Innovating Growth: The Synergy of Human Capital, Dynamic Capability and Entrepreneurial Orientation in SMEs

Human capital and dynamic capability are configurations through which SMEs convert knowledge and agility into innovation advantage, yet their interplay with entrepreneurial orientation in developing-economy contexts remains under-specified. This study investigates how human capital and dynamic capability shape SMEs’ entrepreneurial orientation and innovation capability, and whether entrepreneurial orientation mediates these effects. Data were collected from SMEs manager in Bali Province, Indonesia (396 questionnaires distributed; 177 valid responses) and analyzed using partial least squares structural equation modeling. Results show that human capital significantly and positively enhances entrepreneurial orientation and innovation capability, while dynamic capability exerts a stronger positive influence on both outcomes. Entrepreneurial orientation, in turn, significantly strengthens innovation capability, confirming its central role as an innovation engine in SMEs. Mediation tests reveal that entrepreneurial orientation partially transmits the effects of both human capital and dynamic capability to innovation capability, indicating that capabilities yield innovation not only directly but also through an entrepreneurial posture that mobilizes them. By integrating RBV and dynamic capabilities theory, the study extends their explanatory power for SMEs in developing economies and offers actionable guidance: investment in people and capability-building should be aligned to cultivate entrepreneurial orientation, thereby accelerating innovation and competitive advantage.