Overcoming Economic Turbulence: The Importance of Innovation Capabilities in Strengthening SME Sustainability

Abstract

This study explores the role of innovation capability in improving the sustainability of SMEs amidst environmental turbulence. Amidst intense competition and rapid technological change, innovation capability is seen as the key for SMEs to remain relevant and competitive. This study uses a theoretical approach, namely dynamic capability theory and contingency theory, to analyze how strategic flexibility and innovation can mediate the relationship between environmental turbulence and business sustainability. Through a survey of 237 batik SMEs in Central Java, data analysis was conducted using SmartPLS version 3.0 to test the hypothesis of the relationship between variables. The study was conducted on 237 batik SMEs in six cities in Central Java selected through a simple random sampling method. The results showed that environmental turbulence has a significant effect on strategic flexibility and innovation capability of SMEs. Strong innovation allows SMEs to adapt quickly to market and technological changes, and increase their competitiveness and business sustainability. Strategic flexibility also plays an important role in responding to rapidly changing market dynamics. However, limited resources such as funding, access to technology, and innovation skills are still major challenges for SMEs. The study recommends collaboration with government agencies and research institutions as well as skills training as a solution to overcome these limitations. With adaptive and innovative strategies, SMEs can maintain business sustainability and remain competitive in an unstable market