The interplay of decentralization, employee involvement and absorptive capacity on firms' innovation and business performance

•Decentralization positively influences innovation performance.•Decentralization positively influences employee involvement and absorptive capacity.•Employee involvement positively influences innovation performance and absorptive capacity.•Employee involvement mediates the relationship between decentralization and innovation performance.•Absorptive capacity mediates the relationship between decentralization and innovation performance.

This paper investigates the relationship between organizational characteristics and firm's innovation and business performance. Specifically, we examine how decentralization, absorptive capacity, and employee involvement (in light of the open innovation literature) impact firm's innovation, which in turn affects business performance. We test the proposed model on a large sample of 421 manufacturing and service firms and find decentralization being positively connected to employee involvement, absorptive capacity, and firm's innovation performance. Moreover, the results show that employee involvement and absorptive capacity mediate the relationship between decentralization and firm's innovation performance. The results also suggest that firm's innovation performance positively influence firm's business performance. Implications for managers and future research are discussed.