Artificial intelligence capability, eco-innovation, and sustainable performance in the digital economy: Evidence from SME hotels in an emerging market

Abstract

In the digital economy, artificial intelligence (AI) is reshaping how firms create value and pursue sustainability, yet how small and medium-sized enterprises in emerging markets convert AI capability into sustainable outcomes remains insufficiently understood. Drawing on the Resource-Based View and Institutional Theory, this study examines whether eco-innovation mediates the relationship between AI capability and the economic, environmental, and social dimensions of sustainable performance, and whether market turbulence conditions these relationships. Survey data from 350 respondents in small and medium-sized hotels in Pakistan were analyzed using partial least squares structural equation modeling. The results show that AI capability strongly fosters eco-innovation, which in turn improves all three performance dimensions and partially mediates the effect of AI capability on sustainable performance. Market turbulence strengthens the contribution of eco-innovation to economic and social performance, but not to environmental performance, and does not alter the link between AI capability and eco-innovation. The study contributes to the digital economy and sustainability literature by identifying eco-innovation as the mechanism that converts AI capability into sustainable value, and market turbulence as a boundary condition on that conversion in resource-constrained service firms. For managers and policymakers, the findings indicate that AI investments yield sustainability gains when they are embedded in eco-innovation strategies, particularly in volatile markets.