Effect of adoption of Financial Innovation on Performance of small and medium Enterprises in Kenya

Abstract

Small and Medium Enterprises (SMEs) are the main drivers of economic and social development in emerging economies. They represent a large number of businesses in a country that generate wealth and employment. They are widely considered vital to a country’s competitiveness. SMEs are hailed for their pivotal role in promoting grassroots economic and equitable sustainable development (Pelham, 2010). According to Tufano (2013), innovation entails firms developing new products or new production processes to better perform their operations, in which case the new products could be based on the new processes. Adoption of financial innovation has been necessitated by the rapid change in technology. The SMEs have adopted new strategies of sustaining their growth due to stiff competition. Most 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 adoption of financial innovation on performance of small and medium enterprises in Kenya. The study adopted Schumpeter theory of innovation, Diffusion of Innovation and Technology acceptance theory to explain the relationship between financial innovation adoption and performance of SMEs in Kenya. The population of the study was the registered SMEs in Nairobi County. Primary data was collected using self-administered semi-structured questionnaires. Secondary data was collected from finance journals and 2 periodicals. 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 SMEs in Nairobi County. The findings revealed a positive relationship between adoption of financial innovation and performance of SMEs in Kenya. 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 up innovation to raise the level of quality of the products they produce which would in the end raise the level of sales and increase the profit margins of the business.