AI-ENABLED FRUGAL INNOVATION: EXTENDING THE DYNAMIC CAPABILITIES FRAMEWORK FOR SUSTAINABLE DEVELOPMENT

Abstract This study examines the drivers of frugal innovation in small and medium-sized enterprises (SMEs) in Jordan, with a focus on artificial intelligence (AI) capability as a digital capability supporting sustainable development within the dynamic capabilities framework. Specifically, it investigates the effects of institutional leverage capability, sustainability orientation, strategic flexibility, and AI capability on frugal innovation. A quantitative research design was applied using data from 389 SMEs across various sectors in Jordan. Partial Least Squares Structural Equation Modeling (PLS-SEM) with SmartPLS was used to test the proposed model. Frugal innovation was conceptualized as a second-order construct comprising substantial cost reduction, emphasis on essential functionality, and value optimization. The findings reveal that institutional leverage capability, sustainability orientation, strategic flexibility, and AI capability all have significant positive effects on frugal innovation. Results highlight the importance of organizational and digital capabilities in enabling firms to innovate under resource constraints while supporting sustainable development goals. AI capability emerges as a key digital dynamic capability that enhances opportunity sensing, resource optimization, and process redesign in cost-effective and sustainable ways. This study extends dynamic capabilities theory and offers practical implications for managers and policymakers seeking to promote sustainable and inclusive innovation.