Int. Journal of Business Science and Applied Management, Volume 16, Issue 1, 2021

How do the dynamic capabilities of Malaysian service small and

medium-sized enterprises (SMEs) translate into international

performance? Uncovering the mechanism and conditional factors

Norwan Ahmad

School of Business & Economics, Universiti Putra Malaysia

Universiti Putra Malaysia, UPM Serdang, 43400, Selangor, Malaysia

Tel: +60172921762

Email: iwanmarrickville@gmail.com

Ng Siew Imm

School of Business & Economics, Universiti Putra Malaysia

Universiti Putra Malaysia, UPM Serdang, 43400, Selangor, Malaysia

Tel: +60397697573

Email: imm_ns@upm.edu.my

Norazlyn Kamal Basha

School of Business & Economics, Universiti Putra Malaysia

Universiti Putra Malaysia, UPM Serdang, 43400, Selangor, Malaysia

Tel: +60397697675

Email: norazlyn@upm.edu.my

Yuhanis Abdul Aziz

School of Business & Economics, Universiti Putra Malaysia

Universiti Putra Malaysia, UPM Serdang, 43400, Selangor, Malaysia

Tel: +60397697874

Email: yuhanis@upm.edu.my

Abstract

The aim of this paper is to provide empirical evidence on the mechanism and conditional factors that translate

dynamic capabilities into the international performance of service small and medium-sized enterprises (SMEs)

from Malaysia as a developing country. This study is underpinned by the dynamic capability view. A cross-

sectional study involving 278 internationalising business service SMEs from Malaysia was implemented and the

data from the study were analysed by using SmartPLS. The results revealed that dynamic capabilities in terms of

technological capability and relational capital require the intervention of innovative service offerings and

government facilitation in enhancing international performance. The results also indicated that the relationships

were contingent upon service SMEs’ entrepreneurial orientation. Our findings suggest that service SMEs may

need to focus on innovative service offerings and government facilitation to improve international performance,

as merely maintaining technological capability and relational capital may not yield optimum outcomes. This

study contributes to the scarce literature on service SME's performance using the logic of dynamic capability. To

enhance the outcomes of dynamic capability, the study proposes that dynamic capability may need to be

managed alongside innovative service offerings, government facilitation and entrepreneurial orientation. The

indirect and conditional impacts of innovative service offerings, government facilitation and entrepreneurial

orientation complement the dynamic capability literature on the importance of supplementary factors rather than

just focusing on the direct impact of dynamic capability.

Keywords: international performance; dynamic capabilities; innovative service offering; government facilitation;

entrepreneurial orientation

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

1. INTRODUCTION

Small and medium-sized enterprises (SMEs) from around the world have become more internationalised

and constituted about 30% of the world’s total exports in 2015 (FedEx Express, 2015). In this regard, changes in

technology (Antimiani & Costantini, 2013), logistics and transport services (Saslavsky & Shepherd, 2012), as

well as a freer investment and trade climate (Huang, 2016) have contributed to the growth of trade in services

(Bello, Radulovich, Javalgi, Scherer, & Taylor, 2016). Although frequently being associated with providing low-

cost basic services, business service SMEs from developing countries have increasingly shown the capability to

compete internationally by providing high value-added and innovative services that will contribute to

international performance (Radulovich, Javalgi, & Scherer, 2018). Essentially, the business service industry is an

industry under the broader service industry (den Hertog, 2000). The industry can be categorised as soft services,

which require simultaneous production and consumption and is knowledge intensive (Abdelzaher, 2012; Ball,

Lindsay, & Rose, 2008). It consists of firms in engineering, architectural, legal, accounting, business consulting,

real estate, construction-related services, advertising, as well as other business services (Matrade, 2019). In this

regard, internationalisation is important for business service SMEs for growth and survival (Javalgi, Todd, &

Granot, 2011; Radulovich et al., 2018). The internationalisation of business service SMEs is also important for

countries due to its linkages with economic growth, trade, employment, innovation (Bell et al., 2004) and social

inclusion (OECD, 2017).

In relation to this, international performance refers to a firm’s successful venture into foreign markets

(Katsikeas, Piercy, & Ioannidis, 1996). It can be measured objectively and subjectively (Gerschewski, Rose, &

Lindsay, 2015). Objectively, international performance relates to the ratio of revenue generated from

international markets to total revenue as well as international market growth (Radulovich et al., 2018).

Subjectively, it captures the perception of a firm vis-à-vis its performance in meeting the objectives set, such as

in terms of profitability, market share, turnover, development of expertise, and image (Nummela, Saarenketo, &

Puumalainen, 2004).

In this regard, the literature suggests that dynamic capabilities are key for creating competitive advantage,

particularly in international markets which are considered dynamic and hostile (Zahra & Garvis, 2000). Dynamic

capability reflects how a firm is able to create a competitive advantage by continuously reconfiguring and

coordinating existing competencies and resources (Teece, Pisano, & Shuen, 1997). An essential aspect of this

definition is how this configuration process is “developed, deployed, and protected” (Teece et al., 1997: p.510),

which reflects the flexibility and adaptability of firms (Teece, 2014). In a way, continuous improvement of a

firm’s internal processes surrounding technology, (organisational and managerial) is key in creating sustainable

competitive advantage (Teece et al., 1997). However, investigation into the effect of dynamic capabilities on

international performance has received scant attention in the literature (Deng, Liu, Gallagher, & Wu, 2018).

Previous empirical investigations have rarely investigated the mechanism in which dynamic capability can be

translated into international performance through its links with innovative services and government facilitation

(Radulovich et al., 2018; Teece, 2018). Questions also abound about the factors that condition the relationship

between dynamic capabilities and international performance (Deng et al., 2018; Teece, 2018). The specific

factors that constitute dynamic capabilities have also not been clearly identified (Teece, 2018).

Furthermore, empirical evidence about services trade and service firms’ international performance is still

scarce (Radulovich et al., 2018). Previous studies have focused more on the manufacturing sector (Gardó, García,

& Descals, 2015) and the available studies on services have tended to focus on large service firms from the

advanced economies (Radulovich et al., 2018). Given the nature of the service industry, which is different from

the goods industry (Samiee, 1999), as well as the differences in competitive behaviour between large firms and

small firms (Chen & Hambrick, 1995), providing empirical evidence in the context of service SMEs from

developing countries is necessary for a better understanding of SMEs’ internationalisation (Bello et al., 2016;

Radulovich et al., 2018). This is key as applying the current understanding of international performance, which

is skewed towards manufacturing SMEs as well as SMEs from developed countries, is considered not to be

appropriate (Li & Hsu, 2016).

In the context of Malaysia, business service SMEs employed more than 314,000 people (DOSM, 2017) and

contributed RM65 billion to value added and RM26.8 billion to exports in 2018 (DOSM, 2019). However, the

Organisation for Economic Cooperation and Development (OECD) in its report in 2017 indicated that

innovation is one of the weaker points for Malaysian SMEs (OECD, 2017). This resulted in low innovative

offerings, which restricted the SMEs from achieving greater international performance (SME Corp., 2018). At

the macro level, the low international performance among service SMEs is reflected in the persistent and

growing services trade deficit for Malaysia, which stood at RM17.7 billion in 2018 as compared with a surplus

of RM1.4 billion in 2010 (BNM, 2019). As such, investigation into the factors that can contribute to international

performance among business service SMEs from Malaysia is pertinent in light of their need for strategies that

can contribute to competitive advantage in the international markets.

Int. Journal of Business Science and Applied Management, Volume 16, Issue 1, 2021

In this regard, this paper is designed to contribute to the debate, bridge the identified chasms, as well as

offer exciting insights for theoretical and managerial lessons by investigating the effect of dynamic capabilities,

innovative service offerings, government facilitation and entrepreneurial orientation on international

performance. Underpinned by the dynamic capability view, this study highlights the importance of considering

supplementary factors, namely innovative service offerings, government facilitation, and entrepreneurial

orientation, which may contribute to translating dynamic capabilities into international performance.

The discussions in this article are structured by, first, providing a literature review on the dynamic

capability view as the underpinning theory before delving deeper into the development of hypotheses and the

research framework. Next, discussions on research methodology as well as results and analysis are covered. The

paper proceeds by deliberating on the findings of the study as well as its implications for theory, management,

and policy. Subsequently, discussions on the limitations and future directions are provided, followed by a

conclusion to encapsulate the key takeaway from this paper.

2. THEORETICAL BACKGROUND – DYNAMIC CAPABILITY VIEW

The literature has indicated the importance of dynamic capabilities in creating competitive advantage that

may lead to better international performance among firms (Teece et al., 1997). Essentially, dynamic capabilities

allow firms to adapt to swift-changing environments by coordinating and reconfiguring existing resources and

capabilities to better sense and seize market opportunities (Teece, 2018) as theorised by the dynamic capability

view (Teece et al., 1997). These include changes that need to be made in terms of operations, management,

practices, as well as technologies to respond to market demands (Deng et al., 2018). The key roles played by

dynamic capabilities, particularly within the realm of international market expansion, cannot be emphasised

enough due to the nature of international markets that are hostile and dynamic (Zahra & Garvis, 2000). Therefore,

in an environment which is constantly in a disequilibrium, firms have no choice but to mobilise their dynamic

capabilities to enhance international performance (Jantunen, Tarkiainen, Chari, & Oghazi, 2018).

In this regard, there are differences between dynamic capabilities and ordinary capabilities (Deng et al.,

2018). Ordinary capabilities reflect the operational capabilities, which are based on current best practices to meet

current market needs, and do not take into account the future suitability of products and services (Teece, 2018).

The efficiency-driven ordinary capabilities are also easily replicated and benchmarked by others (Teece, 2018).

In this regard, ordinary capabilities may not support the creation of long-term competitive advantage for firms

(Teece, 2018).

Conversely, dynamic capabilities are viewed as higher-level activities (Teece, 2016) undertaken by firms to

respond to market dynamics, which necessitate the realignment and integration of existing resources and

capabilities (Deng et al., 2018). These capabilities reside in the top management and managers of a firm (Teece,

2016). Essential to this is the embeddedness of organisational processes, routines, and managerial decisions that

are not easily replicated in performing various value-creating functions (Krasnikov & Jayachandran, 2008; Teece,

2016). In addition, the accumulative nature of the capabilities, be it in terms of knowledge, skills, and

understanding on how best to unlock the value of the firm’s resources, are also not easily replicated (Murray,

Gao, & Kotabe, 2011). The embedded nature of dynamic capabilities with organisational practices contributes to

the creation of competitive advantage as rival firms may find it difficult to replicate (Krasnikov & Jayachandran,

2008). Furthermore, dynamic capabilities have been found to be particularly important as compared to resource

ownership in explaining the diverse international performance (Kaleka, 2002). This is in line with the view of

Day (1994), who posited that dynamic capabilities are crucial for creating a competitive advantage that will

result in enhanced performance.

Although the actual factors reflecting dynamic capabilities that are key to capturing the activities of sensing

and seizing international market opportunities have not been clearly identified (Teece, 2018), Al-Aali and Teece

(2014) and Teece (2018) suggested that firms could leverage on technology as well as building relationships

with customers and suppliers in order to sense and seize market opportunities. This is based on conceptual

discussions about the ability of firms to sense and seize market opportunities by being proactive in seeking

market opportunities, being willing to take risks, using technology, and building relationships with customers

and suppliers as suggested by Al-Aali and Teece (2014) and Teece (2018). In a sense, technological capability

and relational capital are crucial for firms in sensing and seizing international market opportunities.

Nonetheless, previous studies have not adequately taken into account the mechanism and conditional

factors that translate dynamic capabilities into international performance (Teece, 2018), which will be addressed

by our study. In this regard, investigating the links between dynamic capabilities (technological capability and

relational capital) and international performance by taking into account the role of innovative service offerings

and government facilitation as mediators promises a better understanding of the presence of factors that translate

dynamic capabilities into international performance (Teece, 2018). This is in light of the conceptual discussions

in the literature which suggest that ownership of technological capability will enable firms to create innovative

services that will lead to international performance (Al-Aali & Teece, 2014). In the same vein, ownership of

relational capital also tends to help internationalising firms in accessing government facilitation programmes that

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

will contribute to better international performance (Al-Aali & Teece, 2014). In addition, the role of

entrepreneurial orientation as a conditional factor which moderates the relationship between dynamic capabilities

(technological capability and relational capital) and innovative service offerings, as well as government

facilitation, is also not well understood (Li & Deng, 2017). Nonetheless, the literature suggests that having

entrepreneurial orientation tends to influence the link between technological capability and innovative services

(Li & Deng, 2017) as well as relational capital and government facilitation (Leonidou, Palihawadana, &

Theodosiou, 2011). This may then lead to better international performance (Acosta, Crespo, & Agudo, 2018).

3. HYPOTHESIS DEVELOPMENT AND RESEARCH FRAMEWORK

Our attempt at addressing the highlighted gaps will extend understanding concerning the importance of

having dynamic capabilities (technological capability and relational capital) together with innovative services

and government facilitation in enhancing international performance. In addition, having high entrepreneurial

orientation is also key for firms to enhance their capability to create innovative services as well as access

government facilitation programmes that will contribute to international performance. In this regard, the links

between these constructs were hypothesised, and have become the basis of our study’s research framework.

3.1. Mediating Effect of Innovative Service Offerings on Technological Capability – International

Performance Relationship

Innovation is essential for a service industry (Prajogo, 2006). It involves the provision of new or enhanced

services for the benefits of customers (Dotzel, Shankar, & Berry, 2013). It also includes implementing processes

and approaches that are innovative in order to improve productivity, facilitate the delivery of services (Verma &

Jayasimha, 2014), and enhance customers’ satisfaction (Hitt, Hoskisson, & Ireland, 1994). Generating innovative

services is therefore pertinent for service SMEs in creating sustainable competitive advantage in international

markets (Prajogo & Oke, 2016; Soto, 2018). In fact, it is considered as paramount for firms in meeting the

growing and changing demand of the global markets (Lee, Ginn, & Naylor, 2009).

In this regard, the literature suggests that the creation and delivery of innovative services may be impacted

by technological capability as technological capability encourages knowledge exchange, idea prioritisation and

innovation (Amundsen, Aasen, Gressgård, & Hansen, 2014; Nieves & Osorio, 2019). This is particularly

pertinent among knowledge-based organisations such as business service SMEs in facilitating organisational

learning as one of the key determinants of innovation performance (Lafuente, Solano, Leiva, & Mora-Esquivel,

2019). In fact, Li and Deng (2017) were of the view that technologically-competent firms tended to explore new

technologies to create and deliver innovative products and services and connect with customers. This may result

in enhanced growth and performance (Prajogo & Oke, 2016), suggesting a mediating role played by innovative

service offerings in the relationship between technological capability and international performance (Bello et al.,

2016).

Essentially, technological capability refers to the capability of a firm to use various technologies, including

scientific knowledge and technological devices (Gao, Gao, Zhou, & Huang, 2015) in creating and delivering

products and services (Afuah, 2002). This is particularly relevant as creating innovative services requires an

understanding about the needs and desires of customers, which can be obtained by using technology (Kraemer &

Gibbs, 2005). Also key to the use of technology in facilitating the creation of innovative services is its

association with operational efficiency and effectiveness (Chatterjee, 2017). In a sense, technological capability

will likely reduce any potential errors and the need to experiment with innovation (Chatterjee, 2017). In fact,

technological capability tends to increase the propensity to innovate (Amara, D’Este, Landry, & Doloreux, 2016),

improve quality, as well as reduce the costs of services among knowledge-intensive service firms (Camacho &

Rodríguez, 2005). In a way, technological capability represents the know-how and knowledge that are necessary

to create innovative products and services, as desired by customers (Chatterjee, 2017).

In this regard, the offering of innovative services is key for achieving competitive advantage, which may

contribute to better international performance (Bello et al., 2016). In other words, the key to sustainable

competitive advantage creation rests on the firms’ ability to be the leader in creating new, or enhancing existing,

services (Prajogo & Oke, 2016) as well as in providing innovative solutions (Javalgi et al., 2011). This will

enable firms to employ a differentiation strategy that may lead to sustainable competitive advantage (Bello et al.,

2016). Furthermore, innovative service offerings may also create sustainable competitive advantage resulting

from customers’ increased dependency on the services provided by firms, indicating the presence of high

switching costs (de Brentani, 2001). Consequently, this creates an innovation-led barrier, which hinders other

firms from competing for the same market segments (de Brentani, 2001).

In line with the literature which suggest that : 1) technological capability is key for creating innovative

services; and 2) innovative services may lead to competitive advantage creation for internationalising firms, it is

likely that an innovative service offering plays a mediating role in the technological capability – international

performance relationship. Therefore, the following hypotheses are formulated:

Int. Journal of Business Science and Applied Management, Volume 16, Issue 1, 2021

H1: Innovative service offering mediates the relationship between technological capability and

international performance.

H1a: Technological capability is positively associated with innovative service offering.

H1b: Innovative service offering is positively associated with international performance.

3.2. Mediating Effect of Government Facilitation on Relational Capital – International Performance

Relationship

A supportive home country institutional environment is key for firms in venturing into international markets

(Leonidou et al., 2011). This is in line with the literature which suggests that regulations, policies, and support

programmes directed at productivity-enhancing activities may yield positive outcomes for firms (North, 1990),

including in terms of internationalisation (Leonidou et al., 2011). In this regard, firms have been found to build

rapport and utilise their connections with government institutions for greater access to support programmes

provided by government (Oparaocha, 2015). This relationship building capability essentially reflects the

relational capital of the firm (Bontis, 1999). Central to relational capital is the capability to build and maintain

relationships with external stakeholders, including government agencies (Bontis, 1999), which provide

opportunities for knowledge building as well as accessing external resources (Inkinen, 2015; Youndt,

Subramaniam, & Snell, 2004). In the case of service SMEs, it is crucial to capitalise on close relationships with

government because of their limitation of resources (Martin, Javalgi, & Cavusgil, 2017), knowledge (Durst &

Edvardsson, 2012), and innovative capability (Boratyńska, 2016). In a way, maintaining relationships or

networks with various stakeholders in the home and host countries, including government, is crucial for

increasing market knowledge (Stoian, Rialp, & Dimitratos, 2017), improving innovative capability (Mahmood &

Rufin, 2005), and enhancing international performance (Brache & Felzensztein, 2019; Suseno & Pinnington,

2017). This may facilitate internationalising firms in venturing abroad (Luo et al., 2010) by making them more

competitive in competing with international players (Aggarwal & Agmon, 1990). This suggests the potential

mediating role of government facilitation in the relationship between relational capital and international

performance.

In this regard, relational capital ensures that the knowledge and understanding that a firm has will facilitate

the creation of credibility and trust with government (Zain & Ng, 2006). This will then enhance a firm’s ability

to obtain information as well as access government support (Oparaocha, 2015). In addition, the capability to

maintain relationships with government agencies is also key for firms in dealing with foreign policies and

procedures as well as other non-trade hurdles (Brache, 2018). In a way, relational capital is vital for establishing

rapport with government agencies, which may help internationalising firms in getting up-to-date information and

accessing government support (Leonidou et al., 2011).

Within the context of SMEs from developing countries, support programmes provided by government are

key in their internationalisation endeavour (Leonidou et al., 2011). The support programmes include financial

assistance, tax-rebates, capacity and capability building, advisory services, market intelligence, as well as

participation in government-led trade fairs and exhibitions (Kahiya, 2018). In this regard, government facilitation

has been found to provide access to resources which facilitate the internationalisation of firms and contribute to

greater international performance (Haddoud & Newbery, 2017). Existing evidence also suggests that government

facilitation influences the adoption of international-led growth strategies among firms (Lu, Liu, & Wang, 2011),

including small firms (Meyer & Skak, 2002). In addition, government facilitation also creates awareness about

opportunities in international markets (Kahiya, 2018) and helps internationalising firms in addressing the

challenges associated with venturing abroad (Volchek, Jantunen, & Saarenketo, 2013).

In line with the literature which suggest that : 1) government facilitation is key for creating international

performance; and 2) relational capital may lead to greater access to government support programmes among

internationalising firms, it is likely that government facilitation plays a mediating role in the relational capital –

international performance relationship. Therefore, the following hypotheses are formulated:

H2: Government facilitation mediates the relationship between relational capital and international

performance.

H2a: Relational capital is positively associated with government facilitation.

H2b: Government facilitation is positively associated with international performance.

3.3. Mediating Effect of Innovative Service Offerings on Government Facilitation – International

Performance Relationship

The literature is cognisant of the key role played by government in fostering innovation among

internationalising firms (Mahmood & Rufin, 2005). The importance of government support in fostering

innovation is even more crucial in the context of SMEs from developing economies (Liu & Vrontis, 2017). With

greater innovative capability, service SMEs tend to be better able to offer innovative services, and they have

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

viable business propositions in the international markets and create sustainable competitive advantage (Prajogo

& Oke, 2016). Innovation-led barriers can then be created, which hinder other firms from competing for the

same market segments (de Brentani, 2001). This reflects the importance of innovative service offerings in

mediating the relationship between government facilitation and international performance.

In this regard, the literature suggests that a home country institutional environment that is supportive and

conducive helps foster innovation among firms (Szczygielski, Grabowski, Pamukcu, & Tandogan, 2017). This is

in line with the literature which suggests that regulations, policies, and support programmes which are directed at

productivity-enhancing activities may yield positive outcomes for firms (North, 1990), including in terms of

innovation and internationalisation (Mahmood & Rufin, 2005). The importance of government support in

fostering innovation is even more crucial in the context of SMEs from developing economies (Liu & Vrontis,

2017) in light of the constraints facing these SMEs with regard to resources, capabilities, knowledge, and

innovation (Boratyńska, 2016; Martin et al., 2017). In a way, the support provided by government may assist

internationalising SMEs in creating innovative services (Prajogo & Oke, 2016). This may then contribute to the

creation of competitive advantage (Bello et al., 2016), which will enable the SMEs to meet the growing and

changing demands of the global markets (Lee et al., 2009). In essence, offering innovative services is key for

enhancing international performance (Prajogo & Oke, 2016).

In line with the literature which suggest that: 1) an innovative service offering is key for creating

international performance; and 2) government facilitation enhances internationalising firms’ ability to provide

innovative services, it is likely that an innovative service offering plays a mediating role in the government

facilitation – international performance relationship. Therefore, the following hypotheses are formulated:

H3: Innovative service offerings mediate the relationship between government facilitation and international

performance.

H3a: Government facilitation is positively associated with innovative service offerings.

H1b: Innovative service offerings are positively associated with international performance.

3.4. Moderating Effect of Entrepreneurial Orientation on Technological Capability – Innovative

Service Offerings and Relational Capital – Government Facilitation Relationships

The literature has suggested a positive relationship between technological capability and the creation of

innovative products and services (Castaño, Méndez, & Galindo, 2016). Nonetheless, this positive relationship

may hinge on the presence of entrepreneurial orientation, which will supplement the ownership of technological

capability in influencing innovative outcomes (Li & Deng, 2017). This is particularly relevant for firms

venturing into international markets, which are characterised by constant disequilibrium in such areas as market

environments, technologies, and changing demands (Lee et al., 2009). While the ownership of technological

capability can help firms in using various technologies in their business operations, which may contribute to the

creation of innovative products and services, the effect may be limited. Firms that are only equipped with

technological capability may put emphasis only on delivering services based on current customers’ needs and

may not pay much attention to new and emerging services, including those that cannot be described by

customers (Li et al., 2008). This limitation can be overcome by supplementing technological capability with an

entrepreneurial orientation, which essentially reflects the proclivity of the firm to be proactive, innovative, and

willing to take risks (Lumpkin & Dess, 1996). Thus, having an entrepreneurial orientation can make a difference

for internationalising firms in enhancing innovation strategies that will contribute to higher international

performance (Ndubisi, Capel, & Ndubisi, 2015).

In a way, entrepreneurially-orientated firms are more supportive of new ideas and creative processes in

discovering and creating future services (Lumpkin & Dess, 1996). Entrepreneurially-orientated firms are also

willing to review existing operations that yield diminishing returns and commit resources and debt to seize

opportunities for higher returns (Javalgi et al., 2011). In fact, Schumpeter, the father of entrepreneurship, posited

that entrepreneurship is closely linked with innovation and disruption (Sweezy, 1943). Essential to this notion is

the ability of firms to spot opportunities, assess the associated threats, and make the necessary alignment

concerning resources and capabilities in introducing new and innovative services (Jogaratnam, 2017). This may

then give the firms superior performance relative to their competitors (Jogaratnam, 2017). In other words, the

quality of the relationship between technological capability and innovative service offerings tends to be better if

it is supplemented with entrepreneurial orientation (Atuahene-Gima & Ko, 2001). This implies that

entrepreneurial orientation is likely to positively moderate the relationship between technological capability and

innovative service offerings. Therefore, it is hypothesised that:

H4a: Entrepreneurial orientation moderates the relationship between technological capability and

innovative service offerings, whereby in higher entrepreneurial orientation conditions, the influence of

technological capability on innovative service offering is stronger.

Int. Journal of Business Science and Applied Management, Volume 16, Issue 1, 2021

The literature also suggests a positive link between relational capital and government facilitation (Senik,

Scott-Ladd, Entrekin, & Adham, 2011). Essentially, relational capital contributes to the creation of credibility

and trust, which will facilitate internationalising firms in getting greater access to information and support

programmes provided by government (Zain & Ng, 2006). In this regard, the extent of the influence of relational

capital on government facilitation may be limited. Firms with relational capital only tend to focus on establishing

relationships with government for the purpose of getting information and accessing the support programmes

provided (Oparaocha, 2015). These firms, however, tend to miss the opportunities of working hand in hand with

government in creating new and innovative services, exploring future market opportunities, and addressing the

challenges associated with venturing into international markets. This limitation may be addressed by

supplementing relational capital with entrepreneurial orientation. In a way, entrepreneurial orientation

contributes to facilitating firms in accessing government support programmes, which may then lead to better

international performance.

In this regard, entrepreneurial orientation, which reflects the proactive, innovative, and risk-taking nature of

firms, tends to increase the likelihood of internationalising firms to be more forward looking in tapping

government networks for the purpose of creating new and innovative services (Mahmood & Rufin, 2005).

Entrepreneurially-orientated firms also tend to be more open towards taking risks and proactive in sensing and

seizing opportunities (Acosta et al., 2018). In a way, the combination of relational capital and entrepreneurial

orientation may assist internationalising firms in optimally utilising government support programmes for

creating higher international performance (Leonidou et al., 2011). This suggests that entrepreneurial orientation

is likely to positively moderate the relationship between relational capital and government facilitation. Therefore,

it is hypothesised that:

H4b: Entrepreneurial orientation moderates the relationship between relational capital and government

facilitation, whereby in higher entrepreneurial orientation conditions, the influence of relational capital on

government facilitation is stronger.

In summary, we hypothesise that dynamic capability in terms of technological capability and relational

capital is indirectly linked to international performance through innovative service offerings and government

facilitation respectively. At the same time, the ability of dynamic capability (technological capability and

relational capital) to bring about positive outcomes (innovative service offerings and government facilitation) is

also conditional on the SME's entrepreneurial orientation. The expected relationships between the factors

discussed in the previous paragraphs are captured in the research framework of our study in Figure 1.

Figure 1: Research framework

4. METHODOLOGY

4.1. Population and Sample

The population of our study is internationalising Malaysian business service SMEs. The focus on business

service SMEs from Malaysia is due to their significant contribution to the economy, employment, value added

and trade (DOSM, 2019; EPU, 2015). Malaysian business service SMEs have also been increasingly involved in

the international markets (SME Corp., 2018). The latest economic census indicated there were 34,000 business

service SMES in Malaysia (DOSM, 2017). However, not all of these SMEs are involved in internationalising

(Matrade, 2019). In this regard, this study is aware that a complete list of business service exporters is not

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

currently available (Rusiah Mohamad, personal conversation, 18 September 2019). Nonetheless, Matrade, an

export development agency for Malaysia, maintains a Service Exporters’ Directory which indicates that 1,734

business service SMEs were registered. The listed business services SMEs in the directory were treated as the

population of the study. The sample size was then determined based on power analysis as suggested by Henseler

and Chin (2010). The result of the power analysis generated from the use of G*Power 3 software by Faul,

Erdfelder, Lang, and Buchner (2007) indicated the minimum sample size was 172.

The current study used a non-probability sampling technique based on two grounds. Firstly, a complete

sampling frame of business service SMEs exporters is not currently available as not all service exporters are

listed in Matrade’s Service Exporters’ Directory. Furthermore, there were instances of the information about the

companies in the directory being out of date and inaccurate. Hence, the use of non-probability is appropriate in

line with the view of Rowley (2014) that in the absence of a complete sampling frame, studies should use non-

probability sampling. Secondly, non-probability sampling is appropriate in studies which tend to suffer from a

low response rate, which may lead to potential bias (Rowley, 2014). This is particularly true for studies on SMEs

as previous studies have suffered from a low response rate of 93 (Subramaniam & Youndt, 2005), 102

(Rodríguez-Serrano & Martín-Armario, 2017), and 120 (Prange & Pinho, 2017). In this regard, a purposive

sampling method was used involving internationalising business service SMEs.

The respondent firms were chosen based on three criteria, namely: i) internationalising business service

SMEs which recorded yearly revenue of less than RM20 million and a headcount of less than 75 people as

prescribed by SME Corporation, a government agency for SME development in Malaysia (SME Corp., 2013); ii)

those registered with Matrade; and iii) those that participated in exporting events organised by Matrade. A self-

administered survey was distributed involving key individuals who have in-depth knowledge about the firm,

such as owners, founders, chief executive officers, and managers. The survey instrument was pre-tested with a

total of ten experts consisting of academics, government agencies, and industry. The experts suggested the

inclusion of four new items under government facilitation, namely: i) access to financial assistance; ii) network

with foreign governments; iii) network with foreign firms; and iv) platforms to discuss industry needs.

Subsequently, the authors further tested the survey instrument by conducting a pilot study involving 60 SMEs

which participated in the productivity nexus initiative spearheaded by the Malaysia Productivity Corporation, a

government agency for productivity development. This process helped us refine the survey instrument.

Realising that conducting surveys with SMEs tend to suffer from low response rates (Dennis Jr., 2003), the

researcher collaborated with Matrade to ensure that an optimal number of responses was obtained. Matrade

provided a support letter and facilitated the participation of the researcher in exporting events organised by

Matrade. During the events, potential respondents were asked about their type of industry to ensure they were the

appropriate respondents for the study. Hard-copy questionnaires were then distributed using a face-to-face

technique. The study’s respondents were given a token of appreciation in the form of a mobile phone cable.

Overall, the authors participated in 13 events, at which 800 questionnaires were distributed, which yielded 337

responses. After eliminating responses with high missing values, inconsistent responses, and responses from

non-SMEs, only 278 of the responses were usable.

4.2. Measurement of Instrument

The constructs of this study were measured using the measurements of prior studies. In this regard,

technological capability was measured by using five items adapted from Knight and Cavusgil (2004) with a

composite reliability (CR) of 0.70. In addition, one item from Zou, Liu, and Ghauri (2010) was added in the

measurement of technological capability to reflect the role of firms in encouraging innovative ideas and their

implementation. Relational capital was measured by adapting three items from Radulovich et al. (2018) with a

CR of 0.95. We also included another three items adapted from Luo, Hsu, and Liu (2008) to measure relational

capital to reflect the importance of building networks with government, trade associations, and regulatory bodies,

with a Cronbach alpha (α) of 0.73. The scale of innovative service offerings was adapted from Bello et al. (2016),

with a CR of 0.88.

Government facilitation was measured by adapting the measures used by Leonidou et al. (2011) involving

three dimensions, namely information sharing, which recorded a CR of 0.89, education and training (CR=0.87),

and trade mobility (CR=0.81) (Leonidou et al., 2011). Entrepreneurial orientation was measured by adapting the

measures from Jantunen, Puumalainen, Saarenketo, and Kyläheiko (2005), with the Cronbach alpha (α) being

0.74. International performance was measured by using objective and subjective measures to reflect the

multifaceted nature of international performance (Madsen & Moen, 2017). Objective measures were adapted

from Radulovich et al. (2018), with a CR of 0.8. Subjective measures were adapted from Nummela, Saarenketo,

and Puumalainen (2004), with a Cronbach alpha (α) of 0.69. The list of the variables and their indicators is

attached in Appendix 1. For all of the constructs, a seven-point Likert scale was used indicating 1=strongly

disagree, and 7=strongly agree. Technological capability, relational capital, and innovative service offerings

were reflectively measured, while entrepreneurial orientation, government facilitation, and international

performance were formatively measured.

Int. Journal of Business Science and Applied Management, Volume 16, Issue 1, 2021

4.3. Exploratory Factor Analysis

We conducted exploratory factor analysis (EFA) for government facilitation, which indicated the items

loaded on three factors. Items GF1, GF2, GF3, GF4, GF5, GF6, GF7, GF9, GF10, GF11 were loaded on Factor 1,

which reflects the role of government in sharing market information and knowledge. Hence, Factor 1 was named

‘information sharing’. Meanwhile, GF13, GF14, GF15 were loaded on Factor 2, which corresponds with the role

of government in providing trade facilitation, hence Factor 2 was named ‘trade facilitation’. Items GF16, GF17,

GF18, and GF19 were loaded on Factor 3, which reflects the role of government in providing a network, hence

Factor 3 was named ‘network’. While the dimensions of information sharing and trade facilitation correspond

with the dimensions as suggested by Leonidou et al. (2011), the EFA uncovered a new dimension involving the

government’s role in creating a network with foreign governments and foreign firms. Perhaps, in the context of

Malaysian service SMEs, networking with foreign governments and foreign firms are among the areas that are

being spearheaded by government, which paved the way for the SMEs to explore market opportunities.

4.4. Data Analysis

Statistical Package for Social Sciences (SPSS) was employed for conducting descriptive analysis, while

Partial Least Squares Structural Equation Modelling (PLS-SEM) was used to test the hypotheses of the study

(Ringle, Wende, & Becker, 2015). The decision to use PLS-SEM was based on its predictive ability (Ramayah,

Cheah, Chuah, Ting, & Memon, 2018), its ability to deal with reflective and formative constructs (Henseler,

Hubona, & Ray, 2016), the complexity of its model (Ringle, Sarstedt, Mitchell, & Gudergan, 2018), and its

applicability in management-related studies (Rigdon, 2016). We used confirmatory factory analysis for assessing

reflective constructs (technological capability, relational capital, innovative service offerings) and confirmatory

composite analysis for formative constructs (entrepreneurial orientation, government facilitation, international

performance) (Hair, Hollingsworth, Randolph, & Chong, 2017). The measurement model assessments suggested

that all requirements for the reflective model were met (Hair et al., 2017; Kline, 2011), as shown in Table 1 and

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

Table 1: Results of Reflective Measurement Model

Construct

Indicator

Loadings

Average Variance

Extracted (AVE)

Composite

Reliability (CR)

Technological capability

TC1

0.847

0.701

0.933

TC2

0.897

TC3

0.875

TC4

0.809

TC5

0.849

TC6

0.738

Relational capital

RC1

0.859

0.764

0.951

RC2

0.882

RC3

0.859

RC4

0.887

RC5

0.866

RC6

0.892

Innovative service offerings

ISO1

0.854

0.759

0.926

ISO2

0.864

ISO3

0.905

ISO4

0.861

GFInfo

GF1

0.808

0.764

0.970

GF2

0.878

GF3

0.812

GF4

0.901

GF5

0.919

GF6

0.891

GF7

0.905

GF9

0.858

GF10

0.878

GF11

0.881

GFTrade

GF13

0.929

0.885

0.959

GF14

0.955

GF15

0.939

GFNetwork

GF16

0.884

0.822

0.949

GF17

0.941

GF18

0.933

GF19

0.866

IP – Objective

IPObj1

0.784

0.680

0.809

IPObj2

0.863

IP – Subjective

IPSubj1

0.830

0.750

0.937

IPSubj2

0.823

IPSubj3

0.902

IPSubj4

0.884

IPSubj5

0.889

Note: TC=technological capability; RC=relational capital; ISO=innovative service offerings;

GF=government facilitation; IP=international performance

Int. Journal of Business Science and Applied Management, Volume 16, Issue 1, 2021

Table 2: Results of Discriminant Validity Analysis using the Heterotrait-Monotrait (HTMT) Criterion

GFInfo

GFNetw

GFTrade

IPObj

IPSubj

ISO

GFInfo

GFNetw

0.820

GFTrade

0.809

0.814

IPObj

0.449

0.452

0.478

IPSubj

0.335

0.374

0.418

0.824

ISO

0.381

0.267

0.325

0.500

0.327

0.379

0.346

0.365

0.431

0.339

0.457

0.336

0.204

0.264

0.547

0.483

0.711

0.375

Notes: TC=technological capability; RC=relational capital; ISO=innovative service offerings; GF=government facilitation;

IP=international performance

For formatively measured constructs, entrepreneurial orientation was unidimensionally measured. The

analysis showed that the construct met the requirements concerning convergent validity, collinearity, as well as

the significance and relevance of the outer weights. However, items EO4 and EO5 were found to have variance

inflated factor (VIF) scores of 3.614 and 3.631. While these scores were higher than 3.3 as set out by

Diamantopoulos and Siguaw (2006), they are still considered to be acceptable (Hair et al., 2017). The results of

the measurement model for entrepreneurial orientation appear as Table 3.

Table 3: Results of Formative Measurement Model – Unidimensional Construct

Government facilitation and international performance were multidimensionally measured. Essentially,

government facilitation met the requirements for convergent validity, VIF, as well as significant and relevant

outer-weights. For international performance, the results indicated that the VIF scores were below 3.3

(Diamantopoulos & Siguaw, 2006), but the objective dimension of international performance was found to be

insignificant. This dimension was nonetheless retained based on theoretical support as suggested by Madsen and

Moen (2017), who argued that objective and subjective indicators of international performance are key in

capturing the multifaceted nature of international performance. The results of the measurement model for the

multidimensional formative constructs appear as Table 4.

Table 4: Results of Formative Measurement Model – Multidimensional Constructs

Construct

Items

Convergent

validity

VIF

Outer

weight

t-value

p-value

Entrepreneurial orientation

EO1

0.773

2.217

0.102

9.564

0.000

EO2

2.295

0.126

12.842

0.000

EO3

2.098

0.127

12.767

0.000

EO4

3.614

0.126

15.545

0.000

EO5

3.631

0.129

15.279

0.000

EO6

1.986

0.127

13.406

0.000

EO7

2.841

0.139

15.350

0.000

EO8

2.906

0.133

17.225

0.000

EO9

2.526

0.144

15.347

0.000

EO10

2.013

0.145

15.997

0.000

Higher order Construct

Sub-dimensions

Convergent

validity

VIF

Outer

weight

t-value

p-value

Government Facilitation

GFInfo

0.864

3.113

0.364

3.799

0.000

GFTrade

2.933

0.312

4.405

0.000

GFNetwork

3.034

0.410

4.886

0.000

International Performance

IPObj

0.856

1.514

0.100

1.935

0.054

IPSubj

1.514

0.938

26.146

0.000

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

4.5. Common Method Variance

As our study used single-source respondents, we used a single method factor test to determine that common

method variance (CMV) was not an issue (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003) by including three

items in the questionnaire to represent a marker variable, namely: “(1) once I have come to a conclusion, I am

not likely to change my mind; (2) I don’t change my mind easily; (3) My views are very consistent over time”

(Oreg, 2003). This marker variable was not included in the model of the study (baseline model) and was used as

an exogenous construct to predict the endogenous constructs in the single method factor model. Comparing the

results of the coefficient of determination (R

) between the baseline model and the single method factor model,

we found that CMV was not an issue as suggested by Tehseen, Ramayah, and Sajilan (2017).

4.6. Results and Analysis

The demographic profile of the sample SMEs of our study appears in Table 5. Essentially, founders/owners

made up the largest portion of the respondents, at 45.3%. In terms of the types of industry, engineering services

led the list with 23%, followed by architecture (20.9%), and business consulting (17.6%). As for the number of

employees, the majority of the SMEs had a headcount of between 5 and 29 (47.5%). The majority of the SMEs

(50%) were also considered as young companies with less than 10 years of operating experience. Interestingly,

about 85% of the SMEs have successfully penetrated between 1 to 5 countries.

Table 5: Demographic Profile of Sample SMEs

Frequency

Percentage (%)

Designation

Founder/owner

126

45.3

CEO/director/top management

21.6

Manager/executive

33.1

Types of industry

Advertising

6.5

Architecture

20.9

Business consulting

17.6

Construction-related

12.9

Engineering

23.0

Legal and accounting

2.5

Real estate

4.3

Others (E.g. finance, event management, ICT)

12.2

Number of employees

20.5

5 – 29

132

47.5

30 – 75

32.0

Years of establishment

1961 – 1970

0.4

1971 – 1980

0.4

1981 – 1990

4.7

1991 – 2000

10.0

2001 – 2010

28.4

2011 – 2019

139

50.0

Missing

6.1

Number of countries penetrated

25.2

26.3

3 – 5

33.1

6 – 10

9.4

More than 10

6.1

Total

278

100

The structural model assessment that was performed indicated that the model did not face any lateral

collinearity issues, with VIF scores of less than 3.3 (Diamantopoulos & Siguaw, 2006). In terms of explanatory

power, the analysis showed that the coefficient of determination (R

) of government facilitation was 0.140,

innovative service offerings (R

=0.439), and international performance (R

=0.231) thus exerted between

moderate and substantial explanatory power (Cohen, 1988). The analysis also showed that the constructs

recorded either a small, medium, or substantial effect size (f

) (Cohen, 1988). Further, the test on the predictive

Int. Journal of Business Science and Applied Management, Volume 16, Issue 1, 2021

relevance of the model indicated that the model has predictive relevance (Q

), whereby government facilitation

recorded a Q

of 0.111, innovative service offerings (Q

= 0.312), and international performance (Q

= 0.166).

Subsequent to this, we performed a path coefficient analysis for all of the hypothesised relationships in the

model. Essentially, the results indicated that technological capability was positively and significantly related to

innovative service offerings (β=0.599, t=13.305, p<0.01), which supported hypothesis 1a (H1a). Innovative

service offering was also found to be positively and significantly related to international performance (β=0.253,

t=3.864, p<0.01), thereby providing support to hypothesis 1b (H1b). Relational capital showed a positive and

significant relationship with government facilitation (β=0.374, t=6.002, p<0.01), thus supporting hypothesis 2a

(H2a). Government facilitation was found to be positively and significantly linked to international performance

(β=0.334, t=5.203, p<0.01), which supported hypothesis 2b (H2b). Government facilitation was also found to

positively and significantly influence innovative service offerings (β=0.164, t=3.177, p<0.01), thereby providing

support for hypothesis 3a (H3a). The results of the path coefficient assessment for the hypotheses appear as

Table 6.

We also conducted a mediation effect assessment on the model and the results revealed that innovative

service offerings mediated the relationship between technological capability and international performance

(β=0.152, t=3.101, p<0.01), which supported hypothesis 1 (H1). Government facilitation was found to mediate

the relationship between relational capital and international performance (β=0.125, t=3.696, p<0.01), thereby

providing support for hypothesis 2 (H2). The link between government facilitation and international performance

was also found to be mediated by innovative service offerings (β=0.042, t=2.407, p<0.05), which supported

hypothesis 3 (H3). The respective outcomes of the mediation effect assessment appear as Table 7.

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

Table 6: Path Coefficient Assessment

Hypothesis

Relationship

Std. Beta

Std. Error

t-value

p-value

Lower CI

Results

H1a

TC – ISO

0.599

0.045

13.305**

0.000

(0.503; 0.657)

Supported

H1b

ISO – IP

0.253

0.066

3.864**

0.000

(0.133; 0.353)

Supported

H2a

RC – GF

0.374

0.062

6.002**

0.000

(0.264; 0.471)

Supported

H2b

GF – IP

0.334

0.064

5.203**

0.000

(0.228; 0.433)

Supported

H3a

GF – ISO

0.164

0.052

3.177**

0.001

(0.075; 0.242)

Supported

Note: **p<0.01, *p<0.05, CI=Confidence Interval

TC=technological capability; ISO=innovative service offerings; IP=international performance; RC=relational capital; GF=government facilitation

Table 7: Mediating effect assessment

Hypothesis

Relationship

Std. Beta

Std. Error

t-value

p-value

Results

TC -> ISO -> IP

0.152

0.049

3.101**

0.002

(0.058; 0.232)

Supported

RC -> GF -> IP

0.125

0.034

3.696**

0.000

(0.068; 0.198)

Supported

GF -> ISO -> IP

0.042

0.017

2.407*

0.016

(0.016; 0.080)

Supported

Note: **p<0.01, *p<0.05, CI=Confidence Interval

TC=technological capability; ISO=innovative service offerings; IP=international performance; RC=relational capital; GF=government facilitation

Table 8: Moderating effect assessment

Hypothesis

Relationship

Std. Beta

Std. Error

t-value

p-value

Results

H4a

TC*EO -> ISO

0.087

0.031

2.773**

0.003

(0.039; 0.132)

Supported

H4b

RC*EO -> GF

0.208

0.068

3.035**

0.001

(0.084; 0.300)

Supported

Note: **p<0.01, *p<0.05, CI=Confidence Interval

TC=technological capability; EO=entrepreneurial orientation; ISO=innovative service offerings; RC=relational capital; GF=government facilitation

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

In terms of moderating effect assessment, we found that entrepreneurial orientation moderated

both the relationships between technological capability and innovative service offerings (β=0.087,

t=2.773, p<0.01), as well as relational capital and government facilitation (β=0.208, t=3.035, p<0.01).

These results supported hypotheses 4a (H4a) and 4b (H4b) of the study. The results of the moderating

effect assessment are captured in Table 8. In this regard, the Dawson’s interaction plot for both of the

hypotheses indicated that the relationship between technological capability and innovative service

offerings as well as relational capital and government facilitation were stronger when entrepreneurial

orientation was higher. For instance, as can be seen in Figure 2, the slope for high entrepreneurial

orientation is steeper than low entrepreneurial orientation, indicating that the influence of technological

capability on innovative service offering is stronger in conditions of high entrepreneurial orientation. In

Figure 3, the slope for low entrepreneurial orientation is almost flat, indicating that relational capital

has no influence on government facilitation in conditions of low entrepreneurial orientation. In

conditions of high entrepreneurial orientation, the slope is positive, indicating that relational capital

positively influences government facilitation when entrepreneurial orientation is high.

Figure 2: Dawson Interaction plot for technological capability, entrepreneurial orientation, and

innovative service offerings

Figure 3: Dawson Interaction plot for relational capital, entrepreneurial orientation, and

government facilitation

6. DISCUSSION

Our study has shown that the framework is applicable from the perspective of business service

SMEs from a developing country. Essentially, the framework highlights the measures that could be

employed to enhance international performance. Among others, dynamic capabilities in terms of

technological capability and relational capital could be leveraged to enhance international performance.

In this regard, dynamic capabilities need to be directed at creating innovative service offerings as well

as leveraging the support programmes provided by government. It is also crucial for internationalising

service SMEs to be entrepreneurially-orientated, as the results of our study indicated that the effect of

dynamic capabilities on innovative service offerings and government facilitation were influenced by

Int. Journal of Business Science and Applied Management / Business-and-Management.org

entrepreneurial orientation. In a way, conditions of high entrepreneurial orientation may contribute to

better innovative service offerings and greater access to government support programmes.

Our study provides empirical evidence concerning the importance of dynamic capabilities, in

particular technological capability and relational capital, in improving international performance

(Teece et al., 1997). The use of these capabilities to operationalise dynamic capability is in line with

Al-Aali and Teece (2014) and Teece (2018). This operationalisation extends the dynamic capability

literature considering that previous studies have thus far approached the construct at the latent variable

level without indicating the actual operational variables that constitute dynamic capabilities (Teece,

2018).

In terms of technological capability, our study suggests that it may be leveraged to create

innovative service offerings. Our view echoes that of Chatterjee (2017) that technological capability is

useful for improving operational efficiency, influencing innovation outcomes, as well as facilitating

effective implementation of internationalisation strategies. This could then contribute to international

market success. Concerning relational capital, our study suggests that it tends to facilitate

internationalising service SMEs in accessing external resources provided by government that may

influence the outcomes of their international ventures. In this regard, the findings of our study support

the findings of Zain and Ng (2006) and Leonidou et al. (2011) concerning the need for firms to build

and maintain a relationship with government to enhance knowledge and understanding about target

markets, build absorptive capacity, and create innovative and value added services.

Our study also extends the dynamic capability literature concerning the mediating role of

innovative service offerings in the relationship between technological capability and international

performance as well as government facilitation and international performance. This is in light of the

scant focus of previous studies on investigating the combined effects of technological capability,

relational capital, innovative service offerings, government facilitation, and international performance,

which is addressed in our study. We posit that technologically competent firms tend to be more

inclined to use new technologies in creating and delivering innovative services, in line with the view of

Li and Deng (2017). This will enable the firms to better respond to market needs, which may contribute

to sustainable international performance (Bello et al., 2016). We also suggest that the support

programmes provided by government may foster innovation among internationalising SMEs, reflecting

the view of Mahmood and Rufin (2005). This could then drive international performance as these

SMEs are able to offer high-quality innovative services to meet the needs of customers in line with the

view of Prajogo and Oke (2016).

Our study has also bridged a gap concerning the intervening effect of government facilitation on

the relationships between relational capital and international performance. This is in light of previous

studies which have mostly focused on the direct relationship between government facilitation and

international performance (Leonidou et al., 2011). Our study suggests that relational capital tends to

enhance a firm’s network with government agencies, which provide various support programmes

(Oparaocha, 2015). The support programmes include market intelligence, export financing, capability

and capacity development, and networks with foreign governments and firms. In this regard, relational

capital may lead to a greater access to support programmes provided by government, which may then

facilitate the internationalisation efforts of firms (Leonidou et al., 2011).

In light of the scant research which has investigated the interaction effect of entrepreneurial

orientation on technological capability – innovative service offerings and relational capital –

government facilitation relationships, our study suggests that these relationships are contingent upon

the entrepreneurial orientation of the SMEs. Essentially, entrepreneurial orientation which entails the

inclination of SMEs towards being proactive, innovative, and risk-taking (Lumpkin & Dess, 1996) may

facilitate the SMEs in sensing and seizing international opportunities. This includes the deployment of

technological capability to create innovative service offerings as well as the building of relational

capital with government to fully optimise the support programmes provided by government (Leonidou

et al., 2011; Teece, 2018). In a sense, the relationship between technological capability and innovative

service offerings tends to be stronger with a higher level of entrepreneurial orientation. Similarly, the

relationship between relational capital and government facilitation also tends to be stronger with a

higher level of entrepreneurial orientation.

Finally, our study also uncovered a new dimension of government facilitation, namely the

‘network’, to reflect the facilitating role played by government in linking SMEs with foreign

governments and foreign firms from the perspective of Malaysian service SMEs. The ‘network’

dimension is in addition to those identified by Leonidou et al. (2011), namely information sharing,

education and training, and trade mobility support.

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

7. THEORETICAL, MANAGERIAL AND POLICY IMPLICATIONS

From the theoretical perspective, our study has, firstly, extended the dynamic capability view

literature by providing empirical evidence for a mechanism that translates dynamic capabilities into

international performance through the mediating effect of innovative service offerings and government

facilitation (Al-Aali & Teece, 2014; Leonidou et al., 2011). This has bridged the gaps in understanding

pertaining to the factors that mediate the link between dynamic capabilities and international

performance. In this regard, dynamic capabilities in terms of technological capability support the

creation of innovative service offerings (Amara et al., 2016), which may lead to better international

performance (Chatterjee, 2017). In the same vein, dynamic capability in terms of relational capital

facilitates the creation of credibility and trust with government (Al-Aali & Teece, 2014; Zain & Ng,

2006). This in turn will enable the firm to have better access to support programmes provided by

government. which will contribute to international performance (Kahiya, 2018; Leonidou et al., 2011).

Our research also extends the dynamic capability view by operationalising it with the use of

technological capability and relational capital (Al-Aali & Teece, 2014; Teece, 2018). In this regard, the

use of technological capability and relational capital is guided by the conceptual discussions provided

by Al-Aali and Teece (2014) as well as Teece (2018) about the ability of firms to sense and seize

market opportunities by using technologies as well as build relationships with customers and suppliers.

Secondly, this paper enhances understanding concerning the moderating role of entrepreneurial

orientation on the relationships between technological capability and innovative service offerings as

well as relational capital and government facilitation. In a way, our study has bridged the chasm

concerning the conditional factors that affect the technological capability – innovative service offering

and relational capital – government facilitation relationships, which otherwise have rarely been

investigated (Teece, 2018). Our study has provided empirical evidence that in conditions of high

entrepreneurial orientation, the links between technological capability and innovative service offerings

as well as relational capital and government facilitation, are stronger. In this regard, technological

capability and relational capital that is combined with entrepreneurial orientation supports the creation

of innovative services (Jogaratnam, 2017) and paves the way for greater access to government support

programmes (Oparaocha, 2015). This may then lead to better international performance.

Thirdly, our study also contributes to the literature by uncovering a new dimension of government

facilitation, namely ‘network’, reflecting the role of government in spearheading the network creation

between service SMEs with foreign governments and foreign firms. The created networks tend to

facilitate the exploration of market opportunities among firms. This new dimension reflects the items as

suggested by SMEs’ stakeholders during the pre-test of the questionnaire surrounding: i) access to

financial assistance; ii) networks with foreign governments; iii) networks with foreign firms; and iv)

platforms to discuss industry needs. The ‘network’ dimension of government facilitation is in addition

to those identified by Leonidou et al. (2011), namely information sharing, education and training, and

trade mobility support.

Fourthly, our study has lent a voice to business service SMEs from a developing country

concerning the factors that drive international performance in light of the scant evidence in the

literature focusing on service SMEs (Radulovich et al., 2018). Fifthly, the emphasis on service SMEs in

the current study also brought interesting insight to the literature due to the usual association of SMEs

with their limitations of resources (Martin et al., 2017), knowledge management (Durst & Edvardsson,

2012) and low innovative capability (Boratyńska, 2016). In this regard, business service SMEs could

leverage on dynamic capabilities, innovative services, and government facilitation to ensure greater

firm performance.

Our study also provides managerial lessons for internationalising business service SMEs by

nudging the SMEs to focus on dynamic capabilities in nurturing and developing their employees,

which may contribute to the creation of competitive advantage. In this regard, service SMEs may need

to invest in various activities that are dynamic in nature, particularly technological capability and

relational capital, to create innovative service offerings and enhance international performance.

To develop technological capability, SMEs need to be open to new technologies available in the

market to facilitate the creation and delivery of innovative services. This is in consonance with Amara

et al. (2016), who posited that technological capability increases the propensity to innovate among

knowledge-intensive service firms. In this regard, service SMEs may need to invest, not only in

acquiring new technology, but also in building the capability and capacity to use the newly acquired

technology (Gao, Yang, Huang, Gao, & Yang, 2018). This is particularly crucial in light of the nature

of technology, which changes rapidly (Jantunen et al., 2018). Hence, firms need to keep pace with the

changing technology and continuously update their technological capability. In this regard, firms could

make the provision for training to build the capability and capacity to use as well as manage the

acquired technology a standard clause in the technology procurement contract.

Int. Journal of Business Science and Applied Management / Business-and-Management.org

To develop relational capital, internationalising SMEs are encouraged to build networks with the

government agencies accountable for providing various support programmes for the industry, including

in terms of internationalisation (Leonidou et al., 2011). These government agencies provide access to

resources such as market information, funds, training programmes as well as networks with foreign

governments and firms (Kahiya, 2018). In this regard, it is important for internationalising service

SMEs to build a rapport with government agencies in order to tap the resources provided by the

government. This may create a stronger footing for the SMEs in competing in the international markets.

SMEs are also encouraged to register with export promotion agencies such as Matrade, which

maintains a database of export ready firms (Matrade, 2019). This database will enable agencies like

Matrade to disseminate key information about specific markets in a timely manner as well as share

information about the support programmes provided by the government.

Since entrepreneurial orientation was found to strengthen business service SMEs’ ability, these

SMEs need to develop an entrepreneurial orientation among employees, particularly the top

management. This can be done by creating an internal environment that is conducive and supportive of

new ideas and creativity among employees, in accordance with the view of Kianto, Sáenz, and

Aramburu (2017). For instance, SMEs could introduce incentive schemes to acknowledge the

contribution of employees for every new idea which has been successfully implemented. Windows for

network building with parties external to the SMEs should also be opened wide. This may make the

employees of the firm aware of the realities, opportunities as well as threats, in their business

environment. This could also make the employees of the firm more vigilant and receptive to new ideas

as well as inspire them to challenge the status quo in finding new and better ways of providing

innovative services.

From the policy perspective, our study provides lessons for policymakers to facilitate the stepping

up of service SMEs’ international performance. In this regard, the government could create a conducive

business environment for business service SMEs through policy interventions and support programmes

that are directed at building the dynamic capabilities of SMEs. For instance, the regulatory framework,

taxation, and training and development need to be supportive of the SMEs’ efforts to build dynamic

capabilities. This will facilitate the SMEs in creating innovative service offerings and enhancing

international performance. In addition, a more tailored programmes for service SMEs, in addition to

those that are generic in nature, could also be implemented to cater to the specific needs of the service

SMEs, which could be different from firms in the goods sector. This is particularly pertinent as the

existing programmes in Malaysia are more skewed towards manufacturing firms.

8. LIMITATIONS AND FUTURE DIRECTION

Our study has a few limitations. First, the model of the study explained about 23% of international

performance, but 77% of international performance was explained by factors that are unknown. While

the predictive accuracy of the model was found to be moderate (Cohen, 1988), it is pertinent to take

into account other factors to improve understanding about international performance such as

collaborative economies (Fehrer et al., 2018), industry 4.0 (Čaić, Odekerken-Schröder, & Mahr, 2018),

and green services (Guyader, Ottosson, Frankelius, & Witell, 2019). This will provide more empirical

evidence that will contribute to greater comprehension of international performance outcomes among

service SMEs. Second, caution must be exercised in applying the results of this study to other contexts

as the data of this study is based on the Malaysian context. Third, 33% of the respondents of this study

were managers and executives. While they have contributed to the study and provided valuable

responses, they might not have complete information about the firm as compared to the top

management of the firm, such as the owner and CEO. This is in line with the view of Thompson,

Mmieh, and Mordi (2018) that in small firms like the SMEs, owners and top managers are deeply

engaged and committed to the day to day operations of the firms as well as in ensuring performance.

Hence, they are likely to have the experience of managing the firm as well as a more complete

information about the firm. Fourth, future studies may also consider applying a mixed-method

approach to gain understanding at a greater depth and breadth concerning the relationships between the

variables.

9. CONCLUSION

Our study, which is aimed at investigating the influence of dynamic capabilities in enhancing

business service SMEs’ international performance, revealed that dynamic capabilities indirectly

enhance international performance. In this regard, the specific dynamic capabilities, namely

technological capability, relational capital, and entrepreneurial orientation, have been found to

contribute to the creation of innovative service offerings as well as accessing government support

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

programmes that may result in enhanced international performance. On this front, our study has

narrowed the gaps in the literature and contributed to greater understanding of the roles and

relationships between the identified variables which were underpinned by the Dynamic Capability

View. In a way, we posit that dynamic capabilities alone might not be sufficient to create international

performance, which necessitates internationalising service SMEs to also invest in creating innovative

service offerings and optimally utilising government support programmes.

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Appendix 1 - Constructs of study

Author

Technological Capability

i. Our firm is at the leading technological edge of our industry.

ii. Our firm invented a lot of technologies embedded in our products/ services.

iii. Our firm is often first to introduce service innovations or new operating

approaches.

iv. Our firm is recognised in the export markets for products/ services that are

technologically superior.

v. Our firm has high profile technological background personnel.

Knight &

Cavusgil

(2004)

vi. Our firm encourages innovative ideas and their implementation.

Zou et al.

(2010)

Relational Capital

i. Our firm has good relationships with existing customers.

ii. Our firm has good relationships with our channels.

iii. Our firm has good relationship with our distributors.

Radulovich et

al. (2018)

iv. Our firm has good relationships with trade associations/ professional associations.

v. Our firm has good relationships with government networks.

vi. Our firm has good relationships with regulatory bodies and other supporting

organisations.

Luo et al

(2008)

Innovative service offerings

i. Our firm offers unique benefits to customers not offered by competitors.

ii. The services offered by our firm are radically different from those provided by

competitors.

iii. Our services are highly innovative, replacing vastly inferior alternatives.

iv. Our services are of higher quality than competitors’.

Bello et al.

(2016)

Government Facilitation

Information sharing

Malaysian Government agencies such as MITI, Matrade, SME Corp. and CIDB…

i. …provide information about foreign market opportunities.

ii. …provide information about doing business with a particular firm.

iii. …provide general information about doing business in a specific country.

iv. …provide marketing information and advice.

v. …provide guidance on how to internationalise.

vi. …publish internationalisation related publications.

vii. …provide market intelligence.

Leonidou et al.

(2011)

Education and training

Malaysian Government agencies such as MITI, Matrade, SME Corp. and CIDB…

i. …organise seminars and conferences for internationalisation.

ii. …provide specialised training programmes for internationalisation.

iii. …provide training on documentations for internationalisation.

iv. …provide counselling advice on internationalisation.

v. …provide foreign language support.

Leonidou et al.

(2011)

Trade mobility

Malaysian Government agencies such as MITI, Matrade, SME Corp. and CIDB…

i. …facilitate the participation of firms in trade shows and exhibitions.

ii. …facilitate the participation of firms in trade missions in foreign markets.

iii. …provide support via trade offices abroad.

Leonidou et al.

(2011)

Financial assistance

Malaysian Government agencies such as MITI, Matrade, SME Corp. and CIDB…

i. …provide financial assistance for internationalisation (e.g. services export fund,

soft loans, market development grants)

Added post pre-

test

Network

Added post pre-

Norwan Ahmad, Ng Siew Imm, Norazlyn Kamal Basha and Yuhanis Abdul Aziz

Malaysian Government agencies such as MITI, Matrade, SME Corp. and CIDB…

i. …provide networks with foreign governments.

ii. …provide networks with foreign firms.

test

Feedback mechanism

Malaysian Government agencies such as MITI, Matrade, SME Corp. and CIDB…

i. …provide platform to discuss industry needs including in matters pertaining to

internationalisation (e.g. Malaysia Services Development Council, National Export

Council, National Professional Services Export Council)

ii. …generally, provide good support programmes and assistance in facilitating the

internationalisation of service firms.

Added post pre-

test

Entrepreneurial orientation

i. Our firm is among the first to implement innovative practices.

ii. Our firm supports projects that are associated with risks and expectation for returns

higher than average.

iii. Our firm actively observes and adopts best practices in our industry.

iv. Our firm actively observes new practices developed in other industries.

v. Our firm actively applies new practices developed in other industries into our

business.

vi. Our firm recognizes early on technological changes that may have an effect on our

business.

vii. Our firm is able to take on unexpected opportunities.

viii. Our firm continuously searches for new practices.

ix. In uncertain decision-making situations, our firm prefers bold actions to make sure

that opportunities are optimised.

x. Our firm allocates resources to new and promising operation areas.

xi. In general, our firm is entrepreneurially-oriented.

Jantunen et al.

(2005)

International Performance

Objective

i. What is the percentage of your firm’s export revenue to total revenue?

ii. Please indicate the level of your firm’s international market growth relative to your

competitors.

Radulovich et

al. (2018)

Subjective

Please indicate the extent of your agreement with the following statements pertaining to

your firm’s international performance.

i. Our firm has met our international market share objectives.

ii. Our firm has achieved the turnover objective we set for internationalisation.

iii. Internationalisation has had a positive effect on our firm’s profitability.

iv. Internationalisation has had a positive effect on our firm’s image.

v. Internationalisation has had a positive effect on the development of our firm’s

expertise.

vi. In general, we are satisfied with our firm’s success in international markets.

Nummela et al.

(2004)