TYPE OF INNOVATION AND SMES PERFORMANCE: FINANCIAL AND NON-FINANCIAL PERSPECTIVE

Abstract

In a rapidly changing environment, innovation is often regarded as a key driver of sustainable competitive advantage. It fosters improvements that facilitate continuous development, which is essential for a firm's survival. This ongoing enhancement enables firms to grow more quickly, increase their efficiency, and ultimately achieve higher profitability compared to those that do not prioritize innovation. However, the relationship between innovation and its impact on the performance of small and medium-sized enterprises (SMEs) in developing countries remains insufficiently explored. Despite the significance of innovation, limited attention given to the potential influence of different types of innovation on SMEs, particularly in terms of both financial and non-financial performance. To address this gap in the extant literature, this study examines the impacts of product, process, marketing, and organizational innovation on the financial and non-financial performance of manufacturing SMEs in Malaysia. This study collected data from 172 SME owners or managers in manufacturing through email surveys. Data analysis employed Structural Equation Modeling with Partial Least Squares (SEM-PLS) to test hypotheses. The results indicate that all four types of innovation, product, process, organization, and marketing, have a positive impact on the financial performance of SMEs. Additionally, the findings reveal that three types of innovation, product, process, and organization, significantly influence the non-financial performance of SMEs, whereas marketing innovation does not demonstrate a significant effect. This research contributes to the existing literature by providing a comprehensive understanding of how various forms of innovation influence SMEs performance in the manufacturing sector of a developing nation, particularly Malaysia.