1. Introduction
Under the context of dynamic changes in the environment with the trend of the Fourth Industrial Revolution, firms have exhibited great interest in innovation as a means of responding to environmental changes effectively for their sustainable competitive advantage [
1]. Firms are naturally required to create or adopt something new to sustain their development or growth under the dynamic business environment [
2]. Thus, many business scholars have been actively conducting research on the impact of environmental dynamism on firms’ innovation or innovation performance [
3,
4,
5,
6,
7,
8,
9,
10,
11,
12,
13,
14,
15,
16].
A review of the literature reveals that existing studies on this issue tend to focus primarily on the direct effect of environmental dynamism on innovation or innovation performance. For example, Martinez-Conesa, Soto-Acosta, and Carayannis [
8] have examined whether environmental dynamism has a direct influence on open innovation for small and medium-sized manufacturing companies in Spain. Pervan, Al-Ansaari, and Xu [
11] have also studied the direct impact of market dynamism on innovation for SMEs in Dubai. Similarly, Turulja and Bajgoric [
14] have examined whether environmental turbulence has a direct effect on product and process innovation for companies in Europe, and Soto-Acosta, Popa, and Martinez-Conesa [
15] have also studied the direct influence of this factor on radical and incremental innovation for SMEs in Spain. Besides, with respect to the results of these existing studies, many studies have revealed a significantly positive direct effect of environmental dynamism on innovation or innovation performance [
5,
8,
12,
14], while some studies have shown no significant direct effect [
6,
13]. A summary of the literature review is provided in
Appendix A.
However, according to the literature, little research has been conducted examining the mechanisms through which environmental dynamism enhances firms’ innovation performance, with the exception of research by Dhir, Aniruddha, and Mital [
4] and Kim, Li, Yoo, and Kim [
6]. Dhir et al. [
4] have conceptually argued that environmental dynamism influences innovation performance positively through alliance network heterogeneity. Kim et al. [
6] have empirically demonstrated that environmental dynamism improves innovation through external knowledge acquisition. While it may be important for managers to understand whether environmental dynamism has a direct positive impact on innovation performance, it is more important to understand how (i.e., through which mechanisms) environmental dynamism enhances innovation performance. Understanding “how” this occurs can provide firms with important implications regarding the improvement of innovation performance. In particular, given the lack of coherence, as noted above, among existing findings on the relationship between environmental dynamism and innovation or innovation performance, a study of the ways in which environmental dynamism affects innovation or innovation performance is required for a better understanding of that relationship.
Thus, we attempt to address the gap in the literature by identifying the mechanisms that link environmental dynamism to innovation performance effectively, based on theories in strategic management, and by analyzing the indirect effect of environmental dynamism on innovation performance through these mechanisms. In this study, we propose the following mechanisms for the first time in the literature that connect environmental dynamism with innovation performance: (1) strategic prospecting [
17], based on the industrial organization theory that argues for an alignment between the environment, strategy, and performance (in the order environment > strategy > performance) [
18]; (2) absorptive capacity [
19], based on the dynamic capability theory that claims that there is an alignment between the environment, capability, and performance (environment > capability > performance) [
20]; and (3) strategic prospecting–absorptive capacity, based on the strategic fit perspective that argues for an alignment between the environment, strategy, capability, and performance (environment > strategy > capability > performance) [
21].
It is important to note that we take a mediation approach to the issue of fit or alignment in this study. According to Venkatraman [
22], fit can be approached either by moderation (fit as moderation) or by mediation (fit as mediation), and it is believed that adopting the “fit as mediation” approach makes more sense here, as we intend to focus our analysis on the mediation effects of the mechanisms on the relationship between environmental dynamism and innovation performance.
Specifically, our study intends to investigate (1) the direct effect of environmental dynamism on innovation performance (direct effect), (2) the indirect effect of environmental dynamism on innovation performance through strategic prospecting (mediation effect), (3) the indirect effect of environmental dynamism on innovation performance through absorptive capacity (mediation effect), and (4) the indirect effect of environmental dynamism on innovation performance through the sequential path of strategic prospecting and absorptive capacity (double sequential mediation effect). In this regard, we address the following original research questions: (1) does environmental dynamism have a direct effect on innovation performance? (2) Does strategic prospecting mediate the relationship between environmental dynamism and innovation performance? (3) Does absorptive capacity mediate that relationship? (4) Does strategic prospecting–absorptive capacity mediate that relationship?
For empirical analysis, we utilized 266 valid questionnaires obtained by mail surveys from small and medium-sized firms engaged in 15 four-digit manufacturing industries in Korea. Our results about the direct effect showed that a total effect of environmental dynamism on innovation performance did exist, but when the mediators were considered, the direct effect of environmental dynamism on innovation performance disappeared completely. This suggests that the relationship between environmental dynamism and innovation performance is completely mediated by the intervening mechanisms. Furthermore, according to our results about the mediation effect, strategic prospecting and absorptive capacity, respectively, mediated the relationship between environmental dynamism and innovation performance when they were assumed to be independent. However, assuming a causal interrelationship between these mediators, strategic prospecting still mediated that relationship, while absorptive capacity alone did not, but absorptive capacity in conjunction with strategic prospecting (strategic prospecting–absorptive capacity) mediated the relationship.
Our paper is structured as follows. The next section discusses the theoretical background of our research. The following section presents a research model and hypotheses for the direct effect of environmental dynamism on innovation performance and the indirect effect of environmental dynamism on innovation performance through strategic prospecting, absorptive capacity, and strategic prospecting–absorptive capacity. The subsequent section discusses the methodology of our study, followed by a section providing the results of our study. The final section presents the conclusions, implications, and limitations of our study with potential future research directions.
3. Model and Hypotheses
The theoretical model of our study with all hypotheses is presented in
Figure 1. In the first subsection, we theorize the effect of environmental dynamism on innovation performance in relation to the first research question. In the next subsection, we theorize the mediation effect of strategic prospecting on the relationship between environmental dynamism and innovation performance to deal with the second research question. In the following subsection, we theorize the mediation effect of absorptive capacity on the relationship between environmental dynamism and innovation performance in relation to the third research question. In the final subsection, we theorize the double sequential mediation effect of strategic prospecting and absorptive capacity on the relationship between environmental dynamism and innovation performance by addressing the last research question.
3.1. Environmental Dynamism and Innovation Performance
Environmental dynamism refers to the rate of change of various environmental factors over time [
9]. Under a dynamic environment, firms will encounter a shift in technology and the market, a shorter product life cycle, unexpected competitor behavior, and other factors. In this circumstance, firms will be faced with the threat of the obsolescence of their existing products and markets, thereby requiring them to develop new products, markets, and technologies to cope with the threat [
38]. Thus, when operating in a dynamic environment, firms are likely to focus on the innovation process of developing new products and markets [
39], through which they can achieve improved innovation performance. Besides, prior studies have shown that environmental dynamism has a positive impact on innovation performance [
10,
11,
12]. Therefore, it is expected that environmental dynamism is positively associated with innovation performance.
Hypothesis 1 (H1). Environmental dynamism has a positive relationship with innovation performance.
3.2. Mediation Effect of Strategic Prospecting
The industrial organization theory claims that the industrial structure or the environment shapes firms’ strategy, which subsequently influences performance [
18,
34]. This theory suggests that firms’ strategies can link the external environment to performance. Following the rationale of this theory, we argue that strategic prospecting can mediate the relationship between environmental dynamism and innovation performance (environmental dynamism > strategic prospecting > innovation performance). First, environmental dynamism is expected to have a positive effect on strategic prospecting. As firms operate in a dynamic environment, they are bound to experience significant environmental changes, such as a shift in customer needs, technology, products, and the market, a reduced product life cycle, and unexpected competitor behavior [
25]. Under this circumstance, firms tend to be motivated or willing to sensitively explore and respond to the initial signals of the new market needs and opportunities posed by environmental changes by pursuing new technologies, products, and markets more aggressively [
17]. Thus, facing a dynamic environment, firms are likely to pursue a higher level of strategic prospecting to cope with environmental changes. Raubitschek [
40] also argues that, under a dynamic environment, firms not only seek to explore and understand environmental changes but also tend to choose a strategic direction that will increase the likelihood of success of new products and markets required to respond to environmental changes effectively.
Next, strategic prospecting is expected to have a positive effect on firms’ innovation performance [
32]. As firms pursue a higher level of strategic prospecting, they need to become more responsive to environmental changes by offering new products, markets, and technologies more proactively. Thus, firms with a higher level of strategic prospecting need to focus on the innovation process of developing new products, markets, and technologies, through which they eventually achieve enhanced innovation performance. For example, Apple, with a high level of strategic prospecting, pursues innovation aggressively by making large investments, thereby achieving a higher level of innovation performance as a result. Similarly, previous studies have revealed that firms that adopt the prospector strategy tend to produce improved innovation and innovation performance [
32].
In summary, under a dynamic environment, firms are likely to pursue higher levels of strategic prospecting as a means of responding to environmental changes effectively, through which they are likely to eventually generate a higher level of innovation performance by enhancing the innovation process of developing new products, markets, and technologies. Based on the discussions above, we propose the following hypothesis.
Hypothesis 2 (H2). Strategic prospecting will mediate the relationship between environmental dynamism and innovation performance.
3.3. Mediation Effect of Absorptive Capacity
The dynamic capability theory suggests that, to respond to environmental changes effectively, firms need to improve their dynamic capability to create valuable new knowledge and skills through which they can enhance their competitive advantage and performance. According to this theory, we argue that absorptive capacity, as with dynamic capability [
19], can mediate the relationship between environmental dynamism and innovation performance (environmental dynamism > absorptive capacity > innovation performance). First, environmental dynamism is expected to increase firms’ absorptive capacity. Facing a dynamic environment, firms need to enhance their ability to absorb external knowledge to develop the new knowledge and skills required by the changes in the environment [
36]. Operating in a dynamic environment, firms need to create new knowledge, skills, products, and markets to deal with the risk of the obsolescence of existing knowledge, skills, products, and markets due to environmental changes [
39]. However, since firms will have difficulty in securing all the necessary knowledge internally [
41], they tend to need to acquire new external knowledge through interactions with environmental factors [
41]. Thus, under a dynamic environment, firms are likely to enhance absorptive capacity through investment to gain and utilize more external knowledge [
19].
Next, it is further expected that absorptive capacity will contribute to improving innovation performance. Absorptive capacity is likely to promote innovation activities, such as developing new products, by successfully adding externally acquired knowledge to an existing knowledge base [
42] and ultimately will have a positive influence on innovation performance [
43]. According to the literature, a firm’s search for external knowledge generally seems to have a greater impact on their innovation or innovation performance than their search for internal knowledge [
28,
41]. This suggests that an absorptive capacity to acquire, assimilate, transform, and exploit new external knowledge will play a critical role in enhancing innovation or innovation performance [
19]. In addition, with an increase in absorptive capacity, firms are more able to secure the external knowledge required to cope with environmental changes, and with new external knowledge, firms can renew and reinforce their accumulated knowledge base [
44] and eventually improve their innovation performance [
35].
In summary, operating in a dynamic environment, firms are likely to be motivated or willing to enhance their absorptive capacity to secure the new external knowledge required to deal with environmental changes, through which they can enhance their innovation performance by strengthening innovation activities with new external knowledge. Based on the discussions above, the following hypothesis is proposed.
Hypothesis 3 (H3). Absorptive capacity will mediate the relationship between environmental dynamism and innovation performance.
3.4. Mediation Effect of Strategic Prospecting–Absorptive Capacity
According to the strategic fit perspective, firms can improve their competitive advantage and performance by achieving a strategic fit or alignment between the environment, strategy, and capability [
35]. This suggests that firms can enhance their performance by aligning their strategy with the external environment and aligning internal capability with their strategy. Following this perspective, we argue that strategic prospecting and absorptive capacity can have a double sequential mediation effect on the relationship between environmental dynamism and innovation performance (environmental dynamism > strategic prospecting > absorptive capacity > innovation performance). First, as discussed in Hypothesis 2, environmental dynamism will have a positive effect on firms’ strategic prospecting. Operating in a dynamic environment, firms tend to experience significant changes in products, technologies, and customer needs [
25] and be motivated or willing to sensitively explore and respond to the initial signals of these environmental changes by pursuing new products, markets, and technologies, thereby pursuing higher levels of strategic prospecting [
17]. Second, strategic prospecting will have a positive influence on firms’ absorptive capacity. Firms with higher strategic prospecting levels tend to explore and respond to environmental changes more proactively by developing new products and markets. To do this, they are likely to need new knowledge and skills to develop new products and technologies, but they may not be able to secure all of them internally [
41]. Thus, firms tend to rely on external knowledge and skills and strengthen their absorptive capacity [
19]. Lastly, as described in Hypothesis 3, absorptive capacity will have a positive effect on firms’ innovation performance. Firms with enhanced absorptive capacity can create new knowledge and skills based on the external knowledge acquired, and they can reinforce their innovation activities with inputs of newly created knowledge and capabilities, thereby subsequently improving their innovation performance.
In summary, facing a dynamic environment, firms are likely to pursue higher levels of strategic prospecting by responding to environmental changes more proactively with the pursuit of new products and markets; then, firms with higher strategic prospecting levels tend to enhance their absorptive capacity to secure the new knowledge and skills needed to support their offensive strategic orientation; finally, firms with enhanced absorptive capacity, in turn, can improve their innovation performance with new knowledge and skills as critical inputs into the innovation process. In other words, it is expected that environmental dynamism will have a positive influence on firms’ innovation performance through the double sequential mediation of strategic prospecting and absorptive capacity. Based on these discussions, we propose the following hypothesis.
Hypothesis 4 (H4). Strategic prospecting and absorptive capacity will sequentially mediate the relationship between environmental dynamism and innovation performance.
6. Conclusions and Implications
6.1. Conclusions
Our study has focused on investigating the mechanisms linking environmental dynamism to innovation performance for firms’ sustainable growth. Specifically, based on theories of strategic management, we have identified strategic prospecting, absorptive capacity, and strategic prospecting–absorptive capacity as mediating mechanisms and examined their mediation effects on the relationship between environmental dynamism and innovation performance. For this purpose, we first analyzed the total and direct effects of environmental dynamism on innovation performance and then analyzed the mediation effects of strategic prospecting, absorptive capacity, and strategic prospecting–absorptive capacity on that relationship. Our key conclusions are as follows.
Our results show that a total effect of environmental dynamism on innovation performance exists, meaning that a dynamic environment tends to motivate or lead firms to improve their innovation performance. However, the direct effect does not exist when mediating variables are controlled. Thus, these findings suggest that the relationship between environmental dynamism and innovation performance is completely mediated by the intervening mechanisms.
Assuming an independent relationship between the mediators (strategic prospecting and absorptive capacity), strategic prospecting is found to mediate the relationship between environmental dynamism and innovation performance. This indicates that a dynamic environment tends to increase the level of strategic prospecting, which subsequently enhances innovation performance. This finding supports the argument of the industrial organization theory. Likewise, absorptive capacity is also found to mediate that relationship. Namely, a dynamic environment tends to motivate or force firms to enhance their absorptive capacity for external knowledge acquisition and utilization, which in turn improves innovation performance. This finding is consistent with the rationale of the dynamic capability theory.
Under the more realistic assumption that the mediators are causally interrelated, strategic prospecting still has a mediation effect on the relationship between environmental dynamism and innovation performance, while absorptive capacity does not, in contrast to the situation when the mediators are assumed to be independent. In addition, strategic prospecting–absorptive capacity has a double sequential mediation effect on that relationship. This means that, to respond to a dynamic environment effectively, firms are likely to exhibit higher levels of strategic prospecting, which tends to reinforce their absorptive capacity to secure and utilize external knowledge, and enhanced absorptive capacity is likely to improve innovation performance. Therefore, assuming a causally interdependent relationship between the mediators, strategic prospecting individually mediates the relationship between environmental dynamism and innovation performance, while absorptive capacity does not individually do so, but rather mediates that relationship only when it is linked to strategic prospecting (strategic prospecting–absorptive capacity) as suggested by the strategic fit perspective. This further suggests that, as a mechanism linking environmental dynamism to innovation performance, strategic prospecting is primarily important, whereas absorptive capacity in conjunction with strategic prospecting is secondarily important. As such, assuming an interrelationship between the mediators, our study has developed two effective paths that connect environmental dynamism with improved innovation performance: (1) facing a dynamic environment, firms can improve innovation performance through the pursuit of higher-level strategic prospecting, and (2) facing a dynamic environment, firms can further improve innovation performance through the enhancement of absorptive capacity in support of higher-level strategic prospecting.
6.2. Implications
Our study has the following important theoretical contributions. First, unlike existing studies that have primarily examined the direct effect of environmental dynamism on firms’ innovation performance, our study investigates the indirect effect of environmental dynamism on innovation performance through such mechanisms as strategic prospecting, absorptive capacity, and strategic prospecting–absorptive capacity. Namely, our study makes an original contribution to the literature by examining whether these mechanisms mediate the relationship between environmental dynamism and innovation performance to aid in the creation of a firm’s sustainable competitive advantage. Second, our study suggests that the industrial organization theory and the strategic fit perspective can explain the indirect effect of environmental dynamism on innovation performance better than the dynamic capability theory. This is inferred from our results that strategic prospecting, based on the industrial organization theory, and strategic prospecting–absorptive capacity, based on the strategic fit perspective, have a strong mediation effect on the relationship between environmental dynamism and innovation performance, while absorptive capacity, based on the dynamic capability theory, does not. Third, existing studies argue for a direct effect of environmental dynamism on innovation performance [
3,
5,
7,
8,
9,
10,
11,
12,
13,
14,
15,
16], but our study suggests that this may not be necessarily the case. Our study reveals that strategic prospecting and strategic prospecting–absorptive capacity completely mediate the relationship between environmental dynamism and innovation performance, as a significant direct effect of environmental dynamism on innovation performance is eliminated when the mediators are considered. This further suggests that the direct effect of environmental dynamism on innovation performance shown in many existing studies may be spurious in nature and may not in fact have been present.
In addition, our study provides important practical implications for firms under a dynamic environment regarding how to improve their innovation performance for their sustainable competitive advantage. By revealing the lack of a direct effect of environmental dynamism on innovation performance, our study demonstrates to managers that dynamic changes in the environment, such as the market [
67], technology [
68], and government policy [
69], are not necessarily or naturally linked to improved innovation performance. Rather, our study clearly shows that firms operating in a dynamic environment need to intentionally identify and utilize specific mechanisms through which they can enhance innovation performance for their sustainable growth. Specifically, our results suggest to managers that, facing dynamic environmental changes, firms can choose two specific paths to improve innovation performance required for their sustainability. The first path is through strategic prospecting: facing a dynamic environment, firms need to pursue higher levels of strategic prospecting, namely a more offensive strategic orientation, through which to improve innovation performance. The second path is through strategic prospecting–absorptive capacity: facing dynamic changes in the environment, firms need to pursue higher levels of strategic prospecting and sequentially strengthen their absorptive capacity, which is associated with a more offensive strategic orientation to further improve their innovation performance. Our results also show that firms in a dynamic environment need not reinforce absorptive capacity alone, but instead need to strengthen absorptive capacity in conjunction with higher-level strategic prospecting in order to further improve their innovation performance for their sustainable competitive advantage.
6.3. Limitations and Future Research Directions
Our study has the following limitations, which may suggest the need for possible future research. First, since our study targeted small and medium-sized manufacturing firms as a research context, this might limit the generalization of our results. Thus, it seems desirable to expand the research context to services and larger firms to verify the generalizability of our results in future studies. Second, since our study collected data related to independent and dependent variables from a single respondent in each sample firm, the possibility of common method bias may exist. To check for this potential bias, we employed Harman’s one-factor test, which showed little evidence of this bias. However, since Harman’s one-factor test has its own limitations [
45], the possibility of common method bias might not be completely ruled out. It therefore seems desirable to obtain data from multiple respondents in future studies. Third, although absorptive capacity was measured as a single construct in our study, it would be meaningful to measure it multidimensionally and consider how the roles of subdimensions like potential and realized absorptive capacity [
17] might vary in linking environmental dynamism to innovation performance. Fourth, our study examined absorptive capacity (in connection with strategic prospecting) as a mechanism for mediating between environmental dynamism and innovation performance, but it would also be meaningful for future studies to investigate other potentially intervening internal factors such as organizational structure, culture, and leadership (in conjunction with strategic prospecting); namely, strategic prospecting–organizational structure, strategic prospecting–organizational culture, and strategic prospecting–strategic leadership.