The Impact of Environmental Sustainability on MSMEs Performance: The Intervening Effects of Digital Transformation and Innovation in Indonesia

In Indonesia’s economy, Micro, Small, and Medium Enterprises (MSMEs) play a crucial role and they have to face the increasing challenges in maintaining competitiveness in the changing business environment and digital era. This study evaluates the impact of environmental practices on the Indonesian MSMEs business performance and investigates the mediating roles of digital transformation and business innovation. This study uses a quantitative research design through a cross-sectional survey of 160 MSMEs owners and managers across various business sectors in Indonesia. The data collection used structured questionnaires and analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM). The findings indicate that environmental sustainability positively and significantly influences business performance, digital transformation, and business innovation. Digital transformation also affects both business innovation and business performance positively and significantly, while business innovation enhances business performance and mediates the relationships between environmental sustainability, digital transformation and business performance. Therefore, serial mediation analysis shows that environmental sustainability improves business performance through stages of digital transformation and innovation capabilities development. These findings support Capability Alignment Theory and highlight the importance of integrating environmental practices, digital transformation, and business innovation to strengthen MSMEs competitiveness and achieve a long-term business performance in Indonesia.