This research examines the effects of psychological empowerment on firm performance through the mediation of innovation types. Using survey data of 202 employees in Saudi Arabia SMEs and a structural equation modeling (SEM) approach, the study finds that psychological empowerment can enhance, directly and indirectly, firm performance. The study also finds that psychological empowerment produces a positive effect on innovation types. Moreover, the study finds an innovative type sequentially mediates the relationships between psychological empowerment and firm performance. An examination of psychological empowerment helps identify a critical psychological process and understanding how empowerment affects firm performance. Furthermore, an organization’s ability to change its capacity and innovation is associated with the observable characteristics of SMEs and the environmental requirements. Contributions to both research and practice are considered, as well as the study’s limitations and followed by the study’s conclusions.