Effect of Innovation Adoption on Financial Performance of Small and Medium Enterprises in Kilifi County, Kenya

Abstract

Aims: Small and medium enterprises (SMEs), create jobs and contribute to GDP but SMEs in Kilifi County are facing stagnation and high failure rate. This study set out to test three hypothesis i.e. process innovation has no significant effect on financial performance of SME’s, product innovation has no significant effect on financial performance of SME’s & Structured innovation has no significant effect on the financial performance of SME’s. The study is anchored on Theory of Technology Acceptance Model (TAM), Diffusion of innovation Theory and Kane's Theory of Innovation. Study Design: The study employed explanatory research design with use of both qualitative and quantitative data approaches. Place and Duration of Study: The study was carried out in the year 2021/2022 in Kilifi County in Kenya. Methodology: From a target population of 496 registered SMEs, a Sample size of 216 SMEs was drawn using simple random sampling with use of self-administered questionnaires with both open and closed ended questions collecting data from managers/owners of the SMEs. Results: Correlation results indicated that innovation (product, process and structural) are significantly associated with financial performance. Regression results revealed existence of a significant effect of each innovation on Financial Performance; Business Structural Innovation (B=.106, p= .001), Process innovation (B=.289, p=.003) and Product innovation (B=.143, P<.001).  Conclusions: A key finding is that only one in every five SMEs in Kilifi are past their 8th birthday. Business innovation has the highest variability suggesting most of the SMEs configure their businesses to market needs. Despite business innovation being low in SMEs, it is the most yielding when it comes to its effect on financial performance. Compared to business and process innovation, product innovation has least differences among the SME. It is conclusive that innovation among the SMEs is still low but the innovation-pursuing SMEs are also performance leaders.