The Impact of Innovation on Small and Medium Enterprises Performance

By: Mohamed Hussein Abdilahi & Abdikarim Adan Hassan

This study examines the impact of innovation on the performance of Small and Medium
Enterprises (SMEs) in Hargeisa, Somaliland. Target population of the study was 6930 SMEs in
Hargeisa; a number provided by Hargeisa Local Government, and Somaliland Ministry of Trade and Investment as the two institutions issue business licenses to the small enterprises and medium enterprises respectively. A sample of 378 SMEs has been drown from this population.

The study adopted both descriptive and regression analyses to estimate the impact of innovation. Regression results of the study reveal that innovation significantly affects the performance of SMEs in Hargeisa. The study finds that the effects of product innovation, marketing innovation and organizational innovation are statistically significant among these SMEs.


The fact that Small and Medium Enterprises (SMEs) constitute around 99.7 percent of the enterprises globally (Martin and Namusonge, 2014) proves their significance in contributing to the economic and industrial development in most countries. It is, therefore, necessary to put in place a policy mechanism that will assist their growth. In order to remain competitive, grow faster and function effectively and efficiently, SMEs need to utilize knowledge and technology efficiently. Employing advanced process technology, for example, generally leads to a better product quality and durability. Moreover, adopting a new technology results reduced costs by saving materials, energy or through replacement of conventional materials with cheaper alternative materials. SMEs play a major role in both developed and developing countries, encompassing more than 90 percent of business operations in Africa, and also contributing over 50 percent of GDP and employment of their economies (Martin & Namusonge, 2014).

Innovation (in business) means novelty, new things being done, or old things being done in new ways to increase the performance in terms of sales, profitability and market shares in an organization. It is an application of technological, institutional, human resources and discoveries of productive processes, resulting in new practices, products, markets, institutions and organizations that need organizational improvement or performance in terms of sales, profitability and market shares. Innovation in SMEs can be a product, process or marketing innovation adopted in order to increase performance of enterprises in terms of sales volume or otherwise. Small and medium enterprises are considered as the machine of economic growth that drives and promotes equitable development of nations, which is achieved by adopting innovation principles. The role of Small and Medium Enterprises in the economic and social development of countries is well established when the concept of innovation is applied on the

SMEs, and as a result, performance will be improving substantially. The sector is a nursery of entrepreneurship, often motivated by innovation (Twaliwi & Isaac, 2017).

SMEs in Hargeisa have not frequently applied the concept of innovation in their businesses. There are less new products in the market, less adoption of marketing innovation strategies and poor business innovation processes. As a result, these enterprises may not likely experience growing sales volume which in turn means poor performance. The market is full of old and previously existing products which the consumers already have knowledge about their quality. However, although SMEs in Hargeisa do not adopt innovation (product, process, marketing or organizational) fully and frequently, this does not mean there is a complete absence of innovation. Though in different degrees, all these innovations are present in these SMEs, and hence, their performance effect needs to be examined.

As innovation enhances the overall performance and competitiveness of the business, its effect can be probed from different angles. One of them is to evaluate the sales volume of the enterprise. Increased sales volume means increased business activities and revenue, and thus, it can be a clear measure of business performance. The purpose of this study is to investigate the effect of innovation on SMEs performance in Hargeisa, Somaliland. It specifically examines the impact of product innovation, process innovation, marketing innovation and organizational innovation on enterprises’ sales volume, and in turn, performance. Hargeisa is the capital of Somaliland, a self-declared republic in the Horn of Africa that broke away from Somalia in 1991 but has not obtained official recognition from any country since then.

The paper is organized as follows. Section one introduces the study while section two reviews the relevant literature. Section three is the methodology and section four presents the findings of the study. Section five concludes the study

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