Financial Literacy and Innovation Performance in SMEs: The Mediating Effect of Risk-Taking

Introduction

Innovation, understood in the world of economics, reflects a set of works focused on the combination of internal and external resources, transformed into flows of knowledge (e.g. Mangematin and Nesta, 1999). Previous literature on innovation indicates that, in recent years, a systematic and fundamental change in the innovative activities has occurred in small and medium-sized firms (SMEs) (Ripoll and Hervás-Oliver, 2011). The study of financial literacy for these kinds of businesses has been recognized as a topic of great importance, as SMEs are the engine of the economy in many countries (e.g. Fernández Mesa and Alegre, 2015) and financial literacy can guarantee the perpetuation and sustainability of these firms (Starček and Trunk, 2013).

However, in previous literature there is little evidence about the influence of financial literacy on innovation performance (Eniola and Entebang, 2015). Furthermore, a significant gap remains in the understanding of how risk-taking can exert a mediating effect between financial literacy and innovation within the world of SMEs. Therefore, although there are studies that have addressed the influence of financial literacy and risk-taking on innovation, their effect has not been collectively analysed.

On this basis, this chapter aims to provide a better comprehension of the direct influence of financial literacy in the innovation performance of SMEs. Financial literacy plays an essential role in generating product and service innovation (Rauch et al., 2009), given that certain financial behaviours make product and service innovation processes different (De Massis et al., 2015). Second, the authors go beyond the conceptual framework that examines the relation of these two variables by introducing risk-taking as a mediating factor, helping to better understand previous findings on consequences of financial literacy and risk (Thakur and Kannadhasan, 2019). The development of financial literacy enhances individuals’ perception of financial knowledge and reduces financial risks (Marques et al., 2015), which in turn may benefit the innovation of products and services (Branson and Zuze, 2012), increasing the sustainability and profitability of the firm (Shen et al., 2016).

In this study, product and service innovation is understood as any improvement in the characteristics or functionalities that allows to reach differentiated performances from other products and services offered by a business (OECD, 2005). Financial literacy refers to the knowledge, behaviours, skills or maturity acquired for adequate and informed financial decision-making (Branson and Zuze, 2012). Finally, risk-taking is considered as the propensity to get involved in risky projects and the capacity to manage their inherent uncertainty.

Based on the above, this chapter seeks to shed light on this topic by addressing the following research questions. How does the level of financial literacy influence the sustainable innovative effort of SMEs? What is the relationship between risk-taking and innovation? Is risk-taking a mediating variable between financial literacy and innovation? To the best of the authors’ knowledge, this is the first study analysing the impact of financial literacy in SMEs innovation taking into account the risk propensity of the firms.

To meet these research objectives, information is collected from 309 SMEs from the Spanish context through a survey on expectations, strategic factors and risks affecting the competitiveness of SMEs. The firms are classified by autonomous communities, industry and size. The primary data collected through the survey is complemented with secondary business data, such as R&D expenditure, total assets, leverage and return on assets (ROA), captured from the Sistema de Análisis de Balances Ibéricos (SABI) database. The collected data are analyzed through a quantitative approach. A mediation analysis is developed using risk-taking as a mediator variable, studying both the direct and indirect effect of financial literacy on innovation performance.