In highly competitive and resource-constrained environments, particularly in emerging economies, small businesses constantly face one central question: How can we build an advantage that lasts?
In today’s highly competitive market environments, businesses must do more than survive; they must innovate in order to sustain a competitive edge. Innovation capabilities (IC), the ability to develop new products and improve internal processes, have increasingly become strategic assets for firms seeking to maintain long-term competitiveness. Yet, translating innovation into a sustainable competitive advantage (SCA) requires careful measurement, valid tools, and an understanding of how these constructs truly relate within specific business contexts.
Innovation is often presented as the answer. But does innovation capability genuinely translate into sustainable competitive advantage? And how can we measure that relationship rigorously?
Our research, conducted in small businesses in Erbil, Iraq, investigates whether a psychometrically validated SCA questionnaire reflects a meaningful correlation with innovation capabilities, specifically product and process innovation. Beyond validation, the study contributes new empirical insights into how these dimensions of innovation predict competitive advantage in a transitional economy.
Why This Topic Matters
The relationship between innovation and performance has been widely discussed in the literature. Innovation capability has been defined as a firm’s ability to transform knowledge and ideas into new products, processes, and systems (Balan & Lindsay, 2010; Mohammad et al., 2018). Lee and Yoo (2021) further describe it as the firm’s ability to manage existing technologies while introducing new ones.
However, much of the empirical evidence comes from developed economies. Emerging and post-conflict regions remain underrepresented in the literature. For small firms operating in environments characterized by institutional instability, financial constraints, and market uncertainty, innovation is not simply a strategic choice; it is often a survival mechanism.
Sustainable competitive advantage, meanwhile, refers to a firm’s ability to maintain superior performance relative to competitors over time (Lee & Hsieh, 2010; Molina-Collado et al., 2022). It must be difficult to imitate and durable in nature. Previous studies have suggested that innovation capabilities are central to achieving this advantage (Akman & Yilmaz, 2008; Yu et al., 2017).
Yet, an important methodological gap remains: Are the instruments used to measure sustainable competitive advantage valid and reliable? And when rigorously tested, do innovation capabilities still significantly predict SCA?
This dual question motivated our research.
What We Did Differently
Our study had two objectives:
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To validate the measurement instrument for sustainable competitive advantage.
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To test whether product and process innovation significantly predict SCA.
We adopted a multidimensional perspective on innovation capability, following Alshanty and Emeagwali (2019), distinguishing between:
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Product innovation: the development of new or significantly improved products (Kuncoro & Suriani, 2018; Yu et al., 2017).
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Process innovation: improvements in production methods, operational systems, and organizational processes (Reichstein & Salter, 2006; Milewski et al., 2015).
To ensure scientific rigor, we conducted:
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Content validity analysis using Lawshe’s (1975) method, achieving acceptable CVR and CVI thresholds (Almanasreh et al., 2019).
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Exploratory Factor Analysis (EFA) and Confirmatory Factor Analysis (CFA), following established guidelines (Watkins, 2018; Bentler, 1990; Barrett, 2007).
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Reliability testing using Cronbach’s alpha (Streiner, 2003).
The psychometric validation process was a critical success of the study. The instruments demonstrated strong validity and internal consistency, reinforcing confidence in the empirical results.
What We Found
The findings were clear and statistically robust.
1. Product Innovation Strengthens Sustainable Competitive Advantage
Product innovation showed a strong positive and statistically significant relationship with SCA. Firms that continuously improve or introduce new products enhance differentiation and strategic positioning, consistent with earlier findings (Lee & Hsieh, 2010; Yu et al., 2017).
In simple terms: businesses that innovate their offerings gain advantages competitors struggle to replicate.
2. Process Innovation Also Matters—Significantly
Process innovation likewise demonstrated a significant positive relationship with SCA. Improving operational efficiency, internal systems, and production methods strengthens cost control and long-term competitiveness (Reichstein & Salter, 2006).
This confirms that sustainable advantage is not only about what firms offer but also about how they operate.
3. Strong Explanatory Power
When both innovation dimensions were tested together, the model explained approximately 68% of the variance in sustainable competitive advantage. Even after controlling for demographic factors, product and process innovation remained highly significant predictors.
These results align with prior empirical studies showing innovation capability as a strategic resource (Atalay et al., 2013; Adam et al., 2017; Karaman Kabadurmus, 2020).
Challenges Along the Way
Conducting empirical research among small businesses in a transitional economy presents several challenges:
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Limited access to structured business records
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Hesitation among respondents to share strategic information
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Ensuring statistical rigor with moderate sample sizes
One of the most demanding aspects was the psychometric validation process. Ensuring that the SCA instrument met validity standards required careful item refinement and repeated statistical testing.
However, this process was also one of the study’s greatest achievements. It strengthened the methodological contribution beyond simply testing relationships.
What Does This Mean for the Future?
For researchers, the study highlights the importance of:
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Validating measurement instruments in local contexts
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Extending innovation research into underrepresented regions
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Examining innovation as a multidimensional capability
For practitioners and policymakers, the implications are direct:
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Sustainable competitive advantage requires continuous innovation.
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Both product differentiation and process efficiency are essential.
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Internal capabilities matter even more in unstable environments.
Future research may examine additional dimensions of innovation capability, longitudinal effects, or cross-country comparisons to further enrich understanding.
Innovation capability is often discussed conceptually. Our findings provide empirical evidence, grounded in validated measurement, that both product and process innovation significantly enhance sustainable competitive advantage.
In emerging markets, where uncertainty is high and resources are constrained, innovation is not optional. It is the foundation of long-term competitiveness.
References
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