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The purpose of this paper is to find out how absorptive capacity (AC), leadership capacity (LC) and government support (GS) affect small and medium enterprises (SMEs) innovation (product innovation [PDI], process innovation [PCI] and distribution channel innovation [DCI]), taking into consideration the role of innovation (PDI, PCI and DCI) on competitive advantage and SMEs performance and the moderating role of customer orientation (CO).

This study gives a theoretical model tested using structural equation modeling. The information used to test the hypotheses came from interviews with the top managers of Vietnam’s SMEs. The 633 survey respondents from the southern part of Vietnam were chosen for the study. The goal of the 47-item questionnaire is to look at how all variables relate to each other.

The results show that a firm’s LC has the most significant impact on innovation, followed by its AC and GS. According to the study, DCI does not lead to competitive advantage but improves SMEs’ performance. In addition, the study’s findings indicate that CO moderates the relationship between PDI – SMEs performance and DCI – SMEs performance.

The classification of only three types of innovation (PDI, PCI and DCI) restricted the applicability of the research to other kinds of innovation in SMEs. Second, only AC, LC and GS are identified in this study as external factors that influence business innovation. In this study, the authors have not studied different business industries; the authors recommend that the research in the back on SMEs should investigate their classification into distinct industry groups, including agricultural, forestry and marine products; industry and construction; and commerce and services.

This study shows the importance of innovation senior management for innovation in SMEs. This study found that innovation, especially continuous innovation, increased competitive advantage and SMEs performance. Companies that wish to innovate must have access to external resources and support. Moreover, enterprises must comprehend their consumers’ wants to achieve innovation and better SMEs’ performance.

This research significantly contributes to enterprise innovation and operational efficiency for the sustainable development of SMEs in Vietnam. It is expected to enhance employment opportunities, maintain social stability and expand Vietnam’s gross domestic product.

This study contributes to the growing knowledge of the indirect and direct effects, the mediating function of innovation (PDI, PCI and DCI) on competitive advantage and SMEs performance and the moderating effect of CO.