A structural equation modeling approach to evaluating innovation dynamics’ effect on SME performance in the United Arab Emirates

Abstract Understanding the role of innovation capabilities in driving the performance of SMEs is crucial in today’s competitive landscape. Despite the prominence of SMEs, the specific mechanisms through which innovation capabilities influence their success remain unclear. This study investigates the relationship between innovation capabilities and SME performance in the UAE, a rapidly developing economy characterized by economic diversification and technological advancement. Using data collected from 255 SME industry experts and analyzed through Structural Equation Modeling (SEM) with AMOS, the results reveal significant positive relationships between the constructs studied. Innovation Capability (IC) demonstrated a notable impact on performance with a beta coefficient of 0.43 (p = 0.001), underscoring its role in fostering adaptability and competitiveness. Innovation Culture (InC) exhibited the strongest influence, with a beta coefficient of 0.65 (p < 0.001), highlighting the importance of fostering a collaborative, creative, and risk-taking environment. Organizational Innovation (OI) and Employee Engagement (EE) also significantly contributed to performance, with beta coefficients of 0.32 (p = 0.001) and 0.28 (p = 0.024), respectively. These findings highlight the critical role of innovative considerations in enhancing SME performance within the UAE’s unique socio-economic and cultural context. These results serve as a guidance for company executives and politicians in creating an atmosphere that supports the nation’s continued SME growth and economic prosperity.