Linking internal environmental capabilities to sustainable competitive advantage in manufacturing SMEs: The mediating role of eco-innovation

With the world's growing emphasis on environmental issues and the increased pressure on small and medium-sized manufacturing enterprises (SMEs) to address such issues, sustaining competitiveness has become a critical concern for SMEs. Their organisational resources and capabilities must be configurated to align with environmental requirements to sustain their competitiveness. While mounting research has highlighted the importance of environmental capabilities in facilitating proactive environmental practices, it remains unclear how these capabilities can improve manufacturing SMEs' sustainable competitive advantage (SCA). This study, therefore, has investigated how; green absorptive capacity, organisational capabilities and strategic environmental orientation have affected firms' SCA, along with exploring the mediating effect of eco-innovation in such relationships. Using a sample of 176 manufacturing SMEs in Egypt, a cross-sectional survey approach was adopted to collect data on the research variables. The data were analysed using the Smart-PLS software application, and the results demonstrated the significant roles of; green absorptive capacity and strategic environmental orientation in facilitating eco-innovation, which in turn have helped SMEs sustain their competitive advantage. On the other hand, organisational capabilities did not appear to directly or indirectly affect firms' SCA. Hence, this study may pique the interest of SME managers as it has emphasised the importance of strategic environmental orientation and green absorptive capacity in fostering eco-innovation and sustaining competitive advantage. [Display omitted] •Developing environmental capabilities is key to fostering eco-innovation among SMEs.•Eco-innovation is a smart business strategy for sustaining competitiveness.•Capabilities alone do not boost competitiveness but require eco-innovation.•Eco-innovation links green absorptive capacity to competitiveness among SMEs.•Eco-innovation also links environmental orientation to SMEs' competitiveness.