Financial literacy, risk-taking propensity and process innovation in Spanish SMES.

Abstract

Objectives: This research aims to understand the influence of the CEO’s financial literacy on SME’s process innovation. For this purpose, it explores the role of risk-taking propensity as a psychological association mechanism. Further, this work elaborates on the conditional role that the CEO’s financial literacy level can exert on this relationship.

Theoretical framework: Hypotheses are constructed drawing on the enriched upper echelon theory and the resource-based view, providing a multi-theoretical perspective.

Methodology: A conditional mediation model is performed on 318 Spanish SMEs using CB-SEM. Endogeneity is addressed using instrumental variables and Gaussian copulas.

Results/implications: Our results not only reveal that the CEO’s financial literacy contributes positively to process innovation by bringing rationality to the whole process, but also enables CEOs to assume more risks as a result of an enhanced risk management. Our results also suggest that above-average financial literacy levels can be considered an intangible resource which, through increased self-confidence and financial resources, can enable CEOs to make the most of their higher risk-taking propensity to innovate processes. These findings entail several implications for SMEs, advisors and legislators.