EFFECTS OF BUSINESS MODEL INNOVATION AND DIGITAL CAPABILITY ON THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN LAGOS

Abstract

Small and medium-sized enterprises (SMEs) are central to Nigeria's economic development, yet persistent performance deficits in market competitiveness, customer retention, and service quality continue to constrain their growth. Empirical evidence on the combined effects of business model innovation (BMI) and digital capability (DC) on SME performance within the Lagos context remains limited. Grounded in the Dynamic Capabilities Theory (Teece, Pisano & Shuen, 1997) and the Technology-Organisation-Environment Framework (Tornatzky & Fleischer, 1990), this study examined the effects of four BMI dimensions, namely value proposition innovation (VPI), value creation innovation (VCI), value capture innovation (VCAI), and market innovation (MI), on SME performance, and tested the moderating role of digital capability. A quantitative cross-sectional survey of 387 respondents, drawn from a registered population of 11,663 Lagos SMEs, tested five null hypotheses using Partial Least Squares Structural Equation Modelling (PLS-SEM) via SmartPLS 4. Four hypotheses were supported: VPI, VCI, VCAI, and MI each positively and significantly predicted all four performance indicators, namely market share, customer retention, employee retention, and product and service quality. Market innovation was the strongest predictor (β = 0.449). The moderation hypothesis was not supported (β = −0.387, p = 0.237), though digital capability exerted a significant direct performance effect (β = 0.546, p = 0.004), with the model explaining 41.1% of variance. The study introduces the dual transformation burden concept, proposing that simultaneous investment in BMI and DC generates diminishing returns in resource-constrained Nigerian SMEs, and contributes a validated instrument and original PLS-SEM evidence to the sub-Saharan African BMI literature.