Innovation and Organizational Learning at MSMEs, What Impacts

on Financial Performance

Lyna Latifah, Rahmawati, Doody Setiawan, Y. Anni Aryani

PDIE, fakultas ekonomi, Universitas Sebelas Maret, Jl Ir Sutami, Surakarta, Central Java

Keywords: Innovation, organizational learning, performance, MSME

Abstract: This article aims to empirically examine the impact of innovation and organizational learning conducted by

SMEs on their financial performance. This research is a survey research using a questionnaire. Respondents

in this study are owners of MSMEs in Solo, Semarang, and Yogyakarta. Sampling technique using random

sampling, 77 data were collected. Data analysis techniques using regression. Regression test results show that

innovation and organizational learning had a positive impact on MSME performance.

1 INTRODUCTION

Globalization causes increasingly fierce business

competition. Micro, Small, and Medium Enterprises

(MSMEs), as the majority of businesses in Indonesia,

are required to have a competitive advantage in order

to win in business competition. Competitive

advantage is the company's ability to produce beyond

the limits of ability because it is able to create more

value from its resources (Jones, 2013). Innovation is

often cited as a key factor that encourages increased

competitive advantage. In order to improve

competitiveness, SMEs are very important in the face

of being skilled at innovating (Parida et al., 2012).

SMEs create innovation by doing something, ways,

methods, or new processes and producing new

products. This is important to do in the face of a

changing market (Nelly and Hii, 1998).

Through innovation, MSMEs can face turbulence

from the external environment, because innovation

can lead to long-term success, especially in dynamic

markets. In addition, SMEs that innovate can respond

to challenges more quickly through new products so

they can capture market opportunities better than

competitors (Jimenez and Valle, 2011). Empirical

studies find that the level of innovation of MSMEs is

lower than that of large companies. MSMEs have

limited resources making it difficult to carry out

innovation activities themselves. Therefore it is

important to collaborate with various parties such as

other companies or universities to develop innovation

(OECD, 2018).

In developing countries like Indonesia, innovation

is often seen as a cost rather than a long-term

investment. This is because the technology is still

imported from developed countries. LIPI research

(2010) shows that innovation in Indonesia is still low.

This can be seen from the low attention of research

and development conducted at both universities and

companies.

Several previous studies have also tested many of

these relationships. Research conducted by (Bierly

and Chakrabarti, 1996; Brown and Eisenhard, 1995;

Damanpour, 1991; Damanpour and Evan, 1984;

Damanpour et al., 1989; Roberts, 1999; Thornhill,

2006) provides similar results that prove a positive

influence between innovation and performance.

Different results are shown by Simpson et al. (2006),

who concluded that innovation is a high-cost activity

and also very risky, so the results on performance can

be positive and can be negative. Wright et al. (2005)

also found that innovation does not affect the

performance of MSMEs that are environmentally

friendly, but has a positive effect on performance in

hostile environments. Some of these studies show

inconclusive results, so it is important to examine the

effect of innovation on MSME performance.

The increasingly fierce business competition also

requires MSMEs to operate more efficiently and

effectively. Organizational learning is a vital process

for MSMEs to be able to manage growth through

better development of new core competencies. Even

the speed of organizational learning is one source of

the company's competitive advantage in the future

(Ajay and Moreno, 2015). Companies that carry out

324

Latifah, L., Rahmawati, ., Setiawan, D. and Aryani, Y.

Innovation and Organizational Learning at MSMEs, What Impacts on Financial Performance.

DOI: 10.5220/0009965603240329

In Proceedings of the International Conference of Business, Economy, Entrepreneurship and Management (ICBEEM 2019), pages 324-329

ISBN: 978-989-758-471-8

organizational learning have the ability to integrate

people and structures to move the organization

towards learning and sustainable change (Marsick

and Watkins, 2003). Through organizational learning,

companies can develop new knowledge that comes

from each employee's personal experience. This will

affect the behavior of human resources, which can

ultimately increase the company's capabilities (Ajay

and Moreno, 2015).

Several studies have found that organizational

learning influences company performance. The

results of the research Bontis et al. (2002) provide

empirical evidence that companies that are oriented

towards organizational learning will show a positive

influence on company performance. Darroch and

McNaugton (2003) show that organizational learning

processes produce better performance. Research

conducted by Jimenez and Valle (2011) also provides

empirical evidence that organizational learning

influences company performance.

Previous studies were mostly done at large

companies, and there was a research gap on

organizational learning at MSMEs. Therefore this

research is expected to fill the research gap. The

purpose of this study is to provide empirical evidence

of the effect of innovation and organizational learning

on the performance of MSMEs in the Solo and

Yogyakarta regions.

Previous research has examined the effect of

innovation on performance. Research conducted by

(Bierly and Chakrabarti, 1996; Brown and Eisenhard,

1995; Damanpour, 1991; Damanpour and Evan,

1984; Damanpour et al., 1989; Roberts, 1999;

Thornhill, 2006) provides evidence that innovation

has a positive effect on performance company.

Different results are shown by Simpson et al. (2006),

who concluded that innovation is an expensive and

risky activity, so the results on performance can be

positive and can be negative. Wright et al. (2005) also

found that innovation does not affect the performance

of MSMEs that are environmentally friendly, but has

a positive effect on performance in hostile

environments. Some of these studies show

inconclusive results, so it is important to examine the

effect of innovation on MSME performance.

The increasingly fierce business competition also

requires MSMEs to operate more efficiently and

effectively. Organizational learning is a vital process

for MSMEs to be able to manage growth through

better development of new core competencies. Even

the speed of organizational learning can be the only

source of competitive advantage in the future (Ajay

and Moreno, 2015). Companies that carry out

organizational learning have the ability to integrate

people and structures to move the organization

towards learning and sustainable change (Marsick

and Watkins, 2003). Through organizational learning,

companies can develop new knowledge that comes

from each employee's personal experience. This has

the potential to influence behavior and enhance

company capability (Ajay and Moreno, 2015).

Several studies have found that organizational

learning influences company performance. The

results of the research Bontis et al. (2002) concluded

that learning orientation has a positive effect on

company performance. Darroch and McNaugton

(2003) show that organizational learning processes

produce better performance. Research conducted by

Jimenez and Valle (2011) also provides empirical

evidence that organizational learning influences

company performance.

Previous studies were mostly done at large

companies, and there was a research gap on

organizational learning at MSMEs. Therefore this

research is expected to fill the research gap. Thus the

goal of this study is to examine the effect of innovation

and organizational learning on the financial

performance of MSMEs in Surakarta and Yogyakarta.

2 LITERATURE REVIEW

2.1 RBV Theory

Resource-Based View theory assumes that valuable,

rare, or unique resources that are difficult to imitate

are the company's main assets in order to increase

competitive advantage (Barney, 1991). When the

environment changes rapidly, and competition is

getting tougher, companies rely heavily on available

resources. Therefore it is necessary to renew the skills

and abilities of resources permanently to maintain

competitive advantage (Vijande et al., 2012). Thus,

the company's ability is needed to be able to integrate,

build, and reconstruct both internal and external

competencies of the company. It is this dynamic

capability that is expected to change their operational

routines and reconstruct resources and skills to be

able to adapt to change (Zollo and Winter, 2002). In

order to obtain valuable, rare, and unique resources

that are difficult to replicate, an organizational

learning process is needed. Companies that

implement organizational learning can help increase

knowledge and a deeper understanding of the

environment so that it can provide customer

satisfaction through its products and services

(Vijande et al., 2012). Associated with innovation, it

is expected that the company can optimize the ability

Innovation and Organizational Learning at MSMEs, What Impacts on Financial Performance

325

of its resources to implement new processes and

create new products so as to increase the company's

competitive advantage.

2.2 Innovation and Performance

Innovation is defined as the process of using

organizational resources and competencies to

develop new products or find better ways to make

new products so they can increase their effectiveness

(Jones, 2013). Whereas Kanter (1983) provides a

definition of innovation as the implementation of new

ideas both in the process, products, and services. The

existence of innovation can help companies deal with

turbulence in the external environment so as to

increase long-term business success. Companies that

use all their resources to innovate will be faster in

responding to challenges and can explore new

products and market opportunities (Jimenez and

Valle, 2011).

Previous research has examined the effect of

innovation on performance. Research conducted by

(Bierly and Chakrabarti, 1996; Brown and Eisenhard,

1995; Damanpour, 1991; Damanpour and Evan,

1984; Damanpour et al., 1989; Roberts, 1999;

Thornhill, 2006) provides evidence that innovation

has a positive effect on performance company.

Different results are shown by Simpson et al. (2006),

who concluded that innovation is an expensive and

risky activity, so the results on performance can be

positive and can be negative. Wright et al. (2005) also

found that innovation does not affect the performance

of MSMEs that are environmentally friendly, but has

a positive effect on performance in hostile

environments. Some of these studies show

inconclusive results, so it is important to examine the

effect of innovation on MSME performance. Various

studies that examine the relationship between

innovation and performance are mostly done on large

companies in developed countries that may have

different characteristics from MSMEs in developing

countries. Thus this research will propose the

following hypothesis:

H1: Innovation has a positive effect on the

performance of MSMEs

2.3 Organizational Learning and

Performance

Organizational learning is a process in which

companies develop new knowledge and new insights

derived from the experience of employees in the

organization. This new thing will potentially

influence behavior that will ultimately support the

company's success (Fiol and Lyles, 1985; Huber,

1991; Slater and Narver, 1995). Recent research

defines organizational learning as a process that has

four stages including; 1) obtain information; 2)

knowledge dissemination; 3) shared interpretation

and 4) organizing memory (Kandemir & Hult, 2005;

Sinkula, 1994; Slater & Narver, 1995; Tippins &

Sohi, 2003). Organizational learning is believed to

strengthen companies in recognizing opportunities

and always pursuing novelty so as to create

sustainable harmony with the environment (Vijande

et al., 2012).

Previous studies studying the relationship

between organizational learning and performance

found that there was a positive relationship between

the two. Bakel and Sinkula (1999); Keskin (2006);

Bontis et al. (2002) provide empirical evidence that

companies that are oriented towards organizational

learning will show a positive influence on company

performance. Darroch and McNaugton's (2003)

research results show that the overall organizational

learning process results in better performance.

Furthermore, Jeminez and Valle's (2012) research

also found similar results. Thus the hypothesis to be

proposed is:

H2: Organizational learning has a positive effect

on MSME performance

2.4 Conceptual Framework

Figure 1. Conceptual Framework

Innovation

Learning

organization

MSME

Performance

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326

3 METHOD

3.1 Research Respondents and Data

Analysis Techniques

This research is quantitative research. Respondents in

this study are the owners of MSMEs in Yogyakarta

and Surakarta. Data collection techniques using a

questionnaire. Sampling technique using random

sampling, 77 data were collected. Data analysis

techniques used multiple regression using SPSS

software.

3.2 Operational Definitions and

Measurement of Variables

3.2.1 UMKM Performance

Company performance is measured using perception

or self-reported measurement. MSME's financial

performance is measured by its effectiveness (sales

growth, range of product), while efficiency is

measured by (profitability and productivity) (Gronum

et al., 2012). The reliability and validity testing of

performance data obtained Cronbach alpha results of

0.764, and the Pearson correlation results were

significant.

3.2.2 Innovation

The innovation referred to in this study, refers to the

definition of Kanter (1983), namely the generation,

acceptance, and implementation of new ideas,

processes, products, or services. The innovation

instrument was adopted from the research of Chenhall

et al. (2011) with reference to the indicators of new

products launched, product modifications made, how

often companies entered new markets, and how many

times companies designed new products. Testing the

reliability and validity of the innovation data obtained

Cronbach alpha results of 0.811, and the results of the

Pearson correlation are significant.

3.2.3 Organizational Learning

The definition of organizational learning referred to

in this study, refers to the definition of Huber (1991),

which is the process of obtaining information,

disseminating knowledge, interpreting shared and

organizational memory. The instruments compiled

adopted from the research conducted by López-

Sánchez et al. (2011). Testing the reliability and

validity of organizational learning data obtained

Cronbach alpha results of 0.827 and significant

Pearson correlation results.

4 RESULTS

Before testing hypotheses, classical assumptions are

tested first. Based on tests of normality,

heteroscedasticity, and multicollinearity using SPSS,

the model meets the requirements of BLUE (Best

Linear Unlimited Estimator).

Table 1. Regression data analysis

Model

Unstandardized

Coeficients

Standardized

Coefficients

B Std. Error Beta

(Constant) 6.225 1.087 5.727***

Inovasi .403 .083 .437 4.841***

Learn org .037 .008 .408 4.521***

R .718a

R2 .516

Adjusted R Square .502

F statistic 39.372

The equation model in this study is: Y1 = B0 +

B1X1 + B2 X2 + e. Based on the results of the data

analysis shown in table 1, B0B values (constants) are

6,225, and regression coefficients for X1 are .403, X2

.037. So that this equation model becomes Y1 = 6.225

+ 0.403 X1 + 0.037 X2 + e. The results of testing

hypothesis 1, which states that Innovation has a

positive effect on performance, can be accepted.

Neither does the results of testing the two

Innovation and Organizational Learning at MSMEs, What Impacts on Financial Performance

327

hypotheses, which say there is a positive effect of

organizational learning on accepted performance.

5 CONCLUSIONS

This study aims to empirically examine the impact of

innovation and organizational learning on MSME

financial performance. Through a survey conducted

on MSME owners in Surakarta and Yogyakarta, a

sample of 77 respondents was obtained. The results

of the data analysis show that innovation and

organizational learning on performance. This has

practical implications for SMEs to pay more attention

to organizational learning and innovation to improve

MSME performance.

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