Digitalization in sustainable development: navigating green innovation in small and medium enterprises

Abstract

Digital transformation and digital leadership are widely cited antecedents of sustainability. Yet the micro-level mechanisms by which they operate, and the boundary conditions that amplify them, remain theoretically underspecified. Drawing on resource-based theory and upper-echelon theory, this study proposes and tests a moderated mediation model. Green innovation transmits the effects of digital transformation and digital leadership on the triple-bottom-line dimensions of sustainability performance (economic, social, environmental), while green organizational culture amplifies those transmission pathways. Hypotheses were tested using partial least squares structural equation modeling (PLS-SEM) with a two-step approach (445 employees from ISO 14001-certified textile-sector SME’s), ensuring robust validation of the proposed relationships. The findings reveal that green innovation serves as a significant mediator between digital transformation and digital leadership concerning sustainability performance. Additionally, green organizational culture is identified as a moderator that influences the relationship between green innovation and sustainability performance. The study extends RBT and UET by demonstrating that green innovation is the operative capability through which digital resources and leadership cognitions translate into triple-bottom-line outcomes. This pathway has previously been assumed but untested in resource-constrained emerging-market SMEs. The study encourages managers to adopt sustainable strategies that integrate digital transformation and leadership practices to foster firm development in an environmentally friendly manner. By promoting green innovation and cultivating a supportive organizational culture, SMEs can enhance their sustainability outcomes. This research highlights the importance of sustainable practices in the textile industry, which is crucial for addressing environmental challenges and promoting responsible business operations in emerging economies. This study contributes to the existing literature by integrating resource-based theory and upper-echelon theory to develop a quantitative model that addresses the gap in understanding how digitalization can lead to sustainability performance. By focusing on the specific context of Pakistani textile SMEs, it provides new insights into the interplay between digital leadership, digital transformation and sustainability practices.