The Role of Networks in Small and Medium-Sized Enterprise Innovation and Firm Performance by Sarel Gronum, Martie-Louise Verreynne, and Tim Kastelle The objective of this paper is to understand the contribution of networks to innovation and firm performance in small and medium enterprises (SMEs). Based on longitudinal data from 1,435 SMEs, we show that strong, heterogeneous ties improve innovation in SMEs. However, the connections between network ties and firm perfor- mance are more complex than previously thought, as the positive association is mediated by innovation. Consequently, SMEs should only concentrate on cultivating and maintaining networks if they lead directly to improvements in innovation. Introduction Innovation is vital to advancing living standards and wealth creation. Though innovation occurs in many guises, firms play a leading role in creating innovation and translating it into useful applications for the market (Organisation for Eco- nomic Co-operation and Development [OECD] 2010a). Innovation in firms takes place when knowledge is commercial- ized, for example in the form of new products, services, processes, or business models (Baldwin and Gellatly 2003). Since Schumpeter (1950) suggested that large firms are more likely to innovate than their smaller counterparts, research- ers have investigated the relationship among innovation, performance, and firm size (Rosenbusch, Brinckmann, and Bausch 2011). The investigation of inno- vation in small and medium enterprises (SMEs) is more recent (Audretsch and Lehmann 2005) and, although the evi- dence of a strong correlation between innovation and SME performance is over- whelming (e.g., Baldwin and Gellatly 2003; Mansury and Love 2008; Roper et al. 2002), the dynamics of this relation- ship remain ambiguous. One explanation can be found in the establishment of networks that play a Sarel Gronum is lecturer and PhD student at the University of Queensland Business School. Martie-Louise Verreynne is senior lecturer at the University of Queensland Business School. Tim Kastelle is senior lecturer at the University of Queensland Business School. Address correspondence to: Sarel Gronum, UQ Business School, Room 417, Joyce Ackroyd Bldg., St. Lucia, QLD, Australia 4072. Email: s.gronum@business.uq.edu.au. Journal of Small Business Management 2012 50(2), pp. 257–282 GRONUM, VERREYNNE, AND KASTELLE 257