The context-dependent role of innovation as a mediator between firm capabilities and performance

This study investigates the context-dependent mediating role of innovation in the relationship between the three primary firm capabilities (absorptive capacity, export orientation, and sustainable practices) and financial performance via a mixed method that combines classical meta-analysis with meta-analytic structural equation modelling. Our analysis of 555 effect sizes from 280 distinct samples published from 2001 to 2022 supports the dynamic capabilities perspective by revealing a nuanced connection between firm capabilities, innovation, and financial performance. The classical meta-analysis identifies statistically significant positive associations among the three firm capabilities, innovation, and financial performance. Grounded in three well-established theoretical lenses - Resource-based View, Exogenous Growth Theory, and Stakeholder Theory, our meta-analytic structural equation modelling results indicate that innovation mediates the positive effects of absorptive capacity, export orientation, and sustainable practices on financial performance. Effect size estimates are quite different according to three subgroups: innovation type (conventional vs. eco-innovation), industry type (knowledge/technology-intensive vs. labour-intensive industries), and country type (developed vs. developing countries), highlighting innovation's context-dependent role in linking firm resources/capabilities with financial outcomes. Our results indicate that innovation's mediating effect is especially prominent in knowledge- and technology-intensive industries and in developing economies, and internal capabilities, such as absorptive capacity and knowledge assimilation, are more critical to innovation and financial performance than external market exposure.