Unpacking the dynamic interplay between absorptive capacity, organizational flexibility and firm performance: the moderating role of environmental dynamism

Purpose Based on the dynamic capabilities view, we examined the impact of absorptive capacity on organizational flexibility, the role of organizational flexibility in the relationship between absorptive capacity and firm performance, the moderating role of environmental dynamism in the relationship between absorptive capacity and organizational flexibility, and finally, the direct effect of organizational flexibility on firm performance. Design/methodology/approach Data were collected from 230 participants occupying at least mid-level managerial positions in small and medium-sized enterprises (SMEs) in Libya. Data were analysed using structural equation modelling using SmartPLS 4.0. Findings The findings reveal that absorptive capacity has a positive effect on organizational flexibility, which in turn adds to firm performance. Absorptive capacity does not directly significantly affect firm performance, while organizational flexibility fully mediates the relationship, meaning that only when adaptive organizational processes are in place does absorptive capacity contribute to performance. The effect of absorptive capacity on organizational flexibility is further strengthened in dynamic environmental contexts, but the moderated indirect effect on firm performance does not reach statistical significance. Research limitations/implications The cross-sectional design and single-country context limit the generalizability of the findings. Future research may benefit from longitudinal and multi-source data. Practical implications SMEs need to use organizational mechanisms that effectively implement external knowledge along with investing in knowledge acquisition. In an environment such as Libya, characterized by uncertainty and limited resources, managers must focus on creating fluid organizational structures and more adaptive processes and decision-making routines that will allow absorptive capacity to be effective at translating into firm performance. Originality/value This study extends the dynamic capabilities field by showing that absorptive capacity does not directly lead to enhanced performance but operates through organizational flexibility. It also advances contingency views by explaining the influence of environmental dynamism on capability effectiveness and broadens knowledge of dynamic capabilities in emerging market SMEs.