Exploring the effect of innovation and firm networks on UK SME performance during times of financial distress

Abstract

Purpose The purpose of this research is to understand the effect of innovation and networks in mitigating the effect of COVID-19 on small and medium-sized enterprises' (SMEs’) performance. Moreover, we aim to explore how different regions withstand the effects of the COVID-19 recession. To do this, we carried out panel data analysis on firm-level data and generated several interesting results. We explore how networking and innovation can help mitigate the effects of extreme shocks on SMEs’ performance. Design/methodology/approach We use a rich and detailed longitudinal dataset and apply panel data econometric methods over the period 2015–2021. We also conduct several robustness tests to address endogeneity and examine the regional disparities between core and peripheral regions. Findings Our study uniquely focuses on the effects of COVID-19, innovation and external advice (as a proxy for networks) on the performance of small and medium-sized enterprises (SMEs). Importantly, we also explore the interaction effects of innovation and external advice with COVID-19. First, we find that both external advice and financial obstacles are associated with firm performance. Second, we find the interaction effect between innovation and the COVID-19 recession dummy to be positive and statistically significant. This suggests that innovation can be an important resilience strategy for SME performance during periods of economic downturn. Third, we find significant regional differences between the SMEs that operate in peripheral regions and those operating in core regions. Our findings are generally robust to potential endogeneity concerns. Originality/value Overall, the paper contributes to the theoretical and empirical literature on pandemic-driven and/or financial crises and the resilience of SMEs.