Dynamic exporting capabilities and SME's profitability: Conditional effects of market and product diversification

The exporting literature has so far shown that dynamic export capabilities (DECs) are instrumental in achieving export success. However, it is unclear whether and to what extent the deployment of DECs represents a profitable activity for exporting SMEs. To resolve these issues, we draw on the knowledge-based view and firm diversification literature to investigate the relationship between DECs (innovativeness and adaptability) and profitability under the moderating effects of market (MD) and product diversification (PD). We analyze our model on a sample of 125 Croatian exporting SMEs. Our findings indicate that innovativeness has an inverted U-shape relationship with profitability under lower MD and higher PD. On the other hand, adaptability shows to have a negative linear relationship with profitability under higher MD and an inverted U-shape relationship under higher PD. This study contributes by providing concrete guidelines how to effectively manage DECs by aligning them with diversification strategies.