ENTREPRENEURIAL ORIENTATION AND BUSINESS PERFORMANCE OF SME's: THE MODERATING ROLE ENVIRONMENTAL DYNAMICS

Abstract This study examines the relationship between entrepreneurial orientation (EO) and business performance in Ethiopian SMEs, with environmental dynamics (ED) as a moderating variable. Grounded in the Resource-Based View (RBV) and contingency theory, the research employs a quantitative approach, utilizing structural equation modelling (SEM) to analyse data collected from 365 SMEs across manufacturing, service, and trade sectors in three Ethiopian regions. The results reveal a strong positive relationship between EO and business performance (β = 0.715, *p* < 0.001), supporting Hypothesis 1. Furthermore, environmental dynamics significantly moderate this relationship (β = 0.175, *p* < 0.001), with the EO-performance link being stronger in turbulent environments (Hypothesis 2). The findings highlight that SMEs in dynamic sectors benefit disproportionately from EO, while those in stable environments may require complementary strategies like operational efficiency. The study contributes to the EO literature by empirically validating the contingency perspective in an emerging economy context and offers practical insights for Ethiopian SMEs and policymakers. Specifically, it underscores the need for tailored entrepreneurial training programs and dynamic capability-building initiatives to enhance SME resilience and competitiveness. Limitations include the focus on three sectors and reliance on subjective performance measures, suggesting avenues for future research to incorporate multidimensional EO constructs and objective performance metrics across diverse industries.