Microfoundations of Dynamic Capabilities for Eco‐Innovation in SMEs: Evidence From Industrial Case Studies

ABSTRACT This study examines the microfoundations, that is, skills, processes, structures and decision rules that underlie the dynamic capabilities enabling SMEs to achieve sustained eco‐innovation performance. Building on dynamic capabilities framework, we adapt it to the SME context to explain how firms sense opportunities and threats, seize them and maintain competitiveness by reconfiguring tangible and intangible assets. Using an inductive and abductive design grounded in five in‐depth case studies of industrial SMEs in water technology, urban manufacturing and technical apparel in the Basque Country, we develop a framework capturing how eco‐innovation emerges from organisational innovation. The analysis reveals how dynamic capabilities are anchored in the orchestration of microfoundations across multiple organisational dimensions, including leadership, strategic intent, people management, business practices and external relations. By extending Teece's model to the SME context, we offer contextualised, transferable insights for companies operating under similar conditions, along with practical pathways to strengthen their eco‐innovation capacity. The framework also informs policymakers designing targeted support measures for industrial SMEs operating in comparable regional ecosystems, encouraging more adaptive, collaborative and scalable sustainability transitions.