The SME network dilemma: Capability building versus capability erosion

Cluster membership is widely expected to make small firms innovative. Often it does not. We locate the explanation inside the firm rather than in its network position. Integrating the dynamic capabilities and attention-based views, we argue that an SME’s external ties matter less for the resources they carry than for what they do to the routines that process those resources—building them in one case, eroding them in the other. Evidence from a four-informant survey of 186 SMEs in government-led Chinese industrial clusters is consistent with this account. Business ties are associated with higher innovativeness indirectly, through stronger absorptive capacity and firm agility. Political ties, once their substantial overlap with business ties is held constant, run in the opposite direction: they are associated with weaker agility, and their negative association with absorptive capacity falls short of conventional significance. Neither tie type retains a detectable direct association with innovativeness: network position appears to matter through the internal routines that convert it. We name this second pathway capability erosion, a decay that we attribute not to overuse or historical lock-in but to the systematic diversion of scarce managerial attention, and we offer it as one explanation for why so many SMEs remain innovation laggards in resource-rich clusters.