Innovation Capability and Financial Performance of Fashion Small and Medium Enterprises: The Role of Dynamic Relational Capability

Abstract

This study examined how innovation capability improves financial performance in fashion small and medium enterprises (SME) in Central Java, Indonesia, with a focus on the mediating role of dynamic relational capability. Although innovation capability has been widely investigated, the interaction with dynamic customer relationships remains understudied. Data were collected through online questionnaires and face-to-face interviews with 308 fashion SME owners/managers, purposively selected based on comprehensive business knowledge. The results showed that, based on PLS-SEM analysis, innovation capability significantly strengthened dynamic relational capability, leading to improvement in networking capapability and financial performance. In conclusion, dynamic relational capability directly improves financial performance and mediates the relationship between innovation capability and financial performance. The results underscore the essence of enhancing dynamic relational capability in fashion SME, providing practical details for owners/managers to build strategies that foster innovation and competitiveness.