Effect of Innovation on Financial Performance of Small and Medium Manufacturing Enterprises in Nairobi County

Abstract

The adoption of innovation has been necessitated by the rapid change in technology. The manufacturing SMEs have adopted new strategies of sustaining their growth due to stiff competition. Most manufacturing SMEs have adopted innovation resulting in better performance, new products, growth and profitability (Lehtimaki, 1991 ). The objective of the study was to determine the effect of innovation on financial performance of small and medium manufacturing enterprises in Nairobi County. The research reviewed theories and empirical studies that explain the relationship between innovation adoption and financial performance. This included Schumpeter theory of innovation, Diffusion of Innovation and Technology Acceptance theory which are theories governing the adoption of innovation in organizations.The population of the study were the registered manufacturing SMEs in Nairobi County. Primary data was collected using questionnaires. The data collected relate to the level of innovation adapted, effects of innovation on financial performance and the challenges faced during implementation. Data analysis was done using Statistical Package for Social Sciences (SPSS) version 21 where inferential statistics were applied and multiple regressions employed to test the relationship between innovation and the financial performance of manufacturing SMEs in Nairobi County. The findings revealed a positive relationship (R =0.427). The study also revealed that a combination of use of computers, implementation of online sales through the internet, training and development of employees, level of expertise employed, adoption of technology, introduction of new branches/business and introduction of new products/services contributed to 73% of financial performance. The study concluded that innovation has a positive effect on financial performance. The study also concluded that innovation increased profits for the company; innovation increases the company’s market share, increases savings for the company and reduces operating cost of the small and medium manufacturing enterprises. The study recommends that it is vital for businesses to take process innovation to raise the level of quality of the products they produce as this research has revealed that process innovation can greatly enhance the production of quality products which would in the end raise the level of sales and increase the profit margins of the business.