Small and Medium Enterprises (SMEs) are widely recognized as the key engine of economic growth, wealth generation and job creation among the populace around the world and Africa in particular. Despite their contributions to income generation and employment creation, SMEs in general are currently faced with many problems. However, innovation adoption has been hypothesized as a means of overcoming harsh conditions of SMEs performance. Unfortunately, there have been poor business innovation processes among manufacturing SMEs in both developed countries and emerging economies. The study examined the effect of environment on the link between process innovation and performance of SMEs in Kenya.The study tested three null hypotheses: process innovation has no significant effect on the performance of SMEs, environmental dynamism has no significant moderating effect on the relationship between process innovation and performance of SMEs and environmental munificence has no significant moderating effect on the relationship between process innovation and performance of SMEs in Nairobi County. The research followed a descriptive survey design. The target population for this study involved all the 600 registered manufacturing SMEs in Nairobi County. In this study,164 respondents were included in the study. Using factor analysis, three antecedents of process innovation were identified namely; new processes, improved processes and blended processes. Based on the summary of the findings, process innovation was found to have a weak but positive significant effect on the performance of SMEs in Nairobi County. However, the inclusion of a moderator variable (external environment) enhanced the link between process innovation and firm performance. This study introducednew statistical models in the form: Y1= βo1 + β11 PI + β21ED+ β31 PI*ED +εo and Y1= βo1 + β11 PI + β21EM+ β31 PI*EM +εo