Academic journal article Asian Social Science

Strategic Orientations and SME Performance: Moderating Effect of Absorptive Capacity of the Firm

Academic journal article Asian Social Science

Strategic Orientations and SME Performance: Moderating Effect of Absorptive Capacity of the Firm

Article excerpt


This paper examines the effect of recent configuration of strategic orientation on SME performance and the moderating effect of absorptive capacity of the firm. Data from 350 owner-managers of small and medium scale hotel and restaurants in Sri Lanka were used with structural equation modelling. The structural model investigates the direct effects of market, entrepreneurial, and learning orientations on firm performance and moderating effect of absorptive capacity. Results indicate that SMEs with high level of absorptive capacity would achieve higher performance by maintaining higher level of strategic orientation.

Keywords: SME performance, strategic orientations, absorptive capacity

1. Introduction

The role of the small and medium scale enterprises (SMEs) has been critical and the sector is considered as the "backbone" of many economies (Wymenga, Spanikowa, Baker, Konings, & Canton, 2012). An impressive empirical support has also been received for its importance for the developing countries in achieving their socio-economic development targets (Subhan, Mehmood, & Sattar, 2013; Asian Productivity Organization, 2011). However, the SME sector in the developing nations faces many constraints such as technological backwardness, low level of human resource skills, weak management systems and entrepreneurial capabilities, unavailability of appropriate and timely information, insufficient use of information technology and poor product quality. Consequently the economic contribution of SMEs in these countries is currently far behind compared to developed countries (Altenburg & Eckhardt, 2006; Emine, 2012; Panday, 2012; Asian Productivity Organization, 2011). Accordingly, low level of performance in SMEs sector is one of the key issues in most of the developing countries though they have been expected to play a critical role in their economies, and the current globalized competitive rivalry has multiplied the importance of the issue.

The performance of SME has been the focus of many prior researchers making it one of the most widely used construct as a dependent variable (Rogers & Wright, 1998; March & Sutton, 1997; Carton & Hofer, 2010). Many of the previous SME performance models have incorporated both internal and external variables to explain the complex relationships with performance (eg. Islam, Khan, & Obaidullah, 2011; Beneki, 2011; Enriquez, Adame, & Camacho, 2011; Leitner & Idenberg, 2010; Inmyxai & Takahashi, 2009; Mancinelli & Mazzanti, 2009). Findings are however, inconsistent and any of the combination of variables has not explained the phenomenon to a satisfactory extent.

Studies have suggested that strategic orientation is critical for the long-term survival of the firm with higher level of performance. Different strategic orientations such as market orientation, entrepreneurial orientation, learning orientation, technology orientation, product orientation, resource orientation and customer orientation have been used to explain the phenomenon (Ledwith & Dwyer, 2009; Li, Zhao, Tan, & Liu, 2008; Gao, Zhou, & Yim, 2007; Kropp, Lindsay, & Shoham, 2008). However, most of the related research have attempted to investigate the effect of single orientation and combined with other contextual factors (Hakala, 2011; Kropp, Lindsay, & Shoham, 2006). Recent studies further argued that the strategic orientation concept used in previous research is fragmented and representing only a disconnected and partial view. Consequently, Hakala (2010) configured the concept of strategic orientation by integrating four different perspectives of strategic elements; entrepreneurial orientation, market orientation, technology orientation and learning orientation and viewed them as templates for the ways of conducting business activity to maintain and improve the organizational performance. Prior to this configuration of the concept, the collective role of entrepreneurial orientation, market orientation and learning orientation in performance models has been investigated in twelve studies among which two were conducted to investigate the corporate entrepreneurship in state-owned companies (Liu, Luo, & Shi, 2002, 2003), and another two studies were in small sample of non-for-profit organizations (Barrett, Balloun, & Weinstein, 2005a; 2005b). …

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