Int. J.

Production Economics 230 (2020) 107817

Contents lists available at ScienceDirect

International Journal of Production Economics

journal homepage: http://www.elsevier.com/locate/ijpe

New product development and sustainable performance of Chinese SMMEs:

The role of dynamic capability and intra-national environmental forces
Yulong Liu a, *, Nelson Oly Ndubisi b, **, Yang Liu c, Fatima Zahra Barrane b
a
Massey Business School, Massey University, Auckland, New Zealand
b
College of Business & Economics, Qatar University, Doha, Qatar
c
Birmingham Business School, University of Birmingham, Birmingham, United Kingdom

A R T I C L E I N F O A B S T R A C T

Keywords: Despite a growing research interest in innovation strategies i.e. new product development, very few studies
Small and medium manufacturing enterprises explore how the regional environmental mechanism is inherent in the link between new product development
New product development and sustainable business performance of small and medium manufacturing enterprises (SMMEs) in Asian
Sustainable performance
countries, due to high-velocity business environments. To address this research gap, the study integrates the
Home regional institution
Regional entrepreneurial intensity
dynamic capability perspective, and the institutional and entrepreneurship theory in the investigation of how the
distinct regional characteristics of the intra-national market in which SMMEs are embedded, along with the
dynamic capability of SMMEs, influence the linkage between new product development and sustainable firm
performance. Using China as the research setting, we test the research model empirically, based on 1321 samples
of SMMEs selected from a nationwide survey. The new findings indicate that an SMME’s regional institutional
forces, regional entrepreneurial intensity and dynamic capability moderate the effects of new product devel­
opment on firms’ sustainable performance by mitigating the inherent inadequacy of and reliance on firm-specific
resources by SMMEs. The new findings also provide the research and managerial implications for SMMEs from
Asian economies conducting new product development strategies.

1. Introduction
Innovation provides a plausible explanation for any organization’s
ability to sustain its competitive advantage (Damanpour, 1991) in an
intensively competitive business environment (Ndubisi, Dayan, Yeniaras
& Al-hawari, 2019). Moreover, sustainability orientation adoption can
be a critical explanatory factor for firms’ differentials in sustainable
performance (Claudy et al., 2016), particularly in high-velocity business
environments (Kranz et al., 2016). Sustainability-orientation enables
enterprises to increase efficiencies regarding new product attributes,
new product design, or manufacturing processes (Adams et al., 2016).
Sustainability-oriented small businesses in intensively competitive and
dynamic business environments pursue increased innovation (Ndubisi
et al., 2019) and new product development, enhanced commitment to
the creation of superior sustainable practices, leading to sustainable
performance (Cheng, 2020).
Asian economies as emerging new markets are some of the world’s
most dynamic markets and small and medium manufacturing enter­
prises (SMMEs) have played a very important role in their economic
growth and development (Budhwar et al., 2016; Ndubisi, 2008; de Sousa
Johnson and Liu, 2011). These Asian SMMEs face intensive market
competition and complex operational issues attributed to the
high-velocity business environment of Asian countries such as China.
Competition, technologies, government policies, products and con­
sumers’ attitudes are highly uncertain, and few competitive advantages
can last in a high-velocity business environment (Eisenhardt and Martin,
2000; Kranz et al., 2016). Therefore, to survive in such an environment,
organisations need to make strategic decisions, such as new product
development (NPD) carefully and quickly (Li et al., 2019).
Asian SMMEs are particularly vulnerable to high-velocity environ­
ments, as they often have only limited firm resources e.g. technologies,
finances and human resources, with which to respond to the challenges
of the external business environment (Budhwar et al., 2016; Ndubisi,
2008; Lopes de Sousa Jabbour et al., 2019; Vargo and Seville, 2011). A

* Corresponding author.
** Corresponding author.
E-mail addresses: y.d.liu@massey.ac.nz, y.d.liu@massey.ac.nz (Y. Liu), olynel@hotmail.com (N.O. Ndubisi), liuyy@bham.ac.uk (Y. Liu), fzahra@qu.edu.qa
(F.Z. Barrane).

https://doi.org/10.1016/j.ijpe.2020.107817
Received 30 August 2019; Received in revised form 21 May 2020; Accepted 1 June 2020
Available online 6 June 2020
0925-5273/© 2020 Published by Elsevier B.V.
Y. Liu et al.
new product can provide an SMME with control over more diverse assets
and quick access to new markets (Oliveira et al., 2018; Sahi et al., 2019).
Thus, it would be critical for Asian SMMEs to engage in NPD to obtain
competitive advantages and synchronicity with their business environ­
ments in the face of both opportunities and threats (Ozer, 2006; Petersen
et al., 2005; Yu et al., 2020).
In this study, we focus on Chinese SMMEs as valuable objects with
which to investigate the impacts of a firm’s home regional characteris­
tics on its innovation strategy and value creation behaviour i.e. via NPD
practices (Abdulrahman et al., 2014). Despite considerable research in
the literature on the NPD of Asian SMMEs, the results remain incon­
clusive and few studies examine the characteristics of high-velocity
environments and intra-national differences (e.g. Sheng et al., 2013;
Yu et al., 2020). The NPD of SMMEs and the impacts of home regional
characteristics on a firm’s innovation strategy is a particularly
under-researched area and recent studies have called for further
research into the impacts of a firm’s regional operational environment
on its strategic behaviours (Chung et al., 2016; Meyer and Peng, 2016).
Prior studies have focused on the firms’ innovation behaviour and
suggested that product innovation is associated with firms’ performance
and competitive advantages. For example, some of the studies (e.g. Kim
et al., 2013; Sheng et al., 2013) have posited that technology-oriented
practices would help develop firms’ new products. However, others
argue that the effects of NPD rely on firms’ attributes, resources and the
external business environment (e.g. Artz et al., 2010; Ndubisi et al.,
2019; Newbert, 2007; Yu et al., 2020; Newbert, 2007; Yu et al., 2020). In
the case of China, there is relatively scant literature on the impacts of
intra-national regional differences e.g. the characteristics of the regional
institutional and entrepreneurship environment and their effects on the
NPD of SMMEs.
China presents an important and suitable context for examining the
mechanism of the NPD of SMMEs, both theoretically and practically.
China has been one of the world’s fastest-growing economies for over 30
years and has demonstrated rapid growth in many sectors due to the
dramatic pace of its economic reforms, making it one of the world’s most
dynamic and high-velocity markets (Easterby-Smith et al., 2008; Li
et al., 2019). Considering the economic significance of Chinese SMMEs
embedded in a unique social and institutional background,
regional-level institutional and entrepreneurship environmental factors,
in particular, could be more appropriate than other measures for
examining the economic impacts of institutional development on firms’
behaviour i.e. NPD (Kusnadi, Yang, & Zhou, 2015; Meyer and Peng,
2016).
Therefore, this study aims to explore how the regional institutional
forces, regional entrepreneurial intensity and dynamic capability of an
SMME support or sustain its financial performance (henceforth, firm
performance or performance) by integrating the dynamic capability
perspective and the institutional and entrepreneurship theory.
Our paper makes several contributions to a greater understanding of
the NPD and performance of SMMEs from Asian economies.
Firstly, we contribute to theory advancement in literature by
developing a research model for the mechanism of NPD, integrating the
dynamic capability perspective and the institutional and entrepreneur­
ship theory, and exploring the impacts of institutional and entrepre­
neurship contexts and firm dynamic capability on the relationship
between NPD and performance of SMMEs.
Secondly, we offer a more detailed understanding of the boundary
conditions under which SMMEs’ regional development, including the
institutional and entrepreneurship context, influences the mechanism of
NPD in firm performance. In this regard, our study focuses on the
moderating roles of regional institutional development, regional entre­
preneurship intensity and firm dynamic capability on the relationship
between NPD and firm performance.
We further explore and validate a configurational effect empirically
by showing how a firm’s dynamic capability and an institutional and
entrepreneurship context impact upon the effects of NPD on firm
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International Journal of Production Economics 230 (2020) 107817
performance. Besides, while an SMME’s dynamic capability may unlock
its potential to increase the firm’s competitive advantages, external
context effects can help it to exploit resources more effectively. To this
end, we adhere to more recent advances of the capability-based theory
(e.g., Newbert, 2007; Ndubisi et al., 2019) by identifying a missing link
between the development of dynamic capability and its exploitation,
thus affecting a firm’s product innovation strategies i.e. NPD.
Thirdly, this study contributes to developing an important theoret­
ical issue by focusing on intra-national differences at a regional level in
the context of China. The study examines the effects of regional insti­
tutional and entrepreneurship environments on firm performance and
therefore contributes to the growing body of literature on intra-national
institutional differences (Meyer and Peng, 2016; Peng and Lebedev,
2017).
The remainder of the paper is organised as follows: Section 2 reviews
the related literature and develops related hypotheses; Section 3 pre­
sents a description of the research methods – data, measurements and
variables; Section 4 presents the main empirical findings; Section 5
concludes with a discussion of the theoretical contribution of this
research and related managerial implications; Section 6 presents the
research limitations and future research directions.
2. Theoretical framework and hypothesis development
2.1. New product development, sustainable development of SMMEs and
intra-national environment
Institutional and entrepreneurship theory suggests that institutions
and entrepreneurship help to form the foundation of a society and guide
firms’ behaviour within it (e.g. North, 1990). According to North’s
institutional tradition, organisations’ strategic choices (e.g. NPD) are
guided not only by economic rationality but also by the institutional
environment (Peng et al., 2008; Wang et al., 2012; Wang et al., 2012).
When conducting corporate activities such as NPD, firms are engaged
within external institutional and entrepreneurship environments and
firms’ strategic choices are viewed as the outcome of the interaction
between institutions, entrepreneurship and organisations (Davis and
Harveston, 2000; Lu, 2002; Peng et al., 2009; Ramaswamy et al., 2017).
Beyond external institutional and entrepreneurship contexts, the
extant literature also highlights the importance of a firm’s resources and
capability influencing decision-making. Capability that firms can utilise
is deployed into markets, helping firms to balance the costs and risks
incurred by managerial complexity (Tseng et al., 2007) and achieve
economies of scale, scope and production rationalisation (Hitt et al.,
1997).
The dynamic capability perspective is also a relevant theoretical
foundation because dynamic capabilities play a critical role in
addressing rapidly changing environments, which in turn offers a lens
with which to capture a firm’s strategic NPD decision. From a capability-
based view (Teece et al., 2016), we argue that a firm’s dynamic capa­
bility as a recourse reduces the resource dependence of a firm on its
region-specific advantages, which might transfer NPD-related risks and
impact firm performance.
Especially in the case of emerging economies, institutions and
entrepreneurship can co-evolve which can influence entrepreneurial
activity such as NPD (Batjargal et al., 2013; Feldman, 2014). Current
understanding of the impact of entrepreneurship, institutional devel­
opment and firms’ dynamic capability on the linkage of NPD and
institutional changes at the regional level in Asian countries like China is
limited. Thus the integrative research model (Fig. 1), which depicts the
hypothesised relationships of SMMEs’ dynamic capabilities and regional
institutional and entrepreneurship contexts on the relationship of NPD
and corporate performance is examined. This theoretical framework
aims to bridge this gap by investigating how the NPD of SMMEs in­
fluences firm performance, as well as the moderating roles of firms’
dynamic capabilities, and the regional institutional and
Y. Liu et al. International Journal of Production Economics 230 (2020) 107817

Fig. 1. Research model of the study.

entrepreneurship context of this relationship. 2018; Peng et al., 2009) might have a role. Institutions capture rules and
government structures and can influence factors that provide a firm with
specific firm-related resources and capabilities derived from the
2.2. Hypotheses development
particular institutional context from which it emerges (Chung et al.,
2016; Kafouros and Aliyev, 2016). For instance, firms embedded in their
2.2.1. New product development and performance of SMMEs
institutional context can accumulate and exploit their knowledge
Prior studies have argued that NPD is one of the key factors in
through firm business behaviour and then turn it into a source of
obtaining competitive advantages and improving corporate perfor­
competitive advantage e.g. non-market advantage.
mance (e.g., Afonso et al., 2008; Subramanian and Ramanathan, 2012;
In an emerging economy such as China, with vast sub-regional dif­
Yu et al., 2020). In particular, we argue that NPD could be critical to the
ferences, the institutional characteristics of a particular sub-national
corporate sustainable development of SMMEs in Asian countries due to
region can influence a firm’s economic behaviour and enable the firm
intensifying competition in the high-velocity market. For example, the
to develop firm-specific advantages e.g. strategic and operational agility
change in customer needs and market segments in the high-velocity
(Ahmadjian, 2016). For example, a well-develop institutional govern­
market are fast and evident. Thus the firms need to diversify their
ment is less likely to abuse its direct administrative and exploitative
product innovations to meet customer needs or cover more customer
power upon firms and reflect less market restrictions exposed by the
segments. These high-velocity markets in Asia (e.g. China) contain
government (Ma et al., 2016). Under a well-develop institutional
relatively short development cycles, requiring SMMEs to engage in NPD
circumstance, the market system plays a crucial role in competition and
(Hu and Bidanda, 2009).
highlights the effectiveness of market-based strategies (Ma et al., 2016).
According to the RBV, firms employ their physical, human, and
We further argue that a well-developed regional institutional context
organizational (operand and opreant) resources to gain competitive
reduces an SMME’s propensity to form competitive advantages from the
edge (Barney 1991). Depending on how valuable these resources are to
benefits of NPD to develop firm-specific advantages in the regional
customers, how rare, and how difficult to imitate, they might lead to
context, as SMMEs face fewer operational risks, such as government
sustainable competitive advantage, enhancing performance (Gatignon
intervention and management uncertainty, when operating in such a
and Xuereb, 1997). Resources boost the efficiency and effectiveness of
context.
firms in generic terms as well as in specific term of NPD (Dangelico and
Moreover, we argue that business performances of SMMEs might be
Pujari, 2010). There are some studies that have examined the linkage
stronger for SMMEs involving NPD in a relatively sound institutional
between firms’ product innovativeness and performance (e.g., Artz
regional context as firms operating costs relating to the institutional
et al., 2010; Li and Atuahene-Gima, 2001). However, prior empirical
context are expected to be lower. The SMMEs operating in a less-
results are inconclusive (Li and Atuahene-Gima, 2001). Hence, given
established institutional environment do not have the same ability to
that NPD could be a key factor in improving and sustaining corporate
follow the ‘rules of the game’ and obtain the information necessary for
performance for SMMEs in China as a high-velocity market, we
their operations.
hypothesise:
Thus we expect the linkage of NPD and business performances of an
Hypothesis 1. New product development in a Chinese SMME is posi­ SMME are contingent to its regional institutional context. A sound
tively associated with its sustainable firm performance. institutional context at a regional level might affect SMMEs’ NPD and
firm performance because these firms might already possess many of the
2.2.2. Regional institutional development and SMMEs’ new product market advantages as a resource from a relatively well-developed
development institutional context, which helps to mitigate the market risks (e.g.,
Past innovation strategy and NPD studies have reported inconclusive Chen et al., 2015; Luiz et al., 2017). Therefore, we propose:
empirical findings, which have been attributed to potential confounding
Hypothesis 2. Sub-national institution moderates the relationship
effects of external factors (Li and Atuahene-Gima, 2001). As for
between new product development and firm performance in Chinese
emerging economies like China, regional institutional development,
SMMEs.
which reflects the level of institutional development at the sub-national
institutional environments in which an SMME is embedded (Liu and Yu,

3
Y. Liu et al.
2.2.3. Regional knowledge spillover entrepreneurship and SMMEs’ new
product development
Regional knowledge spillover entrepreneurship reflects the level of
entrepreneurial development at the sub-national entrepreneurship
context, where a higher level of entrepreneurship context can offer firms
with more knowledge and generate more entrepreneurial opportunities
(Audretsch and Keilbach, 2007). SMMEs’ NPD can relate to the trans­
formation of economic knowledge generally available from its entre­
preneurial environments to SMMEs into viable new products or
technologies (Audretsch and Keilbach, 2008; Colombelli and Quatraro,
2018; Qiu et al., 2017). For example, a sound country or regional context
can serve as a hub for inter-firm innovation collaborations (Ndubisi
et al., 2019). In a sound regional entrepreneurship context of SMMEs, we
argue that SMMEs might take knowledge-based opportunities from that
regional entrepreneurship context. SMMEs might benefit from knowl­
edge spillovers in a region and enhance the linkage of NPD and business
performance.
Moreover, innovative entrepreneurs from SMMEs may fully exploit a
business opportunity eventuating from the entrepreneurship context
and benefit from NPD, as SMMEs can utilise the decent amount of
knowledge-based entrepreneurship from locations with greater levels of
knowledge (Plummer and Acs, 2014). A well-developed regional
entrepreneurship context might create geographical proximity to help
SMMEs reduce the cost of accessing and absorb knowledge spillovers
(Colombelli and Quatraro, 2018), ultimately enhance the output from
NPD practices.
Also suggested in prior studies, regions with higher levels of
knowledge creation (i.e. innovation or innovation efforts) are expected
to show greater levels of knowledge-based (innovative) entrepreneurial
activity with more start-ups in high-tech-related industries (Antonelli,
2000; Audretsch et al., 2008; Landstro €m et al., 2012). By discovering
and investing in opportunities in a region resulting from knowledge, the
regional entrepreneurship context would be very important to the
linkage of NPD and performance in Chinese SMMEs. However, the
mechanism in the transformation of new knowledge from regional
knowledge-spillover entrepreneurship into the relationship of NPD and
corporate performance is relatively neglected, in our view. Thus, one
hypothesis results from our discussion above:
Hypothesis 3. Sub-national entrepreneurship context could moderate
the relationship between new product development and firm perfor­
mance in Chinese SMMEs.
2.2.4. Dynamic capability and SMMEs
The dynamic capability perspective emphasises the critical role of
dynamic capabilities to “integrate, build and reconfigure internal and
external competencies to address rapidly changing environments”
(Teece et al., 1997, p. 516). In the case of emerging markets like China,
compared to state-owned firms, SMMEs might counter non-market ad­
vantages due to the uneven allocation of valuable resources. Generally,
firm capabilities can represent organizational capacity and the means by
which resources are deployed and configured to achieve particular
priorities. Thus SMMEs’ inherent dynamic capabilities are critical to the
implementation and final performance of their strategic choice i.e. NPD,
as a firm’s product innovation strategy could be more costly and
time-consuming (Morita, Machuca, & P� erez Díez de los Ríos, 2018; Sahi
et al., 2019). Equipped with stronger capability bases, we argue that
SMMEs are more likely to overcome the difficulties and risk associated
with NPD and better make use of its advantages from NPD (Pal et al.,
2014).
Moreover, we believe that SMMEs with a stronger dynamic capa­
bility are more capable of mitigating operating risks and grasping
emerging business opportunities in the markets, as these SMMEs are
more likely to have the right sets of resources. A firm’s dynamic capa­
bilities would affect its sequent performance in firm innovation strate­
gies i.e. NPD. Prior research suggests that dynamic capabilities could
4
International Journal of Production Economics 230 (2020) 107817
help provide a firm with a competitive advantage, as they reflect a firm’s
ability to reconfigure resources and coordinate processes promptly and
effectively to meet rapid environmental changes (Liu et al., 2017;
Ndubisi et al., 2019; Suddaby et al., 2019).
Thus we argue that SMMEs’ dynamic capabilities could enhance the
relationship between NPD and successful outcomes for SMMEs, as dy­
namic capabilities of Chinese SMMEs could help provide a SMME with a
relatively competitive advantage to employ the risky activity of NPD and
eventually obtain a more sound business performance and competitive
advantages. we propose that SMMEs with stronger dynamic capabilities
are more likely to facilitate and benefit from their NPD. Hence, we
hypothesise:
Hypothesis 4. Dynamic capabilities moderate the relationship be­
tween new product development and firm performance in Chinese
SMMEs.
3. Methods
3.1. Data
We tested our hypotheses in the context of Chinese SMMEs, deriving
the data from multiple sources. We examined how SMMEs’ capability
and embedded intuitional and entrepreneurship environments help to
accelerate firm growth and development during the NPD process. We
used data from the survey of China’s private enterprises conducted in
2012 by the All-China Federation of Industry and Commerce (ACFIC)
and the State Administration for Industry and Commerce (SAIC). Using a
multi-stage, stratified random-sampling method, this nationwide survey
of enterprises provides information on a representative sample of Chi­
nese private firms, often regarded as entrepreneurial firms in China
(Chung et al., 2019; Li et al., 2014).
Entrepreneurial firms in China are part of a vigorous economic en­
gine that plays an important role in generating export sales and facili­
tating economic development. The data set is by far the best for studying
Chinese private firms; with a nationwide random sample of private
firms, it enabled us to explore the role of intra-national institutional and
entrepreneurship forces and firm capabilities in explaining Chinese
SMMEs’ NPD and performance.
The survey contains 5073 valid responses from private firms. In
accordance with the OECD, we further defined SMMEs as firms staffed
by up to 249 persons, with the following breakdown: micro (1–9), small
(10–49), and medium (50–249). After the data was cleaned and firms
with missing variables were deleted, our final sample contained 1323
SMMEs. These SMMEs are all operating in the manufacturing industry
and the average firm age is 8.76 years. They are distributed between the
regions of Eastern China (69.3%), Mid-China (19.1%) and Western
China (9.6%).
To estimate potential non-response bias, we compare early and late
respondents in terms of the number of employees and firm age. The
results showed that the t-test for the employee numbers and firm age, are
not significant. Thus we believe that non-response bias was not an issue
in our study. Regarding the potential issue of common method bias
(CMB), we conducted a Harman’s one-factor test and all the variables
are loaded into an exploratory factor (Podsakoff et al., 2012). The results
show the largest factor explains only 15.48% of the total variance, which
indicates that CMB was not a major concern in our data.
Information about regional entrepreneurship intensity is on the
China Private Enterprise Activity (CPEA) index developed by the Chi­
nese Professionals and Entrepreneurs Association. This index is devel­
oped from the Global Entrepreneurship Monitor (GEM) as a Chinese
report and defined as the ratio of new venture numbers to the labour
force in each region of China (Kelley et al., 2012). Prior research (e.g.
Cai et al., 2017; Guo, 2019; Johnson and Liu, 2011) has used the CPEA
index as a proxy for regional entrepreneurial activities. Data on the
home regional institutional development of Chinese enterprises in terms
Y. Liu et al.
of the provinces in which the enterprises are headquartered was gath­
ered from China’s National Economic Research Institute (NERI) report
(Fan et al., 2011).
3.2. Measurement and variables
3.2.1. Dependent variable
To model SMMEs’ performances, the profit margin has been used to
evaluate the firms’ operating incomes and the effects of firms’ product
differentiation strategies (Banker et al., 2011). Thus we used the ratio of
net profit to total revenue, namely net profit-margin ratio, suggested by
prior studies (e.g. Banker et al., 2011; Dechow et al., 2010; Fairfield and
Yohn, 2001).
3.2.2. Independent variable
NPD is measured by the ratio of R&D expenditure for NPD to total
revenue and referred as the R&D intensity for NPD, following prior
studies (e.g. Griffin, 1997; McGrath and Romeri, 1994; Walwyn, 2007).
These studies suggest that the rapidity with which firms accumulate
R&D revenue for NPD can reflect their NPD effectiveness (Hall and
Bagchi-Sen, 2002; McGrath and Romeri, 1994).
3.2.3. Moderators
To ascertain the dynamic capabilities of Chinese SMMEs, we
measured the amount of R&D capability proxied by the companies’ R&D
expenditure scaled by total assets, as suggested by previous studies (e.g.
Helfat and Winter 2011; Hsu and Wang, 2012; Laaksonen and Pelto­
niemi, 2018; Liao and Rice, 2010). As suggested by Teece et al. (1997)
and following previous studies (e.g. Rothaermel and Hess, 2007), dy­
namic capabilities are unique assets to firms and focus on learning and
change. They can be proxied by R&D capability as firm-specific
knowledge can be created by their R&D capability (Rothaermel and
Hess, 2007).
Regional institutional context is proxied by the level of institutional
development, so we measured the sub-national institutional environ­
ment in which a SMME is embedded based on the market development
level. In line with prior studies (e.g. Huo et al., 2013; Meyer and Nguyen,
2005), a marketization index published by National Economic Research
Institution (NRRI) (Fan et al., 2011) is widely used to proxy the level of
institutional context. This index reflects the institutional quality within
the local economy of each province and consists of five sub-indices: the
level of government interference in markets; the development of
non-state owned enterprises; development of product markets; devel­
opment of factor markets; development of market intermediaries and
intellectual property rights protection (Fan et al., 2011).
The regional knowledge-spillover entrepreneurship context is prox­
ied by the concept of entrepreneurial intensity. It is measured by the
number of new start-ups evidenced within a given region in China to
reflect regional entrepreneurial intensity (Bettinelli et al., 2017; Wright
et al., 2005).
3.2.4. Control variables
We included several additional variables from the extant SMME
literature. We included firm size, which refers to an SMME’s employee
level as suggested by Deb, David, and O’Brien (2017). We controlled
family business ownership as the ratio of family ownership, which in­
dicates a firm’s level of control by family, as innovation activities i.e.
new product development could be sustained or hampered by family
ownership in SMMEs (Sciascia et al., 2015). We controlled the degree of
internationalization, which denotes the ratio of overseas sales to total
sales, in line with most past studies (e.g. Cheng et al., 2015). Apart from
R&D expenditure on NPD, SMMEs might also use R&D expenditure on
technical improvements for existing products. We controlled an SMME’s
R&D spending on technical improvements, which is excluded from the
R&D expenditure for NPD. Debt ratio of SMMEs was controlled and
measured as short and long-term debt divided by total assets, which
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International Journal of Production Economics 230 (2020) 107817
reflects the firm’s leverage and access to outside finance, which can
financially constrain a firm (Ellul and Yerramilli, 2013). Firm age is
important for SMMEs because older firms that had been embedded in
the pre-reformed period are more risk-averse and inertial when it comes
to corporate entrepreneurship and venturing (Yiu et al., 2007).
Following Chen and Young (2010) and Boateng et al. (2008), we
measured firm age by the number of years since the firm was estab­
lished, and controlled for age differentials.
Survey-based research may face the problem of common method
variance due to self-reported measures from a single source. However,
we do not consider common method variance to be a major concern in
this study, as independent variables and dependent variables were
collected from multiple sources (Chang et al., 2010). To address po­
tential endogeneity issues, we further conducted a Hausman test by
using an instrumental variable (IV) and comparing the estimates with
two-stage least squares (2SLS) estimates (Heckman, 1979). Following
these practices (e.g., Hong et al., 2015; Wei and Nguyen, 2017), we used
and controlled outward foreign direct investment (FDI) of SMMEs as the
IVs, since firm-specific advantages and knowledge associated with a
higher level of outward FDI tend to be stronger in SMMEs with a higher
level of NPD. However, SMMEs from emerging markets might utilise a
high level of outward FDI to seek strategic resources, but this strategic
FDI is not necessarily correlated with the high level of firm performance.
Using Stata 14 software, we followed Heckman’s two-step selection
model and performed a regression including the IV in the first stage.
Then the coefficient of the inverse Mills’ ratio was calculated in the
second stage and we found that the Mills’ ratio was not significant in the
model specifications, which indicates that endogeneity is not a concern
in our study. To avoid the risk of misstating the results (Kingsley et al.,
2017), we evaluated the statistical significance of the marginal effect of
the independent and moderating variables. According to the marginal
effect results, the risk of overstating and understating the empirical re­
sults is not an issue in our study.
4. Results
Table 1 reports descriptive statistics and correlation matrix for the
main variables. Almost all correlation coefficients are very low. We
checked the variance inflation factors (VIF) by using pooled regression
analysis versions of our models; the highest VIF amounts were under 2.8,
which is well below the critical threshold of 10 (Allison, 1999). There­
fore, multi-collinearity is not a serious issue in this study.
We began by establishing the baseline model as Model 1. This model
includes the control variables mentioned above but leaves out the in­
dependent variables that relate to the hypotheses. The baseline specifi­
cation has been used in the literature to test the postulations of the
proposed theoretical framework.
Table 2 presents the results of the hierarchical regressions. Present­
ing regression results in six different models allows for comparisons of
model fit and explanatory power between models (Aiken et al., 1991).
We reported the main effects of the control, independent and moderator
variables, before analysing the interaction effects.
Model 1 includes only control variables and serves as the base model
to show the effects of the control variables on the relationship between
NPD and firm performance. Model 2 includes the effects of NPD,
regional institutional development and regional entrepreneurial in­
tensity from Chinese SMMEs’ intra-national context on firm perfor­
mance. Model 3 includes the main effects of NPD, regional
entrepreneurship intensity on Chinese SMMEs’ firm performance. Model
4 includes the moderating effect of dynamic capability and the NPD of
Chinese SMMEs. Model 5 includes the effects of the interaction between
regional institutional development and the NPD of Chinese SMMEs.
Model 6 examines the moderating effect of regional entrepreneurship
intensity and the NPD of Chinese SMMEs.
The estimate of the main effects of NPD in Chinese SMMEs is sig­
nificant in Model 2 and Model 3. The direct effects of NPD on Chinese
Y. Liu et al. International Journal of Production Economics 230 (2020) 107817

Table 1
Means, standard deviations and correlations.
Variables Mean S.D. 1 2 3 4 5 6 7 8 9 10

1. Firm performance 0.06 0.80 1

2. New product development 0.04 0.15 0.096** 1
3. Dynamic capability 13.8 17.6 0.102** 0.104** 1
4. Regional marketization 9.22 1.98 0.021 0.071** 0.008 1
5. Regional entrepreneurial intensity 2.40 0.73 0.019 0.050 0.019 0.792** 1
6. Firm age 8.76 5.22 0.053 0.032 0.091** 0.165** 0.167** 1
7. Familiarization 77.9 28.8 0.013 0.022 0.052 0.088** 0.019 0.085** 1
8. Debit ratio 24.3 25.8 0.151** 0.035 0.126** 0.113** 0.095** 0.058* 0.061* 1
9. Internationalization 0.11 0.56 0.011 0.016 0.004 0.103** 0.072** 0.011 0.024 0.009 1
10. Technical innovation investment 0.06 0.81 0.071** 0.087** 0.017 0.006 0.028 0.018 0.038 0.019 0.005 1
11. Firm size 3.85 1.15 0.005 0.068* 0.086** 0.216** 0.143** 0.319** 0.043 0.239** 0.049 0.059*

**p < 0.01; *p � 0.05; Significance levels are based on a two-tailed test; N ¼ 1321.

Table 2
Hierarchical regression results.
Models (1) (2) (3) (4) (5) (6)

Interaction effect
NDP � DC 0.046**
(0.023)
NDP � RM 0.065*
(0.038)
NDP � REI 0.052*
(0.031)
Independent variable
New product development (NDP) 0.091*** 0.098*** 0.061** 0.115*** 0.109***
(0.028) (0.027) (0.031) (0.029) (0.028)
Moderators
Dynamic capability (DC) 0.065** 0.063**
(0.028) (0.027)
Regional marketization (RM) 0.003 0.001
(0.046) (0.028)
Regional entrepreneurial intensity (REI) 0.000 0.002
(0.045) (0.027)
Control variables
Firm age 0.063** 0.064** 0.068** 0.064** 0.068** 0.069**
(0.029) (0.029) (0.029) (0.029) (0.029) (0.029)
Degree of Familiarization 0.002 0.001 0.003 0.001 0.005 0.004
(0.028) (0.028) (0.028) (0.028) (0.028) (0.028)
Debit ratio 0.156*** 0.147*** 0.157*** 0.149*** 0.156*** 0.158***
(0.028) (0.028) (0.028) (0.028) (0.028) (0.028)
Internationalization 0.013 0.016 0.015 0.015 0.015 0.015
(0.027) (0.027) (0.027) (0.027) (0.027) (0.027)
New technical innovation investment 0.073 0.065** 0.065 0.065 0.066 0.066
(0.027) (0.027) (0.027) (0.027) (0.027) (0.027)
Firm size 0.004*** 0.009 0.003** 0.008** 0.000** 0.000**
(0.030) (0.031) (0.030) (0.030) (0.030) (0.030)
F ratio 7.236*** 6.237*** 7.236*** 7.400*** 6.674*** 5.959***
R 0.180 0.214 0.205 0.221 0.210 0.209
Adjust R2 0.032 0.046 0.042 0.048 0.044 0.044
Obs. 1321 1321 1321 1321 1321 1321

***p < 0.01, **p < 0.05, *p < 0.10. Dependent variable: Firm performance. N represents observations; RM ¼ Regional marketization; REI ¼ Regional entrepreneurial
intensity; DC ¼ Dynamic capability.

SMMEs’ firm performance are both significant, implying that Chinese
SMMEs’ NPD strongly affects their firm performance, which supports
Hypothesis 1.
In Model 4, which includes the effects of the interaction between the
dynamic capability of SMMEs and the NPD of Chinese SMMEs, the es­
timate for the main effects of dynamic capability of SMMEs is positive
and significant (p < 0.05). It shows that a higher level of dynamic
capability enhances the relationship between NPD and firm perfor­
mance. The interaction term in Model 3 is positive and significant (p <
0.05), which supports Hypothesis 2.
In Model 5, we find that main effect of regional institutional devel­
opment is not significant but the second interaction term between
regional institutional development and NPD in Chinese SMMEs is posi­
tive and significant (p < 0.01). This finding lends support to Hypothesis
3, proposing that firms’ NPD in a greater institutional quality of regional
institutional context countries increases firms’ NPD involvement.
Consistent with expectations, in Model 6 the estimate for the main
effect of regional entrepreneurial intensity is not significant, but the first
interaction term between entrepreneurial intensity and Chinese SMMEs
NPD is positive and significant (p < 0.01), which supports Hypothesis 4.
Interaction effects need to be plotted to facilitate meaningful inter­
pretation (Dawson, 2014). Figs. 2–4, therefore, display the plots of the
two-way interactions. Vertical Y-axis presents the trend of firm perfor­
mance and X-axis shows a level of new product development of SMMEs.
In particular, Fig. 2 illustrates the relationship between the regional
institutional development of a firm and its NPD. Fig. 3 illustrates the
relationship between the regional entrepreneurial intensity of a firm and
its NPD. Fig. 4 illustrates the relationship between the dynamic capa­
bilities of a firm and its NPD.
In addition, we conducted simple slope tests as suggested by Aiken

6
Y. Liu et al.
Fig. 2. Regional Marketization x New Product Development.
Fig. 3. New Product Development x Regional Entrepreneurial Intensity.
et al. (1991). These tests displayed significant results for each interac­
tion, lending support to the direction and significance of the in­
teractions’ effects.
To assess the robustness of the results, we considered and added
another control variable – SMMEs’ corporate social responsibility (CSR)
spending measured by a ratio of SMMEs’ spending on pollution reduc­
tion to net profit in ad hoc robustness testing (Heckman, 1979; Young
and Holsteen, 2017). Table 3 presents the results of these hierarchical
regressions with additional control variable of CSR spending. The results
with additional control variable in Table 3 are consistent with the results
in Table 2, which further corroborates our hypotheses.
5. Discussion and conclusions
In this study, we examined the role of regional institutional devel­
opment, entrepreneurial intensity, and firms’ dynamic capability on the
relationship between SMMEs’ NPD and firm performance, as the distinct
characteristics of the intra-national market in which SMMEs from China
7
International Journal of Production Economics 230 (2020) 107817
Fig. 4. New Product Development x Dynamic capability of SMMEs.
are embedded and the dynamic capability of the SMMEs can influence
the linkage between NPD and cooperate performance for SMMEs. Using
the literature from the institutional theory, knowledge spillover entre­
preneurship theory and dynamic capability-based theory, we found
empirical support for our theoretical model in Fig. 1. The results of the
empirical analysis support the argument that the relationship between
NPD and firm performance is moderated by a firm’s dynamic capability
and institutional and entrepreneurship environment at the regional
level. These findings remain robust after controlling for firms’ CSR
spending and other potential confounding factors (as shown in Table 3).
Further, there is no evidence that CSR spending undermines financial
performance, as some SMMEs have in the past used to explain away their
reluctance to invest in environmentally friendly intitiatives and those
that promote societal wellbeing.
5.1. Theoretical implications
The results of the study help to extend the frontiers of the literature,
which considers the impact of intra-national institutional differences on
firms’ NPD and firm performance (e.g., Meyer and Peng, 2016; Peng and
Lebedev, 2017). This result extends the past findings (e.g. Chung and
Tan, 2017) by emphasising that regional environment parameters, such
as regional institutional and entrepreneurship contexts help firms to
reduce operational costs and the business risks and enhance the linkage
of NPD and business performance for Chinese SMMEs. Thus, the pres­
ence of favourable regional institutional and entrepreuneurship contexts
can strengthen the important role of NPD in sustaining Chinese SMMEs’
performanc.
Our study provides empirical evidence that it is necessary for Chinese
SMMEs to align its innovation strategy (i.e. NPD) with such external
moderating factors (Boellis et al., 2016). SMMEs with relatively higher
levels of regional institutional development and entrepreneurship
context, may benefit more from NPD to better identify and exploit op­
portunities arising in fast-moving market conditions and create stronger
firm performance.
Our study contributes to the institutional and entrepreneurship
literature and offers insights about the regional innovation system by
examining the diverse regional institutional and entrepreneurship con­
texts. We find that these regional institutional and entrepreneurship
contexts can compensate for a SMME’s lack of market knowledge in
relation to its NPD. In particular, greater institutional development in
responding to the institutional quality of the home region also enables
Chinese SMMEs to mitigate their sensitivity to external challenges e.g.
Y. Liu et al. International Journal of Production Economics 230 (2020) 107817

Table 3
Hierarchical regression results with additional control variable - CSR spending.
Models (1) (2) (3) (4) (5) (6)

Interaction effect
NDP � DC 0.044**
(0.023)
NDP � RM 0.065*
(0.037)
NDP � REI 0.058*
(0.031)
Independent variable
New product development (NDP) 0.080*** 0.088*** 0.052* 0.104*** 0.101***
(0.028) (0.028) (0.031) (0.029) (0.028)
Moderators
Dynamic capability (DC) 0.069** 0.066**
(0.028) (0.028)
Regional marketization (RM) 0.008 0.004
(0.047) (0.029)
Regional entrepreneurial intensity (REI) 0.003 0.003
(0.046) (0.028)
Control variables
CSR spending 0.007 0.002 0.005 0.005 0.004 0.003
(0.028) (0.028) (0.028) (0.028) (0.028) (0.028)
Firm age 0.057* 0.057* 0.062** 0.058** 0.062** 0.063**
(0.030) (0.030) (0.030) (0.030) (0.030) (0.030)
Degree of familiarization 0.002 0.000 0.003 0.001 0.005 0.004
(0.028) (0.028) (0.028) (0.028) (0.028) (0.028)
Debit ratio 0.161*** 0.151*** 0.162*** 0.153*** 0.161*** 0.164***
(0.029) (0.029) (0.029) (0.029) (0.029) (0.029)
Internationalization 0.015 0.017 0.016 0.016 0.017 0.016
(0.028) (0.028) (0.027) (0.027) (0.028) (0.028)
New technical innovation investment 0.235*** 0.212*** 0.210*** 0.210*** 0.210*** 0.213***
(0.052) (0.053) (0.053) (0.053) (0.053) (0.053)
Firm size 0.008 0.004 0.001 0.004 0.005 0.004
(0.031) (0.031) (0.031) (0.031) (0.031) (0.031)
F ratio 8.032*** 6.602*** 8.321*** 7.643*** 6.980*** 5.959***
R 0.206 0.233 0.224 0.239 0.229 0.229
Adjust R2 0.043 0.054 0.050 0.057 0.052 7.006
Obs. 1271 1271 1271 1272 1272 1272

***p < 0.01, **p < 0.05, *p < 0.10. Dependent variable: Firm performance. N represents observations; RM ¼ Regional marketization; REI ¼ Regional entrepreneurial
intensity; DC ¼ Dynamic capability.

government intervention by eventually benefiting more from NPD
practices. Regarding the entrepreneurship literature, studies suggest
that the characteristics of entrepreneurship context i.e. entrepreneur­
ship intensity increases firms’ knowledge bases to identify and exploit
opportunities and engage product innovation strategies (e.g., Barkema
and Drogendijk, 2007; Bloodgood et al., 1996). We extend related
studies (Colombelli and Quatraro, 2018) and find that a well-developed
regional entrepreneurship context can help SMMEs better absorb
knowledge spillovers and ultimately enhance the output from NPD
practices. Given the complementarity of dynamic capability and insti­
tutional context, we encourage future scholars to investigate other
capability-institution configurations to explain the influence of in­
stitutions beyond moderating effects (Hoskisson et al., 2013).
The results also extend the scholarly understanding of the mecha­
nisms through which firm-specific capabilities as dynamic capability
interactively influence the relationship between NPD and firm perfor­
mance. Prior studies indicated that dynamic capability of a firm can
provide related knowledge and routines for firms’ business activities
(Blomstermo et al., 2006; Eriksson et al., 1997; Hollender et al., 2016)
and dynamic capability can work as a predictor of both NPD and firm
performance (Gutierrez-Gutierrez et al., 2018; Mu et al., 2017; Ndubisi
et al., 2019) In this study, we further advance the existing literature by
finding the moderating effect of dynamic capability on the linkage of
NPD and business performance in Chinese SMMEs.
5.2. Managerial implications
Our findings have implications for practitioners and policymakers.
Our results indicate that managers of SMMEs need to develop and utilise
firms’ dynamic capability as it can enhance the linkage of its NPD and
business performance. Considering that many SMMEs could be limited
in their strategic choices (e.g. NPD due to resource deficiencies), it will
be helpful for local government to promote novel market and entre­
preneurial opportunities that SMMEs can leverage to enhance NPD and
to create more benefits out of NPD. This new perspective can influence
the implementation of NPD and performance of SMMEs accordingly.
Policymakers should be aware that the mechanism of NPD and SMME
performance can be enhanced by ensuring strong entrepreneurship
context and regional institutions that provide quality support for
SMMEs.
6. Limitations and future directions
As other studies, this study is subject to limitations. Firstly, other
resources and factors of external environment exist, beyond the dynamic
capability and the institutional and entrepreneurship context of home
region, and may address the idiosyncrasies inherent in SMMEs’ NPD and
firm performance relationship. While we theorise that factors from
institutional and entrepreneurship environment are highly relevant
moderators in our study’s context, investigating further capabilities and
context-related factors for SMMEs was beyond the scope of our work but
nonetheless constitutes a promising area for future research. Future
research may investigate the influence of specific sub-dimensions of the
dynamic capability in order to understand which specific aspects of
dynamic capability influence Chinese SMMEs’ performance. Industry
differences in manufacturing could present different levels of NPD and
financial performance, which should be explored in future studies.
Secondly, the Chinese market provides apposite study context

8
Y. Liu et al.
because new product development is a vital growth strategy for firms
operating in China, and its fast-changing nature also makes dynamic
capabilities more prominent for firms operating there. However, this
also presents a potential limitation for the generalisability of the results.
Future studies may further examine the research model in other Asian
countries and employ longitudinal data to examine the research model.
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