Master's Thesis from the year 2014 in the subject Business economics - Miscellaneous, grade: 1.3, Berlin School of Economics and Law (Institute of Management Berlin), course: MBA Transatlantic Management - Innovation, language: English, abstract: This research aims to understand how innovation affects and is affected by a firm's financial performance. It focuses particularly on the Internet industry and collects both quantitative and qualitative data from online-based SMEs in Germany. The results reveal that among online-businesses, the size of the company in terms of revenue is positively related to the level of innovation, whereas lower profitability and smaller absolute earnings seem to encourage higher levels of innovation. Companies with higher revenues are found to earn generally lower profit margins. It was also found that companies that experienced a reduction in annual revenue have a tendency to increase innovation levels. No significant effects were found between innovation levels and change in profitability. Similarly, no significant effects were found between change in profitability and growth. Among online-based SMEs, this study highlights the importance of innovation as an instrument employed by distressed companies to improve their performance. It also shows that there may be a tendency for the companies that are more profitable to focus less on innovation.