Purpose The purpose of this paper is to examine the mediating effect of product innovation on the relation between the knowledge management and competitive advantage. To analyze the effect of knowledge management on innovation, the effect of knowledge management on competitive advantage and the effect of innovation on competitive advantage in small and medium enterprises in food products are taken into account. Design/methodology/approach The approach used in this study was quantitative approach. The population in this study was all the small and medium entrepreneurs of typical food products of Riau and Central Java Indonesia, which consisted of 238 business units: secondary data of Industry, Trade and Cooperative Service and SME Riau and Central Java Province at 2016. The data analysis method was structural equation modeling, using three measurement models (reflection of three research variables, equivalent to the first-order factor analysis). Findings Product innovation mediated the effect of knowledge management on the competitive advantage. It indicated that the higher the knowledge management, the higher the competitive advantage would be, if mediated by higher product innovation. The test results showed that knowledge management had positive and significant effect on product innovation. The positive effect showed that the better the knowledge management by the entrepreneurs of small and medium enterprises of typical food products of Riau, the better is the product innovation and vice versa. Originality/value This paper examines the mediating effects (using Sobel test) of product innovation on the relation between knowledge management and competitive advantage (no previous research on this relation), and the study is conducted on SMEs in Indonesia, especially in Riau and Central Java provinces. Previous studies on knowledge management and other factors affecting competitive advantage are also mostly performed on smaller samples, that is in one work unit or department. Although the variables were the same, this study was conducted on different sample units.
