The Role of Innovation Capability in Enhancing Sustainability in SMEs: An Emerging Economy Perspective

Abstract

Today, we are living in the knowledge century. Knowledge-based intangible resources in enhancing sustainable growth of small and medium enterprises (SMEs) is presently a significant scope of research. Innovation capability is the intuitive skill of an individual or a firm to transform an explicit concept towards value orientation that carries an economic value. This economic value would then lead to wealth creation and eventually result in sustainable SMEs. The SME sector has been highlighted for its significant contribution towards the creation of employment, opportunity for innovation and economic dynamism. In this study, evidence derived from knowledge-based view and knowledge creation theory was used to construct a structured model to analyze the relationships among innovation capability, disruptive technology and knowledge creation and their impacts on SMEs sustainability. A sample of 384 owners of SMEs in Sri Lanka was included in the study. The outcome of structural equation modelling (SEM) discovered positive effects of innovation capability, disruptive technology and knowledge creation on sustainability. Innovation capability also emerged as a predictor of disruptive technology and knowledge creation. Moreover, disruptive technology and knowledge creation were found to be partial mediators of the association between innovation capability and SMEs’ sustainability. These findings pave the way for policy makers to promote sustainability in SMEs, by assisting to enhance their performance in competitive and innovative economic environments. Further, the validated model can be empirically tested in future research.

1. Introduction

Innovation has been identified as a strategic driver in penetrating the competitive market to enhance resilience. Business innovation capabilities have been identified as an antecedent of sustainable economic development [1]. Indeed, innovation capability is considered the most valuable and inevitable knowledge-based intangible resource for the survival, competitiveness and long-term sustainability of enterprises. However, measuring innovation capability is challenging. Multi-faceted constructs have arisen in the process of innovation. Innovation involves interrelated processes and relates to markets, new products, redesigning, processes and production. Successful innovation arises from an amalgamation of progressive thoughts and a set of potential capabilities [2].

Small and Medium Enterprises (SMEs) pave the way for sustainable economic development through employment creation, opportunities for innovation, the adaptation of technological advancement and reducing poverty through wealth accumulation [3]. The SME sector is recognized as the largest business establishment sector in Sri Lanka which accelerates economic growth by managing unemployment, mitigating inequities of the income distribution and underpinning regional imbalance [4]. It accounts for 35% of the national labour force, 30% of gross domestic production (GDP), 30% of manufacturing value added and 20% of total export revenue [5]. In general, most businesses established in Sri Lanka can be categorized under three categories: micro, small and mediumscale enterprises (MSMEs).

Globalization has impacted the way businesses have been managed and governed, hence competition has accelerated in emerging economies. Naradda et al. [6] state that SMEs have to overcome their inherent problems, in addition to conquering barriers imposed by larger enterprises. Additionally, SMEs are inexperienced and lack capabilities in relation to larger well-established organizations in the marketplace [7]. SMEs should, therefore, pay preeminent attention to enhancing their innovation capabilities by developing entrepreneurial knowledge, adopting new technology and enhancing competencies as a coping strategy to defend their market position.

In the recent past, eminent scholars have paid much attention to knowledge-based intangible resources which include specific human potentialities as well as tangible resources. Knowledge-based view (KBV) has been a key driver in navigating organizations in the right direction. Greater organizational performance can be reached through competitive advantages by implementing strategies of KBV [8]. Knowledge has been identified as a critical success factor according to the KBV, which has been identified as an extension of the resource-based view (RBV) [9]. This makes the paradigm shift from resource-based competitiveness to knowledge-based competitiveness, i.e., from RBV to KBV. Accordingly, organizational performances are primarily dependent on tacit and collective knowledge [10]. The amalgamated knowledge of an individual and firm is input to generate products and services, as stated in KBV [11]. Hence, knowledge-driven organizations can generate more returns than their counterparts [11]. Knowledge has been identified as a unique resource that cannot be easily matched [12,13].

KBV suggests that an organization can obtain more benefits from external opportunities by effectively using existing resources. The innovation capability of an enterprise is one of the most valuable existing resources that can be used to provide resilience against changes that occur in national and international economies. Innovation capability is a prerequisite to commence, continue and pursue the growth of business [14]. Innovative capability issues and difficulties have been a great challenge for SMEs in Sri Lanka. The lack of innovation capabilities in the SME sector has been identified by relevant authorities. However, little related literature is available in the context of Sri Lanka. This issue is also clearly evidenced by the dearth of patent ownerships and entitlements in the country. Further, the Government of Sri Lanka has identified a key reason for lacking innovation capability as the lack of adoption of new technology and knowledge creation in SMEs in Sri Lanka [4]. SMEs have been struggling to adopt innovation to underpin their business operations. Despite its predominant ability to sustain firms, as yet, innovation capability is a scarce knowledge-based intangible resource for SMEs. However, there exists a lack of concern paid to the dearth in the literature on pursuing SME sustainability by utilizing knowledge-based resources. This study was constructed to address the prevailing performance gaps in SMEs’ sustainability in view of its importance, given the existing lack in innovation capability. The study addresses five key areas in the literature on SME innovation capability and sustainability. First, it addresses three theoretical perspectives, including KBV, RBV and knowledge creation theory, to identify the significance of innovation capability, disruptive technology and knowledge creation in the SME landscape. Second, the study endeavours to broaden the know-how of innovation capability by attempting to identify prevailing relationships between innovation capability and SMEs’ sustainability. It also enriches the contemporary literature related to SMEs by using structural equation modelling (SEM), as it has not been widely used thus far in the field of innovation capability in the Sri Lankan SME sector. Third, despite the fact that innovation capability is a predominant concept, and important at both the personal and firm level, it has not been well-recognized in developing economies; this study is expected to fill this gap by discovering the firm-level innovation capability of SMEs in Sri Lanka. Fourth, the study conceptualized a framework within which SMEs would be able to reach sustainability because it has been empirically found that less number of SMEs will survive after the first five years of their establishment [15]. A framework of this nature reflects relevance in dealing with stagnating and growing SMEs. Fifth, the outcome of this study will contribute to assist relevant authorities to design and implement programs to accelerate innovation capability after identifying the requirements of SMEs. The relevant authorities may plan to offer specific training programs which would improve the innovation capability of owners and managers in the SME sector. The main research problem in this study is, ‘How does innovation capability enhance sustainability in SMEs’? In addition to which, this research aims to support entrepreneurship and innovation capability in firm sustainability, and to enrich the literature on SMEs in Sri Lanka. Thus, the findings will contribute to expedite the sustainability of SMEs in Sri Lanka.

The flow of the rest of the study is as follows: section two presents the literature review and development of hypotheses. Section three discusses the methodological approach. The outcomes are analysed in section four, which contains a brief discussion of the key findings as well. Finally, sections five and six validate the theoretical perspectives and suggest managerial interventions, investigate limitations, outline future research directions and suggest recommendations and conclusions.

2. Literature Review and Hypotheses Development

This forthcoming segment comprises a comprehensive literature review on innovation, disruptive technology, knowledge creation and sustainability in SMEs. In this segment, critical findings are uncovered and the rationale behind the arguments related to the area of discussion are revealed.

2.1. Innovation Capability and the Sustainability in SMEs

Innovation forms the backbone of all successful economies, globally. It is considered a vital source of economic growth in the provision of employment opportunities, reducing poverty and contributing to the development of gross domestic production (GDP) of both developed and developing economies.

The capacity to constantly turn information and ideas into new products, processes, and systems for the benefit of the company and its stakeholders is characterized as innovation capability [16]. Innovation capability is concerned not only with the ability to properly manage a new business avenue, but also with the ability to blend operational models of business [17]. According to Romijn and Al-baladejo [18], innovation capability refers to the abilities and knowledge required to effectively engage, lead and enrich existing technologies as well as create novel ties. Similarly, innovative capability can be identified as the ability to penetrate, design and utilize innovative methods for design and production simulation [19]. Ngo and O’Cass [20] introduced innovation-based capability as the integrative process of applying a firm’s collective knowledge, skills and resources to achieve technical and non-technical innovation activities. The relationship between innovation and the achievement of better firm performance is widely demonstrated in existing empirical findings. The recent academic literature indicates that there is a high correlation between innovation and improvement of firm performance in the manufacturing sector [21,22]. The important aspect that enables SMEs to reach a high degree of competitiveness in both the domestic and international markets is their capacity to innovate [23]. Organizations that invest in the development of their innovation potential have a higher probability of success in the future [24]. Likewise, there is a plethora of data in the academic literature suggesting a favourable relationship between a firm’s ability to innovate and its performance in the manufacturing business [25].

In the context of SMEs as well, the majority of empirical investigations discovered a clear correlation between innovation capability and business performance. According to Agyapong et al. [26], there is a significant relationship between innovative capabilities and SMEs’ performance. Likewise, Keskin [27] contends that SMEs with innovation capacities can outperform their competitors. According to Bigliardi’s [28] findings, enhancement of innovation potential can improve the operational efficiency and financial position of SMEs. Al-Ansari et al. [29] examined the inventive characteristics of SMEs in Dubai and proposed a substantial positive association between innovation and firm success. Similarly, Exposito and Sanchis-Llopis [30] provide evidence from Spanish SMEs, where researchers discovered that innovation had a considerable influence on the operational performance and wealth of the business entities. Research conducted in Mexico to evaluate the impact of SMEs’ innovation skills on firm performance also found that innovation in goods, processes, marketing and management had a favourable and substantial influence on the business efficiency of Mexican SMEs [31]. Furthermore, empirical research [32,33,34] revealed a significant relationship between innovation capability and business performance.

From a theoretical standpoint, the KBV focuses on the firm’s intangible abilities and organizational resources, recognizing the relevance of these resources as drivers of the firm’s strategy and organizational performance [12]. Based on these arguments, this study claims that the growth of SMEs’ innovation capabilities may improve the performance of their business. This relationship is stated in the following hypothesis:

Hypothesis 1 (H1).

Innovation capability positively affects sustainability in SMEs

2.2. Disruptive Technology and Sustainability in SMEs

Technology has improved, and continues to enhance, people’s social and economic behaviour, and the way they run businesses. Firms that are technologically oriented tend to have the desire and capacity to acquire and apply improved technologies in order to achieve greater performance [35]. Likewise, Zhou and Li [36] emphasized that firms’ sustainable performance can be improved through adaptive capability by increasing their new technological capability. Dominic and Wilhelmina [37] discovered that managers or owners of SMEs in emerging economies are aware of the most recent technologies available to them, as well as their economic implications. Thus, in line with the knowledge-based view, integrating new technology is critical in developing and maintaining competitive advantages. As explained by Adner [38], disruptive technology (DT) is a critical element in the survival and performance of SMEs’ in today’s volatile business environment. According to field observations and past research, disruptive technology support could possibly help SMEs improve their performance. Illustratively, the use of disruptive technology has now modified and revolutionized the way businesses are conducted, and digital technology presents enterprises with significant opportunities to improve their commercial performance.

Anthony [39] stated that SMEs which adopt new technologies understand that effectiveness and efficiency of operation may lead to achieving sustainability of firm performance. Mayanyn and Maria [40] opined that the evolution of disruptive technology paves the way to accelerate better firm performance, incorporating the attractive attributes of products and service deliveries, from the customer’s point of view. Therefore, ultimately, disruptive technology results in firms’ gaining a competitive advantage with sustainable firm performance. Technology disruption similarly impacts micro and small business performance [41]. Geared by disruptive technology, SMEs gain competitive advantages, which thereon lead to sustainability of SME performance. This relationship is demonstrated in the following hypothesis:

Hypothesis 2 (H2).

Disruptive technology positively affects sustainability in SMEs

2.3. The Links between Innovation Capability, Disruptive Technology and Sustainability in SMEs

Technology has become important to business and community, and a corporation’s performance is progressively contingent on how disruptive technology transforms the enterprise [42]. Technology aids an organization in retaining its competitive position in the market. Disruptive technology’s impact may be generally explored in terms of business benefits for information technology, business systems and processes, business strategy, and the impact on an organization’s customers and clients. Windell [43], describes disruptive technology as innovative ways of doing things that disrupt or overthrow existing corporate techniques and practices. In addition, in order to preserve a competitive edge in today’s ever-changing business climate, organizations must adapt to the usage of such new technologies. According to Adner [39], features and advantages of newly developing technologies are frequently recognized by consumers, typically for their more significant performance, importance or value. Dominic and Wilhelmina [38] state that the internet has been one of the technologies replacing old techniques, and that using such technologies is inexpensive, fast and efficient and saves overall business expenses. Gao et al. [35] noted that technology-oriented organizations appear to have the capacity and willingness to gain improved technology in order to attain greater performance. Stronger firms are able to recognize the prospects of disruptive technology and seek methods to incorporate and embrace it in their business operations. Likewise, with the adoption of disruptive technology in terms of management of assets—both tangible and intangible—through effective utilization of workforce diversity, penetrating new markets and overall operation attainments, organizations can outperform others that do not incorporate disruptive technology into their operations and strategies.

The evolutionary theory of KBV and RBV helps explain the link between innovation capabilities and sustainability in SMEs via disruptive technologies. Accordingly, disruptive technology expands the body of knowledge and encourages the acquisition of skills and growth of innovation capability of the owner or top management, leading to the improvement of sustainability of SMEs. This approach stresses the need for seeking out novel solutions to improve the performance of business corporations. Hence, innovation capability induces and influences disruptive technology, which then re-structures the existing systems of the business firms and effectively utilizes the innovation capability of firm owners or managers, strengthening the sustainability of the firms. Based on this presumption, the following dual hypotheses are formed.

Hypothesis 3 (H3).

Innovation capability positively affects disruptive technology

Hypothesis 4 (H4).

Disruptive technology mediates the relationship between innovation capability and sustainability in SMEs

2.4. Knowledge Creation and Sustainability in SMEs

Knowledge is often regarded as a critical strategic tool for enhancing innovation and improving a firm’s operations [44]. According to the findings of previous empirical studies, e.g., [45,46,47,48], owners or managers of SMEs in developing countries should be well-versed in knowledge creation and its associated benefits. Evidence-based research has discovered a link between knowledge creation and business performance [45,46,47,48]. Mills and Smith [49] stated that in order to be successful, businesses must not only efficiently organize their material assets, but also successfully operationalize information. The ability of an organization to produce new knowledge is dependent on knowledge-based resources and capabilities [50]. Greater use of the knowledge generation process empowers an enterprise to utilize new information in innovative ways that increase consumer value by improving the business’s market offers [51]. Firms that are better at creating knowledge through the socialization, externalization, combination and internalization (SECI) processes, according to Nonaka et al. [50], are more effective in achieving capability, growth and yield. As a result, knowledge generation is critical to enhancing the performance of an organization [49].

This study will focus on the internal dimension of knowledge creation. In terms of internal research investigations, Nonaka and Takeuchi’s SECI model, which describes the knowledge creation process as a spiral process of socialization, externalization, combination and internalization, is the most extensively used model for assessing knowledge creation. Both explicit and tacit knowledge, according to the KBV, are important in solid knowledge creation. For example, a firm can employ explicit knowledge to detect and forecast industry trends, but tacit know-how is required to adapt to sociocultural and economic dynamics in the business setting and keep up with the digitalization of business functions [49]. Therefore, knowledge creation is mostly the outcome of individual mental exchanges, and it may aid in the development of new ideas or performance in businesses [52,53,54,55]. Similarly, knowledge creation is described as the act of creating information generated by individuals, enhancing it in social situations, and strategically linking it to the firm’s current knowledge [51]. Many researchers also found that knowledge creation improves organizational creativity, which has a favourable impact on SMEs’ sustainability [51,56,57].

Liao and Wu [58] have empirically shown that knowledge development activities have a significant impact on business performance. Knowledge-creation systems and methods generate new knowledge in the process, which strengthens the competitive advantages of firms [59]. Organizational learning and knowledge components have a significant correlation with firm development and performance [60,61]. Yang [62] stated his support for the knowledge creation process in performance improvement because it aids in obtaining knowledge from various stakeholders of the firms with the potential to reach profit, economic expansion, efficiency and long-term competitive advantages. Knowledge creation is considered to exert a positive effect on the sustainability of SMEs. As an outcome of the above discussion, the following hypothesis is developed:

Hypothesis 5 (H5).

Knowledge creation positively affects sustainability in SMEs

2.5. The Links between Innovation Capability, Knowledge Creation and Sustainability in SMEs

The ability to convert business resources into novel products and innovative ideas is known as innovation capacity. Resources alone are insufficient to achieve a competitive edge. In order to enhance firm performance, organizations must gain the competency to transform their resources and adapt them to evolving business trends and patterns. Knowledge has been recognized as the major source of innovation and creativity in the majority of the world’s economies [63]. It enables them to survive severe economic situations and volatile market movements.

The concept that knowledge enhances organizational innovation is widely recognized in the literature [64]. However, scholars have only just begun to investigate the function of creating knowledge in supporting organizational innovation [65]. Knowledge creation has been identified as a fundamental precondition for creativity, innovativeness and invention by researchers from numerous disciplines [51,66,67]. The ability of a business to innovate is heavily reliant on the creation of knowledge [68]. Knowledge creation converts general knowledge into specific knowledge, resulting in the creation of new processes, commodities and services [49,50]. The process of knowledge creation facilitates and accelerates access to unique views and ideologies that broaden the creative horizon and improve the innovation process [68]. Nonaka and Takeuchi’s [50] research and their well-known SECI model of creating knowledge, which this research is based on, includes four modes, i.e., socialization, externalization, combination and internalization, for the two forms of knowledge–tacit and explicit–to interact with one another [13,50,69]. Knowledge, according to the knowledge creation idea and its advocates, is an essential, strategic asset for firms [70], with properties such as stability, originality and complexity [71]. Likewise, the ability to develop, integrate and use knowledge enables businesses to improve their specific competencies, competitive landscap, and economic growth, and obtain long-term strategic benefits [69,72]. Prior research has found that knowledge creation performs a critical role in the survival or failure of a business [73]. Firms that efficiently execute knowledge creation processes are capable of integrating information in creative and distinctive ways and offering novel and inventive products and services to generate value for their clients. According to Kuo [74], certain learning-climate-related elements facilitate knowledge creation, allowing companies to gain increased profitability and long term performance. Similarly, Liao and Wu [58] Durst et al. [75] have experimentally revealed how successful knowledge creation integrates the association between innovative capabilities and sustainability in SMEs. Thus, the effect of innovation capability, via its influence on knowledge creation, contributes to SME sustainability. Accordingly, the following hypotheses were developed:

Hypothesis 6 (H6).

Innovation capability positively affects knowledge creation

Hypothesis 7 (H7).

Knowledge creation mediates the relationship between innovation capability and sustainability in SMEs

2.6. Research Model

The latent variables of this study include innovation capability (exogenous variable), disruptive technology and knowledge creation (mediator variables) and sustainability in SMEs (endogenous variable). The research model of this study was developed based on the aforementioned relationships between these variables. The research model is depicted in Figure 1.

3. Methodological Approach

3.1. Sample and Data Collection

Small and medium scale enterprises (SMEs) for the sample were selected from the following affiliated organizations in Sri Lanka: Small Enterprises Development Division (SEDD), National Chamber of Commerce of Sri Lanka (NCCSL) and National Enterprise Development Authority (NEDA). After evaluating the various definitions of SMEs, we selected a population sample comprising enterprises with 11–300 workers from the Western, Central, Southern and North Western provinces of Sri Lanka. These four provinces were selected as 70% of SMEs are established in these regions.

For the study, a quantitative research technique was used. A cross-sectional approach was adopted using a self-administered questionnaire in the form of a standardised measuring instrument. The questionnaire was developed following a rigorous literature review. Structured questionnaires were utilized to collect data, and they were divided into five sections: Section 1 demographic factors, Section 2 innovation capability, Section 3 disruptive technology, Section 4 knowledge creation and Section 5 sustainability in SMEs. Before distributing the questionnaire, a pilot test was carried out with 36 SMEs from the Western Province of Sri Lanka. Subsequently, 500 questionnaires were distributed among the SMEs owners and managers. Of these, 116 were removed and 384 were used in the analysis, representing a 76.8 percent response rate.

3.2. Profiles of Respondents and SMEs

The following is a summary of the characteristics of the SMEs’ firm profile. Sectoral distribution of participating SMEs: 42.9 percent of firms were involved in manufacturing, 27.7 percent in trade and 29.4 percent in services. More than a quarter (28.6 percent) had 61–110 employees and 27 percent had 111–160. The majority of the SMEs (33.6 percent) had been in operation for 6–10 years, whereas 29.7 percent had been in operation for 11–15 years. The majority of the sample (66.2 percent) was represented by male entrepreneurs. The sample’s age distribution comprised three age groups, 20–35, 36–50 and over 50 years, with the 36–50 years age group representing the greatest number of SMEs (51.1 percent). Moreover, the majority of the entrepreneurs had finished secondary school (66 percent).

Table 1. Profile of the respondents.

Variables and Category			Frequency	Percentage
Firm-level
	Industrial sector	Manufacturing	165	42.9%
		Service	106	27.7%
		Trade	113	29.4%
		Less than 5 years	78	20.3%
	Experience	Between 6 and 10 years	129	33.6%
		Between 11 and 15 years	114	29.7%
		More than 16 years	63	16.4%
		11–60 employees	67	17.4%
	Employees	61–110 employees	110	28.6%
	Size	111–160 employees	104	27.0%
		161–210 employees	58	15.2%
		211–300 employees	45	11.8%
Representative level	Gender	Male	254	66.2%
		Female	130	33.8%
		Between 20 and 35 years	116	30.2%
	Age	Between 36 and 50 years	196	51.1%
		More than 51 years	72	18.7%
		Primary Education	63	16.3%
	Education	Secondary Education	253	66.0%
		Tertiary Education	68	17.7%

Note: n = 384; Identification of manufacturing, service and trade sectors according to the standards issued by the Central Bank of Sri Lanka (CBSL).

shows the sample’s essential characteristics, such as the representatives’ gender, age and education; and the firms’ industry, experience and number of employees.

3.3. Measurement of Variables

This study’s questionnaire explored four main concepts; innovation capability, disruptive technology, knowledge creation and SME sustainability. All of the measurement scales used were derived from scales existing in prior research. The survey was a checkbox type, with responses measured on a seven-point Likert scale (1: “Strongly Disagree” to 7: “Strongly Agree”). The items were slightly adjusted during translation to Sinhalese, in order to be applicable to the Sri Lankan context, and to avoid misunderstandings and ambiguity among target respondents. All measurements are presented below, in

Table 2. Measurement of variables.

Variable	Indicators of Variables	Source
Innovation Capability (IC)	Product Process Marketing Organization	OECD (Oslo Manual, 3rd Edition, 2005a) [76]
Disruptive Technology (DT)	Sensing Response Investment	Srinivasan, Lilien, and Rangaswamy (2002), Sircar et al. (2000), Bharadwaj (2000) [77,78,79]
Knowledge Creation (KC)	Socialization Externalization Combination Internalization	Nonaka and Takeuchi (1995) [50], Schulze, A., and Hoegl, M. (2006) [80], Salarzechi et al. (2013) [81]
Firm’s Sustainability (FS)	Sales Growth Employment Growth Market Share Return on Investment (ROI) Operating costs Delivery cycle time Net assets Customer satisfaction Assets Utilization	Aidis and Van Praag, (2007) [82], Hoque et al. (2001) [83], Degong et al. (2018) [84]

.

Innovation Capability: To assess innovative capacity, the researcher adopted four measurement constructs, product, process, marketing and organizational innovation, for the study [85]. In order to measure the 27 indicators, the researcher used a seven-point Likert scale to quantify the results. Sample items included, ‘We have the ability to expand our product and service offerings’ and ‘We have increased capacity of production or service provision’.

Disruptive Technology: To measure disruptive technology, three items (Sensing capability, Response capability, and Technology investment) were adapted from the study of Srinivasan et al. [77] and Bharadwaj et al. [79]. This scale is widely accepted and used by previous researchers [79]. The scale consisted of 10 items; for example, ‘We have the skills to actively seek intelligence on disruptive technology that is likely to affect our business’ and ‘We have the ability to respond very quickly to the emergence of disruptive technologies’.

Knowledge Creation: Nonaka and Takeuchi [50] proposed the SECI model to explain how businesses create knowledge. The dimensions of this model are socialization, externalization, composition and internalization [81]. The measurement tool utilized here covers 16 statements, such as ‘My firm usually uses apprentices and mentors to transfer knowledge’ and ‘My firm usually adopts repositories of information, best practices and lessons learned’.

Firm Sustainability: The scarcity of reported financial facts on SMEs renders the assessment of their viability challenging [85]. SME founders are often hesitant to disclose the financial data required to measure firm performance [86], and it is impossible to determine the veracity of the financial statistical information of SMEs [87]. When empirical data is unavailable, researchers are advised to rely on self-reported data. Therefore, this research assessed the SMEs’ performances based on the owners’ or managers’ estimates of the companies’ overall financial wealth using the Degong and Ullah [83] measurement scale, the measuring scale created by Mikalef & Pateli [88], and later adapted by Degong et al. [83] and Ying et al. [89]. This scale contained nine criteria, and we asked owners’ and managers’ to rate the performance of their companies in comparison to its competitors. Items such as, ‘My business’s market value has increased during the last few years’ and ‘My firm has reduced operating costs’ were included.

Control Variables: This study employed experience in business, size and industry type as control factors in order to obtain better results. The model directly examined the SMEs’ experience and size, whereas the industrial sector was examined as categorical data (i.e., manufacturing, trading and services). Table 2 contains the measurable items.

4. Results

4.1. Measurement Model Assessment

There were four constructs in the initial measurement model. The measurement model was examined to assess the applicability of the specified constructs to this investigation. Accordingly, content validity was established using three different methods. To begin with, all constructs in this study were discovered following a thorough literature review. Secondly, the researcher had discussions with many industry professionals and academics in the domains of management, entrepreneurship, innovation and research technique to determine the content’s validity. Finally, the measurements were pilot-tested among 36 participants with managerial expertise. Subsequent to this, minor changes were incorporated into the questionnaire before final dissemination.

Skewness and kurtosis scores were used to assess the data’s normality.

Table 3. Reliability, validity and descriptive statistics.

Constructs	Items	Loadings	Mean	SD	VIF	Skewness	Kurtosis
Innovation Capability
Product Innovation	ICpt1	0.824	5.352	1.214	2.243	−0.752	0.799
	ICpt2	0.613	5.352	1.214	1.830	−0.752	0.799
	ICpt4	0.667	5.055	1.488	1.912	−0.690	0.173
	ICpt5	0.692	5.055	1.488	2.115	−0.690	0.173
Process Innovation	ICps1	0.721	5.143	1.779	2.306	−0.856	−0.158
	ICps4	0.693	2.818	1.161	1.531	−0.433	−0.299
	ICps5	0.696	3.818	1.262	2.188	−0.731	−0.603
	ICps6	0.758	3.818	1.262	2.529	−0.731	−0.603
	ICprs7	0.824	4.827	1.134	2.108	−0.211	−0.254
Marketing Innovation	ICmt1	0.719	4.827	1.134	1.421	−0.211	−0.254
	ICmt3	0.777	5.534	1.697	2.920	−0.226	0.733
	ICmt4	0.677	4.974	1.456	2.205	−0.417	−0.357
	ICmt5	0.719	4.729	1.463	2.378	−0.325	−0.401
Organizational Innovation	ICog1	0.795	4.729	1.463	2.067	−0.325	−0.401
	ICog2	0.715	4.648	1.428	1.570	−0.264	−0.310
	ICog3	0.796	5.424	1.380	2.685	−0.579	−0.634
	ICog4	0.642	5.206	1.497	2.190	−0.682	−0.246
	ICog5	0.680	4.977	1.431	2.643	−0.633	0.173
	ICog6	0.704	4.310	1.477	2.212	−0.204	−0.536
	ICog8	0.729	4.404	1.853	2.455	−0.277	−0.962
Disruptive Technology
Sensing	DTsc1	0.745	3.260	1.325	2.162	−0.163	−0.133
	DTsc3	0.752	4.302	1.593	1.899	−0.131	−0.540
	DTsc4	0.767	4.844	1.428	2.363	−0.224	−0.612
Response	DTtr1	0.681	4.513	1.558	2.479	−0.327	−0.432
	DTtr3	0.685	4.135	1.829	1.308	−0.237	−0.940
Investment	DTti1	0.728	4.135	1.829	2.201	−0.237	−0.940
	DTti2	0.754	4.404	1.853	1.979	−0.277	−0.962
	DTti3	0.770	4.404	1.853	2.216	−0.277	−0.962
Knowledge Creation
Socialization	KCso1	0.792	3.745	1.296	2.905	−0.692	−0.726
	KCso2	0.737	3.260	1.325	2.130	−0.163	−0.433
	KCso3	0.912	3.260	1.325	1.643	−0.163	−0.333
	KCso4	0.918	4.648	1.428	2.579	−0.264	−0.310
Externalization	KCex1	0.772	4.648	1.428	2.198	−0.264	−0.310
	KCex2	0.806	5.424	1.380	2.771	−0.579	−0.634
	KCex3	0.930	5.424	1.380	2.672	−0.579	−0.634
	KCex4	0.795	5.206	1.497	2.179	−0.682	−0.246
	KCex5	0.759	5.206	1.497	2.501	−0.682	−0.246
Combination	KCco1	0.679	4.977	1.431	2.663	−0.633	0.173
	KCco3	0.685	4.310	1.477	2.803	−0.204	−0.536
	KCco4	0.694	5.031	1.477	2.582	−0.667	0.050
	KCco5	0.687	5.031	1.477	2.353	−0.667	0.050
Internalization	KCin1	0.746	3.958	1.640	1.519	−0.050	−0.772
	KCin2	0.798	3.958	1.640	1.543	−0.050	−0.772
	KCin3	0.692	4.977	1.518	1.423	−0.615	−0.035
Firm’s Sustainability
	FS1	0.822	2.859	2.042	2.349	0.639	−0.996
	FS2	0.692	4.776	1.466	1.984	−0.156	−0.789
	FS3	0.725	4.776	1.466	2.251	−0.156	−0.789
	FS4	0.749	4.341	1.497	1.918	−0.217	−0.352
	FS5	0.628	4.341	1.497	1.643	−0.217	−0.352
	FS6	0.741	4.951	1.467	2.023	−0.471	−0.489
	FS7	0.729	4.951	1.467	1.735	−0.471	−0.489
	FS8	0.795	4.896	1.548	2.118	−0.439	−0.555
	FS9	0.699	4.896	1.548	1.613	−0.439	−0.555

VIF—Variance Inflation Factor; SD—Standard Deviation.

shows that the data did not have a normality problem because all of the skewness and kurtosis scores were between −1 and +1 [90]. The Durbin-Watson statistic of 1.973 proves that the model is free from serious autocorrelation. Eight items were deducted due to their low correlation (0.4) in outer loadings (five from innovation capability, two from disruptive technology, and one from knowledge creation), resulting in an improvement in construct reliability and validity [90]. Table 3 presents the output of internal consistency in terms of reliability, construct validity and statistics in descriptive nature.

Cronbach’s alpha and composite reliability (CR), stated by Hair et al. [91], were employed to measure the internal consistency of the questionnaires in the latent variables, and average variance extracted (AVE) values and outer loading (given in

Table 4. Result of internal consistency reliability and convergent validity.

Constructs	Cronbach’s Alpha	CR	AVE
Combination	0.875	0.814	0.727
Disruptive Technology	0.868	0.795	0.567
Externalization	0.900	0.826	0.715
Innovation Capability	0.954	0.858	0.682
Internalization	0.846	0.755	0.663
Investment	0.819	0.792	0.734
Knowledge Creation	0.953	0.859	0.582
Marketing	0.836	0.791	0.673
Organizational	0.876	0.804	0.575
Process	0.849	0.792	0.625
Product	0.789	0.763	0.613
Response	0.874	0.757	0.611
Sensing	0.838	0.803	0.756
Socialization	0.902	0.832	0.775
Firm’s Sustainability	0.891	0.812	0.538

CR—Composite Reliability; AVE—Average Variance Extracted.

, below) were used to assess convergent and discriminant validity [92]; Table 4 summarizes the findings. As per the results, all Cronbach’s alpha and CR values were greater than 0.7, whereas AVE was greater than 0.5, demonstrating the dataset’s reliability, internal consistency and convergent validity.

To examine the discriminant validity of the data, the Fornell and Larcker [92] criteria and the Heterotrait–Monotrait ratio (HTMT) [93] were utilized.

Table 5. Discriminant validity—Fornell and Larcker criterion.

Constructs	Com	DT	Ext	IC	Int	Inv	KC	Mar	Org	Prs	Prt	Res	Sen	Soc	FS
Combination (Com)	0.853
Disruptive Technology (DT)	0.666	0.753
Externalization (Ext)	0.506	0.516	0.845
Innovation Capability (IC)	0.636	0.691	0.651	0.826
Internalization (Int)	0.576	0.620	0.562	0.614	0.814
Investment (Inv)	0.567	0.677	0.608	0.720	0.656	0.857
Knowledge Creation (KC)	0.581	0.653	0.765	0.567	0.717	0.590	0.763
Marketing (Mar)	0.639	0.501	0.602	0.685	0.704	0.648	0.589	0.820
Organizational (Org)	0.579	0.537	0.452	0.657	0.684	0.591	0.621	0.709	0.758
Process (Prs)	0.593	0.447	0.706	0.737	0.648	0.603	0.615	0.682	0.674	0.790
Product (Prt)	0.522	0.482	0.697	0.685	0.752	0.626	0.525	0.727	0.695	0.604	0.783
Response (Res)	0.652	0.558	0.511	0.585	0.531	0.510	0.467	0.578	0.551	0.406	0.494	0.782
Sensing (Sen)	0.784	0.668	0.420	0.649	0.587	0.588	0.589	0.641	0.590	0.616	0.539	0.666	0.869
Socialization (Soc)	0.634	0.571	0.604	0.778	0.612	0.674	0.659	0.699	0.596	0.735	0.672	0.574	0.647	0.880
Firm’s Sustainability (FS)	0.612	0.653	0.562	0.671	0.712	0.586	0.545	0.654	0.686	0.688	0.602	0.565	0.623	0.619	0.733

Notes: The square root of AVE is represented by the bold numbers on the correlation matrix’s diagonal.

summarizes the results for the Fornell and Larcker [92] criteria; diagonal values in the correlation matrix exceed the rest of the correlation values of the latent variables as it is a prerequisite for indicating that the discriminant validity was accurate. Furthermore, the HTMT values for all latent variables were less than 0.9, indicating that the discriminant validity was accurate (given below in

Table 6. Discriminant validity—Heterotrait–Monotrait ratio.

Constructs	Com	DT	Ext	IC	Int	Inv	KC	Mar	Org	Prs	Prt	Res	Sen	Soc	FS
Combination	-
Disruptive Technology	0.879	-
Externalization	0.780	0.620	-
Innovation Capability	0.692	0.773	0.822	-
Internalization	0.710	0.611	0.743	0.875	-
Investment	0.665	0.723	0.758	0.736	0.688	-
Knowledge Creation	0.874	0.650	0.831	0.803	0.874	0.794	-
Marketing	0.743	0.738	0.718	0.784	0.849	0.701	0.789	-
Organizational	0.655	0.747	0.770	0.842	0.786	0.747	0.790	0.740	-
Process	0.684	0.674	0.730	0.833	0.753	0.676	0.805	0.724	0.702	-
Product	0.619	0.740	0.738	0.817	0.775	0.822	0.739	0.689	0.748	0.776	-
Response	0.528	0.630	0.729	0.789	0.717	0.634	0.714	0.619	0.876	0.705	0.726	-
Sensing	0.744	0.804	0.817	0.624	0.740	0.710	0.602	0.664	0.583	0.729	0.658	0.803	-
Socialization	0.707	0.780	0.796	0.752	0.801	0.610	0.724	0.725	0.697	0.865	0.631	0.789	0.741	-
Firm’s Sustainability	0.687	0.759	0.773	0.649	0.709	0.632	0.710	0.782	0.714	0.712	0.748	0.685	0.617	0.714	-

).

4.2. Evaluation of Structural Models and Hypothesis Testing

As the initial stage in evaluating structural models, a multicollinearity assessment [91] utilizing variance inflation factors (VIFs) was performed. In this investigation, all VIF values were less than three, suggesting that there was no multicollinearity in the data (see Figure 2). Following this, the bootstrapping method proposed by Hair et al. [91] was used to empirically verify the significance of the path coefficients. As a result, it utilized 5000 bootstrap samples to determine the importance of path coefficients using a cut-off value of 1.96. (5 percent significance). The results demonstrated that all path coefficients were statistically significant and confirmed all of the study’s direct assumptions (Figure 2). summary of the structural model with results in the manuscript (Figure 2). Detailed structural model of the manuscript (Appendix A).

The researcher investigated five direct hypotheses in this study. The findings indicate that innovation capability (IC; β = 0.757, p < 0.001) has a direct beneficial influence on SME sustainability. As a result, hypothesis 1 was accepted. Moreover, there was a relationship between disruptive technology and SME sustainability (β = 0.263, p < 0.001), as well as a relationship between knowledge creation and SME sustainability (β = 0.464, p < 0.001). The current study’s findings suggest that innovation has the potential to improve SME sustainability, but the influence of knowledge creation is stronger than that of disruptive technology. As a result, Hypotheses 2 and 5 were also accepted. There were also direct impacts of innovation capability on disruptive technology (β = 0.891, p < 0.001) and knowledge creation (β = 0.967, p < 0.001), supporting Hypotheses 3 and 6.

The third stage involved calculating the coefficient of determination (R²) [94]. According to the results, the R2 values of disruptive technology (0.79), knowledge creation (0.93) and sustainability in SMEs (0.94) were all greater than 0.50, suggesting that the variables had high predictive accuracy (

Table 7. Direct path coefficient of the structural model.

Hypotheses	Path	Path Coefficients	t- Values	p Values	f2	Significance
H1	IC → FS	0.757	9.053	0.000	0.320	Yes
H2	DT → FS	0.263	5.073	0.000	0.193	Yes
H3	IC → DT	0.891	6.093	0.000	0.374	Yes
H5	KC → FS	0.464	5.163	0.000	0.272	Yes
H6	IC → KC	0.967	9.671	0.000	0.398	Yes

Note: The two-tailed test is significant at 5% (>1.96).

) [91]. The fourth stage was to analyse the effect size (f²), and all pathways (IC–FS, TD–FS, IC–DT, KC–FS, and IC–KC) had a medium impact, as shown in Table 7.

The analysis of the structural model’s predictive significance (Q²) was the final element of the structural model evaluation. Apropos of which, the blind-folding procedure described by Hair et al. [91] was employed in this investigation, and we chose “D = 7” as the omission distance. According to

Table 8. Coefficient of determination (R²) and predictive relevance (Q²).

Constructs	R2 Value	Q2 Value
Disruptive Technology	0.794	0.388
Knowledge Creation	0.935	0.370
Firm’s Sustainability	0.949	0.341

, Q² values were greater than zero for both endogenous latent variables of the model, indicating acceptable predictive significance.

4.3. Disruptive Technology as a Mediator between Innovation Capability and Sustainability in SMEs

Hypothesis 5 suggests that disruptive technology acts as a mediator in the relationship between innovation capabilities and sustainability in SMEs. The importance of the direct impact of innovation capability on sustainability in SMEs was first tested using bootstrapping in the absence of a mediator. The data’s applicability for further analysis was proven by the significant direct effect of innovation capabilities on sustainability in SMEs. When the mediator of disruptive technology was added to the model, the path coefficients were used to test the significance of the indirect impact and related t-values. The indirect impact values are not calculated automatically by Smart-PLS. As a result, after completing the bootstrapping phase (with a mediator), all 5000 path coefficients were transferred to an Excel worksheet. Then, in the worksheet, a column was titled “indirect effect,” which would have been the multiplication outcome of different pathways “IC–DT DT–FS.” The standard deviation of those 5000 path coefficients was obtained using the Excel command “=STDEV (),” and the t-value of the in-direct impact was calculated by dividing the indirect effect (0.891 × 0.263 = 0.234) by the bootstrapping standard deviation (0.234/0.113 = 2.07). The outcome indicates the importance of indirect influence. The strength of the mediator was then assessed using the variance accounted for (VAF) value. As a result, the VAF was computed as (indirect impact/total effect) 0.234/0.991 = 0.236. This reveals that disruptive technology can explain 23.6 percent of the influence of innovation capabilities on sustainability in SMEs. Hair et al. [91] proposed that partial mediation arises when VAF is between 0.2 and 0.8, whereas complete mediation exists when it is more than 0.8. Therefore, disruptive technology mediates the link between innovation capability and sustainability in SMEs to a certain extent. As a result, hypothesis 4 was only partially validated.

4.4. Knowledge Creation as a Mediator between Innovation Capability and Sustainability in SMEs

Hypothesis 7 suggests that knowledge creation acts as a mediator in the link between innovation capabilities and sustainability in SMEs. Following confirmation of the strong direct effect of IC on SME sustainability, the approach described in Section 4.3 was repeated, and the VAF value was determined to assess the size of the mediating variable. Accordingly, VAF was (indirect impact/total effect) 0.449/1.205 = 0.372. This reveals that the mediation of knowledge creation may account for 37.2 percent of the influence of innovation capability on sustainability in SMEs. According to Hair et al. [91], knowledge creation mediates the link between innovation capabilities and sustainability in SMEs to some extent. Consequently, Hypothesis 8 was only partially validated.

Table 9. Hypothesis testing results.

Hypotheses	Decision
H1: Innovation capability positively affects sustainability in SMEs	Supported
H2: Disruptive technology positively affects sustainability in SMEs	Supported
H3: Innovation capability positively affects disruptive technology	Supported
H4: Disruptive technology mediates the relationship between innovation capability and sustainability in SMEs	Partially Supported
H5: Knowledge creation positively affects sustainability in SMEs	Supported
H6: Innovation capability positively affects knowledge creation	Supported
H7: Knowledge creation mediates the relationship between innovation capability and sustainability in SMEs	Partially Supported

summarizes the outcomes of the hypotheses testing.

5. Discussion

5.1. Discussion of the Empirical Findings

This research investigates the prevalent link between innovation capabilities and the sustainability of SMEs in the context of Sri Lanka, an emerging economy. It studied the total effect (direct and indirect) of innovation capabilities on the sustainability of SMEs using a structural equation model. Simultaneously, the research attempted to assess the direct impact of disruptive technology and knowledge creation on the sustainability of SMEs. Based on the conceptual model, seven hypotheses were tested. The findings suggested that innovation capability has a direct impact on the long-term viability of SMEs. Disruptive technology and knowledge creation were recognized as partial mediators of the link between innovation capability and SME sustainability. Of the two mediators, knowledge creation displayed a higher impact, β = 0.372, than a disruptive technology, which was recorded as β = 0.236. In general, the findings of this study provide sufficient empirical data to demonstrate that innovation capabilities (products, processes, marketing, and organizational) have a positive influence on the sustainability of SMEs. As a consequence, the findings of this study are consistent with several prior studies, e.g., [21,22,32,33,34,95,96] which too have discovered a significantly positive association between innovation capability and long-term firm performance.

Furthermore, the knowledge-based view supports the mediation effect of disruptive technology and knowledge creation on the link between innovation capabilities and SME sustainability. The research verified that disruptive technology has an influence on small firm performance and that SME owners/managers are aware of both these technologies and the benefits of utilizing them. This is consistent with the majority of previous research. The researcher also discovered that knowledge creation has a similar and significant influence on SME sustainability; concurrently, it acts as a mediator, boosting the impact of those variables on SMEs’ sustainability and superior performance.

5.2. Theoretical Implications

This study provides new insight to the SME literature on beneficial adoption of innovation. The outcomes of the study are utilized to evaluate and form the function of innovation capability in boosting sustainability in SMEs, thereby attaining a strategic competitive advantage in ensuring long-term success. This study explored the structural linkages between innovation capabilities, disruptive technology, knowledge creation and the sustainability of SMEs. This emphasizes the need for employing a variety of theories and concepts to describe how SMEs’ innovation capabilities influence their performance. Exploring the contribution of innovation capability in the sustainability of SMEs from various perspectives, and in line with various concepts, is crucial to broadening our knowledge of innovation capability and its potential beneficial applications.

This study helps to identify the role of knowledge-based view, resource-based view and organizational knowledge creation theory in explaining the sustainability of SMEs by examining the impact of knowledge, resources and capabilities on Sri Lankan SMEs. Insofar as the researchers are aware, there have been no similar studies conducted heretofore that integrate these three theories simultaneously in analysing the concept of innovation capability in the context of Sri Lankan SMEs. Through the lens of these theories, this research explored how Sri Lankan SMEs deploy knowledge, resources and capabilities to develop a competitive advantage by ensuring the sustainability of firms. This study has contributed to addressing a need for summarized information on innovation capability. The findings of this study are aligned with previous studies of a similar nature which are in consensus that innovation capability leads to sustainability in SMEs’ firm performance.

The use of SEM in research on the innovation capabilities of SMEs adds a new dimension to the existing literature and fills a methodological vacuum. Previous studies solely focused on the direct link between innovation capability and SMEs’ performance, leaving a gap in understanding with regard to the in-direct influence of innovation capability on SMEs’ sustainability, which is addressed by this research. This study bridges a further research gap by using a multi-mediator structural equation model to test hypotheses concerning indirect linkages. Additionally, this is the first SEM-based research of innovation capability in the Sri Lankan environment. This finding adds to the theoretical understanding of how disruptive technology and knowledge creation mediate the relationship between innovation capability and SMEs’ sustainability, and it suggests the possibility of new channels between innovation capability and sustainability. As a result, this work makes a substantial contribution to entrepreneurship and strategic management.

5.3. Practical Implications

This research presents empirical evidence of the links between innovation capability, disruptive technology, knowledge creation and SMEs’ sustainability for practitioners, suggesting that SMEs should strive to improve their innovation capability. This study may also help entrepreneurs and managers understand the role of innovation capability in the SMEs in the manufacturing and service industries. Policymakers are critical to the growth of a robust SME sector in emerging economies. Thus, relevant authorities can offer training and workshops aimed especially at improving the innovation capabilities of SMEs. Such initiatives should not be confined to innovation capability; they should also explore disruptive technology adaptation and new knowledge creation. Finally, our findings provide useful information for SMEs that are expecting to develop their innovation capability, knowledge creation and technology. Innovation is the primary driving force of SMEs in the manufacturing and service industry in Sri Lanka; it is an essential factor for all SMEs in achieving firm sustainability.

5.4. Limitations and Future Work

This study, similar to all empirical studies, has numerous limitations. This will be useful for future studies which can assist to improve upon these areas. One such limitation is that this research is solely centered on SMEs; the conclusions, therefore, are restricted in their applicability to large and/or worldwide firms. Thus, future studies may broaden the scope to encompass larger corporations and emerging economies worldwide. This will assist in the confirmation of the findings of this study. Another drawback is that the questionnaire was only delivered to SMEs in four provinces across Sri Lanka. Future research may thus include comparison studies expanding to the other provinces of Sri Lanka, or other developing nations, to assess whether the results are comparable and generalizable. The scales used to quantify both innovation capabilities and sustainability are the next restriction. In this scenario, just four dimensions (i.e., innovation in goods, processes, marketing and organizational), with a total of 25 items, were utilized to test innovation capabilities, and only one dimension (with 9 items) was used to measure firm sustainability. Other scales will need to be used in future studies to corroborate the conclusions obtained here. A further drawback is that only quantitative criteria for measuring innovation capability and firm sustainability were evaluated. Consequently, future studies might employ qualitative factors, such as government policies, to assess whether there are significant changes in the outcomes produced. The final constraint is that the questionnaire was only sent to owners and managers of SMEs. This was based upon the assumption that these individuals were aware of the organization’s innovative potential and level of commercial sustainability. Future studies can disseminate the same questionnaire among other levels of experienced employees in SMEs, other than owners or managers, to validate and expand on the findings, as all stakeholders within the firms are involved in the innovative decision-making processes of SMEs.

This study considered only two mediators of the link between innovation capabilities and sustainability. These factors, disruptive technology and knowledge creation, only partially mediated the association between innovation capability and sustainability, suggesting that alternative paths connecting the two latter variables exist. To strengthen its explanatory relevance, it would be interesting to expand our model to incorporate additional potential mediating and moderating factors, such as business size, learning experience, financial resources and entrepreneurial abilities.

6. Conclusions

Knowledge has been recognized as a critical resource for global competitiveness and prosperity. In today’s rapidly changing corporate environment, innovative and knowledge-based firms are distinguished by higher productivity and sustainability. Evolving technologies are opening up new avenues supporting creativity, innovation, collaboration and knowledge transfer.

In order to assist SMEs achieve sustainable growth, a theoretical framework is provided in this study to find empirical relationships between innovation capability, disruptive technology, knowledge creation and the sustainability of SMEs. This study identified innovation capability, disruptive technology and knowledge creation as some of the essential requirements for Sri Lankan SMEs’ sustainability. The research endeavors to explore the fundamental question, ‘How do innovation capabilities influence the sustainability of SMEs?’ The knowledge-based view, resource-based view and organizational knowledge creation theory were utilized in the research to build a conceptual model that includes disruptive technologies and knowledge creation as mediators of the link between innovation capability and sustainability in SMEs.

A systematic questionnaire was used to collect data from 384 Sri Lankan SMEs, which was then used to test the study model. We utilized the PLS-SEM technique to analyse and test our hypotheses. It was demonstrated that innovation capability is the predominant driver of long-term growth and profitability for SMEs, and is essential for the firms’ survival. The results demonstrate innovation capability, disruptive technology and knowledge creation directly affect sustainability in SMEs, whilst disruptive technology and knowledge creation partially mediate the relationship between innovation capability and sustainability in SMEs. Further research could explore whether innovation capability is an important capability for disruptive technology, knowledge creation and sustainability in SMEs. Moreover, the analysis of the relationships between three variables, innovation capability, disruptive technology and knowledge creation, as predictors of SME sustainability contributes to the originality of the article. The study offers an additional explanation and enlarges the SME development literature by demonstrating that disruptive technology and knowledge creation are antecedents of SMEs’ sustainability, suggesting new ways of enhancing the sustainability of SMEs, particularly in an emerging economy. Finally, this study educates researchers of emerging economies, and thereby may also encourage them to explore similar relationships in their countries and provide supporting empirical evidence to increase the generalizability of the findings.