Effect of human capital on the performance of small and medium enterprises: a mediating role of innovation practice in Ethiopia

In this knowledge economy era, people-dependent intangible organizational resources, such as human capital, drive SMEs’ innovation and performance globally. However, scant literature examines the nexus between human capital, innovation, and SMEs’ performance. Hence, the study aimed to examine the mediating role of innovation practice in the nexus between human capital dimensions (formal education and managerial skill) and the performance of SMEs. A proportionate stratified with a simple random sampling technique was used to take 425 representative owner-managers of SMEs in Ethiopia. CB-SEM was used for data analysis. Findings reveal that owner’s managerial skills and formal education significantly and positively influence SME performance and innovation practice. However, innovation practice partially mediates the nexus between formal education, managerial skills, and SME performance. Hence, the study suggests for policymakers and stakeholders to play a critical role in aligning the formal education system and managerial skill development to stimulate innovation and improve SMEs’ performance. The study also suggests for SMEs to leverage their owners’ human capital for innovation-driven performance. Furthermore, this study contributes novel insights that add to the body of knowledge in the extant entrepreneurship field.