Innovation dynamics and sustainability in manufacturing: leveraging open innovation and dynamic capabilities

Purpose The purpose of this study is to evaluate how manufacturers today face mounting demands from stakeholders to adopt innovative manufacturing systems that mitigate the negative societal and environmental effects of their operations. Consequently, manufacturing processes are constantly evolving. Open innovation (OI) systems present a promising avenue for manufacturers to develop dynamic capabilities (DCs), thereby enhancing their long-term performance. However, despite its potential significance, empirical research linking OI, DC and sustainable manufacturing performance (SMP) remains relatively scarce, especially concerning the simultaneous minimization of environmental impact, economic viability and social acceptability. Design/methodology/approach This study rigorously investigates the intricate relationship between various OI systems (namely outbound, inbound and coupled) and their impact on SMP through the mediating influence of DC within the context of large-scale manufacturing enterprises. Using a robust quantitative research design, the authors surveyed 346 employees from prominent Malaysian manufacturers. Data collection utilized a 5-point Likert scale questionnaire drawn from established literature. The authors then used partial least squares structural equation modelling (PLS-SEM) for comprehensive data analysis, resulting in the validation of 11 out of 12 research hypotheses. Findings The findings reveal that both inbound innovation and coupled OI exert direct, positive influences on the social, economic and environmental facets of manufacturing performance. Conversely, outbound innovation predominantly affects economic and environmental performance. A key insight from this study is the mediating role played by DC in shaping the relationship between OI and SMP. This underscores the critical importance for manufacturers to invest in developing DC to maximize the positive impact of OI on SMP. Practical implications The study emphasizes the importance of fostering DC to leverage the potential benefits of OI for SMP improvement. The findings can guide manufacturers in adopting strategies that simultaneously address environmental concerns, economic sustainability and social responsibility. Originality/value Unlike prior studies that treat OI as a unitary construct or assert DC’s mediating role by citation alone, this study disaggregates OI into inbound, outbound and coupled forms, and grounds DC’s mediating function in its sensing, seizing and transforming microfoundations, showing that mediation strength scales systematically with each OI mode’s knowledge-integration demands (variation accounted for [VAF] ranging from 22.34% to 68.67%). This mechanism-level, differentiated account rather than a uniform DC–OI–SMP relationship is the study’s central conceptual contribution.