Innovation Capabilities Decoded: Risks and Rewards in Small and Medium Enterprise Performance

European Management Journal. 2026. Vol. 44. No. 2. P. 245–259.

Osiyevskyy O., Sinha K., Shirokova G., Shtepa S.

Innovation capabilities form the basis for firms’ adapting to changing external environments and creating and sustaining competitive advantage. Yet we still know relatively little about the impact of the distinct types of innovation capabilities on firm performance and its reliability. Grounded in the organizational capability view of innovation, our study is the first to propose a theoretical framework linking the three distinct types of firm innovation capabilities (customer-, marketing-, and technology-focused) with the characteristics of the resulting performance distributions (level and variability) of small and medium enterprises. The presented empirical results reveal that distinct types of innovation capabilities have dramatically different risk–reward payoffs. In particular, customer-focused innovation capability improves the performance level while also rendering it unreliable. Marketing-focused innovation capability does not have a significant impact on firm performance, yet noticeably augments its variability. Finally, technology-focused innovation capability stabilizes performance without affecting its level.

Keywords: performance, innovation capability, SMEs, Performance variability

Publication based on the results of: Economic and mathematical analysis of markets, games, and decision-making (2025)