Abstract

The objective of this current study is to investigate the relationship between different types of innovation and the financial performance of small and medium-sized enterprises (SMEs) in a developing country, specifically in Eritrea. To achieve this, a questionnaire was distributed to managers/owners of selected firms, and Smart-PLS structural equation modeling was employed to test the hypotheses. The results reveal that all the types of innovation considered, including product/service, process, marketing, and organizational innovations, have a significantly positive effect on the financial performance of SMEs. These findings can increase awareness among entrepreneurs, researchers, and policymakers regarding the relationship between innovation and SMEs' financial performance. They also underscore the significance of innovation as a fundamental driver for firms to enhance their competitiveness. This study contributes to a better understanding of how different types of innovation impact SMEs' performance. This study builds upon prior evidence regarding the impact of innovation on firm performance. It also significantly extends the existing literature on innovation and SMEs from the perspective of a developing country, thereby making substantial contributions to research in terms of policy, practice, and theory.

Key words: Innovation types, financial performance, developing country, small and medium-sized enterprise.