Internal Dynamics of SMEs for Their Sustainable Development: Investigating the Antecedents and Outcomes of Sustainable Innovation Behavior and ESG Strategies

ABSTRACT Studies on the internal dynamics of smaller firms, such as SMEs, in relation to their innovation and sustainability efforts are rare and limited in their scope. This research unveils the relationships existing between organizational intellectual capital (OIC), employee sustainable innovation behavior (SIB), ESG practices, and company performance. Specifically, the study aims to explore the antecedents of both SIB and ESG practices and how the latter ultimately influence SMEs' market, organizational, and sustainability innovation performance. This empirical research was conducted in the EU context and adopted a quantitative research design based on the partial least squares to structural equation modeling (PLS‐SEM) approach. The findings reveal that both structural and organizational capital positively influence SIB, which, in turn, plays a crucial role in the implementation of ESG practices. The latter, composed of ENV, SOC, and GOV, has significant effects, albeit to different degrees, on company performance. It is crucial for SMEs to implement intangible resources and nurture a culture based on sustainability and innovation, as this could represent the microfoundation of their sustainable development.