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All Journal International Journal of Economics, Business and Accounting Research (IJEBAR)
Ilham Sentosa
Universiti Business School, Kuala Lumpur, Malaysia
Economics, Econometrics & Finance

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THE ROLE OF INNOVATION CAPABILITY IN ENHANCING SME COMPETITIVE ADVANTAGE: EVIDENCE FROM INDONESIA'S DIGITAL ECONOMY Bangun Prajadi Cipto Utomo; Tri Djoko Santosa; Ilham Sentosa
International Journal of Economics, Business and Accounting Research (IJEBAR) Vol 10 No 2 (2026): IJEBAR: Vol. 10, Issue 2, June 2026
Publisher : LPPM ITB AAS INDONESIA (d.h STIE AAS Surakarta)

Show Abstract | Download Original | Original Source | Check in Google Scholar | DOI: 10.29040/ijebar.v10i2.20092

Abstract

The rapid advancement of digital technologies has intensified competition among Small and Medium Enterprises (SMEs), requiring firms to continuously innovate, respond effectively to market changes, and leverage organizational knowledge to sustain competitive advantage. Although previous studies have examined these factors independently, limited research has investigated the integrated effects of open innovation, market orientation, and knowledge management on competitive advantage through innovation capability, particularly in emerging economies. This study examines the direct and indirect relationships among these variables using survey data collected from 200 Indonesian SMEs operating in manufacturing, trade, and service sectors. Data were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM). The results indicate that open innovation (β = 0.284), market orientation (β = 0.317), and knowledge management (β = 0.298) positively and significantly influence innovation capability. Furthermore, innovation capability significantly enhances competitive advantage (β = 0.412) and partially mediates the effects of the three antecedent variables. The model explains 68.4% of the variance in innovation capability and 74.1% of the variance in competitive advantage. These findings highlight innovation capability as a strategic mechanism that transforms knowledge resources, external collaboration, and market intelligence into sustainable competitive advantage in an increasingly digital economy.
Co-Authors Bangun Prajadi Cipto Utomo Tri Djoko Santosa