The Mediating Role of Competitive Advantage: Exploring the Nexus of Managerial Competencies and Employee Engagement on SME Financial Performance in an Emerging Market

Purpose - This study analyzes the impact of managerial competencies and employee engagement on the competitive advantage and financial performance of small and medium enterprises (SMEs) in an emerging country. Design/Methodology/Approach - T his study uses t he structural equation modelling (SEM) method. Data were collected through a structured questionnaire distributed among 253 executives and managers who represent Vietnamese SMEs. This sample was then utilized in the verification of research hypotheses using the AMOS. Findings - The research findings reveal that managerial competencies and employee engagement positively influence the competitive advantage of SMEs. Concurrently, a reciprocal relationship is observed, where a strengthened competitive advantage positively contributes to improved SME financial performance. Additionally, the effects of managerial competencies and employee engagement on SME financial performance are not direct; instead, their influence is mediated through the competitive advantage. Research Implications - Our study is a notable contribution to SME literature, particularly in emerging countries, as it explores the relationship between internal factors, competitive advantage, and financial performance of SMEs. Also, our research findings carry significant implications for managers of SMEs in emerging countries. To enhance the SMEs’ financial performance, managers must prioritize developing competencies and engagement, driving innovation and challenging competitors. This strategic approach enhances overall competitive advantage, making it crucial for SME success.