Exploring the effect of innovation and firm networks on UK SME performance during times of financial distress

Purpose: the purpose of this research is to understand what is the effect of innovation and networks in mitigating the effect of Covid-19 on SMEs’ performance. Moreover, we aim to explore how different regions withstand the effects of Covid-19 recession. To do this, we carried out panel data analysis on firm-level data and generatseveral interesting results. We explore how networking and innovation can help mitigate the effects of extreme shocks on SMEs’ performance. <br/><br/>Design/Methodology/Approach: we use a rich and detailed longitudinal dataset and apply panel data econometric methods over the period 2015-2021. We also conduct several robustness tests to address endogeneity and examine the regional disparities between core and peripheral regions.<br/><br/>Findings: our study uniquely focuses on the effects of Covid-19, innovation, and external advice (as a proxy for networks) on the performance of SMEs. Importantly, we also explore the interaction effects of innovation and external advice with Covid-19. First, we find that both external advice and financial obstacles are associated with firm performance. Second, we find the interaction effect between innovation and the Covid-19 recession dummy to be positive and statistically significant. This suggests that innovation can be an important resilience strategy for SME performance during periods of economic downturn. Third, we find significant regional differences between the SMEs that operate in peripheral regions and those operating in core regions. Our findings are generally robust to potential endogeneity concerns. <br/><br/>Originality/Value: overall, the paper contributes to the theoretical and empirical literature on pandemic-driven/financial crisis and the resilience of SMEs.<br/>