Driving Triple Bottom Line Performance Through Green Innovation: The Roles of Innovation Orientation and Green Absorptive Capacity in Indonesian SMEs

Abstract

Objective: This study examines innovation orientation and green absorptive capacity as internal capabilities that drive green innovation (GI), and tests GI as the mediating mechanism influencing firm performance across the triple bottom line (TBL). Design/Methods/Approach: This study employs a quantitative cross-sectional survey design. Data were collected from 191 owners or decision-makers of green/sustainable SMEs operating across six business sectors in Java, Indonesia, through purposive sampling. The collected data were analyzed using Partial Least Squares Structural Equation Modeling with SmartPLS 4.1. Findings: The results indicate that innovation orientation and green absorptive capacity both positively and significantly influence GI. GI significantly improves firm performance. Furthermore, GI mediates the relationship between innovation orientation and firm performance, as well as that between green absorptive capacity and firm performance. Originality/Value: This study contributes to the existing literature on GI in SMEs by simultaneously integrating two internal capabilities as antecedents of GI within a comprehensive model. It extends prior studies by adopting GI as a higher-order construct comprising green product and green process innovation, and by measuring firm performance through the TBL framework, which encompasses financial, environmental, and social dimensions. This study is also one of the few empirical investigations conducted in the Indonesian SME context. Practical/Policy implication: Given the results, SME owners should prioritize building an innovation orientation through an integrated strategy, structure, and process, while simultaneously developing green absorptive capacity to effectively absorb and utilize external environmental knowledge. Policymakers and supporting institutions should design programs that strengthen these internal capabilities to accelerate green transformation among Indonesian SMEs.