Adaptive capability: Capability to create innovation and competitive advantages of SME's in the industry 4.0 era

The main contribution of this research is to explore the adaptive capability of Small and Medium-sized Enterprises (SMEs) as a company's capability that will increase the competitive advantages through innovation; especially with the occurrence of environmental changes. The analysis of structural equation modelling on 220 samples with the response rate of 56%, was used. The research results show that the adaptive capability has had a positive influence on innovation and competitive advantages. Innovation has become the mediation variable between adaptive capability and competitive advantages. The research finding supports the Dynamic Capability View (DVC) stating that the competitive advantages do not always come from the asset, but also from the capability to keep changing and adapting for environmental changes, through the improvement of innovation.