Bridging innovation and sustainability: The impact of entrepreneurial practices on ESG outcomes

Entrepreneurial orientation has gained significant attention as a strategic resource that enhances firm competitiveness and long-term success. However, its relationship with sustainability remains underexplored. This study investigates how entrepreneurial orientation fosters environmental, social, and governance (ESG) performance among manufacturing small and medium-sized enterprises (SMEs), focusing on the mechanisms that bridge innovation and sustainability. In particular, it examines the mediating roles of innovative capabilities, stakeholder engagement and circular economy practices. The study also considers whether AI-driven decision-making moderates the effect of entrepreneurial orientation on innovative capabilities and ESG performance. Using the questionnaire data of 493 managers and owners of SMEs in Guangdong, China, partial least squares structural equation modeling (PLS-SEM) is applied to assess the relationships among the variables. The findings indicate a positive and significant correlation between entrepreneurial orientation and ESG performance. The results further show that innovative capabilities, stakeholder engagement and circular economy practices each serve as meaningful mediators, whereas AI-driven decision-making strengthens the influence of entrepreneurial orientation on innovative capabilities and ESG performance. Overall, the results suggest that SMEs adopting proactive entrepreneurial practices are likely to improve their ESG performance, particularly when AI tools are incorporated into decision-making. This research advances dynamic capabilities and institutional theory by identifying entrepreneurial orientation, innovative capabilities, stakeholder engagement, and circular economy practices as important drivers of ESG performance. This research provides novel and actionable insights into how entrepreneurial behavior and technological integration foster sustainability in SMEs, enriching the current understanding of ESG advancement in the Chinese context.