Innovation seems to be a fundamental requirement for the growth and sustainability of small businesses. While previous research revealed a strong correlation between intellectual capital and performance, the role of intellectual capital in facilitating the innovativeness and performance of a firm has not been thoroughly examined in the small and medium-sized enterprise (SME) context. This study examines the role of innovativeness in the intellectual capital and organizational performance relationship using a sample of small firms. The results of a survey conducted on 460 small business owners indicate a positive relationship between two components of intellectual capital, human capital and organizational capital, and organizational performance. Further analysis finds that innovativeness partially mediates the relationship between intellectual capital and organizational performance. Our findings indicate that efficiently and effectively organized firms can leverage well skilled and innovative employees to achieve the best performance through innovation.

Introduction

Small and medium-sized enterprises (SMEs) must often be creative and diligent in establishing, solidifying, and defending strategies for sustained competitive advantage, given the difficulties in realizing gains from economies of scale (Patel & Jayaram, 2014; Wales, Patel, Parida, & Kreiser, 2013). Researchers argue that the development and deployment of knowledge-based resources are critically important tools for firms to garner a sustained competitive advantage and greater profitability (Cohen & Levinthal, 1990; Grant, 1996a, 1996b; Kogut & Zander, 1992). In particular, these intangible resources have been shown to be more important than tangible assets in the early stages of new venture development (Lichtenstein & Brush, 2001). Entrepreneurs and small business owners have been consistently coached to focus on the novelty of their offerings compared to their often larger competitors, as well as to utilize their firm-specific knowledge to establish processes and routines that make them nimble (Rosenbusch, Brinckmann, & Bausch, 2011; Zulu-Chisanga, Boso, Adeola, & Oghazi, 2016). Response speed and ability to adapt to market demands allow SMEs to leverage the advantages of their “smallness” through innovation (Leal-Rodríguez & Albort-Morant, 2016; Rosenbusch et al., 2011). Therefore, innovation is an important topic of investigation in the research on SME performance. Most scholars consider innovation a key source of sustainable competitive advantage for SMEs (Andries & Czarnitzki, 2014; Rosenbusch et al., 2011). Based on the tenets of the Knowledge-based View (Grant, 1996a, 1996b; Kogut & Zander, 1992), which extends from the Resource-based View (Barney, 1991), the ability to successfully leverage innovation as a key firm strategy depends on the knowledge, skills, and other capabilities within the firm (Andries & Czarnitzki, 2014; Dibrell, Davis, & Craig, 2008; Subramaniam & Youndt, 2005). Thornhill (2006) argues that “…what an organization knows determines what it can do” (p. 691). Small organizations often invest heavily in intellectual capital through their employees, communications, and processes and leverage such investments to foster innovation within the company (Maes & Sels, 2014; Thornhill, 2006). Therefore, the relationship between the development, accumulation, and distribution of knowledge (facilitated by intellectual capital development) and performance is likely to be indirect. Organizations work to build intellectual capital, which likely serves as an input to enhancing the firm’s innovation strategy (Maes & Sels, 2014; Subramaniam & Youndt, 2005; Thornhill, 2006), providing sustained performance advantages. The effects and relationships among intellectual capital, innovation, and business performance in the SME context are, however, ambiguous and generally under-investigated (Gronum, Verreynne, & Kastelle, 2012).