Enhancing the sustainability performance of village-owned enterprises (VOEs): The mediation role of innovation capability

This research investigates the role of social capital—both internal and external—in influencing the sustainability performance of Village-Owned Enterprises (VOEs) in Indonesia, with a particular focus on innovation capability as a mediating variable. Given the growing significance of VOEs in local economies, particularly in rural and underdeveloped regions, understanding the drivers of their sustainability performance is crucial for promoting long-term viability. The study draws on a sample of 209 VOEs across Indonesia, collected through a structured survey questionnaire. The data were analyzed using Partial Least Squares (PLS) method to examine the relationships between social capital, innovation capability, and sustainability performance. The findings suggest that internal social capital does not have a direct effect on the sustainability performance of VOEs. Instead, internal social capital affects sustainability performance indirectly by enhancing the innovation capability, which in turn drives better sustainability outcomes. This indicates a full mediation effect of innovation capability in the relationship between internal social capital and sustainability performance. On the other hand, external social capital—representing the connections and networks between VOEs and external stakeholders—has a more direct impact on sustainability performance. It not only positively influences sustainability performance directly but also strengthens it through its indirect effect via innovation capability, suggesting a partial mediation effect. These results underline the importance of both types of social capital in shaping the sustainability performance of VOEs. The study contributes to the existing literature by demonstrating that innovation capability is a critical mediating factor in the relationship between social capital and the sustainability performance of VOEs. The findings highlight the need for VOEs to foster both internal and external social capital, as well as to prioritize the development of innovation capabilities, in order to achieve enhanced sustainability outcomes.