<![CDATA[This study examines the relationship between dynamic capabilities and firm performance, with product innovation as a mediating variable. Grounded in the dynamic capabilities framework, this research focuses on three key dimensions: sensing, seizing, and transforming, within small and medium-sized enterprises (SMEs) in Central Java, Indonesia. A quantitative approach was employed using Partial Least Squares Structural Equation Modeling (PLS-SEM) to analyze survey data collected from 204 SMEs. The results indicate that sensing capabilities have a significant positive effect on product innovation, which in turn enhances firm performance. However, the effects of seizing and transforming on product innovation are found to be statistically insignificant. Furthermore, product innovation demonstrates a significant positive relationship with firm performance, suggesting its important role as a mediating mechanism. These findings imply that dynamic capabilities do not uniformly influence innovation outcomes, and that sensing capability plays a more critical role in driving innovation among SMEs operating under resource constraints and environmental uncertainty. This study contributes to the literature by providing empirical evidence on the indirect relationship between dynamic capabilities and firm performance through product innovation in an emerging economy context. Practically, the findings suggest that SME managers should prioritize market sensing activities and innovation development to improve long-term performance.]]>
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