Understanding the Competitiveness of Small and Medium-Sized Enterprises: The Positive Nonlinear Influence of Digitalization, Environmental Policies, and Innovation

This study investigates the complex interplay between digitalization, adherence to environmental policies, and innovative practices in driving the sustained competitiveness of small and medium-sized enterprises (SMEs). While existing literature addresses these factors individually, there remains a critical gap in understanding their direct and potential nonlinear influence on firm performance within dynamic market contexts. Drawing on the Dynamic Capabilities Theory and the Resource-Based View, this research models how SMEs integrate these strategic dimensions to achieve a competitive advantage. Utilizing a quantitative survey methodology with a sample of 1,044 SMEs, the study employs ordinal least square and quantile regressions. Our results suggest that while the direct effect of high digitalization and proactive environmental management as well as innovation demonstrate a positive effect, it is nonlinear. These findings offer crucial strategic implications for SME leaders and policymakers, underscoring the necessity of investment across technological, ecological, and innovative fronts to build resilient and competitive organizations. Our results advise executives to manage the nonlinear returns of digitalization and innovation by co-investing in complementary capabilities (skills, integration, and alignment) rather than simply increasing tech or compliance intensity to capture initial steep gains and shift the optimal point where costs outweigh benefits.