Unleashing SME innovation in small open economies: the strategic role of market dynamism, R&D, and organizational capabilities

Abstract Drawing upon both environmental and dynamic capabilities theory, this paper investigates the impact of market dynamism and selected organizational factors on the innovativeness of SMEs operating in Montenegro, observed through a knowledge management perspective. Empirical research was conducted on a sample of 175 SMEs, and the data gathered was analyzes using structural equation modelling (SEM) and fsQCA analysis. The results obtained highlight the insufficient innovativeness of SMEs, predominantly caused by the organizational characteristics of the company (such as lack of knowledge-oriented leadership and underdeveloped potential absorptive capacity). These characteristics are exacerbated by underdeveloped research and development (R&D) sectors and insufficiently trained human resources personnel who cannot properly assess and use knowledge from external sources and translate it into innovative products and services. The results shed light on the different ways of configuring the internal determinants of SMEs, which could lead to incremental and patented innovation development in strong market dynamism, which tends to characterize open and small economies. The research offers insight into how businesses from transition countries can remain competitive in highly innovative markets.