The Mechanism of Sustainability Orientation Towards <scp>SME</scp> Innovation and Performance: The Role of Organizational Capabilities and Co‐Innovation

ABSTRACT This study investigates the role of sustainability orientation activities on innovation capabilities and organizational capital that determine SME performance. The research entails a quantitative method with a survey questionnaire to examine the relationships of variables in the research model. Using data collected from 450 SMEs across various sectors, our findings reveal three key insights. First, the sustainability activities, including economic and social sustainability orientation, significantly enhance SMEs' innovation capability. Second, innovation capability improves other types of organizational capital, including intellectual and learning, which subsequently transform into innovation and performance outcomes. Third, the most profound finding is that co‐innovation negatively moderates the relationship between innovation performance and SME performance. Hence, this study not only enriches the existing literature but also underscores the importance of embedding sustainability into core SME strategies. It highlights the strategic significance of sustainability in enhancing competitiveness and supports the Resource‐Based View (RBV) by showing that sustainability orientation boosts SMEs' innovative capacities. Notably, the negative moderating role of co‐innovation sheds new insights for developing markets. SME managers should adopt human‐centric, collaborative approaches with stakeholders, including businesses, universities, and governments, to foster innovation and access technological and financial resources.