The influence of capital structure on technological innovation and business performance: examining the moderating role of absorptive capacity

Purpose This study aims to examine the relationship between capital structure, technological innovation and business performance in small and medium-sized enterprises (SMEs) within the manufacturing industries in Mexico, offering insights to enhance their growth and competitiveness. Design/methodology/approach A quantitative, cross-sectional study was conducted using 200 SMEs in Guanajuato, Mexico. The research employs variance-based structural equation modeling (PLS-SEM), integrating a hierarchical components model and the sequential scoring method for latent variables. Findings The results highlight the critical role of capital structure in driving technological innovation. A well-structured financial base significantly enhances innovation efforts, leading to higher productivity, competitiveness and profitability. Additionally, technological innovation is a key determinant of business performance, with absorptive capacity (ACAP) moderating this relationship. SMEs with higher ACAP effectively capitalize on their innovation initiatives, achieving superior performance outcomes. Practical implications Findings provide actionable insights for policymakers and industry stakeholders. Policymakers can develop innovation-friendly policies, while SMEs can use these insights to strategically allocate resources and optimize innovation-driven growth. Originality/value This study contributes to the literature by providing empirical evidence on the capital structure–innovation–performance nexus in Mexican SMEs. It also sheds light on ACAP’s moderating role, deepening our understanding of innovation and competitiveness mechanisms in resource-constrained firms.