Moderating Effect of Dynamic Capabilities on the Relationship between Entrepreneurial Orientation and Business Performance of Small and Medium Enterprises.

Abstract

This paper reviewed past literature with the aim of establishing the trends in published literature on dynamic capabilities, entrepreneurial orientation (EO) and business performance of Small and Medium Enterprise’s (SMEs). Based on this review the relationship between dynamic capabilities, entrepreneurial orientation and business performance of SMEs is hinged on Schumpeter theory of innovations, (Schumpeter, 1942) and dynamic capability theory by Teeceet al (1997). Scholars have a common view that the association between EO and business performance is too complex hence moderated by variables. Dynamic capabilities (DC) have a moderating role between predictors of competitive advantage and business performance. The literature reviewed therefore presents the empirical studies globally and locally on moderation of dynamic capabilities on EO and business performance of SMEs. From the review it has been established that there are inconsistent findings in terms of relationships between DCs, EO and performance of SMEs which is justified by the fact that DCs, EO dimensions vary independently and may not be equally valuable across performance metrics or different stages of development of SMEs, besides different situations impacts on the relationship between DCs, EO and business performance of SMEs. In addition there is a dearth of literature on the moderating effect of dynamic capabilities on the relationship between EO and business performance thus calling for further interrogation in the context of developing countries. In conclusion there are mixed results in the linkage between EO and business performance, however effective integration and implementation of EO and DC would help the organization secure competitive advantage in the face of dynamic business environment to foster high business performance.