Failure Analysis and SME Growth: The Role of Dynamic Capabilities and Environmental Dynamism

Although prior research acknowledges that small and medium-sized enterprises (SMEs) can turn failures into growth opportunities, the mechanisms through which failure analysis contributes to such growth remain underexplored. Grounded in organizational learning and dynamic capabilities theory, this study explores how failure analysis facilitates SME growth through the mediating role of dynamic capabilities and the moderating role of environmental dynamism. Drawing on survey data from 207 managers of China SMEs, the study employs linear regression and bootstrapping techniques to empirically test the proposed hypotheses. The results reveal that failure analysis significantly promotes SME growth, with dynamic capabilities—specifically, sensing, seizing, and reconfiguring—serving as key mediators. Furthermore, environmental dynamism positively moderates both the relationship between failure analysis and dynamic capabilities, and the indirect effect of failure analysis on growth via dynamic capabilities. Unlike previous research that focuses primarily on innovation or resilience, this study uniquely highlights the role of failure analysis in cultivating dynamic capabilities to drive SME growth.