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Advances in Social Sciences Research Journal – Vol. 10, No. 1
Publication Date: January 25, 2023
DOI:10.14738/assrj.101.13802.
Al-Sharif, A. M., Ali, M. A., Jaharuddin, N. S., Abdulsamad, A., & Jandab, A. (2023). The Role of Innovation Capability in the Relationship
between Entrepreneurial Leadership and Innovation Performance in the SMEs Service Industry. Advances in Social Sciences Research
Journal, 10(1). 264-278.
Services for Science and Education – United Kingdom
The Role of Innovation Capability in the Relationship between
Entrepreneurial Leadership and Innovation Performance in the
SMEs Service Industry
Abdulrahman M. Al-Sharif
School of Business and Economics, UPM, Malaysia
Mass Hareeza Ali
School of Business and Economics, UPM, Malaysia
Nor Siah Jaharuddin
School of Business and Economics, UPM, Malaysia
Akram Abdulsamad
https://orcid.org/0000-0001-9039-3925
Faculty of Economics and Political of Science,
University of Aden, Yemen
Abdulwahab Jandab
Faculty of Administration Sciences,
Albaydha University, Yemen
ABSTRACT
Drawing on the resource-based view (RBV) and the dynamic capabilities view
(DCV), this study aimed to investigate the mediating role of innovation capability
(IC) on the relationship between entrepreneurial leadership (EL) and innovation
performance (IP). Survey data were collected from 321 middle-level employees in
the SME service industry. Structural equation modeling (SEM) was used to assess
the proposed relationships. The empirical analysis revealed that entrepreneurial
leadership impacted innovation performance directly and indirectly through the
mediating role of innovation capability. The current research contributes to both
RBV and DCV by proposing and empirically testing how entrepreneurial leaders
affect innovation performance. The results from this research suggest that service
SME managers can play a crucial role in promoting their firms' innovation
capabilities, which, in turn, influences the firms' innovation performance. This
study emphasizes EL's innovation effectiveness and the triggering process of
innovation capability and provides various solutions for firms to demonstrate
leadership and innovation practices in responding to uncertain environments.
Keywords: Entrepreneurial Leadership, Innovation Capability, Innovation Performance,
SMEs, Service Industries.
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Al-Sharif, A. M., Ali, M. A., Jaharuddin, N. S., Abdulsamad, A., & Jandab, A. (2023). The Role of Innovation Capability in the Relationship between
Entrepreneurial Leadership and Innovation Performance in the SMEs Service Industry. Advances in Social Sciences Research Journal, 10(1). 264-278.
URL: http://dx.doi.org/10.14738/assrj.101.13802
INTRODUCTION
Today's firms operate in a volatile, uncertain, complex, and ambiguous (VUCA) environment
[1]. This situation has created a challenge for businesses operating in a turbulent environment
characterized by rapid change and challenging competition and has no compelling reason to
continue except to engage in creativity and innovation [2]. Contrarily, firms that prioritize the
development of novel products and services along with the innovation of business models will
maximize the use of their dynamic capabilities [3]. Innovation is a vital driver of businesses'
survival, expansion, and sustainability and is increasingly essential to their success in advanced
and developing countries [4]. However, the willingness to engage in innovation activities is a
top management decision [5]. Thus, the future direction of the business is influenced by leaders
with entrepreneurial mindsets and behaviors.
Entrepreneurial Leadership has evolved from entrepreneurship and Leadership for businesses
vulnerable to the dynamic environment [6, 7]. Several scholars asserted that entrepreneurial
Leadership could influence how resources are structured, how they are used to develop
capabilities, and how those capabilities are then used to drive a firm's innovation [2]. Although
several studies such Nor-Aishah, Ahmad [8], Latif, Nazeer [9] have acknowledged the positive
impact of EL on organizational outcomes, the empirical findings are inconsistent and mixed due
to the different levels of leadership effectiveness and various correlation coefficients. Thus, the
relationship between EL and organizational outcomes remains questionable [10].
Previous studies have been unable to explore how entrepreneurial leadership influences
innovation performance [11]. For instance, several mediating factors have been introduced to
link entrepreneurial Leadership and innovation performance, such as exploratory innovation
and exploitative innovation [12], innovation process [13], organizational innovation [14], and
TQM [15]. However, the mediating role of innovation capability has less attention [16, 17].
Although earlier research connected EL and IC in different settings, contradictory findings have
been found [18], which justify further research into this relationship. Filling this gap will
answer the call that stated a dearth of IC research in the SMEs contexts [18, 19] is very
important for SMEs to develop a strategy to respond to the rapidly evolving market dynamics
while using scarce resources, specifically in the service sector [20].
This study developed a conceptual model to explain how entrepreneurial leadership can foster
innovation performance and examined the hypotheses using data from managers working in
the Malaysian SMEs service sector. This study anticipates addressing the stated knowledge gaps
and contributes in several ways. First, this study contributes to the development of studies
linking RBV and DCV by linking entrepreneurship leadership, dynamic capabilities (innovation
capability), and innovation performance, and strengthens the findings of previous research that
the EL contributes to performance outcomes if considering the dynamic capabilities. Second,
the role of IC as a unique dynamic capability of the firm lacks attention in the literature [21].
This study adds to the prior literature by highlighting the mediation role of IC in EL-IP
relationships. Lastly, given the scarcity of research on innovation in the context of the service
industry, the findings of this study supported this notion and provided a more comprehensive
understanding of the service innovation capability construct and their performance outcomes
within the context of Malaysian service SMEs.
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THEORETICAL FOUNDATION AND LITERATURE REVIEW
Theoretical Foundation
The resource-based view (RBV) of the firm is known as one of the most essential and prominent
theories for identifying, clarifying, and predicting organizational relationships [22]. It desires
to link the internal sources of a firm with its performance. RBV's key point is that competitive
advantage and success are the outcomes of the firm's (tangible and intangible) resources and
capabilities that other rivals find challenging to duplicate [23]. The RBV postulated that the
resources and capabilities possess specific characteristics to be considered crucial components
of sustainable competitive advantage and superior firm performance. These characteristics
include rare, valuable, inimitable, increasing efficiency and effectiveness, can apply and absorb,
and improperly imitable and non-substitutable [23-25]. Accordingly, scholars in the field of
entrepreneurship shifted their attention to research on these resources, which are linked with
the opportunities for exploration and exploitation, and vision realization for sustained
competitive advantage and superior performance achievement [26]. Therefore, [27] suggested
that entrepreneurship is one of the firm's resources. In the same way, this study considers
entrepreneurial leadership as a business resource since the entrepreneurial leader has the
ability to organize the portfolio of resources strategically and then coordinate these resources
to shape organizational capabilities for a business [28].
The dynamic capability view expands on the theoretical origin of the RBV [29]. By introducing
dynamic capabilities, firms can build and implement new knowledge, which serves as the
source of innovation and output. Therefore, to understand an enterprise, the dynamic
capabilities approach is relied on the basic assumptions of RBV by asserting that the company's
unique capabilities evolve [30]. DCV has attracted the extensive interest of researchers but still
has no coherent framework. Much needs to be learned and explained theoretically and
empirically [3, 31]. This study uses RBV and DCV to explain the relationship between EL and IP
and how IC, as a unique capability, can promote a firm's innovation outcome.
Literature Review and Hypotheses Development
Entrepreneurial Leadership and Innovation Performance:
Innovation performance is a critical component of an organization's success because it involves
a variety of factors, such as the environmental and social effects of operational processes,
encourages employee creativity, and collaborates with clients, supply chain partners, and other
commercial partners to design and develop innovative products and services [32]. In the same
view, scholars Gupta, MacMillan [7], Renko, El Tarabishy [33] have suggested entrepreneurial
Leadership as a style of Leadership to deal with unpredictable and demanding environments to
stimulate and improve innovation activities and identify opportunities for all types of
organizations, particularly in SMEs [13]. Entrepreneurial Leadership and innovation
performance connection can be explained through RBV. However, innovation performance can
be determined by a combination of assets and resources. Therefore, it requires various
resources and capabilities [2] to drive success in a rapidly changing environment. According to
RBV, leadership styles are considered vital resources for an organization and influence
organizational performance [24, 25]. However, entrepreneurial leaders can communicate the
value of opportunities and how exploiting them contributes to the firm's and individuals' goals
[34]. Therefore, this study argues that entrepreneurial Leadership enhances the firm
innovation performance. Previous studies supported the positive link between EL and IP. For
instance, Yu, Zhang [35] found that entrepreneurial Leadership positively influence the
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[46].
Previous studies have connected organizational capabilities with innovation performance in
different settings. In Hong Kong, Lau and Lo [46] found that technological innovation capability
positively affects firms' innovation performance. A study by Saunila, Ukko [47] revealed that
human and time management capabilities positively impact innovation performance, while
marketing capability is not. Andersson, Moen [48] found that organizational climate for
psychological safety is positively correlated to innovation performance. However, these studies
conceptualized innovation performance as product and process innovation. Nonetheless, a
positive relationship was found between product innovation, process innovation,
organizational innovation, and SMEs innovation performance, while marketing innovation is
not [46]. Considering that the relationship between innovation capability and performance has
received less attention in earlier studies [17], particularly in service industries [49], we
developed the hypothesis as follows:
H3: There is a significant positive relationship between innovation capability and
innovation performance.
Figure 1: Research Framework
The Mediating Role of Innovation Capability in The Relationship Between
Entrepreneurial Leadership and Innovation Performance:
Leadership plays a vital role in effecting innovation because leaders are responsible for
supporting innovation efforts and processes by making the right decisions and setting specific
targets [50]. Several studies indicated that leaders who engaged in entrepreneurial activity
could guide their team members to recognize and seize opportunities and encourage creative
behavior within employees [50, 51].
The concept of innovation originated in the DCV [29]. It is considered a new concept that aligns
with the DCV, whereas the RBV postulates that businesses entirely use their resources and
capabilities [40]. In this scheme, "innovative capability" refers to the firm's ability to ideally use
dynamic capabilities to innovate at the firm level [40]. This capacity obviously affects the
consistency and pace of the company's performance in innovation and is essential to its success
[52]. Therefore, innovation capability potentially links entrepreneurial Leadership's positive
impact to SME firms' innovation performance. The hypothesis is proposed as follows:
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Al-Sharif, A. M., Ali, M. A., Jaharuddin, N. S., Abdulsamad, A., & Jandab, A. (2023). The Role of Innovation Capability in the Relationship between
Entrepreneurial Leadership and Innovation Performance in the SMEs Service Industry. Advances in Social Sciences Research Journal, 10(1). 264-278.
URL: http://dx.doi.org/10.14738/assrj.101.13802
H4: Innovation capability mediates the relationship between entrepreneurial
leadership and innovation performance.
METHODOLOGY
Service SMEs firms in Klang Vally, Malaysia, make up the sample for this study because the
service sector contributes 60.0% of Malaysia's GDP and 63.3% of the employment compared to
other sectors [52]. In addition, the competition in this sector is very high and requires SME
firms to be more innovative in offering their products/services [53, 54]. Since this study
involves the organizational level, middle-level managers were selected as respondents whom
better understood their firms' decision-making process and innovation activities. Moreover,
middle-level managers were chosen to evaluate their top leaders to avoid the bias of
overconfident leaders who answer entrepreneurial leadership questions. A total of 321 sample
sizes were achieved using convenience sampling; however, only 313 were utilized. The
respondents' demographic profile results revealed that the majority are females. The
respondents are mostly aged between 40 old years and below. The majority hold a bachelor's
degree, work as a manager, and have experienced between 1–15 years.
All conceptual model variables were measured on a five-Likert scale ranging from 1 (strongly
disagree) to 5 (strongly agree). The entrepreneurial leadership construct compromises eight
items on the ENTRELEAD scale and is adapted from Renko, El Tarabishy [33]; for instance, the
"Manager of this company often comes up with radical improvement ideas for the
products/services we are selling." Innovation capability was measured using: client-focused
innovation, marketing-focused innovation, and Technological-focused innovation. Ten items
adopted from Hogan, Soutar [20] are used to measure IC dimensions. Lastly, innovation
performance construct compromises of nine items adopted from the study of Saunila, Ukko [47]
and Lau and Lo [46]. Data analysis was performed using Smart PLS v.3.3.9.
DATA ANALYSIS AND RESULTS
Data collected from the questionnaire survey were examined using partial least squares
structural equation modelling (PLS-SEM) utilizing the path modelling technique. PLS path
modeling was chosen since it is widely used in management science disciplines [53]. In
addition, PLS-SEM is the "most fully developed and general system" in SEM studies utilized to
predict the endogenous variable 'innovation performance' [55, 56]. Following Hair, Sarstedt
[57] guidelines, the PLS-SEM analysis was carried out in a two-stage approach. The
measurement model was initially evaluated for validity and reliability following the set criteria.
The structural model was evaluated after establishing the validity and reliability of the
measurement model.
Measurement Model Assessment
The measurement model examines the constructs and indicator relationships. It comprises
individual indicator reliability and composite reliability (CR), which evaluates internal
consistency, and average variance extracted (AVE), which assesses convergent validity. Tables
1 and 2 display the reliability and validity of the constructs. The results in Table 1 exhibit that
most indicators showed factor loadings over the threshold of 0.70 [53, 58]. For all constructs,
Cronbach's alpha (α) scores and composite reliability (CR) scores were higher than the cut-off
criteria of 0.70 [57, 59]. Additionally, the average extracted variance (AVE) scores were greater
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than 0.50 [27, 57]. The measurement model's reliability and convergent validity are
established. Figure 2 displays the results of the measurement model.
Table 1. Factor loadings, reliability, and validity
Construct Item Λ α CR AVE
Entrepreneurial Leadership EL1 0.747 0.893 0.914 0.572
EL2 0.752
EL3 0.775
EL4 0.760
EL5 0.748
EL6 0.728
EL7 0.781
EL8 0.758
Client-focused IC2 0.870 0.829 0.898 0.746
IC3 0.890
IC4 0.829
Marketing-focused IC5 0.790 0.859 0.904 0.703
IC6 0.846
IC7 0.875
IC8 0.841
Technology-focused IC9 0.869 0.858 0.913 0.778
IC10 0.896
IC11 0.882
Innovation Performance IP1 0.717 0.910 0.926 0.583
IP2 0.726
IP3 0.785
IP4 0.772
IP5 0.751
IP6 0.785
IP7 0.776
IP8 0.741
IP9 0.815
Table 2: Discriminant validity (HTMT)
Construct CFI EL IP MFI TFI
CFI
EL 0.727
IP 0.725 0.713
MFI 0.888 0.641 0.750
TFI 0.760 0.520 0.621 0.852
CFI: Client-focused, EL: Entrepreneurial Leadership, IP: Innovation Performance, MFI: Marketing-focused, TFI:
Technology-focused.
After establishing the internal consistency reliability, the Heterotrait Monotrait (HTMT) ratio
is employed to determine the measurement model's discriminant validity. Instead of only
assessing cross-loadings or using the Fornell-Larcker method, HTMT is a more accurate
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Table 3: Hypotheses Testing.
Hypothesis Relationships Path Coefficient T statistics P values 95% CI Result
H1 EL --> IP 0.356 6.548 0.000 0.242 - 0.456 Supported
H2 EL --> IC 0.636 13.802 0.000 0.547 - 0.725 Supported
H3 IC --> IP 0.458 8.322 0.000 0.353 - 0.568 Supported
Figure 2: Results of Structural Model
Mediation Analysis
Since the mediation approach is thought to be the best for PLS-SEM, it was used in the current
study [57]. Traditional methods for evaluating the significance of mediation relationships
include the Sobel test; however, recent research has highlighted the Sobel test's statistical
weaknesses and advocated using bootstrapping instead [61]. So, in this study, the
bootstrapping method was used to determine the significance [62]. In addition, Zhao, Lynch
[63] asserted that a full mediation establishes when the exogenous variable does not
significantly affect the endogenous variable upon including the mediator. On the contrary,
partial mediation happens when the exogenous variable significantly and directly impacts the
endogenous variable. As shown in table 4, the result of mediation analysis revealed that IC has
a complementary partial mediation role in the linkage between EL and IP (β = 0.291, t = 6.870,
p <0.000). Thus, H4 was accepted.
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Al-Sharif, A. M., Ali, M. A., Jaharuddin, N. S., Abdulsamad, A., & Jandab, A. (2023). The Role of Innovation Capability in the Relationship between
Entrepreneurial Leadership and Innovation Performance in the SMEs Service Industry. Advances in Social Sciences Research Journal, 10(1). 264-278.
URL: http://dx.doi.org/10.14738/assrj.101.13802
Table 4: Result of Mediation Relationship
Total effect (EL--> IP) Direct effect (EL--> IP)
Coefficient T value P-value Coefficient T value P-value
0.647 17.851 0.000 0.356 6.548 0.000
Indirect Effect of EL on IP
Hypothesis Coefficient S. E T value P-value Percentile bootstrap
95% confidence interval
Lower Upper
H4: EL->IC->IP 0.291 0.042 6.870 0.000 0.218 0.383
DISCUSSION AND CONCLUSION
This study provided an explanation of the relationship between EL, IC, and IP. It was
demonstrated that EL might enhance IP, and the interaction paths between EL and IP were
explored. The proposed hypothesis' acceptance validates both the Resource-based view (RBV)
and the Dynamic-based view (DCV). Firstly, this study revealed a positive impact of EL on IP.
The outcomes are in line with earlier studies where EL and performance outcomes were found
to be positively correlated [5, 9, 10, 14, 63]. It was argued that SMEs' owners and managers who
exhibit this style of Leadership are more likely to be able to improve the company's innovation
activities. In addition, leaders can exert their entrepreneurial skills in a competitive
environment to achieve innovative performance [7, 13]. This increased our certainty that EL
positively and significantly influences IP.
Secondly, this study found a significant positive effect of EL on IC. These findings support and
expand the research from [12-14, 18], which revealed that EL enhances organizational
innovation. According to Renko, El Tarabishy [33], entrepreneurial leaders emphasize their
followers' self-efficacy and entrepreneurial passion by inspiring their passion for creativity and
innovation.
Thirdly, the results of this study revealed a significant impact of IC on IP. These results support
both the hypothesis and earlier studies regarding the effect of IC on organizational outcomes
[41, 45, 46]. As a unique firm capability, innovation capability is an ever-evolving firm-specific
construct that is created from a collection of specific activities (i.e., client-focused innovation,
marketing-focused innovation, and technological-focused innovation) that are added,
developed, and modified over time [31]. The dynamic capabilities are essential for the creation
of innovation, thus SMEs in the service sector update, integrate, and reconfigure their current
innovation resources to create new products and services in response to market opportunities
and changes. Subsequently, achieving higher performance and gaining sustainable competitive
advantage [29].
Finally, the result of this study supports the mediating effect of innovation capability in EL-IP
relationships. This finding has confirmed previous literature on the mediating role of the IC [16,
18, 43]. Theoretically, this finding is consistent with RBV and DCV. According to RBV assertation
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that firms depend on their internal resources and capabilities to achieve competitive advantage
instead of external resources. Whereas, DCV emphasized on depending on all of the firm
resources and capabilities whether internal or external to address rapidly changing
environments. Therefore, entrepreneurial leaders, as firm physical resources, use their
capabilities to promote innovation capability to enhance the firm's level of innovation. In
addition, as a firm dynamic capability, innovation capability plays a key role in building up
innovation performance and sustainable competitive advantage [28].
This study offers several practical implications. With the guidance of the proposed conceptual
framework in this study, SMEs owners/managers in the service sector can better understand
how EL affect the innovation activities in their firms, so they focus more on building these
capabilities to achieve better performance outcome and gain sustainable competitive
advantages. Following this model, SME owners/managers should lead with vision, passion,
innovativeness, and risk-taken while dealing with the dynamic environment and business
uncertainty. In other words, SME owners/managers should develop and utilize EL capabilities
to identify and seize business opportunities to guide their team members toward sustainable
goals.
LIMITATIONS AND FUTURE DIRECTIONS
Despite the significant empirical findings and implications, the current study has some
limitations. First, the study used a cross-sectional design, which limits the ability to infer causal
explanations. However, the study gave assurance of anonymity to individual respondents to
reduce potential response bias. Comparatively to a cross-sectional technique, a longitudinal
method can clearly demonstrate the causal effect, providing a deeper comprehension of the
correlation. Qualitative approaches may be applied to explore deeper problems relating to
innovation in the SMEs service industry. Qualitatively-shaped future studies and longitudinal
sections can support this study to examine the contextual aspects of innovation in the SMEs
services sector. Second, this study focused only on service SMEs in Klang Valley to save time
and costs since the data collection was done during the COVID-19 pandemic. Future research
could extend this study to a broader sample involving other states in Malaysia, such as Johore
and Penang is desirable. Moreover, similar research should be conducted in different countries
to review entrepreneurial leadership practices in service firms comprehensively. It is necessary
to replicate the current study and address the issues overlooked in this study. Including other
prime areas in future research can benefit researchers in generalizing their findings within
service firms.
References
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2. Schoemaker, P.J.H., S. Heaton, and D. Teece, Innovation, Dynamic Capabilities, and Leadership. California
Management Review, 2018. 61(1): p. 15-42.
3. Teece, D.J., Dynamic capabilities and entrepreneurial management in large organizations: Toward a
theory of the (entrepreneurial) firm. European Economic Review, 2016. 86: p. 202-216.