This study examines the correlation between the organizational capabilities and firm performance of SMEs in both dynamic and stable environments in Hong Kong. Organizational capabilities are measured in terms of innovative ability, quality-enhancing capability, cost-reduction capability and ‘organicity’. Organizational capabilities are hypothesized to correlate positively with firm performance and to be moderated by environmental dynamism. A sample of 71 SMEs was drawn from the chemical and computer industries, which represent stable and dynamic industrial environments respectively. The findings suggest that organizational capabilities can significantly explain the level of SME performance and the impacts of environmental dynamism on these relationships.
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