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This paper aims to discuss the mediating effects of innovation on the relationship between knowledge management and firm competitiveness.

A self-administered questionnaire was used to collect data from small construction firms in the Eastern Region of Peninsular Malaysia. Out of the 190 construction firms surveyed, 153 (80.5%) respondents returned their completed questionnaire. These were used for data analysis. The data were then analyzed using the covariance-based structural equation modeling (SEM).

Knowledge management had a direct and significant positive effect on firm competitiveness. Nonetheless, the effect of knowledge management on firm competitiveness was mediated by innovation. This indicates that knowledge management should be supported by technical and administrative innovations in the firm.

The data collected were from a limited sample of construction firms. In addition, conducting a study on a region of Malaysia may limit the generalizability of the model.

While knowledge management is crucial for a firm’s competitiveness, technical and administrative innovations must be concurrently improved for a stronger firm competitiveness. This is especially true in terms of financial strength and core competence.

This paper provides some empirical evidence that technical and administrative innovations fully mediated the relationship between knowledge management and firm competitiveness. The results consolidate the resource-based view on the importance of internal resource and capability of the firm and improve KM research area. It also strengthens the view that KM is a critical factor for firm competitiveness, but a good KM without strong innovation will not increase the competitiveness of small construction firms.