How SMEs convert customer orientation and marketing capability into innovation and competitive performance

SMEs in emerging economies operate in highly competitive, turbulent markets where customer orientation and marketing capabilities alone may not sustain performance. Although prior research confirms their positive effects, the mechanisms through which these resources translate into superior outcomes remain underexplored in resource-constrained SME contexts. Drawing on Resource-Advantage Theory and the Dynamic Capabilities View, authors propose an integrative framework in which customer orientation and marketing capability enhance performance through the complementary roles of open innovation and competitive advantage. Using survey data from 220 garment SMEs in Central Java, Indonesia, and analyzing it with Partial Least Squares Structural Equation Modeling (PLS-SEM), the findings demonstrate that customer orientation and marketing capability enhance open innovation and competitive advantage, both of which positively affect enterprise performance. The results further confirm that open innovation and competitive advantage act as partial and complementary mediating mechanisms, highlighting distinct yet interconnected pathways through which market-driven resources generate performance outcomes. Our study contributes to the literature by moving beyond direct-effect models and offering a process-oriented explanation of SME performance grounded in dynamic capabilities. In practice, the findings suggest that SMEs should not only strengthen customer-orientation and marketing capabilities but also actively orchestrate external collaborations and strategic positioning to remain competitive in dynamic markets.