Driving Competitive Edge, Performance in SMEs

Abstract

This study examines how dynamic capabilities and artificial intelligence (AI) capabilities shape innovation, competitive advantage, and business performance (BP) in Vietnamese small and medium-sized enterprises (SMEs). Drawing on the dynamic capabilities view, survey data from 1,512 managers in 301 SMEs were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM). The findings show that exploitative capability enhances both innovation capability and competitive advantage, while exploratory capability directly improves competitive advantage but does not significantly affect innovation capability. Innovation capability positively influences BP both directly and indirectly through competitive advantage. AI capability emerges as a key organizational capability: it strongly predicts innovation capability, improves BP, and strengthens the relationship between innovation capability and competitive advantage. The study contributes by distinguishing between exploitation and exploration, positioning AI capability beyond technology adoption, and demonstrating how AI helps SMEs convert innovation into competitive advantage.