Open innovation has a significant impact on innovative activities and the competitiveness of small and medium-sized enterprises (SMEs). Furthermore, this topic addresses a key challenge faced by many firms in maintaining their position within the high-risk business environment. The present study was conducted to investigate the relationship between recruitment capacity, open innovation activities, and firm performance, with the mediating role of innovation strategy, among managers and employees of SMEs in the city of Mashhad. The employed method is descriptive in nature and survey-based. A combination of library and field research methods was used for data collection. In terms of application, this study is categorized as applied research. The statistical population comprises managers and employees of SMEs located in Mashhad. Based on convenience sampling, a total of 195 finalized questionnaires were obtained after collection. The data were analyzed through structural equation modeling using SmartPLS software. The findings confirm all hypotheses and indicate a significant relationship between recruitment capacity, open innovation activities, and firm performance, mediated by innovation strategy, among managers and employees of SMEs in Mashhad. According to the findings, this study's results may benefit startups by helping them foster innovation and embrace entrepreneurial orientation behaviors to enhance their recruitment capacity and firm performance. These results underscore that improving recruitment capacity and designing effective innovation strategies can contribute to better performance in small and medium-sized enterprises.