Entrepreneurial Orientation and Business Performance: The Mediating Role of Innovation Capability in an Emerging Economy

While the importance of entrepreneurial orientation (EO) for business performance (BP) is well established, the mechanisms underlying the EO-BP relationship remain unclear, especially in emerging economies. In this study, we explored the role of innovation capability (IC) as a mediator between EO and BP among small and medium-sized enterprises (SMEs) in Kosovo. A quantitative research design was used, and a survey was conducted with 525 SME owner-managers and senior managers. We used PLS-SEM in SmartPLS 4 to test the proposed model, including measurement model assessment, mediation testing using 5000 bootstrap replications with bias-corrected confidence intervals, moderation testing, and out-of-sample prediction (PLS predict). The results show that EO is positively associated with IC and that IC is positively associated with BP. The model explains 60.3% of the variance in BP, and IC partially mediates the EO-BP relationship, accounting for 44.4% of the total effect. The model specification examined found no statistically significant moderating effect of firm size on the EO–BP relationship (β = 0.052, p = 0.120). This finding emphasises that innovation capability is a suitable mediating variable between EO and BP in an emerging-economy context.