The Interplay of Business Strategies, Social Capital and Innovation Capability (Studies SMEs East Java, Indonesia)

This study attempts to empirically examine the interplay between business strategies and social capital to the performance of small and medium enterprises (SMEs) operate in small industry clusters. Specifically, an attention is also paid to scrutinize the role of innovation capability in mediating this interplay. By using multi-stage sampling, the data were collected with distributing questionnaires to various clusters in East Java, Indonesia. This research then obtained 98 SMEs owners who have fulfilled the questionnaires completely. In order to test the hypotheses, Partial Least Square method then was used by employing SmartPLS 3.1.8. The results reveal that business strategies do not directly influence performance. It seems that the effects of business strategies to performance are mediated by innovation capability (β = 0.157; ρ-value = 0.026). Contrarily, social capital which is reflected by bridging and linking social capital directly contributes to firm performance (β = 0.343; ρ-value = 0.000). Therefore, this study recommends to intensify cluster social capital and augment innovation capability for enhancing the performance of SMEs.