Small and medium enterprise (SME) competitiveness and employment creation: the mediating role of SME growth

The study addresses persistent unemployment in Nigeria and the broader global context where governments struggle to provide sufficient jobs. SMEs constitute over 80% of Nigerian businesses but face high failure rates due to environmental and policy constraints. Recognizing SMEs as engines of job creation and economic development, the study asks how SME competitiveness translates into employment generation and whether SME growth mediates this relationship. Grounded in the capability-based view (CBV), which posits that firm capabilities (rather than resources per se) drive competitive advantage, the study proposes that activity-based capabilities—product innovation, product differentiation, product line, and product imitation—enhance competitiveness, expand market share, foster SME growth, and ultimately create jobs. The research aims to determine the extent to which these competitiveness dimensions influence market share and employment generation, and whether SME growth mediates their effects. It formulates mediation hypotheses for each capability and an overall mediation hypothesis linking SME competitiveness to employment via SME growth, focusing on SMEs in Southwest Nigeria.

Conceptual review: The paper defines SME competitiveness in terms of the firm’s ability to leverage capabilities that drive performance and market position. SMEs are crucial to GDP and job creation globally and contribute to SDGs including no poverty, decent work and economic growth, and reduced inequalities. Innovation and business networks are highlighted as determinants of competitiveness. Innovativeness stimulates competitive responses and is widely documented as foundational to competitiveness. Market share is presented as a key indicator of competitive standing and business success. Theoretical framework: Using the Capability-Based View (CBV), the study argues that capabilities—information-based, firm-specific processes enabling the deployment of resources—are the true sources of sustained competitive advantage. Dynamic capabilities enable firms to integrate, build, and reconfigure competencies in changing environments. The study focuses on activity-based capabilities: product innovation, product differentiation, product imitation, and product line. Empirical review and hypotheses: Prior studies report mixed or positive effects of innovation on employment; differentiation relates positively to performance and market share; product line strategies can enhance competitive advantage but effects vary by industry; and creative imitation can improve performance and spur innovation. Studies show SMEs contribute significantly to employment. The paper formulates null hypotheses that SME growth does not significantly mediate the relationships between each capability (innovation, differentiation, product line, imitation) and employment generation, and an overall hypothesis that SME growth does not mediate the relationship between SME competitiveness and employment generation. The study’s conceptual framework (Fig. 1) reflects these mediation paths.

Research design: Cross-sectional survey of owners/managers from SMEs in Ogun, Osun, and Ondo States, Nigeria. Sampling used stratified random technique (strata: employees and owners; lottery method for randomization). Of 113 invited respondents from 39 SMEs, 93 responses were obtained (82.3% response rate). Instrument: Structured questionnaire (five-point Likert scale). Validity assessed via expert review and Content Validity Index (CVI): product innovation 0.72, differentiation 0.87, product line 0.74, imitation 0.73, SME growth 0.82, employment generation 0.84, overall 0.77 (≥0.70 benchmark). Reliability assessed via Cronbach’s alpha: product innovation 0.71, differentiation 0.81, product line 0.69, imitation 0.74, SME growth 0.75, employment generation 0.73, overall 0.76 (≥0.70 indicates internal consistency). Common method bias: Multicollinearity tests indicated VIFs within tolerance (max VIF 3.333 for product imitation; tolerance ≥0.300), suggesting limited common method variance. Model specification: Employment generation (eg) as a function of increase in market shares (ims), innovativeness (inn), product differentiation (pd), product line (pl), and product imitation (pi): eg = β0 + β1 ims + β2 inn + β3 pd + β4 pl + β5 pi + e. Analysis: Descriptive statistics and Structural Equation Modelling (SEM) for mediation analysis and path estimation (reported SEM observations = 101). Goodness-of-fit assessed via equation-level R-squared and Wald tests. Descriptive statistics (means [SD]): innovation 3.51 (0.6695), differentiation 3.47 (0.7024), product line 3.525 (0.6233), imitation 3.527 (0.6745), SME growth 3.591 (0.6684), employment generation 3.896 (0.5815).

- Paths to SME growth (gsme): - Product innovation → SME growth: negative coefficient (−0.186), statistically significant; indicates innovation associated with reduced SME growth in this sample. - Product differentiation → SME growth: positive, significant (0.241). - Product line → SME growth: positive, not significant (0.165). - Product imitation → SME growth: positive, significant (0.573). - Employment generation model (empg) with SME growth as mediator: - SME growth → employment generation: positive, significant (0.564, p<0.001). - Direct effects on employment: innovation (0.321, p<0.001) and product differentiation (0.226, p=0.015) significant; product line (0.127, p=0.211) and product imitation (0.034, p=0.755) not significant. - Indirect (mediated) effects via SME growth: - Innovation → employment (indirect): positive, significant (~0.242). - Differentiation → employment (indirect): positive, significant (~0.213). - Product line → employment (indirect): positive, not significant (~0.087). - Imitation → employment (indirect): positive, significant (~0.279). - Goodness-of-fit: - Overall R-squared (equation-level, combined): 0.756. - Wald tests significant for both gsme and empg equations (p<0.001).

Findings show that SME growth is a key mechanism linking capability-driven competitiveness to employment creation. While product innovation exhibited a negative association with SME growth in the growth equation, its total effect on employment was positive through both a significant direct path and a significant indirect path via SME growth. Product differentiation consistently improved SME growth and directly increased employment, reflecting its role in enhancing brand loyalty and market performance. Product imitation did not directly increase employment but showed a significant positive indirect effect via SME growth, suggesting that imitation contributes to expansionary outcomes that translate into job creation when growth materializes. Product line expansion had positive but statistically insignificant effects. Overall, the results support the CBV: activity-based capabilities (innovation, differentiation, imitation) enhance competitiveness and, through growth, employment generation. This clarifies how SMEs can convert competitive strategies into broader labor market benefits in the Nigerian context.

Product innovation, product differentiation, and product imitation positively and significantly influence employment generation, with the growth rate of SMEs serving as a crucial mediator. SME growth fully mediates the relationship between product imitation and employment, and partially mediates the relationships for product innovation and product differentiation. Integrating multiple capability dimensions—innovation, differentiation, imitation, and product line—into a single framework advances understanding of SME competitiveness and its translation into job creation, contributing theoretically to the capability-based view. The study underscores that reinforcing activity-based capabilities can stimulate growth and employment outcomes among SMEs.

- Sampling and generalization: The study used a sample of SMEs in Southwest Nigeria to generalize to the broader SME population; complete randomization cannot be guaranteed despite probability sampling. - Construct scope: SME competitiveness was operationalized with four capability dimensions (innovation, differentiation, imitation, product line); other relevant dimensions were not included. - Geographic focus: The study focused on Southwest Nigeria; findings may not generalize to other geopolitical zones or countries without further validation.