The effect of green innovation on the performance of small and medium enterprises

Abstract

Environmental degradation presents a major challenge for modern businesses, particularly for small and medium-sized enterprises (SMEs) in developing nations like Indonesia. In response to growing public concern over global environmental issues, green innovation has emerged as a viable solution. However, many SMEs remain primarily focused on enhancing their economic performance. Adopting green innovation offers a strategic pathway for SMEs to improve both sustainability and financial outcomes in the increasingly competitive global market. This study aims to comprehensively examine the factors that influence the adoption of green innovation in SMEs, as well as the outcomes of its implementation. It also investigates the mediating role of green innovation in the relationship between intellectual capital, sustainability performance, and financial performance. Data were collected through a survey involving 336 SMEs operating in Bali, Indonesia, using a questionnaire distributed directly to business owners or managers over a three-month period. The findings reveal that intellectual capital significantly contributes to enhancing green innovation, sustainability, and financial performance among SMEs. Furthermore, green innovation functions as a mediating factor linking intellectual capital to both sustainability and financial outcomes. These results highlight that implementing green innovation not only supports SMEs in meeting social and environmental responsibilities but also strengthens their economic performance.