Systemic relation between innovation capabilities, innovation strategy, and financial performance of small and medium enterprises: Impact of technology trajectory, management obstacles, and investment

Innovation capabilities are an asset of the company to achieve competitive advantages, are related to strategy and impact on financial performance. They have been analyzed with quantitative methods that, although allow determining the causal relationships between the variables, are not enough to understand their dynamics, especially in developing countries. This study used structural equation modeling to confirm the relationships among four innovation strategies and innovation capabilities and financial performance in a sample comprising 135 small and medium enterprises (SMEs) in Colombia. In addition, an exploratory System Dynamics simulation model was designed based on archetypes to broaden the understanding of the behavior of relationships as variables change. It was found that investment in innovation capabilities, management obstacles, and the impact of changes in the technology trajectory influence the dynamics of the problem. Furthermore, different strategies generate different behaviors in innovation capabilities and different financial performance. Other theoretical and practical findings and implications are discussed.