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The purpose of this paper is to examine effects of entrepreneurial leadership (EL) and organizational innovation (OI) on business performance (BP) of small and medium enterprises (SMEs) as well as to determine whether environmental dynamism (ED) moderates the mediating effect of OI in the EL‒BP relationship.

The study was carried out on the basis of questionnaire survey among 243 SME owners of Pokhara valley of Nepal. Hierarchical multiple regression and other different PROCESS models were considered to examine direct, mediation, moderation and moderated mediation relationships.

The findings suggest a significant positive effect of EL on OI and BP and significant mediating role of OI in EL‒BP relationship. But contrary to the prediction, the results indicate that the moderation and moderated mediation relationship are weaker under a dynamic environment than a stable environment.

As research reveals, ED moderates the studied model differently, and it raises questions on applicability of western theories, scales and their relationship in the South Asian context. Besides this, it has few limitations, which also present opportunities for future research.

The findings of this research will be significant to entrepreneurs, educators and policymakers for better understanding about study variables, to use as consulting options as well as to prepare effective policies for entrepreneurship development.

This study is perhaps the first study that examines the complex moderated mediation model in the context of minimal work on EL‒BP relationship and facilitates more sophisticated understanding about their relationships as well as shows variables’ and model’s generalizability in the eastern context.