German Mittelstand firms are part of an institutional setting characterized by tightly knit relationships with internal and external stakeholders, which makes it more difficult for these firms to engage in business model innovation. The topic of how these firms have remained competitive over time has attracted growing interest from researchers. Therefore, this study investigates how dynamic capabilities can promote business model innovation for a sample of SMEs from the German Mittelstand (n = 285) and tests whether the different characteristics of these firms moderate this relationship. We find that specific dynamic capabilities are needed for the various aspects of business model innovation. Medium-sized firms profit from higher engagement with outside stakeholders, while balancing efficiency and flexibility, and small firms are advised to concentrate on revising their resource configurations. Moreover, we identify whether the innovativeness of Mittelstand firms is rooted in their individual characteristics or is a function of this institutional setting. © 2020 Elsevier Inc.
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