Green, digital, or twin strategic orientation: What drives environmental sustainability and digitalization in German innovative SMEs?

Firms are facing a substantial challenge in their journey towards a twin transformation to achieve greater environmental sustainability and digitalization simultaneously. Research lacks a deeper understanding on how firms respond to the need for a twin transformation. This study examines resources and capabilities that drive the green, digital, or twin transformation, in small and medium-sized enterprises (SMEs). Utilizing cross-sectional data from a sample of 7531 German firms sourced from the KfW SME panel, we conduct probit analysis to empirically test our hypotheses. Based on the different patterns observed with respect to the strategic orientation of a firm, we identify three distinct clusters: (1) firms solely prioritizing digitalization, which benefit primarily from size (number of employees and investments) and are situated in cities with access to a large number of graduates; (2) those emphasizing sustainability, typically smaller in scale with limited access to graduates and the tendency to be located in less densely populated areas; and (3) firms engaging in twin transformation, exhibiting similar characteristics to those focused on digitalization but possessing more experience and often being older. We find that the presence of college graduates as well as regular innovation activities have a significantly positive impact on digitalization, but a negative one on sustainability. This study contributes to research on understanding the strategic orientation of SMEs choosing between digitalization, environmental sustainability, and twin transformation, focusing on firm size as well as resources and capabilities. JEL Codes: D22, L21, O14, O32, R11