Business creativity, innovation culture, sustainable competitive advantage, and sustainable business performance: evidence from MSMEs in Indonesia and the Philippines

Abstract

Achieving sustainable business performance has become a major challenge for Micro, Small, and Medium Enterprises (MSMEs) operating in dynamic and resource-constrained environments. Although capability-based perspectives explain how organizational capabilities contribute to competitive advantage, limited attention has been given to why different entrepreneurial capabilities perform distinct strategic functions in creating sustainable value. This study develops the Strategic Differentiation Perspective of Entrepreneurial Capabilities, conceptualizing Business Creativity as a generative capability, Innovation Culture as an enabling capability, and Sustainable Competitive Advantage as the Capability Conversion Mechanism through which entrepreneurial capabilities are transformed into Sustainable Business Performance. A quantitative comparative research design was employed using survey data from 200 MSMEs, comprising 100 respondents from Indonesia and 100 from the Philippines. The research model was analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM), complemented by bootstrapping, mediation analysis, and Partial Least Squares Multi-Group Analysis (PLS-MGA). Business Creativity positively influences both Sustainable Competitive Advantage and Sustainable Business Performance, whereas Innovation Culture positively affects Sustainable Competitive Advantage but does not exert a significant direct effect on Sustainable Business Performance. Sustainable Competitive Advantage significantly enhances Sustainable Business Performance and mediates the relationships between both entrepreneurial capabilities and performance. Partial mediation is observed for Business Creativity, while full mediation is identified for Innovation Culture. Multi-group analysis indicates that the model is largely robust across Indonesia and the Philippines, although the effect of Innovation Culture on Sustainable Competitive Advantage differs significantly between the two countries. The findings contribute to sustainability and entrepreneurship literature by introducing a function-based perspective that differentiates entrepreneurial capabilities according to their strategic roles during capability deployment and by reconceptualizing Sustainable Competitive Advantage as the mechanism through which entrepreneurial capabilities generate sustainable organizational value. The findings also provide practical guidance for entrepreneurs and policymakers seeking to strengthen MSME competitiveness, resilience, and sustainable performance in emerging economies. L26, M13, O31.