Previous research emphasizes the importance of dynamic capabilities for the firms in achieving a competitive advantage, particularly during changing environments (Teece and Pisano, 2003; Liao et al., 2009; Adeniran and Johnston, 2012; Mikalef and Pateli, 2017; Albort-Morant et al., 2018; Ferreira et al., 2020; Han and Zhang, 2021). Dynamic capabilities explain how firms acquire, alter, incorporate, and recombine resources to create firm value. Hence, these capabilities cover both managerial and organizational routines, which assist firms in the management of resources. The dynamic capabilities may help firms develop working capital that further influences company performance (Rus and Achim, 2020). The dynamic capability-based view has been employed previously to describe many organizational processes and outputs, including innovation capabilities (Schoemaker et al., 2018; Ferreira et al., 2020), cognitive processes (Easterby-Smith et al., 2009), and firms’ decision regarding internationalization (Arikan et al., 2019). Considering these tenets of dynamic capabilities and the extant research about the influence of innovation on internationalization (Lewandowska et al., 2016; Tavassoli, 2018; Reçica et al., 2019; Edeh et al., 2020; Enjolras et al., 2020; Wu et al., 2021), the current study conceptualizes breakthrough innovations as firms’ capabilities, enabling SMEs’ to enhance their export performance. Hence, we may assume that dynamic capability offers sound theoretical support to explain the influence of breakthrough innovation on international performance.

Generally, innovation involves the process of developing and executing an idea in the form of a product, process, or behavior (Damanpour and Evan, 1984; Damanpour, 1996). Innovation is a complex phenomenon and covers several activities, including managerial and administrative processes; product development; and organizational structures (Damanpour and Aravind, 2012). Whereas breakthrough innovations refer to the process by which required knowledge is created and associated with other current or new knowledge in marketable terms that has the ability to disrupt the existing market and/or develop new markets (Mooty and Kedia, 2014, p. 223). It is commonly argued that breakthrough innovations recombine diverse and distant knowledge bases (Kaplan and Vakili, 2015) and allow firms to deep dive into a particular business by exploring complex issues (Kamuriwo et al., 2017). Breakthrough innovations in the form of a novel and unique product may generate a new business domain, offering new benefits and attracting new markets (O’Connor, 2008). Some of the examples of breakthrough innovations include automatic welding machines, autopilot cars backed by artificial intelligence (in-progress), and microfinance loans. The above-mentioned characteristics suggest that breakthrough innovation is a complex phenomenon, and thereby it may require innovation capabilities and a new knowledge base.

Wang and Feng (2020) identified that there are two significant predictors of technological innovation breakthroughs, i.e., technological factors and market factors. Originally, Benner and Tushman (2003) categorized technological innovation breakthroughs into technology innovation and market innovation after comparing new technologies with existing technologies and evaluating new technologies in relation to existing market segments. Later on, Zhou et al. (2005) extended this conceptualization into two groups: technology-based innovations and market-based innovations. The former group is defined as those innovations that drive through new techniques, involving the most advance and cutting edge R&D functions; however, the latter type of breakthrough innovations involve offering simple solutions to the emerging market segments that may bring substantial improvements in the markets. In the same way, Govindarajan et al. (2011) contended that technology-based innovations follow new material techniques to be incorporated into products, whereas market-based innovations are typically designed for emerging markets or new customer segments with a focus on existing techniques. The classification of breakthrough innovations by Zhou et al. (2005) is well accepted in the current literature. For example, Silva et al. (2017) has recently reported a positive association between breakthrough innovations (i.e., technology-based and market-based innovations) and export performance in the Portuguese context. Similarly, the same classification was explored in relation to organization performance (Wang and Feng, 2020) and innovation performance (He et al., 2021). Consequently, the current study follows Zhou et al.’s typology of breakthrough innovations while examining the link between breakthrough innovations and export performance.

We have adopted institutional theory to better explain the influence of the institutional environment (institutional specificity and enforceability) on the relationship between breakthrough innovations and export performance. The characteristics of the institutional theory reflect that institutional frameworks and arrangements whether it is external or internal to the firm may impact business transaction mechanisms, strategic decisions, and subsequent performance outputs, including the chances of being involved in exporting and international activities (Bruton et al., 2010; Volchek et al., 2013). Studies have advanced the perspective that governance and institutional systems are key determinants of firms’ competitive performance, particularly important for the firms operating in developing and emerging economies (Adomako et al., 2019; Donbesuur et al., 2020). Consequently, a firm’s domestic and international success significantly depends on the institutional environment or institutional arrangement.

Considering the influence of breakthrough innovation on export performance (Silva et al., 2017) and taking the support from the international business literature (Zhou and Poppo, 2010; Ngo et al., 2016; Donbesuur et al., 2020), the current study has adopted institutional environment specificity and enforceability as significant boundary conditions. There are three important reasons behind adopting these boundary conditions. First, the presence and absence of a strong institutional environment are critical to a firm’s innovation activities (Barasa et al., 2017). It has been observed that SMEs in developing markets often face innovation costs (Safari and Saleh, 2020). Thus, legal systems like intellectual property rights’ specificity and enforceability that are supposed to safeguard the innovations will be the most suitable way to enhance export performance. Hence, the benefits coming through SMEs’ innovations are greatly influenced by the availability or absence of legal systems and the protection of innovations. Second, either a strong or weak institutional environment has a significant influence on firms’ exporting performance or internationalization activities (LiPuma et al., 2013; Adomako et al., 2019). So, institutional theory can allow us to explain that when breakthrough innovations are in a position that would enhance exporting performance. Third, the context of developing markets is itself an important rationale behind investigating the impact of the institutional framework on the relationship between breakthrough innovations and exporting performance. About developed economies, emerging and developing economies often face institutional voids that refer to the situation when “institutional arrangements that support markets are absent, weak, or fail to accomplish the role expected of them” (Mair and Marti, 2009). These voids are characterized by several institutional faults such as corruption, political instability, violation of intellectual property rights (Khanna and Palepu, 1999), all of which may influence a firm’s exporting strategies and performance.

To examine study hypotheses, we used a sample of SMEs operating in Pakistan. There are two important reasons behind considering Pakistan as the research setting. First, SMEs in Pakistan are greatly contributing to the economy by sharing 40% in GDP, creating 80% employment in the country, and managing 30% of export activities (Khalique et al., 2015; Ali Qalati et al., 2021). Hence, the export literature may get benefits from the research that examines how SMEs in developing economies continue to internationalize with their breakthrough innovations and what are the significant contributors to their performances in international markets. Second, in recent times, Pakistan has achieved promising improvements in maintaining a sound institutional environment to support and protect innovative practices of the firms (Trade Representative, 2016). The laws are specified to protect intellectual property rights (IPR) such as patents, trademarks, copyrights and to provide investors solid guarantees regarding the protection of intangible assets (Janjua et al., 2019). This is credited to the fact that Pakistan has made good efforts to improve IPR laws and enforcement by implementing key aspects of the “Intellectual Property Organization of Pakistan Act of 2012 (Trade Representative, 2016). These endeavors include establishing tribunals for IPR protection and a schedule to amend major IPR laws, creating public awareness about IPR laws, and the imminent implementation of the IP enforcement rules. With these constructive roles of SMEs in the economy and economic outlooks, the country offers a relevant context to examine study propositions. Consequently, the information coming from this context may contribute significantly to the export business literature.

Considering our study context and following previous studies (Silva et al., 2017; Gerschewski et al., 2018; Ali Qalati et al., 2021), the following criteria have been adopted to finalize an appropriate random sample from the sample frame. We focused on the export venture as a unit of analysis: (i) firms that offer single or multiple products to be exported and (ii) engage in innovative practices. The information about registered SMEs was gathered through listings available at Lahore and Karachi Stock Exchange, all Chamber of Commerce in Pakistan, Jamal Yellow pages, and the Punjab Directory of Industrial Establishment. The sample was randomly drawn from four major provinces of Pakistan, including Punjab, Sindh, Khyber Pakhtunkhwa, and Balochistan. Thus, we were able to select 514 firms as a final sample, which fulfilled our sampling criteria. This sample covered six major industries, including textile, sports, food, leather, furniture, and metal. An online survey was done through the distribution of 514 closed-ended questionnaires in a period of five months. We sent an online survey through an email to potential respondents with a cover letter, including a confidentiality clause and an explanation of the study purpose. The online survey can help gather information from a large population and thereby provide greater statistical power (Manfreda et al., 2008). Among distributed questionnaires, we received 423 responses, and from which 13 responses were excluded due to incomplete information. Hence, 410 responses were available for the final analysis. Table 1 provides information about the sample profile.

To handle non-response bias, we compared early responses (initially received 60% responses) and late responses (the remaining 40%) with all items measuring main study constructs, number of employees, and export intensity. We found no significant differences under this comparison, indicating that there is no significant issue of non-response bias in this study (Armstrong and Overton, 1977).

To manage common method bias (CMB), this study maintained the conciseness and simplicity in the questionnaire. Moreover, we used reverse coded items with different dimensions spreading across the questionnaire. By doing this, we ensured consistency in the questionnaire. To further address the bias, we ran ex post statistical technique. For that purpose, we conducted partial correlation and Harman’s single factor test to check CMB (Podsakoff et al., 2003). The Harman’s test reveals that all items were loaded on single factor, showing variance of 19%. Hence, there is no issue of CMB as the total variance is less than 50%. The partial correlation test shows that addition of the marker variable did not influence the hypothesized paths as well as their significance. Lately, multicollinearity statistics reveal that there is no problem of multicollinearity as the variance inflation factor (VIF) is smaller than 3 (Johnson and Lebreton, 2004).

We adopted measures from previous studies in the developing context of Pakistan. The detail about measures is given in Appendix A. The construct of export performance, including economic and strategic export performance, was adapted from Silva et al. (2017). They previously used scales from the study of Zou et al. (1998) and Morgan et al. (2004). The economic export performance was measured on a seven-point scale: 1 for “much worse” and 7 for “much better,” while the strategic export performance was measured on the seven-point scale: 1 for “strongly disagree” and 7 for “strongly agree.” The construct of breakthrough innovation in terms of technology-based innovations and market-based innovation was adapted from the study of Zhou et al. (2005). The anchor used to measure breakthrough innovation includes a seven-point scale: 1 for “strongly disagree” and 7 for “strongly agree.” The constructs of institutional environment specificity and enforceability were adapted from previous studies (Zhou and Poppo, 2010; Ngo et al., 2016; Donbesuur et al., 2020). For institutional environment specificity, the respondents were directed to indicate to what extent they perceive about the existence of institutional rules and regulations about their innovations on a seven-point scale (1 for “non-existing” and 7 for “prevalent”). Similarly, we asked respondents to indicate to what extent they perceive the level of enforcement regarding the protection of their innovations on a seven-point scale (1 for “strongly disagree” and 7 for “strongly agree”).

Descriptive statistics provide a level of respondents’ agreement regarding study constructs. Table 2 shows that respondents have a positive perception of technology-based innovations and market-based innovation with a mean value greater than 3.5. Near to respondents, technology-based innovations are more important as the mean value (mean = 4.63) is greater than the mean value (3.95) of market-based innovation. Moreover, respondents demonstrate a good level of agreement with export performance, institutional environment specificity, and enforceability with a mean value greater than 3.5.

We employed two-stage structural equation modeling (SEM) through AMOS 21 to determine the construct validity and to examine hypothesized paths. During the first stage, confirmatory factor analysis (CFA) was conducted to assess the discriminant and convergent validity. In this regard, the measurement model was developed. The construct of export performance was considered as a second-order construct in the measurement model as it contains two dimensions, i.e., economic export performance and strategic export performance (Davcik, 2014). The model fitness indices show that the measurement model is fit with all fit indices fall under the recommend range, i.e., Chisq/df < 3 (1.96); CFI > 0.90 (0.98); NNFI > 0.90 (0.97); RMSEA < 0.08(0.049) (Bagozzi and Yi, 1988; Browne and Cudeck, 1992; Bollen and Hoyle, 2012; Hair et al., 2014). Bagozzi and Yi (1988) suggested that the convergent validity of the constructs will be satisfied if the value of standardized factor loadings >0.5, composite reliability (CR) > 0.7, and average variance extracted (AVE) > 0.5. Table 3 shows that convergent validity is satisfied as standardized factor loadings are greater than 0.5, CRs are greater than 0.7 and AVEs are greater than 0.5 for all constructs.

The discriminant validity of the constructs was assessed by following the method of Fornell and Larcker (1981). They determined that discriminant will be satisfied if the square root of AVE of a particular construct is greater than the corresponding correlation among the variables. Table 4 reveals that the value of the square root of AVE on the diagonal is greater than the corresponding correlation among the variables. So, discriminant validity is also satisfied.

After the assessment of the measurement model, we developed a structural model to examine the hypothesized paths. The model is fitted with all fit indices fall under the recommended range, i.e., Chisq/df < 3 (1.94); CFI > 0.90 (0.98); NNFI > 0.90 (0.97); RMSEA < 0.08(0.048) (Bagozzi and Yi, 1988; Browne and Cudeck, 1992; Bollen and Hoyle, 2012; Hair et al., 2014). Findings about the hypothesized paths are given in Table 5. H1 posits that technology-based innovations are positively associated with the export performance of SMEs in terms of economic export performance and strategic export performance. It is accepted as the β-estimate (0.648) from technology-based innovations to export performance is significant with p < 0.05 (Table 5). This finding is in agreement with previous studies (Zhou et al., 2005; Paladino, 2007; Silva et al., 2017; Wadho and Chaudhry, 2018). Technology-based innovations enhance customer value by offering advanced technologies, replacing inferior alternatives. Thus, it may lead to a better economic and strategic position internationally. Besides, uniqueness and newness among products and services may improve firms’ ability to satisfy customers’ latent needs and thereby provide a competitive advantage over other firms (Zou et al., 2003). H2 posits that market-based innovations are positively associated with the export performance of SMEs in terms of economic export performance and strategic export performance. It is accepted as the β-estimate (0.532) from market-based innovations to export performance is significant with p < 0.05 (see Table 5; Figure 2). This finding supports the argument of Zhou et al. (2005) that market-based innovations provide a first-mover advantage to the firms, hence improving export performance. Market-based innovations depart from already available products and offer unique and simple products to target new markets. This orientation leads firms to enhance export performance. Furthermore, the impact of technology-based innovations on export performance is greater (β = 0.648) as compared to market-based innovation (β = 0.532).

To test the moderating effect of institutional environment specificity and enforceability, we developed four separate structural models in AMOS. Model 1 includes interaction among technology-based innovations and institutional environment specificity (Figure 3). This model is used to test hypothesis 3a, which posits that institutional environment specificity improves the impact of technology-based innovations on the export performance of SMEs. It is accepted as the β-estimate (0.45) from interaction among technology-based innovations and institutional environment specificity to export performance is significant with p < 0.05. Besides, the interaction graph (Figure 4) shows that the more the institutional environment specificity, the greater the impact of technology-based innovations on export performance.

Model 2 includes interaction among market-based innovation and institutional environment specificity (Figure 5). This model is used to test hypothesis 3b, which posits that institutional environment specificity improves the impact of market-based innovation on the export performance of SMEs. It is accepted as the β-estimate (0.48) from interaction among market-based innovation and institutional environment specificity to export performance is significant with p < 0.05. Besides, the interaction graph (Figure 6) shows that the more the institutional environment specificity, the greater the impact of market-based innovation on export performance.

Model 3 includes interaction among technology-based innovations and institutional environment enforceability (Figure 7). This model is used to test hypothesis 4a, which posits that institutional environment enforceability improves the impact of technology-based innovations on the export performance of SMEs. It is accepted as the β-estimate (0.44) from interaction among technology-based innovations and institutional environment enforceability to export performance is significant with p < 0.05. Besides, the interaction graph (Figure 8) shows that more the institutional environment enforceability, the greater the impact of technology-based innovations on export performance.

Model 4 includes interaction among market-based innovation and institutional environment enforceability (Figure 9). This model is used to test hypothesis 4b, which posits that institutional environment enforceability improves the impact of market-based innovations on the export performance of SMEs. It is accepted as the β-estimate (0.52) from interaction among market-based innovation and institutional environment enforceability to export performance is significant with p < 0.05. Besides, the interaction graph (Figure 10) shows that the more institutional environment enforceability, the greater the impact of market-based innovation on export performance.

The current study aims to examine the influence of breakthrough innovation on the export performance of SMEs in a developing context. Also, the purpose of the current study is to assess the presence of the institutional environment (i.e., institutional environment specificity and enforceability), while examining the breakthrough innovations–export performance link. The findings reveal that technology-based innovations and market-based innovations enhance the export performance of SMEs, whereas technology-based innovations have a greater influence on export performance as compared to market-based innovations. Furthermore, we find that the institutional environment in terms of specificity and enforceability enables SMEs to enhance their export performance through breakthrough innovations.

The current study adds value to the export business literature, innovation, and institutional literature in the following three major ways. First, drawing on the institutional theory and institutional literature framework (Bruton et al., 2010; Hessels and Terjesen, 2010; Ngo et al., 2016; Amankwah-Amoah et al., 2018; Donbesuur et al., 2020), we extend the institutional environment by examining the moderating influence of institutional environment specificity and enforceability on the relationship between breakthrough innovations and export performance. We fulfill this gap by examining how institutional specificity and enforceability enhance the influence of technology-based innovations and market-based innovations on the export performance of developing SMEs. Also, the typology of breakthrough innovation comprises two distinctive innovation types, i.e., tech- and market-based innovation (Zhou et al., 2005). Therefore, the current study contributes significantly by offering a comprehensive moderating framework of the institutional environment in relation to breakthrough innovations–export performance link. Second, the current study contributes to the existing body of knowledge, which contends that innovation practices help firms in enhancing export performance (Azar and Ciabuschi, 2017; Silva et al., 2017; Tavassoli, 2018; Reçica et al., 2019; Edeh et al., 2020; Enjolras et al., 2020; Wu et al., 2021). Here, drawing on the dynamic capability theory, we demonstrate that breakthrough innovations in terms of tech- and market-based innovations are positively associated with the export performance of SMEs in a developing country. In developing countries, firms often face limited resources and thereby look for unique methods to use resources, leading to breakthrough innovations, while, in developed countries, where companies have better access to resources follow standard ways to use resources to comply with only regulations or business requirements. Finally, we tested our proposed model in the unique developing setting of Pakistan. In this regard, we extend the previous literature on the export performance of SMEs from developed economies (Silva et al., 2017) to developing contexts. This is an important contribution as little focus has been given to understand when and how SMEs in developing context enhance their export performance through their breakthrough innovations.

This study has several implications for SME owners, policymakers, and those stakeholders who engage in export activities. First, our findings reveal that technology-based and market-based innovations improve the export performance of SMEs. Thus, SMEs can get maximum benefits from their export decisions by doing technology-based and market-based innovations. Specifically, SMEs can get better export performance by exploring their capabilities in developing technologically advanced products and unique products. It is often noted that SMEs in developing economies face difficulties and barriers in both local and international markets (El Makrini, 2017); however, their innovative capabilities can help them mitigate these barriers and participate in exports actively. Besides, SMEs can commit their resources coming through exports into R&D to bring more technology-based and market-based innovative products. Second, the institutional environment plays an important role in providing a safe path to innovative practices toward internationalization. In the developing context, we often observe that institutional voids and corruption hinder innovative activities. However, with globalization and advancement in technology, developing countries like Pakistan are working in maintaining a good institutional environment to protect innovations and inventions. Besides, managers appreciate institutional support as it can help them gain a competitive advantage in local and international markets. Therefore, institutional environment specificity and enforceability may induce confidence among the managers of SMEs, reduce market uncertainty, and provide freedom to operate in international markets. Given the economic benefits of the institutional environment, policymakers of the developing countries must specify and enforce a comprehensive legal framework for the protection of SMEs’ innovations and inventions.

The current study is limited in certain ways, setting avenues for future research. First, we have examined the moderating role of institutional environment specificity and enforceability among the relationship between breakthrough innovations and export performance. However, we did not include other attributes of the institutional environment such as institutional predictability and stability (Acemoglu and Johnson, 2005; Ngo et al., 2016). Therefore, future study is needed to consider these dimensions of the institutional environment for a more nuanced and comprehensive understanding of the impact of the institutional environment on breakthrough innovations–export performance link. Second, we consider export performance as a second-order construct, limiting us to determine the differential moderating effect of institutional environment on the link between breakthrough innovations, and strategic export performance, and economic export performance. Therefore, future studies can separately assess the moderating role of the institutional environment for strategic and economic export performance. Third, we have tested our model from a managerial perspective. Therefore, future study is required to examine and measure the institutional environment from other important stakeholders such as the government and policymakers. Fourth, as we collected data from only one developing country, it can be important to examine the study model in comparison with other developing and emerging countries. Finally, it can be interesting to evaluate the cultural and technological dimensions while examining the influence of breakthrough innovations on export performance.