ABSTRACT. This research examines the individual and combined effects of internal
integration (II) and external integration (IE) on product innovation (IP), which is based
on ambidexterity theory. This study demonstrated that the combined effect of II and IE
are able to facilitate internal exploitation and external exploration to improve product
innovation. Originally, this study used two independent variables only – i.e. II and IE –
and product innovation as the dependent variable. Then, two additional independent
variables are added by calculating the combination between II and IE. Using different
calculation methods, the two variables results in two variables – ie. balanced II and IE
(BI) and complementary II and IE (CI) which represents combined effects of II and IE.
The object of this study is Small and Medium Enterprises (SMEs) situated in
Yogyakarata. The results showed that the individual effects of II and IE on IP are not
positively associated with product innovation. Similar with individual effects of II and
IE, BI also has no positive impact on product innovation, but CI is able to provide a
significant positive effect on product innovation.