Globally, small businesses are acknowledged as key drivers of inclusive and sustainable economic growth. They make a substantial contribution to employment opportunities, innovation, resource usage, income distribution, and generation of revenue for governments in both the developed and developing economies (Turyakira, Sendawula, Turyatunga and Kimuli, 2019). This has drawn the attention of the policymakers and academicians, who have advocated for further research on small businesses (see: Adomako, Danso and Ofori Damoah 2016; Sandada, Pooe and Dhurup, 2014). The call for further research presents the need for the small business fraternity to develop strategies that catalyze their performance (Sendawula, Bagire, Mbidde and Turyakira, 2021).
Currently, the performance of small businesses in most developing countries including Uganda is undesirable (National Planning Authority, 2020). Specifically, 65.7 per cent of the small businesses in the four main commercial districts of Uganda (Kampala, Wakiso, Mukono and Jinja) are non-profitable (Mayanja, 2020). Similarly, majority of small businesses in trading, service and hospitality are more likely to lose 20–30 per cent of their total revenue (UN Capital Development Fund, 2020). This explains why more than 50% of these business in Uganda are more likely to operate below the poverty line or closing their operation during the current volatile, uncertain, complex, and ambiguous (VUCA) economic conditions (UN Capital Development Fund, 2020). This implies that if the current trend continues, it could lead to the liquidation of several small businesses in Uganda. As such, there is an urgent need to explore feasible strategies to restore small business performance in order to promote inclusive and sustainable growth in Uganda's economy.
Existing literature presents several theories to explicate strategies that can be undertaken to foster small business performance. These include; the resource based view theory (Hart, 1995), the dynamic capability theory (Teece, Pisano and Shuen, 1997), networking theory (Johanson and Mattsson, 1988), resource dependence theory (Pfeffer and Salancik, 1978) and the Schumpeterian theory (Schumpeter, 1942). However, we adopted the networking and the Schumpeterian theories to appreciate the efficacy of entrepreneurial networking and innovation in fostering small business performance in Uganda. This is because these theories can better explain how small businesses can obtain resources, develop capabilities and innovate which are a basis for better performance of small business.
The networking theory, as developed by Johanson and Mattsson (1988), suggests that entrepreneurial networking catalyzes small business performance. Entrepreneurial networking enables small businesses to establish formal and informal associations with customers, suppliers, financial institutions, and other players to get the support necessary for business performance (Sendawula, Ngoma, Bananuka, Kimuli and Kabuye, 2021). As such, entrepreneurial networks have emerged as a vital strategy for small firms to access resources especially in the developing world where formal institutions are reluctant to deal with them (Anwar and Ali Shah, 2020). With the informality nature of most of small businesses (Struwig, Krüger and Nuwagaba, 2019), they capitalize on informal networks to acquire customers as well as transact with other stakeholders like suppliers, creditors which boost their performance (Cárdenas, 2021).
Networks not only help small businesses function better, but they also stimulate innovation, which leads to higher performance. Through networks, owners can get business opportunities, skills, and knowledge that are vital in unlocking the innovative potential of small businesses to foster their performance as postulated by the Schumpeterian theory (Schumpeter, 1942). The theory argues that attaining high performance levels among small businesses calls for innovation that will enable them to respond to changing customer needs (Schumpeter, 1942). Empirically, innovation has been positively associated to small business performance (Ramadani et al., 2019; Hanelt et al., 2021). For any business to attain superior performance, innovation is critical. As the business environment becomes more volatile (Hanelt et al., 2021), entrepreneurs need to adjust their practices by becoming innovative (Guerrero-Villegas et al., 2018), otherwise their businesses will become obsolete (Zhang et al., 2019). Therefore, for businesses to remain competitive there is need to satisfy the unmet customer needs through innovation.
Upon that backdrop, it is arguably patent that entrepreneurial networking and innovation potentially boost the performance of small businesses. However, there is very scanty literature regarding the mediating effect of innovation in the association between entrepreneurial networking and small business performance. Even then, while there are considerable efforts to understand small businesses performance challenges as explicated by entrepreneurial networking in the small business fraternity, most strands of this research have focused mainly on the global north. Thus, this study undertakes to explore this phenomenon by highlighting holistic and contextual aspects in a developing economy perspective. Therefore, scholars and practitioners will get a thorough understanding of the importance of improving their entrepreneurial networks which will catalyze their innovative potential in order to produce new or significantly improved products and services that are vital in enhancing their performance.
The remainder of the paper is structured as; Section 2 is a review of literature where hypotheses have been developed, followed by section 3 which is methodology. Section 4 presents study findings whereas section 5 is the discussion of results and lastly Section 6 presents the summary and conclusion.