Is Product Innovation always Beneficial for Small and Medium Enterprises?

Currently, innovation is an important issue among SMEs, especially the creative industry. This research is based on the phenomenon that occurs in the creative (fashion) SMEs, such as batik, weaving, silver handicrafts and leather crafts industry that mostly traditionally produced in the Special Region of Yogyakarta, Indonesia. This study aims to examine the role of innovation in mediating the effect of market orientation and entrepreneur. It used a cross-sectional survey of 187 creative SMEs owners The data were analyzed with the analysis of structural equation modeling (SEM). Findings reveal that market orientation and entrepreneurial orientation proved to have a positive and significant effect on business performance. An interesting result of this study is that there are differences in measurement to construct market orientation variables in the context of SMEs. Other findings indicate that innovation plays a role as a mediator in the influence of market orientation and entrepreneurial orientation on SME business performance. Nevertheless, the mediating role of innovation in determining the magnitude of the influence between market orientation and entrepreneurial orientation on business performance is smaller than the direct influence. Overall, the results of this study indicate that a combination of market orientation and entrepreneurial orientation are the instruments that underlie fashion SMEs in shaping innovation to improve the performance of creative (fashion) SMEs. Keywords—Market orientation, Entrepreneurship orientation, Innovation, Business performance, SMEs.