Purpose – The purpose of this paper is to examine innovation in small and medium-sized enterprises (SMEs), and develop a comprehensive theoretical framework of how innovation occurs, the end result, and impact on business financial performance, focusing on three types of innovations. Design/methodology/approach – The study uses a grounded methodology. Interviews with entrepreneurs from across industries inform the development of the research propositions. Findings – Besides market environment, business and quality aspects, for SMEs innovation is driven by a desire to be successful, and improve working conditions. Positive outcomes of innovation include an enhancement of SMEs’ reputation and image, an increase in operational efficiency and cost benefits, resulting in a better business financial performance, recruitment of a more skilled workforce, and greater in-house expertise leading to further innovation. The negative outcomes of innovation relate to management, operational issues, and financial risks; including costs, uncontrollable business growth, companies’ image and reputation loss, employees and customers’ issues as well as health, safety, and environmental impacts. Further hypotheses emerge from executives’ interviews, regarding specific outcomes of new product development, process innovation, and new ways of working. Research limitations/implications – Future research is required to examine how negative outcomes can be managed overall, and specific to types of innovation, as well as determining the financial cost and benefit of having a company-wide innovation. Originality/value – This study contributes to the theoretical basis for understanding organisational innovation in SMEs. The proposed framework is focused and comprehensive, enabling a better understanding of innovation.
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