The Moderating role of venture capital financing on the determinants of financial innovation in Kenyan Micro and Small Enterprises

Abstract

In Kenya’s evolving entrepreneurial ecosystem, financial innovation is critical to the growth and competitiveness of Micro and Small Enterprises (MSEs), yet innovation outcomes remain uneven. This study examined the determinants of financial innovation and the moderating role of venture capital (VC) financing among MSEs in Nairobi, Mombasa, and Nakuru. Specifically, the study sought to assess the effect of firm-level determinants financial health, networking capabilities, founding team experience, firm size, and ownership structure on financial innovation; determine the direct influence of VC financing; and analyse the moderating effect of VC financing on these relationships. Anchored on the Resource-Based View and the Technology Acceptance Model, the study adopted a cross-sectional design. Data were collected using structured questionnaires from 543 MSEs, of which 483 valid responses were obtained through stratified and purposive sampling. Financial innovation was measured using a composite innovation index, and data were analysed using Ordinary Least Squares regression with interaction terms. The findings indicate that firm-level determinants significantly influence financial innovation and that VC financing strengthens the effect of internal firm capabilities on innovation outcomes. The study contributes empirical evidence on entrepreneurial finance in an emerging market context and informs policies aimed at promoting innovation-driven MSE growth. However, the cross-sectional design limits causal inference over time.