From financial constraints to performance via innovation: Evidence from Indigenous‑owned SMEs

Conventional wisdom suggests that financial constraints hinder innovation and firm performance, yet emerging research hints at a more complex relationship. Building on Indigenous entrepreneurship and cultural entrepreneurship theory, we examine how and why financial constraints translate into innovation, and subsequent consequences for firm performance. Drawing on a nationally representative sample of 1,101 Indigenous-owned SMEs in Canada and matching with mediation analysis, we find that financial constraints are associated with weaker firm performance, yet are simultaneously associated with a higher likelihood of product and process innovation. Innovation, in turn, offsets up to 32% of the negative association between constraints and performance. We explain this pattern through the notion of culturally purposeful innovation—which channels scarcity into market‑ and mission‑relevant solutions. In Indigenous entrepreneurship contexts characterized by structural constraints and strong cultural logics, innovation emerges as a culturally grounded mechanism linking adversity to sustained performance outcomes. We contribute to strength-based Indigenous entrepreneurship, cultural entrepreneurship, and financial constraint literature. We also offer implications for entrepreneurship practice.