Published July 14, 2026 | Version v1
Journal article Open

GREEN INNOVATION, SME ENVIRONMENTAL PERFORMANCE, AND COMPETITIVE ADVANTAGE: MODERATING ROLE OF GOVERNMENT GREEN POLICY AND INDUSTRY PRESSURE

Authors/Creators

  • 1. PhD Scholar, Department of Business Administration [Gomal University, DI Khan], Pakistan
  • 2. Professor, Department of Business Administration [Gomal University, DI Khan], Pakistan
  • 3. Associate Professor, Department of Business Administration [Gomal University, DI Khan], Pakistan

Description

ABSTRACT:

The growing global environmental challenges, combined with increased competition in emerging markets, has sparked a new understanding of environmental management in small and medium-sized enterprises (SMEs) and made it a source of innovation, rather than a compliance requirement. Green innovation, which is defined as the creation of environmentally favourable product, process and organizational innovation, that at the same time create a competitive advantage, has become the key enabler for SMEs for attaining both environmental sustainability and competitive advantage. However, the boundary conditions when, how and for which SMEs, green innovation leads to better environmental performance and competitive advantage are yet to be theorized and empirical investigation of these conditions is still limited especially for the industrial SMEs in Pakistan which are growing at a very rapid rate. This research aims to develop and then empirically test a theoretically integrated dual moderation framework that examines (1) the direct influence of green innovation on SME environmental performance (EP) and competitive advantage (CA); (2) the mediational role of environmental performance in the green innovation-competitive advantage pathway; (3) the moderating role of government green policy (GGP) as an institutional enabler that enhances the effectiveness of green innovation and (4) the moderating role of industry pressure (IP) as a market-competitive driver that improves the returns of green innovation to CA. The study is designed using a stratified random sample of 486 SMEs in five major industrial sectors of Pakistan: Textiles, Pharmaceutical, Food Processing, Chemicals and Engineering, and was conducted using a multiple sources survey design (Wave 1 - GI and Moderators, Wave 2 - EP and CA) with a four-month delay. The study theoretical framework is based on Natural Resource-Based View (NRBV; Hart, 1995), Dynamic Capabilities Theory (Teece et al., 1997), and Institutional Theory (DiMaggio & Powell, 1983). Mainly, PLS-SEM (SmartPLS 4.0) analysis method was used, followed by the Hierarchical Regression Analysis (HRA) and Hayes (2022) PROCESS Macro Model 59 moderation testing with 5,000 BCa bootstrap iterations of dual moderation. Results show that the variable of green innovation has a significant and positive positive predictive value for the variable of environmental performance (beta = 0.521, p < 0.001) and competitive advantage (beta = 0.389, p < 0.001). The GI-CA relationship is to a large extent mediated by environmental performance (indirect effect = 0.198, 95% BCa CI [0.142, 0.261] and PM = 33.7%). Government green policy is a significant moderator for the GI-EP pathway (beta 0.213, p<0.001) and industry pressure is a significant moderator for the EP-CA pathway (beta 0.187, p<0.001). Dual moderated mediation is evidenced when both moderators enhance the pathway between GI-EP-CA. The results contribute to the NRV and Dynamic Capabilities Theory in SME environment and provide practical implications for the managers of SMEs, environmental policy makers, and industrial sector associations in Pakistan. 

Keywords: Green Innovation, SME Environmental Performance, Competitive Advantage, Government Green Policy, Industry Pressure, Natural Resource Based View, Dynamic Capabilities, PLS-SEM, Pakistan SMEs, Environmental Management, Sustainability.

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