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:

1. To validate the measurement instrument for sustainable competitive advantage.

2. 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:

• Product innovation: the development of new or significantly improved products (Kuncoro & Suriani, 2018; Yu et al., 2017).

• Process innovation: improvements in production methods, operational systems, and organizational processes (Reichstein & Salter, 2006; Milewski et al., 2015).

To ensure scientific rigor, we conducted:

• Content validity analysis using Lawshe’s (1975) method, achieving acceptable CVR and CVI thresholds (Almanasreh et al., 2019).

• Exploratory Factor Analysis (EFA) and Confirmatory Factor Analysis (CFA), following established guidelines (Watkins, 2018; Bentler, 1990; Barrett, 2007).

• 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:

• Limited access to structured business records

• Hesitation among respondents to share strategic information

• 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:

• Validating measurement instruments in local contexts

• Extending innovation research into underrepresented regions

• Examining innovation as a multidimensional capability

For practitioners and policymakers, the implications are direct:

• Sustainable competitive advantage requires continuous innovation.

• Both product differentiation and process efficiency are essential.

• 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

Adam S, Mahrous AA, Kortam W (2017) The relationship between entrepreneurial orientation, marketing innovation and competitive marketing advantage of female entrepreneurs in Egypt. Int J Technol Manag Sustain Dev 16(2):157–174

Akman G, Yilmaz C (2008) Innovative capability, innovation strategy and market orientation: an empirical analysis in Turkish software industry. Int J Innov Manag 12(01):69–111

Almanasreh E, Moles R, Chen TF (2019) Evaluation of methods used for estimating content validity. Res Social Adm Pharm 15(2):214–221

Alshanty AM, Emeagwali OL (2019) Market-sensing capability, knowledge creation and innovation: the moderating role of entrepreneurial-orientation. J Innov Knowl 4(3):171–178

Atalay M, Anafarta N, Sarvan F (2013) The relationship between innovation and firm performance: an empirical evidence from Turkish automotive supplier industry. Procedia Soc Behav Sci 75:226–235

Balan P, and Lindsay NJ (2010). Innovation capability, entrepreneurial orientation and performance in Australian hotels: an empirical study. Cooperative Research Centre for Sustainable Tourism Gold Coast, Australia.

Barrett P (2007) Structural equation modelling: adjudging model fit. Pers Individ Differ 42(5):815–824

Bentler PM (1990) Comparative fit indexes in structural models. Psychol Bull 107(2):238

Karaman Kabadurmus FN (2020) Antecedents to supply chain innovation. Int J Logist Manag 31(1):145–171

Kuncoro W, Suriani WO (2018) Achieving sustainable competitive advantage through product innovation and market driving. Asia Pac Manag Rev 23(3):186–192

Lawshe CH (1975) A quantitative approach to content validity. Pers Psychol 28(4):563–575

Lee J-S, and Hsieh C-J (2010). A research in relating entrepreneurship, marketing capability, innovative capability and sustained competitive advantage. J Business Econ Res (JBER), 8(9).

Lee S, Yoo J (2021) Determinants of a firm’s sustainable competitive advantages: focused on Korean small enterprises. Sustainability 13(1):346

Milewski SK, Fernandes KJ, Mount MP (2015) Exploring technological process innovation from a lifecycle perspective. Int J Oper Prod Manag 35(9):1312–1331

Molina-Collado A, Santos-Vijande ML, Gómez-Rico M, Madera JM (2022) Sustainability in hospitality and tourism: a review of key research topics from 1994 to 2020. Int J Contemp Hosp Manag 34(8):3029–3064

Mohammad IN, Massie JD, and Tumewu FJ (2018). The effect of entrepreneurial orientation and innovation capability towards firm performance in small and medium enterprises (Case Study: Grilled Restaurants in Manado). Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis Dan Akuntansi, 7(1).

Reichstein T, Salter A (2006) Investigating the sources of process innovation among UK manufacturing firms. Ind Corp Chang 15(4):653–682

Streiner DL (2003) Starting at the beginning: an introduction to coefficient alpha and internal consistency. J Pers Assess 80(1):99–103

Watkins MW (2018) Exploratory factor analysis: a guide to best practice. J Black Psychol 44(3):219–246

Yu C, Zhang Z, Lin C, Wu YJ (2017) Knowledge creation process and sustainable competitive advantage: the role of technological innovation capabilities. Sustainability 9(12):2280