Innovation and Firm Performance: Evidence from Malaysian Small and Medium Enterprises

Acknowledging the existence of a large proportion of small and medium enterprises (SMEs) and their remarkable contribution to an economy, this sector’s competitiveness and development must be sustained. At the firm level, intense competition under the global economic framework requires this sector reconsider their competitive position vis-à-vis their rivals, amongst others, through innovation. Therefore, innovation has become a centre stage in many empirical studies, especially to examine its relationship with firm performance. Little attention, however, was given to the possible impact of various dimensions of innovation on firm performance. Enriching the literature, this paper evaluates the impact of various innovation dimensions on the performance of SMEs. A total of 284 samples were collected from SMEs in the food and beverage, textiles and clothing and wood-based sub-industries. The data were analysed using a hierarchical regression analysis. The findings confirmed the hypotheses that product innovation and process innovation influenced firm performance significantly, where the impact of the former was stronger than the latter. Besides consolidating the existing theory on the importance of innovation for explaining a variation in firm performance, the findings also inform SMEs and policy makers that innovation is a critical factor in today’s entrepreneurial activities. Further studies should look into how SMEs could calculate cost-benefit ratio of innovation and how they could opt for internal or external sources of innovation before actual innovation is undertaken.