Intellectual capital and entrepreneurial orientation influence firm performance through innovation capability among micro and small enterprises in Ethiopia

The study focuses on direct and indirect impact of intellectual capital (IC) and entrepreneurial orientation (EO) on firm performance through innovation capability (ICAP) in micro and small enterprises (MSEs) in an emerging market context. The study responds to growing calls for research that explains the mechanisms through which intangible resources and entrepreneurial strategic orientations contribute to firm performance in resource-constrained economies. The study design was quantitative cross-sectional and 300 respondents like owners, employees and managers were surveyed between January and April 2026 in Ethiopia. For this, the researcher used the technique of Structural Equation Modeling with AMOS to evaluate the measurement model, the structural model, and to test the direct and indirect relationships between IC, EO, ICAP and firm performance. The findings reveal that IC and EO significantly and positively influence firm performance. The results further demonstrate that ICAP partially mediates the relationships between IC and firm performance and between EO and firm performance, indicating that IC and EO contribute to firm performance both directly and indirectly through ICAP. The results contribute to the understanding of how MSEs in developing economies can use IC and EO to build their ICAP and improve their firm performance, and, more importantly, shed new light on the mechanisms that enable firms to gain sustainable competitive advantage, while providing entrepreneurs, managers, and policy makers with practical insights on ways to stimulate innovation-driven growth.