Innovation Capability and Supply Chain Integration in MSMEs Performance

The key to the success of the company in this dynamic era is innovation capability and absorptive capacity. There is a paucity of research that links these two things with supply chain integration, especially for MSMEs. This study aims to analyze the relationship between innovation capability, absorptive capacity and supply chain integration in improving the performance of MSMEs in the creative industry of Yogyakarta Indonesia. The empirical test, which used a sample of 135 managers of the creative industry MSMEs in Yogyakarta supports most of the hypotheses in the study. The study conducted structural equation modeling to test the proposed relationship. The results demonstrate that innovation capability has a significant influence on supply chain integration and the performance of MSMEs. And supply chain integration has significant role on performance of MSMEs. The results of this study are expected to be able to contribute to SME managers both owners and the government in improving the performance of creative industry MSMEs in Yogyakarta. THE INTERNATIONAL JOURNAL OF BUSINESS & MANAGEMENT ISSN 2321–8916 www.theijbm. com 19 Vol 7 Issue 12 DOI No.: 10.24940/theijbm/2019/v7/i12/BM1911-005 December, 2019 improve supply chain management in the company, specifically related to integration in the supply chain. Khalfan and Demott (2016) state that innovation can improve supply chain integration. This was also supported by Lii & Kuo, (2016) and Seo, Dinwoodie, & Kwak (2014). In addition to innovation, in this modern era information is an important factor in running a business. Therefore the company must have the ability to absorb good information or called absorptive capacity. Absorptive capacity is the company's ability to gather information from outside which can then be used for the benefit of the company's innovation development. Dobrzykowski (2015) examines how absorptive capacity mediates the relationship between responsive strategy and company performance, then results in that absorptive capacity is able to moderate and significantly influence company performance. Likewise, with Tavani (2013) also states that absorptive capacity as measured by aspects of knowledge of workers and managers as well as networks and communication climate can provide a significant influence on company performance. Different from previous researchers Li and Zhang (2016) stated that in addition to influencing company performance, absorptive capacity also had a significant influence on the company's supply chain which was an important factor in the company's sustainability. In some literature, it is mentioned that supply chain management is an important factor in a company. But an interesting and more needed issue in this dynamic era is how companies are able to create supply chain integrity. Supply chain integration is a practice that is implemented by companies in building strategic collaboration within and outside the ownership and range of control of the company (Ali, Zhan, & Nature, 2017). Flynn (2010) explained that supply chain integration has three elements, namely integration between suppliers, consumers and internal company. In his research Flynn stated that supply chain integration can improve company performance. Therefore this study aims to analyze how the relationship between innovation ability, absorptive capacity on the performance of Kasongan MSME in Bantul and how supply chain integrity can moderate the relationship between innovation ability, absorptive capacity on the performance of Kasongan MSME in Bantul. 2. Literature Review 2.1. Innovation Capability and Supply Chain Integration Innovation is the creation of new combinations, which can be "new products, new technologies for existing applications, new technology applications, the development or opening of new markets, or the introduction of new organizational forms or strategies to improve results (Ferrer 2011) while Liao and Lii (2018) defines innovation capability as the ability not only to identify and create new value but to assimilate initiatives back into existing processes and operations. In this study, we argue that the ability of innovation refers to the ability of companies to efficiently and effectively launch new products in response to changes in the business environment. Iddris (2014) analyzes innovation capability using the dimensions of cloud computing, trust and open innovation. The research seeks a relationship between innovation capability and supply chain agility that has an integrated dimension, and results in the development and interaction of trust with cloud computing and open innovation which is very important in the process of developing innovation capabilities. The process of developing innovation capabilities with cloud computing, trust, and open innovation will affect the agility of the company, which leads to the company's competitiveness. The importance of innovation is also supported by Desbarats (1999) who conducts qualitative research and produces that to survive and achieve high margins, producers need more than just innovation, they need good innovation. Internal and external commercial relationships along the supply chain of innovation need to be carried out based on commercial partnerships, with the same emphasis on short-term and long-term goals. Then Idrris (2016) re-analyzes the relationship between innovation and supply chain and finds that the dimensions of innovation capability are embedded in the company's supply chain, the focus company will be in a better position to respond quickly to the needs and desires of customers currently in the market by innovating. Whereas Khalfan (2016) states in more detail that innovation can create integration in supply chain management, this research offers transferable learning opportunities and motivation for other construction company staff who want to promote integration in their supply chains through innovative procurement routes. Different from several other studies Liao (2018) states that innovation can be created from good competence in supply chain management. Liao emphasized that organizations must consider joint efforts to develop internal collaboration, supply network flexibility, and supplier operational capabilities as a package to create innovation capabilities. More broadly Lii (2016) found that innovation can have an influence on supply chain integration and supply chain integration on the company's competitive ability and performance. Lii emphasized that the orientation of innovation affects the integration of supply chains and company performance. Drawing from previous studies of resource dependency theory, this study shows how innovation orientation helps companies in integrating their supply chains and realizing the potential of supply chain management mechanisms. Lii's statement was supported by Dinwoodie (2014) who also supported the role of innovation in supply chain integration (SCI) and stated that innovation in the supply chain had a positive impact on SCI and SCP. However, the direct impact of innovation on SCP disappears when the model informs SCI as a mediator. Specifically, internal and supplier integration fully mediates the innovation-SCP relationship, whereas customer integration has no intermediary role in the relationship. The findings show that innovation can affect SCP only when the SCI level of the manufacturer is sufficiently effective in developing the required supply chain practices. THE INTERNATIONAL JOURNAL OF BUSINESS & MANAGEMENT ISSN 2321–8916 www.theijbm. com 20 Vol 7 Issue 12 DOI No.: 10.24940/theijbm/2019/v7/i12/BM1911-005 December, 2019 Innovation capability is the company's ability to continue to innovate and adapt to market conditions. This capability is very important for companies in this dynamic era. Some literature states that by having innovation capability, companies will be able to improve supply chain management, especially in supply chain integration. The relationship between innovation and supply chain integration, supported by several literatures namely Iddris (2014), Ferrer (2011), Ayoub (2017), Desbarats (1999), Iddris (2016), Khalfan (2006), Liao (2018), Lii (201) 2016), Dinwoodie (2014) and Yunus (2018) who stated that the ability of innovation can increase supply chain integration, both directly and jointly with other variables. Therefore this study proposes the following hypothesis: H1: Innovation capability has significant effect to supply chain integration 2.2. Supply Chain Integration and Firm Performance Integration is needed in managing the supply chain. Supply chain integration is a practice that is implemented by companies in building strategic collaboration within and outside the ownership and range of control of the company (Ali, Zhan, & Nature, 2017). Supply Chain Integration can also be defined as integrated control of a number of consecutive or similar economic or industrial processes that were previously carried out independently (Flynn, Huo, & Zhao, 2010). According to the Big Indonesian Dictionary, integration is integration to become a unified whole or round. So it can be interpreted that supply chain integration is a collaborative process between the parties involved in the supply chain in order to create a unified whole and add value to the company. Flynn (2010) explained that supply chain integration has three dimensions, namely integration between suppliers, consumers and company internal. In his research Flynn stated that supply chain integration can improve company performance. Likewise, Ali (2016) also described supply chain integration with these three indicators and also supported the results of Fynn's research, only that Ali provided a mediating variable, namely halal food supply chain integration and proved to be able to mediate between supply chain integration and company performance. Supply chain integration is one of the dimensions in several variables related to supply chain. Rojo, Llore