Academic journal article Journal of Small Business Strategy

Investigating the Path from Firm Innovativeness to Financial Performance: The Roles of New Product Success, Market Responsiveness, and Environment Turbulence

Academic journal article Journal of Small Business Strategy

Investigating the Path from Firm Innovativeness to Financial Performance: The Roles of New Product Success, Market Responsiveness, and Environment Turbulence

Article excerpt

INTRODUCTION

The rapid growth in new technologies, intensifying competition, and increasingly diverse and demanding customers have increased the importance of innovativeness to the success of a firm (Atalay, Nilgun, & Fulyan, 2013; Story, Boso & Cadogan, 2015; Tellis, Prabhu, & Chandy, 2009). Indeed, firms that hope to compete effectively in both local and global marketplaces must develop and offer value-added products that are competitive with marketplace peers (Rosenbusch, Brinckmann, & Bausch, 2011). A firm's innovativeness is measured by the extent to which it is creative enough to develop not only radically new products but also novel processes and technologies (Story, Boso, & Cadogan, 2015), and to reaffirm its position in existing markets, enter new markets, and create a differentiation advantage over competitors (Boso, Story, & Cadogan, 2013). Firm innovativeness has become a critical determinant of financial health and growth.

A review of the innovation literature provides an inconclusive account of the financial performance outcomes of firm innovativeness, with scholarship suggesting both positive and negative outcomes. For example, while Artz, Norman, Hatfield and Cardinal (2010); Calantone, Cavusgil, and Zhao (2002); Günday, Ulusoy, Kilic, and Alpkan (2011) and Jimenez and Sanz-Valle (2011) have found that innovation is positively associated with financial performance, Baum, Calabrese, and Silverman (2000) and Vermeulen, De Jong and O'Shaughnessy (2005) found that innovation is a risky and costly undertaking which negatively affects financial performance. In addition, Story et al.'s (2015) recent study hints at the possibility of a U-shaped firm innovativeness-financial performance relationship. Furthermore, the innovation literature is not so clear on how the firm innovativeness-financial performance relationship is affected by a firm's internal and external environmental conditions.

Accordingly, this study examines the financial performance outcomes of firm innovativeness by taking into account the intervening roles of new product success and moderating roles of market responsiveness and environment turbulence. By so doing, this study contributes to extant product innovation literature in several ways. First, prior studies have discussed firm innovativeness as a causal antecedent fuelling financial performance (e.g., Rosenbusch, Brinckmann, & Bausch, 2011). We extend the existing theorizing in the innovation literature by arguing that an additional causal path results from firm innovativeness that leads to new product success and improved financial performance. Additionally, we suggest that this causal direction from new product success to improved financial performance is conditional upon levels of market responsiveness and environment turbulence. Further, in analyzing these causal paths, we reason that contextual consideration is important if we are to make precise and accurate conclusions (Whetten, 2009). Contemporary innovation research acknowledges that context is important in innovation theory building as it provides scholars opportunity to reach more accurate conclusions from empirical findings (Rousseau & Fried, 2001). Accordingly, we extend extant innovation research by examining relationships within the context of small- and medium-sized enterprises (SMEs).

In particular, we draw insight from the resource-based view (Barney, 1991) of firms to argue that variations in a SME's financial performance are a consequence of that firm's innovativeness efforts, and that the interplay of new product success, market responsiveness, and environment turbulence provides a causal link underlying the effect of the innovation(s) on financial performance. The following section presents our theoretical model and the study's hypotheses. Next, we describe the methods used to test our model and present the study findings. This is followed by a discussion of our study's theoretical and managerial implications. …

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