Can playing defense yield gains? Examining the relationships among regulatory focus, innovation, and SME performance

Innovativeness and performance are keys to understanding the capability of SMEs. However, scant research examines the motivational frames that enhance behaviors, such as innovation, in SMEs. Regulatory focus theory provides the lens through which to we examined how SME owner motivation impacts innovation and firm performance, given that the SME owner primarily displays either a promotion or prevention focus. As such, we hypothesize the moderating effects of dominant regulatory foci radical on the relationship between innovation and SME performance. Based on a sample of 422 small business owners, we find a positive and significant direct relationship between both incremental and radical innovation on performance. Further, we report that prevention focus heightens the positive relationship between incremental innovation and performance, while radical innovation negatively impacts the relationship between radical innovation and performance; thus, highlighting the critical nature of strategic alignment that exists between regulatory focus strategy, innovation type and performance outcomes. This study brings the entrepreneur back into focus for small business research and investigates the intersection of firm-level and individual-level units of analyses.