into their operational success.
Primary performance data refers to internally generated metrics, while secondary performance data is collected from external sources such as industry databases (Venkatraman & Ramanujam, 1986) Researchers often ask respondents to evaluate their firm’s performance in comparison to competitors, which can provide valuable strategic insights (Greenley, 1995) Comparing performance with competitors can reveal critical information that supports more informed decision-making (Birley & Westhead, 1990) Additionally, studies have shown a strong correlation between subjective assessments and objective performance measures, highlighting the validity of different data collection approaches (Dess & Robinson, 1984; Greenley, 1995).
Objective measures of performance are generally preferred in the literature; however, obtaining accurate objective data from small businesses is challenging because owners often withhold this information and may provide biased reports (Dess & Robinson, 1984; Sapienza, Smith & Gannon, 1988) Despite this, research shows a significant correlation between objective and subjective performance measures, suggesting that subjective assessments can serve as reliable alternatives when objective data is unavailable or difficult to access (Dess & Robinson, 1984; Venkatraman & Ramanujam, 1986).
Research indicates that the relationship between independent variables and firm performance varies depending on whether objective or subjective performance measures are used Meta-analyses by Kirca, Jayachandran, and Bearden (2005) and Jaworski and Kohli (1993) reveal that the link between market orientation and firm performance is stronger when performance is measured subjectively Gonzalez-Benito and Gonzalez-Benito (2005) found that nearly 50% of studies using both measures show a stronger relationship with subjective performance, compared to only 20% favoring objective measures These findings suggest that subjective performance measures are more closely associated with market orientation, a conclusion supported by Shoham, Rose, and Kropp (2005) in their meta-analysis Optimizing these insights can enhance SEO by highlighting the key relationship between performance measurement methods and firm success.
53 firm performance, indicating that the impact of market orientation on subjective measures of performance is stronger than its impact on objective measures
Research by Mention (2012) explores the relationship between intellectual capital and firm performance based on perceptions rather than absolute metrics Ling (2013) further examines how the three components of intellectual capital—human capital, structural capital, and relational capital—affect both financial and non-financial performance using perceived performance scales The study finds that only structural capital is directly linked to financial performance, while all three dimensions positively influence non-financial performance, highlighting the importance of intellectual capital in overall business success.
This thesis presents a conceptual framework designed to explore the influence of intellectual capital and strategic orientations on firm innovation capability and performance The framework is developed after a thorough review of relevant variables related to firm innovation ability and overall performance Additionally, the article discusses the construct specifications that underpin the framework and support the hypothesized relationships between these key factors.
Development of Conceptual Framework and Hypothesis
The proposed conceptual framework (Figure 3.1) illustrates the relationships between intellectual capital, strategic orientations, and innovation capability, highlighting their collective impact on firm performance It examines whether innovation capability mediates the connection between these strategic resources and performance outcomes, emphasizing that possessing resources like intellectual, financial, and technological capital is insufficient without the ability to innovatively combine and reconfigure them Innovation capabilities enable firms to excel across all value chain stages—from ideation to commercialization—by facilitating effective customer insights, market assessment, and co-design processes Leading innovators such as Apple, Google, and Siemens demonstrate that early customer engagement and market evaluation, driven by strong innovation capacity, are vital for realizing commercial success, underscoring the importance of innovation capability in translating resources into competitive advantages.
While possessing 54 driven capabilities provides a solid foundation, they are insufficient on their own; successful integration with distinctive capabilities such as awareness of emerging technological developments and vigilant product platform management is essential for competitive advantage The article explores specific hypotheses about these relationships and their underlying rationales, emphasizing the importance of combining core capabilities with innovative and strategic insights to drive sustained growth and innovation.
This study develops a comprehensive conceptual framework based on the Resource-Based View and Dynamic Capabilities theories, integrating four key hierarchical components: intellectual capital, market orientation, learning orientation, and innovation capability, all conceptualized at the second-order level Additionally, the framework includes two lower-order constructs—technology orientation and performance—that are directly linked to the broader multidimensional constructs These theoretical foundations underpin the modeling of how firm capabilities influence performance outcomes, with detailed discussion and justification provided in Chapter 4, Subsection 4.5.3, ensuring alignment with SEO best practices for clarity and relevance.
This study proposes a conceptual framework that explores the impact of intellectual capital on three strategic orientations—market orientation, learning orientation, and technology orientation—and their combined influence on innovation capability Innovation capability, in turn, serves as a key determinant of overall firm performance The framework, illustrated in Figure 3.1, highlights the hypothesized relationships among these variables, emphasizing how strategic orientations driven by intellectual capital can enhance innovation and drive business success Incorporating SEO best practices, this research underscores the importance of intellectual capital and strategic orientations in boosting innovation and improving firm performance.
HC- Human capital; OC – Organisational capital; SC- Social Capital
CTO - Customer Orientation; CPO - Competitor orientation; IFC- Inter-functional Coordination; LATENT- Latent need fulfilment Commit – Commitment to learning; SVision- Shared Vision; Openmind-Open-mindedness
CFIC- Client-focused Innovation Capability; MFIC- Marketing-focused Innovation Capability;
TFIC- Technology-focused Innovation Capability
To effectively test hypotheses, it is essential to establish hypothesized relationships between constructs based on the conceptual framework The subsequent sections explore existing research on these key constructs, providing a foundation for developing valid and relevant hypotheses for this thesis.
3.6.2 Intellectual Capital, Innovation Capability and Firm Performance Link
Intellectual capital is a crucial factor influencing firm success, especially amid the shift from traditional industrial economies to a knowledge-based economy (Wiig, 1997; Zhou & Fink, 2003) Research consistently demonstrates that intellectual capital positively impacts innovation and overall firm performance, highlighting its importance in today’s competitive business environment (Bontis, 1998; Bontis, Keow & Richardson, 2000; Cabello-Medina et al., 2011).
To succeed in the competitive global market, firms must continuously develop innovative solutions driven by valuable knowledge resources According to the Resource-Based View (RBV), firms are unique entities defined by their distinct resource bases, with intellectual capital being a key asset that meets criteria of being valuable, rare, inimitable, and non-substitutable Intellectual capital plays a crucial role in facilitating innovation processes and enhancing a firm's innovation capabilities, which are essential for sustainable success Research indicates that a company's innovation capacity largely depends on its knowledge resources, enabling the development of new technologies and solutions Ultimately, leveraging intellectual capital is vital for firms aiming to remain competitive and achieve long-term growth in a rapidly changing environment.
A 2013 study in Spain revealed a positive and significant link between internal knowledge resources and a firm's innovation capability, highlighting the importance of leveraging internal knowledge for successful innovation The research also found that external knowledge resources only significantly impact innovation when acquired through cooperation agreements, emphasizing the value of collaborative knowledge sharing Overall, the study suggests that firms should strategically combine internally developed and externally obtained knowledge to enhance their innovation performance.
Human capital, the knowledge of individuals within an organization, is a key resource for innovation, but its impact depends on effective networking, sharing, and relationship channels Research by Subramaniam and Youndt (2005) shows that human capital’s contribution to both incremental and radical innovation is significant only when knowledge is interconnected, emphasizing social capital as a foundational element Their findings highlight that social capital not only directly enhances innovative capabilities but also acts as a moderator, strengthening the relationship between human capital and innovation Similarly, Carmona-Lavado, Cuevas-Rodriguez, and Cabello-Medina (2010) demonstrate that social capital positively influences innovation in Spanish firms, with a particularly strong impact on radical innovations.
57 Capital strengthens collaboration within network relationships, fostering innovation especially when complex information is actively shared among individuals Building strong relationships is crucial for enhancing innovation activities, as highlighted by researchers like Holmen, Pedersen, and Torvatn (2005) According to Prihadyanti, Surjandari, and Dianawati, effective collaboration and trust within networks significantly contribute to the development and implementation of innovative ideas.
(2012) social capital can contribute to the development of innovation capability in Indonesia’s automotive companies through well-managed close supplier-customer relationship
Organisational capital has a direct, positive impact on incremental innovation capability, as evidenced by Subramaniam and Youndt (2005) Empirical studies by Leenders and Voermans (2007) highlight the crucial role of organisational capital in maintaining organisational memory, which is essential for fostering innovation Access to up-to-date, reliable, and accessible internal knowledge—especially within R&D departments—significantly enhances innovative outcomes, as this institutionalised and codified knowledge is leveraged by firm members to develop new ideas This knowledge, stored in databases and routines, forms a vital component of organisational capital that supports continuous innovation growth (Carmona-Lavado, Cuevas-Rodriguez & Cabello-Medina, 2010) These insights lead to the hypothesis that strong organisational capital promotes incremental innovation.
Hypothesis 1 (H1): Intellectual capital has a positive and significant relationship with innovation capability of the firm
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Summary
This chapter reviews relevant literature on innovation, strategic management, marketing, intellectual capital, the Resource-Based View (RBV), and Dynamic Capabilities, highlighting empirical studies related to the key variables A conceptual framework has been developed based on theoretical reasoning and previous research findings, which is illustrated in Figure 3.1 The study proposes specific hypotheses regarding the relationships between these constructs, providing a clear foundation for the research objectives.
H1: Intellectual capital has a positive and significant relationship with innovation capability of the firm
H2: Intellectual capital has a positive and significant relationship with firm performance
H3: Innovation capability mediates the relationship between intellectual capital and firm performance
H4: Market orientation has a positive and significant relationship with innovation capability of the firm
H5: Market orientation has a positive and significant relationship with firm performance
H6: Innovation capability mediates the relationship between market orientation and firm performance
H7: Learning orientation has a positive and significant relationship with innovation capability of the firm
H8: Learning orientation has a positive and significant relationship with firm performance
H9: Innovation capability mediates the relationship between learning orientation and firm performance
H10: Technology orientation has a positive and significant relationship with innovation capability of the firm
H11: Technology orientation has a positive and significant relationship with firm performance
H12: Innovation capability mediates the relationship between technology orientation and firm performance
H13: Innovation capability has a positive and significant relationship with firm performance
The following chapter presents issues regarding the research design and methodologies required to measure the constructs and test the hypotheses proposed in this chapter