Driving Sustainable Performance in SMEs Through Frugal Innovation: The Nexus of Sustainable Leadership, Knowledge Management, and Dynamic Capabilities

Abstract

Small and Medium Enterprises (SMEs) often need help to achieve sustainable performance due to constraints such as limited human and financial resources and restricted access to information. Frugal innovation, an approach that emphasizes cost-effective and resource-efficient solutions, offers the potential to address these challenges. This study explores how sustainable leadership, dynamic capabilities, and knowledge management interplay with frugal innovation to enhance the sustainable performance of SMEs. A quantitative survey was conducted using purposive sampling, collecting data from 236 craft SMEs in East Java, Indonesia. The research model was analyzed using Partial Least Square Structural Equation Modeling (PLS-SEM). The findings reveal significant positive relationships between sustainable leadership, knowledge management, dynamic capabilities, and frugal innovation. Additionally, frugal innovation directly impacts sustainable performance and partially mediates the relationships between sustainable leadership, knowledge management, dynamic capabilities, and sustainable performance (p <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"> <tex-math notation="LaTeX">$\le 0.001$ </tex-math></inline-formula> ). These insights contribute to the knowledge of SME sustainability by demonstrating that frugal innovation, supported by sustainable leadership, dynamic capabilities, and knowledge management, can significantly enhance sustainable performance. Practically, this research offers valuable implications for stakeholders and policymakers in crafting strategies that foster sustainable development in SMEs.