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Why are some firms able to survive and prosper through the recessions, technological revolutions, economic and market changes but others fail? As the business environment is characterised by accelerating pace of changes, this topic has received increasing attention from both academic scholars and industrial practitioners in an attempt to explain sustainable competitive advantage of firms. Establishing business partnerships has long been recognised as one of the most effective ways to help firms manage technological turbulence and dynamic market environments. Thus, this study adopts a promising approach-Dynamic Capability Approach (DCA)-in the context of business partnerships and investigates the role of dynamic capabilities in achieving superior firm performance. DCA has emerged to explore the dynamic capabilities that firms use to purposefully create, modify and re-combine their resources base in response to external market dynamics (Eisenhardt & Martin, 2000; Helfat, et al., 2007; Teece, Pisano, & Shuen, 1997). The central logic of DCA is that dynamic capabilities are higher-order capabilities that persistently transform ordinary organisational resources and capabilities into superior firm performance; they are conceptualised as the sources of firms' sustainable competitive advantage especially in dynamic business environments. Most studies in DCA field are conceptual and explanatory nature and empirical works are rare. The main purpose of this study is to conceptualise and operationalise dynamic capabilities, examine their importance for firm performance as well as their mediating role in the relationship between organisational resources, capabilities and firm performance. Five important dynamic capabilities identified are: integrative capability, agility, network competence, R&D competence, and market orientation. Integrative capability is the ability of firms to promote inter-organisational coordination and manage the complementarity and compatibility of resources and capabilities. Thus, this study also examines the role of integrative capability in enhancing the effect of organisational resources and capabilities on developing new dynamic capabilities.Relationship marketing perspective is incorporated to help explain the variation in organisational performance in business partnerships. To date, very little research has integrated DCA and relationship marketing perspective to study the firms' superior performance. This study is therefore aimed at filling this gap. Firms that are able to generate relational rents are those that are better at managing relational capital than their counterparts. Thus, the study empirically examines the importance of relational capabilities on firm performance and to what extent they enhance the effect of organisational resources and capabilities on superior firm performance and the development of dynamic capabilities. The study context is the Chinese manufacturing sector. Mail survey with structured questionnaire was used to collect date. Senior managers were chosen as key informants since they were assumed to have the broadest knowledge on the partnerships their business had. The sampling frame consisted of Chinese manufacturers with minimum of fifty full-time employees and five years of history in the main industry. A usable sample of 300 was obtained, yielding an effective response rate of 30%. The direct contribution of organisational resources, organisational capabilities, relational capabilities and dynamic capabilities on firm performance was examined using multiple regression. The findings indicate that the most important resources predicting superior performance are reputation for quality and brand reputation. Human resources are related to the achievement of strategic performance, although they do not have a significant effect on marketing effectiveness and financial performance. In terms of organisational capabilities, marketing and technological capabilities are more important predictors of firm performance than manufacturing and managerial capabilities. Surprisingly, learning capability is not directly related to firm performance. The findings also indicate that guanxi (interpersonal relationship) is the most important relational factor, followed by organisational commitment and loyalty to partnerships. Trust and conflict management do not significantly predict firm performance. With regard to dynamic capabilities, the findings indicate integrative capability, agility, network competence, R&D competence, and market orientation significantly predict the firm performance. The set of dynamic capabilities explains the highest variance of firm performance than organisational resources, organisational capabilities and relational capabilities. This suggests that dynamic capabilities are a superior source of firm performance.Structural equation modelling was used to examine the mediating role of relational capabilities and dynamic capabilities in the relationship between organisational resources, capabilities and firm performance. Relational capabilities are the important mechanisms for transmitting the effect of human resources and brand reputation into firm performance, as well as boosting the effect of managerial and marketing capabilities on firm performance and new capabilities. Relational capabilities are also important mechanisms that transform manufacturing, managerial and marketing capabilities into dynamic capabilities.With regard to dynamic capabilities, the findings support that each dynamic capability significantly mediates the relationship between resources and firm performance, particularly financial reputation, brand reputation and human resources. The findings also indicate that dynamic capabilities mediate the relationship between organisational capabilities, firm performance and the development of new capabilities. Among all dynamic capabilities, integrative capability is the strongest mechanism for transforming the capabilities particularly manufacturing, managerial, marketing and learning capabilities into superior firm performance and new capabilities. Integrative capability also enhances the effect of these four capabilities on the development of new dynamic capabilities. Agility and network competence are important mechanisms for transforming manufacturing, managerial and marketing capabilities into performance outcomes. Further, R&D competence enhances the effect of manufacturing and learning capabilities on performance whilst market orientation assists managerial and marketing capabilities in achieving superior performance. The major contribution of this study is to extend the knowledge of DCA by conceptualising, operationalising and empirically testing the importance of dynamic capabilities on firm performance in the context of business partnerships. The study suggests that further investigation in DCA is potentially a productive area to understand competitive advantage and business performance. The study also extends the applicability of DCA by testing the approach in emerging economies. In addition, by incorporating the relationship marketing perspective, the study provides a holistic overview of the major determinants of successful partnerships within the Resource-Based View. Furthermore, the study has implications for managers in that incorporating dynamic capabilities deepens the understanding of determinants of firm performance. Finally, the study implies that establishing business partnerships can be an effective approach to create dynamic capabilities with significant performance implications for the partner organisations.
