European Journal of Innovation Management

Innovation, firms’ performance and environmental turbulence: is there a

moderator or mediator?
Lejla Turulja, Nijaz Bajgoric,
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To cite this document:
Lejla Turulja, Nijaz Bajgoric, (2018) "Innovation, firms’ performance and environmental turbulence:
is there a moderator or mediator?", European Journal of Innovation Management, https://
doi.org/10.1108/EJIM-03-2018-0064
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Firms’
Innovation, firms’ performance performance and
and environmental turbulence: is environmental
turbulence
there a moderator or mediator?
Lejla Turulja and Nijaz Bajgoric
School of Economics and Business,
Received 24 March 2018
University of Sarajevo, Sarajevo, Bosnia and Herzegovina Revised 5 May 2018
Accepted 14 May 2018

Abstract
Purpose – The purpose of this paper is to draw on dynamic capability view and contingency theory to
clarify the nature of the effect of environmental turbulence on the relationships between firm’s both product
and process innovations and business performance.
Design/methodology/approach – The authors developed and empirically tested two structural models
using structural equation modeling approach. The first model deals with both product and process innovations
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as the mediators between environmental turbulence and business performance. The second model considers the
moderating effect of environmental turbulence between innovation and business performance.
Findings – The findings show that environmental turbulence does not moderate the relationship between
innovation and business performance. The authors have found a clear role of environmental turbulence in
boosting innovation rather than moderating the relationship between innovation and performance.
Research limitations/implications – The data set is a cross-section of heterogeneous firms regarding
the industry.
Practical implications – Managers should be aware of the importance of the innovation for the environmental
turbulence and dynamism counteracting. The results imply a negative influence of environmental turbulence on
business performance. However, with the innovation in the equation, this influence can be positive, because it
boosts firms to innovate and though to achieve better business performance.
Originality/value – It contributes the management and innovation research and practice through offering
insights into the role of environmental turbulence in product innovation, process innovation as well as
organizational business performance through comprehensive analysis of mediation and moderation effects
between the observed constructs.
Keywords Mediation, Moderation
Paper type Research paper

Introduction
The increasing pace of globalization, changing customers’ demands, increasing
competitiveness and rapid technological advancements create an environment in which
sustained competitive advantage is difficult to achieve and sustain (Bhatt et al., 2010).
Besides, rapid technology advances increase the need for firms to continuously adapt,
improve and innovate in order to survive (Chen et al., 2010). In other words, the
contemporary business environment is characterized by constant changes and dynamic
turbulences (Menguc and Auh, 2006). The ability of a firm to respond to market pressures
and changes is a critical success factor in such environments. Since customers’ needs and
expectations continually evolve, delivering improved product and services requires ongoing
responsiveness to market needs and innovation efforts. Therefore, an important driver of
firm competitiveness and success is the ability to innovate in dynamic business
environments (Zaefarian et al., 2017; Uzkurt et al., 2013; Chen et al., 2009). The concept of
innovation though has received considerable attention from the researchers and
management literature (Tajeddini and Trueman, 2008). In this regard, many scholars
considered innovation as critical firm’s capability indispensable for the survival,
profitability and growth of modern business organizations (Kyrgidou and Spyropoulou, European Journal of Innovation
Management
2012; Tajeddini, 2011). Firms with high innovation capability support new ideas, © Emerald Publishing Limited
1460-1060
support change, encourage risk-taking and stimulate new business approaches DOI 10.1108/EJIM-03-2018-0064
 EJIM (Tsai and Yang, 2014). As a result, greater innovation contributes to increased business
performance (Bolivar-Ramos et al., 2012; Boyer and Lewis, 2002). Thus, some scholars
offered and empirically confirmed positive impact of innovation on firm’s business
performance and competitiveness (Hurley and Hult, 1998; Tsai and Yang, 2013a, b; Menguc
and Auh, 2006).
However, considering the dynamism of modern business environment, several scholars
addressed the moderating effect of environmental turbulence between innovation and business
performance (Zulu-Chisanga et al., 2016; Calantone et al., 2003; Tsai and Yang, 2014). In other
words, they investigated how environmental turbulences influence the effect of firm innovation
on business performance. Rapid changes in the environment make current products and
services obsolete. Therefore, firms must continually introduce new products and services to
neutralize the threats of product and service obsolescence, thereby enhancing competitiveness
and business performance. Firms with the high innovation capability address market change
in new ways and are able to exploit rapidly changing market demands (Tsai and Yang, 2014).
However, some scholars considered environmental turbulence as antecedents of innovation
(Lee and Tang, 2017). Specifically, Lee and Tang (2017) suggested that technological
turbulence drives firms to pursue innovation which leads to better performance outcomes.
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We recognized the threefold gap in the literature. First, there is no empirical confirmation about
the impact of other types of environmental turbulence or environmental turbulence in general
on the relationship between innovation and business performance, i.e. the consideration of
innovation as mediator. Second, one study testing both antecedent and the moderating role of
environmental turbulence is missing. Finally, examining these relationships in the transitional
economy would provide a significant contribution to the field of innovation since it is of special
importance for firms operating in this context to be innovative. Therefore, our primary
objective is to test whether environmental turbulence has the moderating or antecedent role in
the relationship between innovation and business performance. Besides, environmental
turbulence would include market and technological turbulence together with competitive
intensity. It will provide new insights into the extent to which environmental turbulence affects
firms’ innovation and business performance.
Firms from the transitional economy of South-Eastern Europe will be used for a sample.
Thus, this study draws on the dynamic capability view (DCV ) and the contingency theory
to develop a conceptual framework to clarify the role of the business environment in the
relationship between firm’s product and process and business performance. Furthermore,
we will measure both product and process innovations separately and analyze their
separate influence on business performance. This is important because process innovation,
due to its cost-cutting nature, can have a more hazy effect on performance while the
introduction of new products is commonly assumed to have an apparent, positive impact on
the performance (Gunday et al., 2011).
In the light of the discussion, the purpose of this study is to examine the relationship
between firm’s innovation and business performances as well as to analyze the impact of
environmental turbulence on this relationship. Based on the findings and results of previous
studies, we developed two models. The first model addressed the mediating role of both
product and process innovations between environmental turbulence and firm’s business
performance. Second, the moderating role of environmental turbulence between product
innovation and firm’s business performance as well as between process innovation and
firm’s business performance is addressed.
This study aims to make a contribution to clarity in management and innovation
research and practice through offering insights into the role of environmental turbulence in
product innovation, process innovation as well as organizational business performance.
In other words, the results should show if environmental turbulence has an antecedent or
moderating role in innovation and business performance. This paper contributes the
 literature by empirically assessing the relationship between innovation and environmental Firms’
turbulence as well as its consequences on organizational business performance. performance and
The study consists of six sections and is structured as follows. Following this environmental
introduction, we first explore the literature on theoretical background, product and process
innovations, as well as environmental turbulence. We then derive relevant research turbulence
hypotheses and develop structural models with relationships based on the DCV and the
contingency theory and outline our research design. Next, we test our models with a sample
of 427 firms from the transitional economy context. This is followed by a discussion
of the findings and its implications. We conclude with limitations as well as directions for
further research.

Literature review
Theoretical background
DCV has become one of the most vibrant performance-focused theories in the domain of
strategic management (Vogel and Güttel, 2013). DCV suggests that a firm can have a
competitive advantage when it is able to effectively utilize its internal resources to enhance
its dynamic capability to quickly address changing business environments (Wang et al.,
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2007). In other words, firms should make efforts to recombine existing resources to react to
new environmental opportunities (O’Connor et al., 2008) and threats. Thus, firms should
develop dynamic capabilities which help to achieve better business performance. Dynamic
capability refers to “the firm’s ability to integrate, build and reconfigure internal and
external competencies to address rapidly changing environments” (Teece et al., 1997).
Innovation is dynamic capability per se since it refers to the firm’s tendency and receptivity
to adopting ideas that deviate from the ordinary course of business to address changes in
the environment.
In addition, since we consider the environmental turbulence and aim to analyze its
impact on business performance and innovation, contingency theory is identified as
necessary theory foundation. Contingency theory implies that organizational success can
be achieved by matching organizational characteristics to contingencies which are defined
as variables that moderate the effect of an organizational characteristic on business
performance (Morton and Hu, 2008). The nature and level of dynamic capabilities partly
depend on the external environment. Miles et al. (2000) confirmed that environmental
dynamism impacts the strategies and moderates the relationships between organization
structure, strategic posture and firm performance. Therefore, Tsai and Yang (2014) noted
that the environmental context is a significant factor to be considered when analyzing
firm’s capabilities because it may provide a clearer understanding of how innovation
contributes to business performance. However, when it comes to innovation, external
environment plays an important role because it can drive a firm to be more or less
innovative depending on its dynamism. The primary focus of the contingency theory is
related to the necessity of firms’ flexible responses. Two assumptions underlie the
contingency theory. First, there is no the best structure or strategy, and second, any
structure or strategy is not equally effective under different environmental conditions
(Calantone et al., 2003).
Therefore, the dynamic capability theory and environmental contingency theory are
adopted as the theoretical background for this paper. According to the DCV, firm’s superior
performance, as well as competitiveness, depends on dynamic capabilities that enable firms
to create, deploy and protect their resources (Teece, 2007). However, environmental
contingency theory suggests that a firm must engage in activities that are based on the
environmental conditions that it encounters in order to succeed (Tsai and Yang, 2013a, b).
DCV is used as a background theory for the relationships between both product and process
innovations and business performance while environmental contingency theory should
 EJIM support the moderating role of environmental turbulence in the relationship between
innovation and business performance as well as the impact of environmental turbulence
on innovation.

Innovation
Innovation refers to the firm’s tendency and receptivity to adopting ideas that deviate from
the ordinary course of business (Menguc and Auh, 2006). Innovation implies the willingness
to give up old habits and try the untested ideas (Tsai and Yang, 2014). This concept is
further seen as firm’s orientation to technological development, development of new
products and services and/or improvement of production and other business processes in
order to achieve competitive advantage (Dibrell et al., 2014). Innovation is a process that
begins with an idea, proceeds with the development of an invention and results in the
introduction of a new product, process or service (Thornhill, 2006). It is widely recognized
that technological change and innovation are the primary engines of economic growth and
lie in the center of the competitive process. OECD/Eurostat (2005) defines innovation as
“the implementation of a new or significantly improved product (good or service), or
process, a new marketing method, or a new organisational method in business practices,
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workplace organisation or external relations.” In addition, four types of innovation are

distinguished: product innovations, process innovations, marketing innovations and
organizational innovations (OECD/Eurostat, 2005). However, it is also possible to find other
categories and types of innovations in previous research, such as behavioral innovation,
social innovation, strategic innovation, etc. Nevertheless, according to most authors of
earlier studies, product innovation and process innovation are considered as two main
innovation categories (Akgün et al., 2014; Cefis and Marsili, 2012; Mavondo et al., 2005).
Product innovation focuses on the market and the customers, whereas process innovation
focuses on the internal firm’s processes and at increasing efficiency (Alegre and Chiva,
2013). Thus, we consider firm’s innovation as product and process innovations separately.
Product innovation is related to the development of new or improved products and/or
services and their successful introduction into the market (Naranjo Valencia et al., 2010;
Wang and Ahmed, 2004). Product innovation is a novel product which is distinctly different
from the previous one (Herrmann et al., 2006). Product innovation involves the introduction
of a product or service that is new or significantly improved. A degree of product innovation
is determined by its newness to a firm that developed the product or to the industry that the
firm operates in and around the world (Goktan and Miles, 2011). Product innovation can be
measured by the level of introduction of a new product as well as with the novelty level of
customers’ perception about new products. Product innovation implies increased benefits
for the customer regarding functionally or other improvements in product or service
(Zaefarian et al., 2017). This type of innovation is tightly linked to the primary activity of a
firm (Naranjo Valencia et al., 2010).
Process innovation refers to performing a business activity in a new, innovative way
(Akgün et al., 2014). Goktan and Miles (2011) define the process as a specific, structured
ordering of business activities designed to produce accurate outputs. The process
innovation involves the implementation of new or significantly improved production,
delivery methods and other business processes. The goal of process innovation can be a
reduction in unit costs of production or delivery or increase in the quality of products or
services. Gunday et al. (2011) point out that, while the introduction of new products assumes
to have a clear, positive impact on the growth of income and employment, process
innovation, due to their nature, can have ambiguous effects. Thus, the process of innovation
means being innovative in any process related to the design and product development.
Process innovation can be perceived as the level of improvement of business processes as
well as the level of new approaches and business processes development.
 Environmental turbulence Firms’
Environmental turbulence refers to the rate of the unpredictability and highly varied events performance and
which occur in the environment in which a particular industry operates (Wong, 2014; Tsai environmental
and Yang, 2014). Environmental turbulence refers to:
turbulence
• Market turbulence—the rate of change in the composition of customers or their
preferences for products and services (Wong, 2014; Tsai and Yang, 2013a, b; Hartono
and Sheng, 2015). In the turbulent markets, firms’ customers often change their
product preferences or tend to seek new products continually (Hanvanich et al., 2006).
• Technological turbulence—the rate of technological change in the industry
(Huang and Tsai, 2014). Hanvanich et al. (2006) defined the technological
turbulence as “the degree of change associated with product and process
technologies in the industry in which a firm embeds.”
• Competitive intensity—the degree of competition in an industry (Tsai and Yang,
2013a, b). Competitive intensity relates to the activities of competing firms, including
promotion competition, price competition and new arrivals (Cui et al., 2005).
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Theoretical background and hypotheses

The DCV suggests that a firm can achieve superior performance if it possesses capabilities to
integrate, build and renew internal and external resources and knowledge (Yu et al., 2013).
One of the most recognized dynamic capabilities in the contemporary economy is innovative
capability or innovation. In other words, innovation is an immediate source of competitive
advantage that leads to an improvement in performance (Camisón and Villar-López, 2014).
The main reason for firms’ engagement in innovation activities is because of the expected
positive impact of innovations on firms’ success (Varis and Littunen, 2010). Innovative firms
welcome new ideas, value change, encourage risk-taking and stimulate novel approaches to
addressing market needs (Augusto and Coelho, 2009). These firms are more capable of
developing new products. Also, managers at such firms tend to devise new ways of resolving
business problems (Tsai and Yang, 2014). Because highly innovative firms value change,
they are more likely to improve their operations, production methods and product
development processes continually (Tsai and Yang, 2014). As a result of their improvement,
these firms may achieve higher performance by enhancing their operational efficiency and
effectiveness. Chatzoglou and Chatzoudes (2018) state that innovation is the main challenge
for firms since it seems to be a key driver of long-term business success while Omri (2015)
suggests that innovative products and processes can facilitate firm survival and growth by
creating new demands on the market. Thus, this study presents the following hypotheses:
H1. Product innovation is positively related to firm’s business performance.
H2. Process innovation is positively related to firm’s business performance.
Naranjo Valencia et al. (2010) highlighted that determinants of innovation could be grouped as
individual factors, organizational factors and environmental factors. Environmental turbulence
is the most critical feature of a contemporary business environment. Turbulence is not just a
dynamic environment because the extent of change is unexpected. Thus, the larger the
unpredictable change, the bigger the negative impact on organizational results (Boyne and
Meier, 2009). Tsai and Yang (2014) noted that technological and market changes in an
environment may generate opportunities and constraints on innovation. Huang and Tsai (2014)
showed in their study that technological turbulence affects new product performance through
product innovativeness and that market intensity has a direct effect on new product
performance. Alexiev et al. (2016) stated that environmental turbulence is an aspect of the
organizational environment that can be related to firm innovation. Omri (2015) noted that firms
 EJIM should pay attention to the association between the level of innovation and the level of change
and complexity in the industry. Finally, Thornhill (2006) noted that the rates of innovation may
be higher in dynamic environments, which imply its impact on innovation. In other words,
doing business in more turbulent markets is likely to have a greater need to be market-oriented
and to innovate (Zhang and Duan, 2010). Wong (2014) stated that environmental turbulence
forces firms to leave the comfort zone and compete with new capabilities and offerings which
presents “an opportunity for developing new products, mastering new technology, engaging
with new customers and reaching into new markets that help fuel growth and gain competitive
advantage.” Hence, we suggest the following hypotheses:
H3. Environmental turbulence is positively related to firm’s product innovation.
H4. Environmental turbulence is positively related to firm’s process innovation.
A majority of studies support the proposition that environmental turbulence has a negative
effect on performance (Boyne and Meier, 2009). It is common sense to expect that the larger
the unpredictable change, the greater the negative direct impact on organizational results.
Environmental factors create instability that influences firm performance (Anning-Dorson,
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2017). Thus, we propose the following hypothesis:

H5. Environmental turbulence negatively influences firm’s business performance.
Calantone et al. (2003) proposed and empirically confirmed the moderating influence of
environmental turbulence on the relationship between the innovation and business
performance taking contingency theory as a theoretical background. Tsai and Yang
(2013a, b) showed that innovation has different effects on business performance because of the
impact of market turbulence and intensity of competition. Also, Zulu-Chisanga et al. (2016)
empirically confirmed that environmental turbulence weakens the relationship between new
product success and financial performance. Moderating effect of environmental turbulence
means that the relationship between innovation and firm’s business performance depends on
the external environment. Greater business performance can be achieved by matching
innovation to market and technological changes and turbulences considering the competitors’
activities. Therefore, we suggest the following hypotheses:
H6. Environmental turbulence moderates the relationship between product innovation
and firm’s business performance.
H7. Environmental turbulence moderates the relationship between process innovation
and firm’s business performance.
Based on the preceding hypotheses, two models are offered with this study: Model 1
presented in Figure 1, and Model 2 presented in Figure 2.
Taking into account H1-H5, i.e. Model 1, we can conclude that it is possible to test the
mediation effect of the product and the process innovation between environmental
turbulence and business performance. Therefore, we propose the following hypotheses:
H8. Product innovation mediates the relationship between environmental turbulence
and firm’s business performance.
H9. Process innovation mediates the relationship between environmental turbulence and
firm’s business performance.

Methodology
Sample
This research aims to reveal the relationships among product innovation, process innovation,
environmental turbulence and business performance in the context of transitional economy in
 Firms’
Product Innovation performance and
H3
environmental
H1 turbulence
Environmental Business
H5
Turbulence Performance

H2
H4

Process Innovation Figure 1.

Model 1
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Environmental
Turbulence

Product Innovation
H6

H5
H7

H1

Business
Performance
H2

Process Innovation Figure 2.

Model 2

South-Eastern Europe. In this study, questionnaire survey technique has been used as a
method of data collection. First, using the recommendations of the European Commission
2003/361/EC on the classification of firms, micro, small, medium and large firms are included
in the sample. When it comes to micro firms, the survey has included only those that belong to
innovative sectors of industry. Respondents were managers familiar with the organizational
capabilities and organizational performance. Web-based software LimeSurvey is used for data
collection. The link to the questionnaire is sent by e-mail with a cover letter. The questionnaire
consisted of measurement items adopted from previous studies as well as firms’
demographics. The survey is distributed to 2,966 e-mail addresses. After initial invitation
for the participation in the research, two reminders are sent after 12 and 16 days. After
exclusion of observations that had more than 20 percent missing data (Hair et al., 2010), 427
observations were retained in the data set representing a valid response rate of 14.39 percent.
The sample consists of 7 percent of micro firms, 39 percent of small firms, 39 percent
of medium firms and 15 percent of large firms. χ2 test is carried out comparing the firms
that responded after the first invitation with those responded after the second reminder
regarding firm’s size, and it revealed significant differences suggesting no non-response
bias ( χ2 ¼ 3.324, p ¼ 0.344).
As the data have been collected from one source within each firm and measures
represent the subjective evaluation of the respondent, there is a potential for common
method bias. Therefore, following Harman’s one-factor test (Harman, 1976), a principal
 EJIM component factor analysis with varimax rotation was conducted on the measurement items
yielding six factors with eigenvalues greater than 1.0 that accounted for 75.073 percent of
the total variance. The first factor accounted for 33.801 percent of the variance, and no single
factor accounted for most of the variance. Moreover, the confirmatory factor analysis (CFA)
showed that the single-factor model did not fit the data well, χ2 ¼ 3,077.326; df ¼ 170; root
mean square error of approximation (RMSEA) ¼ 0.200; standardized root mean residual
(SRMR) ¼ 0.142; comparative fit index (CFI) ¼ 0.755; normed fit index (NFI) ¼ 0.742. While
the results of these analyses do not preclude the possibility of common method variance,
they do suggest that common method variance is not of great concern and thus is unlikely to
confound the interpretations of results (Podsakoff et al., 2003).

Measures
A total of 20 indicators for proposed models were adopted from already published studies
and research. These indicators attempted to quantify product innovation, process
innovation, three dimensions of environmental turbulence and business performance using
the seven-point Likert scale ranging from 1 ¼ strongly disagree to 7 ¼ strongly agree.
Items are adopted from those authors who used wording that was easier to translate, taking
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into account the conceptualization of the constructs that indicators should present:
• Product innovation (PROD) and process innovation (PROC). The measurement
models of PROD and PROC were created using indicators proposed by Ellonen et al.
(2008). Both of the first-order reflective measurement models consisted of four
indicators.
• Environmental turbulence (ET). Eight items for the second-order reflective
measurement model of ET consisting of three first-order models, namely market
turbulence, technological turbulence and competitive intensity are adopted from
Kmieciak et al. (2012).
• Firms’ business performance (BP). This first-order reflective measurement model is
adopted from Chen et al. (2009), and it consisted of four items (Table I).
In addition, firm’s size and age are used in this study as control variables. Size is an
adequate control because some scholars suggested that larger firms implied a higher
number of resources and higher innovative potential. However, scholars were arguing that
small firms can be more innovative because they have more flexibility and a higher ability
to adapt (Lopez-Cabrales et al., 2009). Besides, there is a common stance in the literature
that firm’s age is positively associated with the rate of innovation because of the
required cumulative experience level needed to successfully carry on an innovation
(Alpay et al., 2012).

Methodology
We have accepted the deductive approach to the research, as well as positivism philosophy.
First, CFA is used to estimate the measurement properties of the constructs. After that,
structural models are analyzed using structural equation modeling (SEM) technique and
maximum likelihood (ML) estimation method. The overall model fit is tested prior to
hypotheses testing. The SEM is the most appropriate methodology for this study since
measurement models are latent variables that consist of more measurement items, as well as
that these techniques are most often used in similar studies. Besides, it is very important to
analyze the simultaneous impact of product and process innovations on business
performance together with moderating or antecedent effect of environmental turbulence.
Thus, to address the impact of environmental turbulence on innovation and innovation on
business performance in one model, SEM is found to be most appropriate methodology.
 Construct Code Item
Firms’
performance and
Product innovation PI1 During the past 5 years, our firm has introduced more innovative products environmental
(PROD) and services than its competitors
PI2 The new products and services of our firm are often perceived as very novel turbulence
and innovative by customers
PI3 In new product and service introductions, our firm is often first to market
PI4 In new product and service introduction, our firm is often at the cutting edge
of technology
Process innovation PC1 Our firm improves its business processes constantly
(PROC)
PC2 During the past 5 years, our firm has developed many new management
approaches
PC3 When a problem cannot be solved using conventional methods, people in
our firm invent new methods
PC4 Our firm changes the production methods faster than its competitors
Environmental turbulence (ET)—second-order construct
Market turbulence (MT) MT1 In our kind of business, customers’ product preferences change quite a bit
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over time
MT2 Our customers tend to look for new products all the time
Technological TT1 Technological changes provide big opportunities in our industry
turbulence (TT)
TT2 A large number of new product ideas have been made possible through
technological breakthroughs in our industry
TT3 The technology in our industry is changing rapidly
Competitive intensity (CI) CI1 Competition in our industry is cutthroat
CI2 One hears of a new competitive move almost every day
CI3 Price competition is a hallmark of our industry
Business performance BP1 Rating realized profits compared to its main competitors in the past 3 years
BP2 Rating realized sales compared to its main competitors in the past 3 years
BP3 Rating realized return on investment compared to its main competitors in
the past 3 years
BP4 Rating realization of the planed market share in the past 3 years
Firm’s size Size Assessed by the number of employees Table I.
Firm’s age Age Assessed by the number of years since the firm was founded Measuring constructs
Source: Authors’ illustration (items adopted from Ellonen et al., 2008; Kmieciak et al., 2012; Chen et al., 2009) and items

This technique allows simultaneous estimation of relationships among latent constructs and
other observable variables, and it accounts for the biasing effect of random measurement
error in the latent constructs. In addition, it is a common technique to address important
measurement and structural issues in survey-designed research (Alexiev et al., 2016). SPSS
22 and Lisrel 8.8 have been used for the data analysis.

Results and discussion

Reliability and validity tests
The dimensionality of the measures is assessed by conducting a series of CFAs (Hair et al.,
2010). Cronbach’s α coefficients are ranging from 0.750 to 0.888 indicating the internal
consistency and reliability of the measures as they exceed the 0.70 cut-off limit.
The convergent validity of a measurement model is realized when the values for the
composite reliability (CR) exceed the 0.7 cut-off limit, and the values for the average variance
extracted (AVE) exceed the 0.5 threshold (Hair et al., 2010). The CR values are ranging from
0.754 to 0.893 while AVE values for observed constructs are ranging from 0.507 to 0.703
which demonstrates construct convergent validity. We used the approach offered by Fornell
 EJIM and Larcker (1981) to assess discriminant validity. By this approach, the square root of AVE
value for each construct should be greater than the correlation between the corresponding
construct with any other constructs. Table II reveals the CR, AVE and α values as well as
square root AVE values in comparison to constructs correlations. All values of the square
root AVE are greater than the correlation of a given construct with other factors which
indicates that the variance explained by the given construct is larger than the variance of
the error (Fornell and Larcker, 1981). Therefore, we can conclude that the measurement
models have satisfactory discriminant validity. Table III shows the goodness of fit indices
for measurement models. We assessed the measurement models fit by evaluating: the
observed norm (χ2/df should be less than 3), RMSEA (should be less than 0.08), SRMR
(should be less than 0.08), NFI (should be greater than 0.95) and CFI (should be greater than
0.9) (Hair et al., 2010). As shown in Table III, all fit indices meet satisfactory levels, and hence
we can conclude that the models fit the data well.

Hypotheses testing
After confirming the reliability and validity of measurement models, structural models
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proposed in this study are analyzed using SEM technique and ML estimation method.
We checked models overall fit using GoF indices.
First, we tested structural model with H1-H5. All fit indices met satisfactory levels and
thus we concluded that the models fit the data well, χ2 ¼ 407.141; df ¼ 62; RMSEA ¼ 0.0596;
SRMR ¼ 0.0741; CFI ¼ 0.973; NFI ¼ 0.956. Consequently, the model is able to explain the
research hypotheses. Therefore, hypotheses are tested, and results are analyzed and
discussed in the light of the theoretical foundation. Results of hypotheses testing are
presented in Table IV. For H1 and H2, we examined the effects of both product and process
innovations on business performance, respectively. As Table IV shows, the influence of
product innovation on business performance ( β ¼ 0.842, t ¼ 2.834, p o0.01) and the
influence of process innovation on business performance are significant ( β ¼ 0.684,
t ¼ 3.881, p o0.01). Therefore, H1 and H2 were supported. Besides, the results support H3
( β ¼ 0.866, t ¼ 6.787, p o 0.01) and H4 ( β ¼ 0.792, t ¼ 6.825, p o0.01). Specifically,
environmental turbulence has a direct positive impact on product and process
innovations and negative impact on firm’s business performance ( β ¼ −0.948, t ¼ −2.169,
p o0.05). Hence, both product and process innovations neutralize the negative impact of

Dimensions CR AVE α MT TT CI PROD PROC BP

Market turbulence (MT) 0.826 0.703 0.825 0.839

Technological turbulence (TT) 0.845 0.646 0.836 0.208 0.804
Table II. Competition intensity (CI) 0.754 0.507 0.750 0.119 0.126 0.712
Results of reliability Product innovation (PROD) 0.893 0.679 0.888 0.383 0.407 0.233 0.824
and validity tests for Process innovation (PROC) 0.870 0.627 0.867 0.350 0.372 0.213 0.686 0.792
measurement models Firm’s business performance (BP) 0.887 0.666 0.884 0.143 0.151 0.087 0.489 0.511 0.816

Measures Items χ2(df ) RMSEA SRMR CFI NFI

Environmental turbulence (ET) 8 28.075(17) 0.0391 0.0367 0.993 0.982

Table III. Product innovation (PROD) 4 4.145(2) 0.0502 0.0110 0.998 0.996
CFA results for Process innovation (PROC) 4 5.100(2) 0.0603 0.0144 0.997 0.995
measurement models Firm’s business performance (BP) 4 4.800(2) 0.0573 0.0117 0.997 0.995
 Dependent variable Independent variable Path coefficient t-value p-value
Firms’
performance and
Direct effects environmental
H1 Business performance ←Product innovation 0.842* 2.834 0.005
H2 Business performance ←Process innovation 0.684* 3.881 0.000 turbulence
H3 Product innovation ←Environmental turbulence 0.866* 6.787 0.000
H4 Process innovation ←Environmental turbulence 0.792* 6.825 0.000
H5 Business performance ←Environmental turbulence −0.948** −2.169 0.032
Controls
Business performance ←Firm’s age −0.105 −1.269 0.206
Product innovation ←Firm’s age 0.079 1.202 0.231
Process innovation ←Firm’s age 0.068 1.047 0.297
Business performance ←Firm’s size 0.077 0.964 0.336
Product innovation ←Firm’s size 0.031 0.458 0.648
Process innovation ←Firm’s size 0.006 0.084 0.933
Interaction effects
H6 Business performance ←Product innovation × ET 0.044 0.811 0.418 Table IV.
H7 Business performance ← Process innovation × ET 0.054 1.249 0.213
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Structural path
Notes: *p o0.01; **p o 0.05; ***p o 0.1 estimations

environmental turbulence on business performance. That is, by exploiting the opportunities

of the turbulence through innovation, firms increase their business performance. In other
words, firms that operate in a more dynamic environment have greater levels of product
and process innovations and thus greater business performance. Our findings provide
empirical support for the proposed structural Model 1 about causal relations between
PROD, PROC, ET and BP.
Furthermore, we included the control variables to the Model 1: firm’s size measured by
numbers of employees; and firm’s age measured by the number of years since the firm was
founded. The results show that the firm’s size has no significant impact on business
performance ( β ¼ 0.077; t ¼ 0.964) nor on firm’s product innovation ( β ¼ 0.031; t ¼ 0.458) nor
process innovation ( β ¼ 0.006; t ¼ 0.084). Also, the firm’s age has no significant impact on
business performance ( β ¼ −0.105; t ¼ −1.269), nor on product innovation ( β ¼ 0.079;
t ¼ 1.202) nor process innovation ( β ¼ 0.068; t ¼ 1.047). In other words, the results suggest
that neither size nor age does explain differences in product and process innovations
outcomes or business performance levels.
To test the moderating impact of environmental turbulence, i.e. structural Model 2, we
used residual centering unconstrained approach. It involves creating a latent interaction
variable by multiplying independent and moderator variable. However, in order to reduce
the number of indicators and to transform second-order models into the first-order
measurement models, composite variables have been created. The first-order constructs’
indicators of INNO and ET are aggregated into one item by calculating their mean value
(Bandalos, 2002). We followed two steps proposed by Steinmetz et al. (2011). First, two
respective indicators of the first-order effect variables (PINNO/PROC and ET) are
multiplied, and the resulting product is then regressed on all first-order effect indicators.
The residuals of these regression analyses are saved in the data set. Second, residuals are
used as indicators of the product variable in the latent interaction model which is tested.
Besides, error correlations were freed for the residual product indicators resulting from the
multiplication of the same first-order effect items.
Results of Model 1 can offer conclusion regarding H8 and H9, namely, the results
suggest the partial mediating role of both product and process innovations between
environmental turbulence and firm’s business performance. The partial mediating effect
 EJIM exists when there are significant relationships between independent variable and mediator
and between the mediator and dependent variable, as well as between independent and
dependent variable (Iacobucci et al., 2007).
In addition, we used a bootstrapping method with bias-corrected confidence estimates to
assess indirect effects in order to determine whether the mediation effects of product and
process innovations between environmental turbulence and business performance are
significant (Table V ).
The results suggest that both product innovation ( β ¼ 0.2658, CI ¼ (0.1877, 0.3621)) and
process innovation ( β ¼ 0.2162, CI ¼ (0.1277, 0.3112)) are significant mediators in driving
the effect of environmental turbulence on organizational business performance. The impact
of environmental turbulence on business performance emerge both directly and indirectly
via both product and process innovations. This is evident from the decomposition of effects
seen in Table VI.
It is worth noting that the direct impact of turbulence on business performance is
negative. However, when turbulence is considered as an antecedent, they have a positive
overall impact on performance, through the product and process of innovation. In other
words, firms operating in turbulent environments will operate with reduced business
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performance. That is, with increasing market and technological turbulence, and with the
stronger intensity of competition, there will be a decline in organizational business
performance. However, if a firm fosters an innovative culture, environmental turbulence will
stimulate the level of innovation, which will result in increased business performance.
In addition, the same procedure is employed treating individual constructs of
environmental turbulence as independent variables. The results confirm the mediation role
of both product and process innovations. All constructs of environmental turbulence have a
statistically significant strong indirect effect on innovations. The only difference is seen in
the intensity of competition where the innovation process did not prove to be a mediator at
the 95% bias-corrected confidence intervals. In other words, with the increased competition
intensity, the product innovation will contribute more to the increase in business
performance (Table VII).
The presented results confirm that both product and process innovations have partial
mediation roles in the proposed model. Partial mediation is present when all three paths
(path from independent to dependent variable, from independent to mediator and from
mediator to dependent variable) are significant (Iacobucci et al., 2007). Therefore, we can

Table V. β SE t p LLCI ULCI

Parameter estimates
for mediation H8: ET → PROD → BP 0.2658 0.0440 6.04 0.000 0.1877 0.3621
relationships H9: ET → PROC → BP 0.2162 0.0462 4.68 0.000 0.1277 0.3112

Unstandardized coefficients (t-values) Standardized coefficients

Path Total effect Direct effect Indirect effect Total effect Direct effect Indirect effect

H1: PROD → BP 0.835 (2.834) 0.835 (2.834*) 0.842 0.842

H2: PROC → BP 0.963 (3.881) 0.963 (3.881*) 0.684 0.684
H3: ET → PROD 2.294 (6.787) 2.294 (6.787*) 0.866 0.866
Table VI. H4: ET → PROC 1.477 (6.825) 1.477 (6.825*) 0.792 0.792
Decomposition of H5: ET → BP 0.848 (3.680) −2.489 (−2.169**) 3.337 (3.126*) 0.323 −0.948 1.271
effects Notes: *po 0.01; **p o0.05; ***p o0.1
 confirm H8 and H9 with the note regarding the mediating role of process innovation Firms’
between the market turbulence and business performance, which is significant at the level performance and
of p o0.1. environmental
Finally, we tested structural model with H1, H2, H5 including H6 and H7, alternately.
All fit indices met satisfactory levels and thus we concluded that the models fit the data well turbulence
(with H6: χ2 ¼ 443.958; df ¼ 286; RMSEA ¼ 0.0360; SRMR ¼ 0.0485; CFI ¼ 0.986;
NFI ¼ 0.963; and with H7: χ2 ¼ 425.692; df ¼ 286; RMSEA ¼ 0.0339; SRMR ¼ 0.0465;
CFI ¼ 0.988; NFI ¼ 0.968. The results indicate the positive and significant relation between
PROD and BP and PROC and BP. This suggests that product and process innovations
positively influence firm’s business performance. The results show that there is a negative
relationship between ET and BP. These results are consistent with the results obtained by
testing Model 1.
When it comes to moderating effect, as Figure 3 indicates, the higher level of business
performance has been associated with lower environmental turbulence. As hypothesized,
the relationship between product/process innovation and business performance was
stronger when environmental turbulence was strong than when they were weak, i.e.
environmental turbulence strengthens the positive relationship that exists between product/
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process innovation and business performance. The moderation hypothesis would be

supported if the added interaction term significantly increases the explained variance in
business performance and when the direction of interaction is consistent with the expected
pattern (Choi, 2004). Notwithstanding, increase in the explained variance is not significant
for the observed sample from the transitional economy context and heterogenic sample
regarding the industry.
In order to confirm the results of moderation effect of environmental turbulence proposed
by this study, we used a bootstrapping method with bias-corrected confidence estimates.
The indirect effect was obtained with 5,000 bootstrap resamples by using the PROCESS
procedure in SPSS (Hayes, 2013), which allowed us to obtain the unstandardized estimates,
95% bias-corrected confidence intervals. The results of the moderation bias-corrected
bootstrapping analysis rejected the moderating role of environmental turbulence in the

β SE t p LLCI ULCI

H8a: MT → PROD → BP 0.0858 0.0222 3.865 0.000 0.0495 0.1367

H9a: MT → PROC → BP 0.0870 0.0258 3.372 0.000 0.0455 0.1493 Table VII.
H8b: TT → PROD → BP 0.1000 0.0274 3.650 0.000 0.0557 0.1645 Parameter estimates
H9b: TT → PROC → BP 0.0879 0.0226 3.889 0.000 0.0505 0.1414 for mediation testing
H8c: CI → PROD → BP 0.0377 0.0183 2.060 0.040 0.0062 0.0798 for individual ET
H9c: CI → PROC → BP 0.0398 0.0231 1.723 0.086 −0.0019 0.0900 constructs

5 5
Low ET Low ET
4.5 4.5
High ET High ET
4 4
3.5 3.5
BP

BP

3 3
2.5 2.5 Figure 3.
2 2 Interaction plots for
innovation and
1.5 1.5
environmental
1 1 turbulence
Low PROD High PROD Low PROC High PROC
 EJIM relationship between product innovation and business performance since the 95%
bias-corrected confidence interval ( from −0.0687 to 0.0884) included zero. Likewise, the
moderating role of environmental turbulence in the relationship between process innovation
and business performance is rejected (CI ¼ −0.0317 to 0.1217).
Given that certain authors analyzed observed environmental turbulences’ factors
separately as individual constructs, and in order to achieve a complete understanding of the
relationship analyzed with this study, moderating effects were tested taking into account
market and technological turbulence separately, as well as the intensity of competition.
Thus, to further examine the extent of the moderating effect of environmental turbulence,
we analyzed the interactivity effects using sub-group analyses (Table VIII).
The results of this analysis confirm earlier conclusions on the moderation effect of
environmental turbulence. To be precise, market and technological turbulence, as well as the
intensity of competition, does not moderate the relationship between the product/process
innovation and business performance.
Based on the comprehensive analysis presented, we can conclude that, in the context of
the transitional economy and industry heterogeneous sample, environmental turbulence
enhances both the product and process innovations, and also organizational business
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performance. In other words, environmental turbulence is antecedent rather than the

moderator of the relationship between innovation and business performance. Put it
differently, both product and process innovations are mediators of the relationship between
environmental turbulence and business performance. When it comes to the individual
constructs of ET, we can conclude that there are no significant differences in results,
namely, the same conclusions apply to the market and technological turbulence
individually, as well as to the intensity of competition.

Discussion
This study’s models aim at explaining the relationship between product innovation and
business performance, as well as process innovation and business performance
considering the effect of environmental turbulence. The first model focuses on the
antecedent effect of environmental turbulence in the relationship between innovation and
business performance. However, in the second model, environmental turbulence has been
set as moderating variable in the relationship between innovation and business
performance. When it comes to the transitional economic context and heterogeneous
sample regarding the industry, the first model explains the role of environmental
turbulence, i.e. it has the antecedent effect. In other words, both product and process
innovations have the mediating role between environmental turbulence and firm’s
business performance. This is consistent with the reasoning that environmental factors
create instability and influence firm performance, but such instability creates pressure to
businesses to adapt (Anning-Dorson, 2017). Innovation is considered as one of the most
effective strategic options available to businesses in addressing the environmental issues
that affect business (Anning-Dorson, 2017).

β SE t p LLCI ULCI

H6a: MT × PROD → BP −0.0097 0.0311 −0.3110 0.7599 −0.0708 0.0514

Table VIII. H6b: TT × PROD → BP 0.0414 0.0302 1.3701 0.1714 −0.0180 0.1008
Parameter estimates H6c: CI × PROD → BP 0.0063 0.0279 0.2257 0.8216 −0.0485 0.0611
for moderation testing H7a: MT × PROC → BP −0.0017 0.0311 −0.0537 0.9572 −0.0628 0.0595
for individual ET H7b: TT × PROC → BP 0.0393 0.0328 1.1988 0.2313 −0.0251 0.1037
constructs H7c: CI × PROC → BP 0.0506 0.0284 1.7829 0.0753 −0.0052 0.1065
 In this study, we investigated and tried to empirically explain the relationships among Firms’
product innovation, process innovation, environmental turbulence and business performance and
performance. From a theoretical point of view, a positive impact of both product and environmental
process innovations on the business performance is expected. The results of this study with
this regard are consistent with some other previous studies (Alpay et al., 2012; Tsai and turbulence
Yang, 2014). We found that a firm’s product innovation positively influences its business
performance. Specifically, a firm can expect a higher profit, sales, return on investments as
well as market share if it: introduces new products/services more frequently than its
competitors; is often first to market with new product/service; and introduces new products/
services which are perceived as an innovative by its customers. Our results confirm positive
impact of process innovation on business performance as well. In other words, a firm can
expect a higher profit, sales, return on investments as well as market share if it: improves its
business processes constantly; develops new management approaches; encourages people
to invent new methods for problem-solving; and changes the production methods faster
than its competitors.
Furthermore, results revealed positive impact of environmental turbulence on product
and process innovations. This practically means that the increased market and
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technological turbulence, as well as competitive intensity, will lead to increased product

and process innovations. In other words, firms been faced with new and changing
customers’ preferences regarding products/services, technological changes and the
opportunities offered by those changes and strong and growing competition, as well as
promotion wars, will strive to innovative ideas which will result with product and process
innovations. This is in line with Thornhill (2006) who suggested that the rates of innovation
may be greater in dynamic environments. Similarly, Zhang and Duan (2010) noted that a
firm has a greater need to be market-oriented and to innovate if it operates in more turbulent
markets. Furthermore, both product and process innovations will result in better business
performance. The results suggest the partial mediating role of innovation between
environmental turbulence and firm’s business performance. This practically means that
innovation neutralizes the negative impact of environmental turbulence on business
performance. Firms through innovation counteract and take advantage of environmental
turbulence aiming to achieve better business performance.

Conclusion, contributions, and limitations

Building on prior studies and drawing strength from theoretical models on innovation,
environmental turbulence and business performance, this study investigated the proposed
relationships to find out if environmental turbulence raises the innovation and how these
constructs contribute to business performance. Consequently, this study developed and
tested two conceptual models. Model 1 presented the joint effects of product and process
innovations on firm’s business performance considering environmental turbulence as an
antecedent variable of these relationships. The results of SEM analysis revealed that
product and process innovations are justifiable constructs in predicting business
performance. At the other side, environmental turbulence enhances both types of
innovation. Model 2 presented the moderating role of environmental turbulence in the
relationship between both types of innovation and business performance. The findings of
the analysis revealed that both product and process innovations have the positive impact on
business performance. However, environmental turbulence does not moderate significantly
these relationships. Thus, environmental turbulence appears to promote product and
process innovations. Besides, both product and process innovations enhance business
performance. This implies that DCV makes sense for the influence of both product and
process innovations on business performance. It implies that a firm can achieve better
business performance when it is able to effectively utilize its internal resources to enhance
 EJIM its innovation capability to address changing business environments quickly. Besides, the
results suggest that contingency theory stands for the extent of the innovation, i.e. the level
of innovation capabilities depends on the external environment.
We extend knowledge about the relationships between product innovation, process
innovation, environmental turbulence and firm performance through our conceptualization
and empirical research. First, we conceptualized and empirically confirmed that both
product and process innovations positively influence firm’s business performance. Second,
we have shown that firms operating in more turbulent markets are likely to have a higher
need to innovate. This is consistent with previous studies and reasoning regarding the
relationships between observed constructs. Anning-Dorson (2017) asserted that market
conditions can drive actions but can serve as moderators on the relationship between the
action taken and the expected outcome as well. By developing and testing the structural
models, a detailed understanding has been developed illustrating how environmental
turbulence, i.e. market and technological turbulence, as well as competitive intensity,
influences the relationship between innovation and firm’s business performance.
Our findings offer both methodical and theoretical contributions to management
literature. In particular, the results elucidate the role of environmental turbulence in
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achieving business performance. We have found a clear role of environmental turbulence in

boosting innovation rather than moderating the relationship between innovation and
performance. In other words, innovation has the mediating role between environmental
turbulence and business performance. That is the main practical implication of this study.
Managers should be aware of the importance of the innovation for the neutralization of
environmental turbulence and dynamism. The results imply a negative influence of
environmental turbulence on business performance. However, with the innovation in the
equation, this influence can be positive, because it boosts firms to innovate and though to
achieve better business performance. This result is along with Wong’s (2014) statement that
environmental turbulence is conceived both as a threat and an opportunity for more
innovative firms, while some firms consider environmental turbulence a risk that threatens
their performance or very survival. Finally, the research was conducted in the transitional
economy context while most of the similar studies have been focused on the developed
western countries.
Certain limitations of the study require specific attention during the interpretation of
results. First, heterogeneity of the sample regarding industry must be taken into account.
Thus, future research should analyze this issue and compare the proposed models across
multiple sectors and industries since innovation is more important in high-tech industries
(Kim and Huarng, 2011) and different economic context. This is especially important for the
result relating to the role of environmental turbulence because unlike most of the prior
research, environmental turbulence did not emerge as moderator of the relationship between
innovation and business performance, but as the antecedent variable. The main reason for
that probably lays in the sample heterogeneity.

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Corresponding author
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Lejla Turulja can be contacted at: lejla.turulja@efsa.unsa.ba

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