Does Innovation Efficiency Matter to Firm Performance the Moderating Role of Environmental Uncertainty?

Abstract

We examine the relationship between innovation efficiency and firm performance, as well as the moderating role of environmental uncertainty in the relationship. Competitive globalization pressures, dynamic changes in customer demand, and rapid technological advances make it difficult for firms to achieve and maintain their competitive advantage. We argue that when environmental uncertainty increases, innovation is needed to maintain the firm's competitive advantage, by making it efficient in its implementation. We tested manufacturing companies listed on the Indonesia Stock Exchange year 2013-2019 with a total number 564 observations. We find that a innovation efficiency improves firm performance, and environmental uncertainty can encourage firms to be more efficient in innovating to improve their performance. This study contributes to a greater understanding of the relationship between innovation efficiency and firm performance in the situation of dynamic environmental uncertainty from the perspective of contingency theory. The evidence shows that environmental uncertainty, as a contingency problem, is an opportunity for firms to improve their performance, by being more active in carrying out innovation projects. When environmental uncertainty increases, policymakers within the firm must ensure that the innovation projects carried out can run efficiently, thus providing great benefits for improving firm performance.