Business creativity, innovation culture, sustainable competitive advantage, and sustainable business performance: evidence from MSMEs in Indonesia and the Philippines

1 Introduction

Achieving sustainable economic development has become a central priority for governments, businesses, and international organizations seeking to balance economic prosperity with long-term social resilience and environmental sustainability. Within this global agenda, Micro, Small, and Medium Enterprises (MSMEs) play a pivotal role by generating employment, stimulating innovation, strengthening local economies, and promoting inclusive growth, particularly in emerging economies. MSMEs account for the overwhelming majority of business establishments worldwide and are increasingly recognized as key contributors to economic resilience, employment creation, innovation diffusion, and the achievement of sustainable development objectives (United Nations, 2023; OECD, 2023; World Bank, 2024). Their strategic importance is reflected in the United Nations Sustainable Development Goals (SDGs), especially SDG 8 (Decent Work and Economic Growth) and SDG 9 (Industry, Innovation and Infrastructure), which recognize entrepreneurship and innovation as fundamental drivers of sustainable development (United Nations, 2015, 2023). Beyond their economic contribution, MSMEs are increasingly expected to strengthen organizational resilience, accelerate sustainable production and consumption, enhance innovation capability, and contribute to inclusive regional development through continuous learning, digital transformation, and adaptive capability development (OECD, 2023; World Bank, 2024; Hanelt et al., 2021; Kraus et al., 2022; Zahra, 2021). However, despite their strategic importance, many MSMEs continue to struggle to maintain sustainable competitive advantage amid rapid technological change, increasing market turbulence, institutional uncertainty, and persistent resource constraints. Recent sustainability research suggests that these challenges cannot be addressed solely through resource ownership but require firms to continuously develop entrepreneurial capabilities that enhance resilience, innovation, adaptability, and long-term value creation in increasingly dynamic business environments (George et al., 2021; Zhang et al., 2023; OECD, 2023). Consequently, understanding how entrepreneurial firms develop organizational capabilities that support sustainable competitive advantage and long-term business performance has become a critical research priority in both sustainability and entrepreneurship scholarship (United Nations, 2015; Barney, 1991; Teece, 2007; OECD, 2023; George et al., 2021; Kraus et al., 2022).

Capability-based perspectives have become one of the most influential theoretical foundations for explaining how firms achieve and sustain competitive advantage under conditions of environmental uncertainty. The Resource-Based View (RBV) argues that superior organizational performance originates from valuable, rare, inimitable, and non-substitutable resources, whereas Dynamic Capability Theory extends this perspective by emphasizing firms' abilities to integrate, build, and reconfigure organizational resources and competencies in response to rapidly changing competitive environments (Barney, 1991; Teece et al., 1997; Teece, 2007). Recent scholarship further reinforces the centrality of dynamic capabilities by highlighting their role in enabling strategic agility, organizational adaptation, innovation, and resilience, particularly in increasingly volatile and technology-driven business environments (Pitelis et al., 2024; George et al., 2022).

Within the context of MSMEs, where financial, technological, and human resources are frequently constrained, entrepreneurial capabilities—including creativity, innovation, organizational learning, and strategic adaptability—are increasingly recognized as critical drivers of sustainable competitiveness, organizational resilience, and long-term business performance. These capabilities enable firms not only to recognize and exploit emerging opportunities but also to respond proactively to market disruptions, institutional change, digital transformation, and evolving sustainability challenges. Consequently, capability-based perspectives have become central to explaining how MSMEs create strategic value, strengthen adaptive capacity, and contribute to sustainable economic development in emerging economies (Helfat and Peteraf, 2003; OECD, 2023; Teece, 2018; Mansouri et al., 2022; Deyassa, 2023).

More recent sustainability and entrepreneurship research argues that long-term competitiveness depends not merely on possessing valuable organizational resources but also on firms' ability to deploy complementary entrepreneurial capabilities that continuously generate innovation, facilitate organizational learning, strengthen resilience, and create sustainable value under dynamic environmental conditions. Accordingly, entrepreneurial capability deployment has emerged as a critical mechanism through which MSMEs transform internal resources into sustainable competitive advantage and superior organizational performance. This evolving perspective provides the conceptual foundation for examining the strategic deployment of entrepreneurial capabilities in sustainability-oriented entrepreneurship research.

To address this theoretical limitation, the present study develops the Strategic Differentiation Perspective of Entrepreneurial Capabilities. Unlike existing capability-based perspectives, which primarily explain how organizational capabilities are integrated, orchestrated, configured, and leveraged, the proposed framework explains why different entrepreneurial capabilities perform distinct strategic functions throughout the entrepreneurial value creation process. Furthermore, this study reconceptualizes Sustainable Competitive Advantage as the Capability Conversion Mechanism through which internally developed entrepreneurial capabilities are transformed into externally recognized customer value, market differentiation, organizational resilience, and superior sustainable business performance. Capability complementarity theory argues that competitive advantage emerges from the synergistic interaction of multiple organizational capabilities whose combined effects exceed the contribution of individual capabilities, emphasizing capability interdependence (Ennen and Richter, 2010; Sirmon et al., 2011; Pitelis et al., 2024). Resource orchestration theory emphasizes managerial processes of structuring, bundling, and leveraging strategic resources (Sirmon et al., 2011; Chirico et al., 2011; Ariwibowo et al., 2024). Capability configuration perspectives explain that firms align portfolios of organizational capabilities with changing environmental conditions (Helfat and Peteraf, 2003; Teece, 2018; George et al., 2022; Pitelis et al., 2024). Although these perspectives have significantly advanced understanding of capability deployment, they predominantly explain how capabilities interact rather than why conceptually related entrepreneurial capabilities perform fundamentally different strategic functions. Recent reviews similarly conclude that capability research has focused primarily on capability integration, resource orchestration, and dynamic capability renewal while paying comparatively limited attention to differentiated strategic functions (George et al., 2022; Ariwibowo et al., 2024; Pitelis et al., 2024). The Strategic Differentiation Perspective addresses this gap by proposing that entrepreneurial capabilities differ not only in their intensity or interaction but also in their intrinsic strategic function. Specifically, business creativity operates as a generative capability responsible for opportunity recognition, idea generation, and strategic innovation, whereas innovation culture functions as an enabling capability that facilitates deployment, coordination, institutionalization, and continuous improvement through learning, collaboration, and knowledge sharing (Anderson et al., 2014; George et al., 2022). Sustainable Competitive Advantage subsequently serves as the Capability Conversion Mechanism through which these differentiated capabilities are translated into customer value, resilient market positioning, and superior organizational performance. By shifting analytical attention from capability possession and capability complementarity toward capability functional differentiation, the proposed perspective extends capability-based entrepreneurship research and provides a more comprehensive explanation of sustainable entrepreneurial value creation among MSMEs operating in resource-constrained and institutionally dynamic environments (Barney, 1991; Helfat and Peteraf, 2003; Teece, 2007, 2018; Ariwibowo et al., 2024; Pitelis et al., 2024).

The comparative context of Indonesia and the Philippines provides an appropriate empirical setting for evaluating the proposed research model. Both countries are among the largest emerging economies in Southeast Asia, where MSMEs constitute the backbone of national economic activity, accounting for the vast majority of business establishments while making substantial contributions to employment generation, innovation, and inclusive economic growth. In both countries, MSMEs are recognized as critical drivers of economic resilience, poverty reduction, regional development, and sustainable entrepreneurship, particularly in the post-pandemic recovery period (Asian Development Bank, 2023; OECD, 2023; United Nations, 2023; World Bank, 2024). Nevertheless, MSMEs continue to face persistent sustainability challenges arising from resource constraints, accelerating digital transformation, institutional complexity, increasing market competition, climate-related uncertainties, and rapidly changing customer expectations. These challenges require firms not only to possess entrepreneurial capabilities but also to strategically deploy them to strengthen innovation capacity, organizational resilience, and sustainable competitive advantage (OECD, 2023; World Bank, 2024; Cirera et al., 2021). Although Indonesia and the Philippines share many structural characteristics as emerging entrepreneurial ecosystems, they differ considerably in institutional quality, innovation support systems, digital readiness, regulatory effectiveness, and entrepreneurial ecosystem maturity. These contextual differences provide an appropriate setting for examining whether the proposed Strategic Differentiation Perspective of Entrepreneurial Capabilities remains applicable across different institutional environments while simultaneously identifying how contextual conditions influence the effectiveness of generative and enabling entrepreneurial capabilities. Consequently, the comparative design enhances both the external validity and contextual generalizability of the proposed research model while extending sustainability-oriented entrepreneurship research beyond single-country investigations (Asian Development Bank, 2023; OECD, 2023; United Nations, 2023; World Bank, 2024; Global Entrepreneurship Monitor, 2024).

Against this background, the present study pursues three interrelated objectives. First, it examines whether business creativity and innovation culture represent strategically differentiated entrepreneurial capabilities that contribute to sustainable competitive advantage and sustainable business performance through distinct capability deployment pathways. Second, it investigates whether Sustainable Competitive Advantage functions as the Capability Conversion Mechanism through which entrepreneurial capabilities are transformed into superior organizational performance. Third, it evaluates whether the proposed research model demonstrates comparable explanatory power across MSMEs operating in Indonesia and the Philippines, thereby assessing the contextual robustness of the Strategic Differentiation Perspective across different entrepreneurial ecosystems. Collectively, these objectives seek not only to explain the relationships among entrepreneurial capabilities, sustainable competitive advantage, and business performance but also to provide a more comprehensive understanding of how entrepreneurial capabilities generate sustainable organizational value under varying institutional conditions, thereby contributing to the growing literature on sustainable entrepreneurship, capability deployment, and MSME competitiveness in emerging economies (George et al., 2022; OECD, 2023; Global Entrepreneurship Monitor, 2024).

This study makes three principal contributions to the literature on sustainable entrepreneurship and capability-based management. First, it advances capability-based theory by introducing the Strategic Differentiation Perspective of Entrepreneurial Capabilities, which distinguishes entrepreneurial capabilities according to the strategic functions they perform during capability deployment. Whereas existing capability-based perspectives—including the Resource-Based View, Dynamic Capability Theory, and capability complementarity perspectives—primarily explain how organizational capabilities contribute to competitive advantage, the proposed perspective explains why different entrepreneurial capabilities perform different strategic roles throughout the entrepreneurial value creation process. In doing so, it extends existing theory from capability possession toward capability differentiation and capability deployment.

Second, this study reconceptualizes Sustainable Competitive Advantage as the Capability Conversion Mechanism through which entrepreneurial capabilities are transformed into sustainable organizational value and long-term business performance. Rather than viewing competitive advantage solely as an intermediate outcome linking capabilities and performance, this perspective explains the strategic process through which entrepreneurial capabilities become externally recognized customer value, resilient market positions, and enduring organizational competitiveness. This reconceptualization contributes to a more process-oriented understanding of sustainable value creation within capability-based entrepreneurship research.

Third, this study provides comparative empirical evidence from Indonesia and the Philippines, thereby extending current understanding of entrepreneurial capability deployment across different institutional and entrepreneurial ecosystems. By demonstrating both the robustness and contextual sensitivity of the proposed research model, the findings offer valuable insights for entrepreneurs, policymakers, and business support organizations seeking to strengthen MSME resilience, innovation capability, and sustainable competitiveness in emerging economies. Collectively, these theoretical, empirical, and practical contributions provide a more comprehensive explanation of sustainable entrepreneurial value creation and establish the foundation for the empirical analyses presented in the following sections.

2 Literature review

2.1 Sustainable entrepreneurship and MSME competitiveness

Sustainable entrepreneurship has emerged as a prominent research stream explaining how entrepreneurial firms create economic value while simultaneously contributing to broader social and environmental sustainability. Unlike conventional entrepreneurship, which primarily emphasizes opportunity recognition and financial performance, sustainable entrepreneurship focuses on identifying, developing, and exploiting opportunities that generate long-term value for multiple stakeholders while strengthening organizational resilience, innovation capability, and adaptive capacity under changing environmental conditions. This perspective is closely aligned with the United Nations Sustainable Development Goals (SDGs), particularly SDG 8 (Decent Work and Economic Growth) and SDG 9 (Industry, Innovation and Infrastructure), which recognize entrepreneurship, innovation, and inclusive industrial development as essential drivers of sustainable economic transformation. Consequently, entrepreneurship is increasingly viewed not merely as a mechanism for business creation but also as a strategic pathway through which firms contribute to sustainable competitiveness, resilience, and long-term societal wellbeing (Cohen and Winn, 2007; Dean and McMullen, 2007; Hall et al., 2010; Shepherd and Patzelt, 2011; United Nations, 2015, 2023; OECD, 2023).

Within this perspective, Micro, Small, and Medium Enterprises (MSMEs) occupy a central position because they account for the overwhelming majority of business establishments worldwide and make substantial contributions to employment creation, innovation, regional development, and inclusive economic growth. In emerging economies, MSMEs are increasingly recognized as critical actors in promoting sustainable entrepreneurship because of their flexibility, close interaction with local communities, and capacity to respond rapidly to changing market conditions. Nevertheless, MSMEs continue to face significant challenges in sustaining competitiveness due to financial constraints, limited technological capabilities, institutional uncertainty, increasing market turbulence, and accelerating digital transformation. Recent evidence suggests that long-term competitiveness depends less on the accumulation of tangible resources than on firms' ability to develop entrepreneurial capabilities that facilitate opportunity recognition, innovation, organizational learning, and strategic adaptation under dynamic business environments (Eggers, 2020; OECD, 2023; World Bank, 2024; Global Entrepreneurship Monitor, 2024; Teece, 2018).

Recent sustainability and entrepreneurship research further argues that sustainable competitiveness cannot be explained solely by economic performance or resource ownership. Instead, firms achieve long-term success by continuously developing organizational capabilities that support innovation, learning, resilience, and strategic adaptation in response to rapidly changing institutional, technological, and environmental conditions. From this perspective, sustainable competitive advantage emerges as the outcome of dynamic organizational processes through which entrepreneurial initiatives are integrated with organizational learning, innovation, and capability renewal. Accordingly, sustainability scholarship has increasingly converged with capability-based entrepreneurship by recognizing entrepreneurial capabilities as strategic mechanisms for strengthening resilience, innovation capacity, and long-term organizational sustainability (Bansal and DesJardine, 2014; Teece, 2007, 2018; George et al., 2021, 2022; OECD, 2023).

Building on these developments, the present study argues that understanding sustainable competitiveness among MSMEs requires moving beyond the conventional question of whether entrepreneurial capabilities improve organizational performance. Instead, greater theoretical attention should be devoted to explaining how different entrepreneurial capabilities create sustainable value through distinct strategic functions during the capability deployment process. This argument is consistent with recent calls for more refined explanations of entrepreneurial capability deployment beyond traditional capability-based perspectives (George et al., 2022; Ariwibowo et al., 2024; Pitelis et al., 2024). Accordingly, this section provides the conceptual foundation for the subsequent discussion of capability-based theories and introduces the Strategic Differentiation Perspective of Entrepreneurial Capabilities as a framework for explaining how entrepreneurial capabilities generate sustainable competitive advantage and long-term business performance.

2.2 Capability-based perspectives in sustainable entrepreneurship

Capability-based perspectives have become one of the dominant theoretical foundations for explaining how firms achieve and sustain competitive advantage under dynamic and uncertain environments. The Resource-Based View (RBV) proposes that firms achieve superior performance because they possess valuable, rare, inimitable, and non-substitutable (VRIN) resources that are difficult for competitors to replicate (Wernerfelt, 1984; Barney, 1991). Building on this foundation, Dynamic Capability Theory extends the RBV by emphasizing that sustainable competitiveness depends not only on the possession of strategic resources but also on firms' abilities to integrate, build, renew, and reconfigure organizational resources and competencies in response to rapidly changing market conditions (Teece et al., 1997; Helfat and Peteraf, 2003; Teece, 2007). More recent scholarship further highlights that dynamic capabilities enable strategic agility, organizational resilience, innovation, and continuous adaptation, making them increasingly important for firms operating in highly volatile technological and institutional environments (George et al., 2022; Pitelis et al., 2024). Collectively, these perspectives provide the theoretical foundation for understanding how firms sustain competitiveness through continuous capability development rather than static resource ownership.

Within sustainable entrepreneurship research, capability-based perspectives have gained increasing prominence because sustainable competitiveness depends on continuous organizational adaptation rather than temporary resource advantages. Entrepreneurial firms operating in rapidly changing economic, technological, institutional, and environmental contexts must continuously develop capabilities that facilitate opportunity recognition, innovation, organizational learning, strategic renewal, and organizational resilience. Consequently, entrepreneurial capabilities are increasingly recognized as strategic mechanisms through which firms simultaneously create economic value, strengthen adaptive capacity, and contribute to long-term sustainability (Bansal and DesJardine, 2014; Teece, 2018; George et al., 2021; OECD, 2023).

For Micro, Small, and Medium Enterprises (MSMEs), capability-based perspectives are particularly relevant because resource constraints frequently limit the effectiveness of conventional sources of competitive advantage. Unlike larger organizations that can leverage substantial financial, technological, and managerial resources, MSMEs rely primarily on entrepreneurial capabilities to identify opportunities, mobilize scarce resources, foster innovation, and respond rapidly to changing competitive conditions. Previous studies consistently demonstrate that entrepreneurial capabilities—including creativity, innovation capability, organizational learning, entrepreneurial orientation, and strategic adaptability—enhance innovation performance, organizational resilience, competitive positioning, and long-term business performance across diverse organizational contexts (Anderson et al., 2014; Eggers, 2020; George et al., 2022; Helfat and Peteraf, 2003; Teece, 2007).

Despite these important contributions, existing capability-based perspectives provide only a partial explanation of how entrepreneurial capabilities generate sustainable organizational value. The Resource-Based View primarily explains why strategic resources create competitive advantage, whereas Dynamic Capability Theory explains how firms renew and reconfigure resources in response to environmental change. More recent perspectives, including capability complementarity, resource orchestration, and dynamic managerial capabilities, further explain how multiple capabilities are coordinated, integrated, and leveraged to improve organizational performance (Sirmon et al., 2011; George et al., 2022; Ariwibowo et al., 2024; Pitelis et al., 2024). Nevertheless, these perspectives generally assume that entrepreneurial capabilities contribute to organizational outcomes through comparable strategic mechanisms and therefore pay limited attention to the distinct strategic functions performed by individual entrepreneurial capabilities during the entrepreneurial value creation process. Building upon rather than replacing these theories, the present study extends capability-based entrepreneurship research by proposing that entrepreneurial capabilities should be differentiated according to the strategic functions they perform throughout capability deployment. This proposition provides the theoretical foundation for the Strategic Differentiation Perspective of Entrepreneurial Capabilities, which is developed in the following section as an extension of existing capability-based theory rather than an alternative to it.

2.3 Strategic differentiation perspective of entrepreneurial capabilities

Although capability-based perspectives have substantially advanced understanding of how firms develop, integrate, and deploy strategic resources, they generally conceptualize entrepreneurial capabilities as a relatively homogeneous category of organizational assets whose contributions to competitive advantage arise through comparable strategic mechanisms. The Resource-Based View explains why valuable strategic resources generate competitive advantage, whereas Dynamic Capability Theory explains how firms continuously renew and reconfigure those resources under changing environmental conditions (Barney, 1991; Helfat and Peteraf, 2003; Teece, 2007). More recent perspectives, including capability complementarity, resource orchestration, and dynamic managerial capabilities, further explain how multiple organizational capabilities are coordinated, bundled, and leveraged to enhance organizational performance (Sirmon et al., 2011; George et al., 2022; Ariwibowo et al., 2024; Pitelis et al., 2024). Collectively, these perspectives have substantially enriched capability-based theory; however, they predominantly explain how capabilities interact rather than why conceptually related entrepreneurial capabilities perform fundamentally different strategic functions throughout the entrepreneurial value creation process. As sustainability challenges become increasingly complex and entrepreneurial firms operate under greater environmental uncertainty, a more function-oriented understanding of entrepreneurial capabilities is required.

Building upon rather than replacing existing capability-based theories, this study proposes the Strategic Differentiation Perspective of Entrepreneurial Capabilities. The proposed perspective argues that entrepreneurial capabilities should be differentiated according to the strategic functions they perform during capability deployment. Rather than treating entrepreneurial capabilities as strategically equivalent organizational resources, this perspective suggests that different capabilities contribute to sustainable value creation through distinct but complementary roles. Consequently, sustainable competitiveness depends not only on the possession of entrepreneurial capabilities or their synergistic interaction but also on the functional differentiation of those capabilities throughout the entrepreneurial value creation process. By shifting analytical attention from capability possession and capability interaction toward capability functional differentiation, this perspective extends existing capability-based entrepreneurship research while remaining theoretically consistent with the broader dynamic capability tradition.

Within this framework, business creativity is conceptualized as a generative capability because it expands the firm's opportunity space through opportunity recognition, idea generation, creative problem solving, and strategic innovation. In contrast, innovation culture is conceptualized as an enabling capability because it establishes the organizational environment that supports collaboration, organizational learning, knowledge sharing, and the effective implementation of entrepreneurial initiatives. Rather than representing competing or hierarchical capabilities, these capabilities perform complementary strategic functions at different stages of entrepreneurial value creation. Business creativity generates entrepreneurial opportunities, whereas innovation culture facilitates the organizational deployment, institutionalization, and continuous refinement of those opportunities into sustainable organizational practices (Amabile, 1996; Anderson et al., 2014; Martins and Terblanche, 2003; George et al., 2022).

A second distinguishing feature of the proposed perspective is the reconceptualization of Sustainable Competitive Advantage as the Capability Conversion Mechanism through which internally developed entrepreneurial capabilities are transformed into externally recognized customer value, market differentiation, organizational resilience, and superior business performance. Whereas previous capability-based studies have primarily positioned competitive advantage as an intermediate outcome linking capabilities and performance (Peteraf, 1993; Sigalas and Economou, 2013), the present study argues that sustainable competitive advantage represents the dynamic strategic process through which differentiated entrepreneurial capabilities are converted into enduring organizational value under changing environmental conditions. This interpretation extends capability-based entrepreneurship research by emphasizing capability conversion as an essential stage of sustainable value creation rather than merely an intervening outcome (Teece, 2018; George et al., 2022; Pitelis et al., 2024).

Collectively, the Strategic Differentiation Perspective of Entrepreneurial Capabilities integrates capability differentiation, capability deployment, and capability conversion into a unified theoretical framework explaining sustainable entrepreneurial value creation. Rather than asking whether entrepreneurial capabilities improve organizational performance, the proposed perspective explains why different entrepreneurial capabilities perform distinct strategic functions, how those functions interact during capability deployment, and how they are ultimately converted into sustainable competitive advantage and long-term business performance. Accordingly, the proposed framework extends existing capability-based entrepreneurship research by providing a more nuanced explanation of entrepreneurial capability deployment among MSMEs operating in resource-constrained and institutionally dynamic environments.

2.4 Business creativity as a generative capability for sustainable value creation

Business creativity is widely recognized as a strategic entrepreneurial capability that enables firms to identify opportunities, generate novel ideas, and develop innovative responses to changing market conditions. Contemporary entrepreneurship research increasingly conceptualizes creativity not merely as an individual cognitive attribute but as an organizational capability that facilitates opportunity recognition, strategic renewal, innovation, and sustainable value creation through the integration of diverse knowledge, experimentation, and creative problem-solving. Within dynamic and uncertain business environments, creativity enables firms to challenge established routines, explore alternative strategic options, and develop differentiated products, services, and business models that enhance organizational resilience and long-term competitiveness (Amabile, 1996; Anderson et al., 2014; Crossan and Apaydin, 2010; George et al., 2022; OECD, 2023).

Within the Strategic Differentiation Perspective of Entrepreneurial Capabilities, business creativity is conceptualized as a generative capability because its primary strategic function is to create entrepreneurial opportunities that serve as the starting point of sustainable value creation. Unlike capabilities primarily concerned with implementation, coordination, or organizational integration, business creativity expands the firm's opportunity space through opportunity recognition, idea generation, experimentation, strategic problem-solving, and innovation. Consequently, creative capability enables firms to anticipate market change, respond proactively to evolving customer needs, and generate innovative solutions that strengthen sustainable competitive advantage. Accordingly, the strategic contribution of business creativity lies not only in producing novel ideas but also in initiating the capability deployment process through which sustainable organizational value is subsequently developed (Barney, 1991; Teece, 2007, 2018; George et al., 2022).

The importance of business creativity is particularly evident among Micro, Small, and Medium Enterprises (MSMEs) operating in emerging economies, where financial, technological, and managerial resources are often constrained. Under these conditions, creativity enables entrepreneurs to compensate for resource limitations by leveraging knowledge, entrepreneurial insight, and strategic flexibility to develop distinctive customer value and innovative market offerings. Rather than relying on resource abundance, creative firms strengthen competitiveness by developing adaptive business models, introducing product and service innovations, and responding rapidly to environmental change. Recent entrepreneurship research further suggests that creativity enhances entrepreneurial resilience by enabling firms to transform uncertainty into opportunity and sustain competitive performance despite institutional and market constraints (Eggers, 2020; George et al., 2021; OECD, 2023; World Bank, 2024).

Previous empirical studies consistently demonstrate that business creativity contributes positively to innovation capability, opportunity recognition, strategic flexibility, competitive advantage, and organizational performance. Nevertheless, the strength of these relationships varies considerably across organizational and institutional contexts, indicating that creativity alone is insufficient to guarantee superior performance. Instead, its strategic value depends on how effectively creative capability is deployed and supported by complementary organizational capabilities. Consistent with the Strategic Differentiation Perspective advanced in this study, business creativity is therefore conceptualized as a generative capability whose principal strategic function is to initiate sustainable value creation by expanding entrepreneurial opportunities that are subsequently transformed into competitive advantage and long-term business performance through complementary enabling capabilities. This conceptualization provides the theoretical foundation for examining the direct and indirect effects of business creativity on sustainable competitive advantage and sustainable business performance in the proposed research model.

2.5 Innovation culture as an enabling capability for sustainable competitiveness

Innovation culture is widely recognized as a strategic organizational capability that shapes the environment in which entrepreneurial ideas are generated, implemented, and continuously refined. Rather than directly creating entrepreneurial opportunities, innovation culture establishes organizational conditions that encourage experimentation, collaboration, knowledge sharing, continuous learning, and employee empowerment, thereby enabling firms to respond effectively to changing market, technological, and institutional environments. Contemporary entrepreneurship and sustainability research increasingly conceptualizes innovation culture not merely as an organizational climate but as a strategic capability that enhances organizational resilience, facilitates strategic renewal, and supports long-term value creation through continuous innovation and adaptive learning (Martins and Terblanche, 2003; Büschgens et al., 2013; Crossan and Apaydin, 2010; George et al., 2021; OECD, 2023).

From the Strategic Differentiation Perspective of Entrepreneurial Capabilities, innovation culture is conceptualized as an enabling capability because its primary strategic function is to facilitate capability deployment rather than opportunity generation. While business creativity expands the firm's opportunity space through idea generation and opportunity recognition, innovation culture creates the organizational infrastructure necessary to coordinate, implement, institutionalize, and continuously improve entrepreneurial initiatives. Through adaptive routines, collaborative norms, organizational learning, and knowledge-sharing mechanisms, innovation culture enhances the firm's ability to transform creative ideas into sustainable organizational practices and enduring competitive advantage. Consequently, its strategic contribution lies in increasing the effectiveness with which entrepreneurial capabilities are deployed and converted into sustainable organizational value (Helfat and Peteraf, 2003; Teece, 2007, 2018; George et al., 2022).

The importance of innovation culture is particularly evident among Micro, Small, and Medium Enterprises (MSMEs) operating in emerging economies, where resource constraints require firms to maximize the effectiveness of existing organizational capabilities rather than relying on resource abundance. A supportive innovation culture enables entrepreneurs to coordinate limited resources more effectively, strengthen organizational learning, encourage cross-functional collaboration, and embed innovation into routine business activities. These organizational processes improve adaptability, reinforce resilience, and enhance firms' capacity to sustain competitive positions despite environmental uncertainty and accelerating digital transformation. Consequently, innovation culture contributes to sustainable competitiveness not by generating entrepreneurial opportunities itself, but by ensuring that entrepreneurial initiatives are effectively implemented and translated into organizational value (Bansal and DesJardine, 2014; Eggers, 2020; OECD, 2023; World Bank, 2024).

Previous empirical studies consistently demonstrate positive relationships between innovation culture, innovation capability, organizational learning, strategic adaptability, competitive advantage, and business performance. However, these relationships frequently vary across organizational and institutional contexts, indicating that innovation culture creates value primarily by strengthening the organizational processes through which entrepreneurial capabilities are deployed rather than by directly improving organizational performance. Consistent with the Strategic Differentiation Perspective proposed in this study, innovation culture is therefore conceptualized as an enabling capability that complements business creativity by facilitating the capability deployment process through which entrepreneurial potential is transformed into sustainable competitive advantage and long-term business performance. This conceptualization provides the theoretical basis for examining Sustainable Competitive Advantage as the Capability Conversion Mechanism linking entrepreneurial capabilities with sustainable business performance.

2.6 Sustainable competitive advantage as the capability conversion mechanism

Sustainable competitive advantage has long been regarded as a central concept in strategic management because it explains how firms maintain superior performance despite operating in dynamic and highly competitive environments. Unlike temporary competitive advantages that arise from short-term market opportunities or resource asymmetries, sustainable competitive advantage reflects a firm's ability to create enduring customer value through resources and capabilities that are valuable, difficult to imitate, continuously renewed, and strategically aligned with changing environmental conditions. Contemporary sustainability and strategic management research further recognizes sustainable competitive advantage as the outcome of organizational adaptability, innovation, resilience, and long-term value creation rather than merely superior market performance (Barney, 1991; Peteraf, 1993; Sigalas and Economou, 2013; Teece, 2007; OECD, 2023).

Capability-based perspectives argue that sustainable competitive advantage emerges not simply from possessing valuable organizational resources but from effectively deploying, integrating, and continuously renewing those resources in response to changing competitive environments. Organizational capabilities represent the firm's internal strategic potential, whereas sustainable competitive advantage reflects the successful realization of that potential through differentiated products, adaptive business models, superior customer value, and organizational resilience. Consequently, long-term competitiveness depends not only on capability development but also on firms' abilities to coordinate, integrate, and transform entrepreneurial capabilities into enduring market positions that competitors find difficult to replicate (Helfat and Peteraf, 2003; Teece et al., 1997; Teece, 2018; George et al., 2022).

Building upon these theoretical foundations, the Strategic Differentiation Perspective of Entrepreneurial Capabilities reconceptualizes Sustainable Competitive Advantage as the Capability Conversion Mechanism through which complementary entrepreneurial capabilities are transformed into sustainable organizational value. Unlike conventional capability-based studies that primarily position competitive advantage as an intermediate outcome linking organizational capabilities and business performance (Peteraf, 1993; Sigalas and Economou, 2013), the proposed perspective argues that sustainable competitive advantage represents the strategic conversion process through which internally developed entrepreneurial capabilities become externally recognized customer value, market differentiation, organizational resilience, and enduring competitive positions. Within this process, business creativity, as a generative capability, expands entrepreneurial opportunities through opportunity recognition, idea generation, and strategic innovation, whereas innovation culture, as an enabling capability, provides the organizational environment necessary to coordinate, institutionalize, and sustain these entrepreneurial initiatives. Sustainable competitive advantage therefore emerges through the effective deployment and conversion of these differentiated capabilities into sustainable organizational value rather than through the independent effects of individual capabilities alone (George et al., 2022; Pitelis et al., 2024).

This perspective provides a more comprehensive explanation of entrepreneurial value creation, particularly for Micro, Small, and Medium Enterprises (MSMEs) operating in emerging economies. Under conditions of resource scarcity, institutional uncertainty, rapid technological change, and increasing market turbulence, entrepreneurial success depends less on the accumulation of tangible resources than on firms' abilities to deploy complementary entrepreneurial capabilities and convert them into sustainable competitive positions. Accordingly, sustainable competitive advantage functions as the critical bridge linking entrepreneurial capability development with sustainable business performance, thereby completing the capability deployment process proposed in this study. By conceptualizing sustainable competitive advantage as a Capability Conversion Mechanism rather than merely a mediating construct, the proposed framework extends capability-based entrepreneurship research and provides a stronger theoretical foundation for examining the mediating role of sustainable competitive advantage within the proposed research model.

2.7 Sustainable business performance as the outcome of capability deployment

Sustainable business performance represents the ultimate organizational outcome through which firms evaluate the long-term effectiveness of their strategic decisions, resource utilization, and competitive positioning. Unlike conventional performance perspectives that primarily emphasize short-term financial outcomes, sustainable business performance reflects a firm's ability to achieve enduring economic success while simultaneously maintaining organizational adaptability, innovation capability, customer value, resilience, and long-term competitiveness under dynamic environmental conditions. Particularly for Micro, Small, and Medium Enterprises (MSMEs), sustainable business performance extends beyond profitability and market growth to include the capacity to continuously innovate, respond to environmental change, strengthen competitive resilience, and create long-term stakeholder value (Venkatraman and Ramanujam, 1986; Richard et al., 2009; Bansal and DesJardine, 2014; OECD, 2023).

Capability-based perspectives consistently argue that superior organizational performance depends less on the possession of valuable resources than on firms' abilities to deploy, integrate, and continuously renew those resources to create sustainable customer value and competitive differentiation (Barney, 1991; Helfat and Peteraf, 2003; Teece, 2007). Contemporary entrepreneurship research further emphasizes that entrepreneurial capabilities enhance organizational performance by strengthening innovation, strategic flexibility, resilience, and adaptive capacity in increasingly uncertain business environments (George et al., 2022; Pitelis et al., 2024). Building upon these perspectives, the Strategic Differentiation Perspective of Entrepreneurial Capabilities proposed in this study argues that sustainable business performance is achieved through the complementary deployment of functionally differentiated entrepreneurial capabilities rather than through the isolated effects of individual capabilities. Specifically, business creativity, as a generative capability, expands entrepreneurial opportunities and stimulates strategic innovation, whereas innovation culture, as an enabling capability, provides the organizational environment necessary to implement, coordinate, and sustain these entrepreneurial initiatives.

Within this framework, Sustainable Competitive Advantage functions as the Capability Conversion Mechanism through which entrepreneurial capabilities are transformed into measurable organizational outcomes. Entrepreneurial capabilities create strategic potential; however, sustainable business performance is realized only when that potential is effectively converted into differentiated customer value, resilient market positions, and enduring competitive advantage. Consequently, sustainable organizational success should not be interpreted as the automatic consequence of entrepreneurial capability development but rather as the outcome of firms' abilities to deploy complementary entrepreneurial capabilities and continuously adapt them to changing environmental and institutional conditions (Peteraf, 1993; Sigalas and Economou, 2013; Teece, 2018; George et al., 2022).

Collectively, this perspective integrates the theoretical arguments developed throughout the literature review into a unified explanation of sustainable entrepreneurial value creation. The proposed framework suggests that sustainable business performance represents the final outcome of the capability deployment process, emerging from the sequential interaction of generative capabilities, enabling capabilities, and the Capability Conversion Mechanism represented by sustainable competitive advantage. By conceptualizing sustainable business performance as the culmination of capability deployment rather than merely an organizational outcome, the proposed framework provides a more comprehensive explanation of how entrepreneurial capabilities generate long-term organizational value among MSMEs operating in resource-constrained and dynamic environments. This theoretical integration provides the conceptual foundation for the research framework and hypotheses presented in the following section.

2.8 Conceptual framework

The preceding literature suggests that sustainable entrepreneurial competitiveness is achieved through a capability deployment process rather than through the isolated effects of organizational capabilities. Building upon the Capability-Based Perspective, this study proposes that entrepreneurial capabilities contribute to sustainable organizational value by performing distinct yet complementary strategic functions that collectively strengthen Sustainable Competitive Advantage and ultimately Sustainable Business Performance. Specifically, business creativity is conceptualized as a generative capability that expands entrepreneurial opportunities through opportunity recognition, creative problem solving, and strategic innovation, whereas innovation culture functions as an enabling capability by establishing the organizational environment required to coordinate, implement, institutionalize, and continuously improve entrepreneurial initiatives. Rather than operating independently, these capabilities complement one another throughout the capability deployment process, thereby enhancing organizational adaptability, resilience, and long-term competitiveness.

Building upon this theoretical foundation, the Strategic Differentiation Perspective of Entrepreneurial Capabilities proposed in this study extends existing capability-based theories by arguing that entrepreneurial capabilities should be differentiated according to the strategic functions they perform during sustainable value creation. Within this perspective, Sustainable Competitive Advantage is reconceptualized as the Capability Conversion Mechanism through which internally developed entrepreneurial capabilities are transformed into externally recognized customer value, market differentiation, organizational resilience, and sustainable organizational performance. Accordingly, the proposed framework explains not only whether entrepreneurial capabilities improve organizational performance but also how different entrepreneurial capabilities interact, are strategically deployed, and are converted into sustainable competitive advantage through distinct yet interconnected strategic pathways.

Figure 1 illustrates the proposed conceptual framework, which integrates the Capability-Based Perspective, the Strategic Differentiation Perspective of Entrepreneurial Capabilities, and the Capability Conversion Mechanism into a unified theoretical explanation of sustainable entrepreneurial value creation among MSMEs. This framework serves as the theoretical basis for the hypotheses developed in the following section and guides the empirical examination of the relationships among business creativity, innovation culture, sustainable competitive advantage, and sustainable business performance across MSMEs in Indonesia and the Philippines.

3 Hypothesis development

3.1 Business creativity and sustainable competitive advantage

Business creativity enables firms to identify entrepreneurial opportunities, generate novel ideas, and develop innovative solutions that create differentiated customer value under dynamic and resource-constrained environments. Contemporary entrepreneurship research increasingly recognizes creativity as an organizational capability that strengthens opportunity recognition, strategic renewal, innovation, and adaptive problem-solving rather than merely an individual cognitive attribute (Amabile, 1996; Anderson et al., 2014; Crossan and Apaydin, 2010). Within the Strategic Differentiation Perspective of Entrepreneurial Capabilities, business creativity is conceptualized as a generative capability because its primary strategic function is to expand the firm's opportunity space through idea generation, strategic experimentation, and entrepreneurial innovation. By continuously generating novel opportunities, business creativity provides the strategic foundation upon which firms develop differentiated products, services, and business models that strengthen sustainable competitive positions.

From a capability-based perspective, sustainable competitive advantage is achieved when firms effectively deploy entrepreneurial capabilities to create valuable and difficult-to-imitate customer value (Barney, 1991; Teece, 2007, 2018). For Micro, Small, and Medium Enterprises (MSMEs), where financial and technological resources are often limited, business creativity becomes an essential strategic capability that compensates for resource constraints by facilitating innovation, strategic flexibility, and market differentiation. Recent studies further demonstrate that entrepreneurial creativity enhances firms' ability to develop innovative offerings, strengthen competitive positioning, and improve organizational resilience under rapidly changing business environments (George et al., 2022; OECD, 2023). Accordingly, firms with stronger business creativity are expected to achieve higher levels of Sustainable Competitive Advantage.

H1: Business creativity positively influences Sustainable Competitive Advantage.

3.2 Business creativity and sustainable business performance

Beyond strengthening sustainable competitive advantage, business creativity contributes directly to sustainable business performance by enabling firms to recognize emerging opportunities, develop innovative business models, and continuously create superior customer value under dynamic market conditions. Within the Strategic Differentiation Perspective of Entrepreneurial Capabilities, business creativity is conceptualized as a generative capability because it initiates the capability deployment process through opportunity recognition, creative problem-solving, and strategic innovation. Although sustainable competitive advantage represents the primary mechanism through which entrepreneurial capabilities generate long-term organizational value, creative capability may also exert a direct influence on business performance by enhancing organizational adaptability, strategic flexibility, and innovation responsiveness. These attributes enable firms to respond proactively to environmental change, exploit new market opportunities, and sustain organizational performance despite increasing uncertainty and resource constraints.

From a capability-based perspective, firms possessing stronger creative capabilities are better positioned to develop differentiated products, adaptive business models, and innovative strategic responses that strengthen long-term business performance (Barney, 1991; Teece, 2007, 2018). This argument is particularly relevant for Micro, Small, and Medium Enterprises (MSMEs), where creativity frequently serves as a strategic resource for overcoming financial and technological limitations through entrepreneurial innovation and opportunity exploitation. Recent entrepreneurship research further indicates that creativity enhances organizational resilience, innovation capability, and sustainable performance by facilitating continuous adaptation to rapidly changing business environments (Eggers, 2020; George et al., 2022; OECD, 2023). Accordingly, firms possessing stronger business creativity are expected to achieve superior Sustainable Business Performance.

H2: Business creativity positively influences Sustainable Business Performance.

3.3 Innovation culture and sustainable competitive advantage

Innovation culture creates an organizational environment that encourages experimentation, collaboration, knowledge sharing, and continuous learning, thereby enhancing firms' capacity to implement and sustain entrepreneurial initiatives. Contemporary entrepreneurship research increasingly recognizes innovation culture as a strategic organizational capability that strengthens organizational adaptability, innovation capability, and long-term competitiveness by facilitating the effective deployment of entrepreneurial resources and knowledge (Martins and Terblanche, 2003; Büschgens et al., 2013; Crossan and Apaydin, 2010). Within the Strategic Differentiation Perspective of Entrepreneurial Capabilities, innovation culture is conceptualized as an enabling capability because its primary strategic function is to facilitate capability deployment rather than opportunity generation. By strengthening organizational coordination, adaptive routines, collaboration, and continuous learning, innovation culture complements business creativity and enhances the firm's ability to transform entrepreneurial initiatives into sustainable competitive positions.

From a capability-based perspective, sustainable competitive advantage is achieved when firms effectively deploy complementary organizational capabilities to create differentiated customer value and resilient market positions (Helfat and Peteraf, 2003; Teece, 2007, 2018). For Micro, Small, and Medium Enterprises (MSMEs), where resource constraints frequently limit conventional sources of competitiveness, innovation culture provides an important organizational mechanism that enables firms to maximize existing resources through continuous learning, collaboration, and strategic adaptation. Recent studies further indicate that innovation-supportive organizational cultures enhance firms' innovation performance, organizational resilience, and sustainable competitive positioning under rapidly changing business environments (George et al., 2022; OECD, 2023; Pitelis et al., 2024). Accordingly, firms characterized by stronger innovation cultures are expected to exhibit higher levels of Sustainable Competitive Advantage.

H3: Innovation culture positively influences Sustainable Competitive Advantage.

3.4 Innovation culture and sustainable business performance

Beyond strengthening sustainable competitive advantage, innovation culture may also contribute directly to sustainable business performance by creating organizational conditions that support continuous innovation, organizational learning, and strategic adaptation. Within the Strategic Differentiation Perspective of Entrepreneurial Capabilities, innovation culture is conceptualized as an enabling capability because it facilitates the effective deployment, coordination, and institutionalization of entrepreneurial initiatives rather than generating entrepreneurial opportunities directly. By fostering collaboration, knowledge sharing, employee participation, and continuous learning, innovation culture enhances firms' capacity to implement innovative ideas, respond proactively to environmental change, and sustain organizational resilience under dynamic business conditions.

From a capability-based perspective, sustainable business performance depends not only on firms' ability to generate entrepreneurial opportunities but also on their ability to create an organizational environment that supports the effective implementation and continuous renewal of those opportunities (Helfat and Peteraf, 2003; Teece, 2007, 2018). For Micro, Small, and Medium Enterprises (MSMEs), where resource limitations often constrain strategic flexibility, a strong innovation culture enables firms to maximize existing organizational capabilities through learning, collaboration, and adaptive decision-making. Recent entrepreneurship research further suggests that innovation-supportive organizational cultures strengthen organizational resilience, innovation capability, and long-term business sustainability, although their direct contribution to business performance may vary across organizational and institutional contexts (George et al., 2022; OECD, 2023; Pitelis et al., 2024). Accordingly, firms characterized by stronger innovation cultures are expected to achieve higher levels of Sustainable Business Performance.

H4: Innovation culture positively influences Sustainable Business Performance.

3.5 Sustainable competitive advantage and sustainable business performance

Sustainable Competitive Advantage reflects a firm's ability to create enduring customer value through differentiated products, adaptive business models, organizational resilience, and superior market positioning. Traditional strategic management perspectives regard sustainable competitive advantage as the primary determinant of long-term organizational success because it enables firms to achieve superior performance that competitors find difficult to imitate (Barney, 1991; Peteraf, 1993). Within the Strategic Differentiation Perspective of Entrepreneurial Capabilities proposed in this study, Sustainable Competitive Advantage is further reconceptualized as the Capability Conversion Mechanism through which internally developed entrepreneurial capabilities are transformed into externally recognized customer value and sustainable organizational outcomes. Rather than representing merely an intermediate organizational outcome, sustainable competitive advantage reflects the strategic process through which entrepreneurial capabilities are deployed, integrated, and converted into long-term competitive positions.

From a capability-based perspective, firms that successfully transform entrepreneurial capabilities into sustainable competitive advantage are better positioned to maintain customer loyalty, strengthen market differentiation, enhance organizational resilience, and achieve superior long-term business performance (Helfat and Peteraf, 2003; Sigalas and Economou, 2013; Teece, 2007, 2018). This argument is particularly relevant for Micro, Small, and Medium Enterprises (MSMEs), where resource constraints require firms to maximize the strategic value generated from entrepreneurial capabilities rather than relying solely on tangible resources. Recent studies similarly suggest that sustainable competitive advantage represents the critical mechanism through which entrepreneurial capability deployment is translated into superior organizational performance under dynamic and uncertain business environments (George et al., 2022; Pitelis et al., 2024). Accordingly, firms possessing stronger Sustainable Competitive Advantage are expected to achieve higher levels of Sustainable Business Performance.

H5: Sustainable Competitive Advantage positively influences Sustainable Business Performance.

3.6 The mediating role of sustainable competitive advantage in the relationship between business creativity and sustainable business performance

The Strategic Differentiation Perspective of Entrepreneurial Capabilities proposes that entrepreneurial capabilities generate sustainable organizational value through a capability deployment process rather than solely through direct effects on organizational performance. Within this perspective, business creativity functions as a generative capability because it expands the firm's opportunity space through opportunity recognition, idea generation, creative problem-solving, and strategic innovation. Although these activities create entrepreneurial potential, they do not automatically lead to superior business performance unless they are successfully transformed into differentiated customer value and sustainable market positions.

Accordingly, this study reconceptualizes Sustainable Competitive Advantage as the Capability Conversion Mechanism through which the strategic potential created by business creativity is converted into measurable organizational outcomes. Firms possessing stronger creative capabilities are more likely to develop differentiated products, innovative business models, and unique value propositions; however, sustainable business performance is realized only when these entrepreneurial initiatives are effectively translated into enduring competitive positions that competitors cannot easily imitate. From a capability-based perspective, sustainable competitive advantage therefore represents the critical strategic process linking entrepreneurial capability deployment with long-term organizational performance (Barney, 1991; Helfat and Peteraf, 2003; Teece, 2007, 2018).

Recent entrepreneurship and dynamic capability research similarly suggests that entrepreneurial capabilities contribute to organizational performance primarily through the development of sustainable competitive positions rather than through direct performance effects alone (George et al., 2022; Pitelis et al., 2024). Consequently, firms that effectively convert creative capability into sustainable competitive advantage are expected to achieve superior Sustainable Business Performance. Therefore, Sustainable Competitive Advantage is expected to mediate the relationship between business creativity and sustainable business performance.

H6: Sustainable Competitive Advantage mediates the relationship between Business Creativity and Sustainable Business Performance.

3.7 The mediating role of sustainable competitive advantage in the relationship between innovation culture and sustainable business performance

Unlike business creativity, which functions as a generative capability by creating entrepreneurial opportunities, innovation culture serves as an enabling capability that strengthens the organizational environment necessary to deploy, institutionalize, and sustain entrepreneurial initiatives. Within the Strategic Differentiation Perspective of Entrepreneurial Capabilities, innovation culture contributes to sustainable organizational value by fostering collaboration, organizational learning, knowledge sharing, employee participation, and adaptive routines that facilitate the effective implementation of entrepreneurial initiatives. Although these organizational conditions enhance firms' capability deployment, they do not automatically translate into superior business performance.

Accordingly, this study proposes that the contribution of innovation culture to Sustainable Business Performance is realized primarily through the development of Sustainable Competitive Advantage, which is conceptualized as the Capability Conversion Mechanism within the proposed theoretical framework. A supportive innovation culture enables firms to coordinate entrepreneurial resources more effectively, continuously improve organizational processes, and strengthen adaptive capabilities, thereby facilitating the transformation of entrepreneurial initiatives into differentiated customer value, resilient market positions, and enduring competitive advantage. From a capability-based perspective, organizational capabilities generate sustainable value only when they are effectively deployed and converted into strategic advantages that competitors cannot easily replicate (Helfat and Peteraf, 2003; Teece, 2007, 2018).

Recent entrepreneurship research similarly suggests that innovation-supportive organizational environments enhance long-term organizational performance primarily by strengthening firms' innovation capability, adaptive capacity, and competitive positioning rather than through direct performance effects alone (George et al., 2022; OECD, 2023; Pitelis et al., 2024). Consequently, Sustainable Competitive Advantage is expected to mediate the relationship between Innovation Culture and Sustainable Business Performance, serving as the strategic mechanism through which enabling capabilities are converted into sustainable organizational outcomes.

H7: Sustainable Competitive Advantage mediates the relationship between Innovation Culture and Sustainable Business Performance.

4 Methodology

4.1 Research design

This study employed a quantitative, cross-sectional, comparative research design to examine how entrepreneurial capabilities contribute to Sustainable Competitive Advantage and Sustainable Business Performance among Micro, Small, and Medium Enterprises (MSMEs) in Indonesia and the Philippines. Guided by the Strategic Differentiation Perspective of Entrepreneurial Capabilities, the study conceptualizes business creativity as a generative capability, innovation culture as an enabling capability, and Sustainable Competitive Advantage as the Capability Conversion Mechanism through which entrepreneurial capabilities are transformed into sustainable organizational performance.

Primary data were collected through a structured questionnaire administered to MSME owners and managers across both countries. A comparative design was adopted because Indonesia and the Philippines represent two emerging entrepreneurial economies that share the strategic importance of MSMEs while differing in institutional conditions, innovation ecosystems, and policy support. This context provides an appropriate setting for evaluating the robustness of the proposed theoretical framework across different entrepreneurial environments.

The proposed research model was analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) with SmartPLS 4, following the two-stage approach recommended by Hair et al. (2022). The measurement model was first assessed for reliability and validity, followed by evaluation of the structural model through bootstrapping with 5,000 resamples. To examine cross-country differences, Partial Least Squares Multi-Group Analysis (PLS-MGA) was performed after establishing measurement invariance using the Measurement Invariance of Composite Models (MICOM) procedure (Henseler et al., 2016a).

4.2 Research context and sample

This study was conducted among Micro, Small, and Medium Enterprises (MSMEs) operating in Indonesia and the Philippines, two emerging Southeast Asian economies where MSMEs play a critical role in employment creation, innovation, and sustainable economic development. Although both countries share similar economic characteristics and rely heavily on entrepreneurial activity, they differ in institutional quality, innovation support systems, digital readiness, and entrepreneurial ecosystem development. These contextual differences provide an appropriate setting for evaluating the robustness of the proposed Strategic Differentiation Perspective of Entrepreneurial Capabilities across different institutional environments.

The target population comprised MSMEs operating in innovation-oriented sectors, including creative industries, culinary businesses, fashion, handicrafts, digital enterprises, and other firms actively engaged in product, service, or business model innovation. These sectors were selected because their competitiveness depends primarily on entrepreneurial capabilities, organizational innovation, and strategic adaptability rather than on abundant tangible resources.

A total of 200 MSMEs participated in the study, consisting of 100 firms from Indonesia and 100 firms from the Philippines. This sample size satisfies the recommended minimum requirements for PLS-SEM and provides adequate statistical power for cross-country comparison using PLS Multi-Group Analysis (PLS-MGA; Hair et al., 2022).

Respondents were selected using purposive sampling. Eligible respondents were required to (1) be the owner, founder, or manager directly involved in strategic decision-making, (2) have operated the business for at least 1 year, and (3) possess sufficient knowledge of the firm's innovation activities, entrepreneurial capabilities, and business performance. These criteria ensured that respondents were able to provide reliable assessments of their firms' capability deployment and competitive performance.

4.3 Data collection procedures

Primary data were collected using a structured questionnaire administered to MSME owners and managers in Indonesia and the Philippines. The questionnaire measured four latent constructs underlying the proposed research model, namely Business Creativity, Innovation Culture, Sustainable Competitive Advantage, and Sustainable Business Performance. Data were collected through both online and face-to-face surveys, depending on respondent accessibility and local business conditions.

To ensure cross-country comparability, the questionnaire was translated, reviewed, and contextually adapted before data collection. A pilot study involving MSME owners and managers was conducted to assess item clarity, content validity, and contextual relevance. Feedback obtained during the pilot stage was incorporated to improve the wording and readability of the questionnaire prior to full-scale data collection.

Several procedural remedies were implemented to minimize Common Method Bias (CMB). Participation was voluntary, respondents were assured of anonymity and confidentiality, and they were informed that the information provided would be used solely for academic research. Clear instructions and construct definitions were included to reduce ambiguity and evaluation apprehension. In addition, statistical assessment of CMB was performed using the full collinearity variance inflation factor (VIF) approach, with values below the recommended threshold indicating that common method bias was unlikely to affect the validity of the results (Kock, 2015).

4.4 Measurement of constructs

The proposed research model comprises four latent constructs derived from the Strategic Differentiation Perspective of Entrepreneurial Capabilities and established capability-based entrepreneurship literature. Business Creativity was operationalized as a generative capability, reflecting the firm's ability to recognize opportunities, generate creative ideas, and develop innovative strategic solutions. Innovation Culture was conceptualized as an enabling capability, representing the organizational environment that supports collaboration, continuous learning, experimentation, and the implementation of innovation. Sustainable Competitive Advantage was measured as the Capability Conversion Mechanism, reflecting the firm's ability to transform entrepreneurial capabilities into differentiated customer value and enduring competitive positions. Sustainable Business Performance represented the final outcome of capability deployment, encompassing organizational growth, market performance, customer development, operational effectiveness, and long-term business sustainability.

Measurement items were adapted from well-established and widely validated scales in entrepreneurship, strategic management, innovation, and organizational capability research. Minor contextual modifications were introduced to ensure their suitability for MSMEs operating in Indonesia and the Philippines while preserving the original conceptual meaning of each construct. All indicators were measured using a five-point Likert scale, ranging from 1 (strongly disagree) to 5 (strongly agree).

The operational definitions, measurement indicators, and original measurement sources for each construct are presented in Table 1.

Table 1. Operational definition and measurement of constructs.

All constructs were measured using a five-point Likert scale, ranging from 1 = strongly disagree to 5 = strongly agree.

4.5 Analytical strategy

Data were analyzed using SmartPLS 4 following the two-stage Partial Least Squares Structural Equation Modeling (PLS-SEM) procedure recommended by Henseler et al. (2009) and Hair et al. (2022). The first stage evaluated the measurement model by assessing indicator reliability, internal consistency reliability, convergent validity, and discriminant validity using factor loadings, Composite Reliability (CR), Average Variance Extracted (AVE), the Fornell–Larcker criterion, and the Heterotrait–Monotrait Ratio (HTMT). In addition, Common Method Bias (CMB) was assessed using the full collinearity variance inflation factor (VIF) approach (Kock, 2015).

The second stage evaluated the structural model by examining collinearity, path coefficients, coefficients of determination (R²), effect sizes (f²), and predictive relevance (Q²). The significance of the direct and indirect effects was assessed using bootstrapping with 5,000 resamples, following current recommendations for mediation analysis in PLS-SEM (Hair et al., 2022; Nitzl et al., 2016).

To examine whether the proposed research model differed across the two countries, Partial Least Squares Multi-Group Analysis (PLS-MGA) was conducted after establishing measurement invariance using the Measurement Invariance of Composite Models (MICOM) procedure (Henseler et al., 2016b). This analysis enabled assessment of the robustness of the proposed theoretical framework across MSMEs operating in Indonesia and the Philippines.

4.6 Ethical considerations

This study was conducted in accordance with accepted ethical standards for research involving human participants. Participation in the survey was voluntary, and all respondents were informed about the purpose of the study before completing the questionnaire. Informed consent was obtained from all participants, who were assured that their responses would remain anonymous and confidential and would be used solely for academic research purposes. Respondents were also informed that they could decline to answer any question or withdraw from the survey at any stage without consequence. No personally identifiable information was collected, and all data were analyzed in aggregated form to protect participants' privacy and confidentiality.

5 Results

5.1 Respondent characteristics

The study included 200 MSME owners and managers, comprising 100 respondents from Indonesia and 100 respondents from the Philippines. Table 2 summarizes the demographic and business characteristics of the respondents. These characteristics provide an overview of the study sample and demonstrate that the data were obtained from MSMEs representing diverse demographic profiles and business sectors.

Table 2. Respondent characteristics (N = 200).

Source: Research Data (2026).

Table 2 presents the demographic and business characteristics of the 200 MSME owners and managers who participated in this study, comprising 100 respondents from Indonesia and 100 respondents from the Philippines. The balanced sample distribution provides an appropriate basis for conducting the comparative analysis between the two countries.

Overall, the respondent profiles were broadly comparable across both national samples. Male respondents constituted the majority in both Indonesia (63%) and the Philippines (64%), resulting in an overall proportion of 64%, while female respondents represented 36% of the total sample. Regarding age distribution, the majority of respondents were between 25 and 34 years old, accounting for 46% of the Indonesian sample and 43% of the Philippine sample. This indicates that most respondents were within the economically productive age group and were actively involved in managing their businesses.

The participating MSMEs represented a diverse range of business sectors. Culinary businesses constituted the largest sector in both countries (40% in Indonesia and 38% in the Philippines), followed by craft and fashion enterprises. Creative industries and digital businesses were also represented, although to a lesser extent. This sectoral diversity provides a comprehensive representation of innovation-oriented MSMEs and supports the generalizability of the proposed research model across different business contexts.

With respect to business experience, most firms had been operating for 4–6 years (43% in Indonesia and 36% in the Philippines), followed by firms with 7–10 years of operation. These findings indicate that the majority of participating MSMEs had accumulated sufficient operational experience to evaluate their entrepreneurial capabilities, competitive positioning, and business performance.

Firm size was dominated by micro-enterprises employing between one and five employees, representing 84% of the Indonesian sample and 77% of the Philippine sample. Only a small proportion of firms employed more than ten workers, reflecting the typical characteristics of MSMEs in emerging economies. Overall, the similarity of respondent characteristics across the two countries supports the suitability of the sample for subsequent comparative analysis using PLS Multi-Group Analysis (PLS-MGA).

5.2 Structural model assessment (PLS algorithm results)

Before testing the proposed hypotheses, the measurement model was evaluated to ensure that the latent constructs satisfied the recommended reliability and validity criteria. Following the two-stage PLS-SEM procedure (Hair et al., 2022), the assessment included indicator reliability, internal consistency reliability, convergent validity, discriminant validity, and estimation of the structural relationships among the proposed constructs.

The outer loading values presented in Table 3 range from 0.832 to 0.944, exceeding the recommended threshold of 0.70 (Hair et al., 2022). These results indicate that all measurement indicators exhibit satisfactory indicator reliability and adequately represent their respective latent constructs. Consequently, no indicators were removed from the measurement model, and all items were retained for subsequent analysis.

Table 3. Indicator reliability (outer loadings).

Source: Research data (2026).

As shown in Table 4, all constructs demonstrate satisfactory internal consistency reliability. Cronbach's alpha values range from 0.901 to 0.932, while Composite Reliability (ρA and ρC) values range from 0.906 to 0.952, all exceeding the recommended threshold of 0.70 (Hair et al., 2022). Furthermore, the Average Variance Extracted (AVE) values range from 0.770 to 0.869, substantially above the minimum criterion of 0.50 (Fornell and Larcker, 1981). These findings confirm that the measurement model possesses satisfactory construct reliability and convergent validity.

Table 4. Measurement model assessment.

Source: Research data (2026).

The Fornell–Larcker criterion presented in Table 5 further supports discriminant validity. The square root of the AVE for each construct (shown on the diagonal) exceeds the corresponding inter-construct correlations, indicating that each construct shares greater variance with its own indicators than with other constructs (Fornell and Larcker, 1981).

Table 5. Discriminant validity assessment (Fornell–Larcker criterion).

Source: Research data (2026). Bold diagonal values represent the square root of the Average Variance Extracted (AVE) for each construct.

The Heterotrait–Monotrait (HTMT) ratios shown in Table 6 range from 0.601 to 0.815, all below the recommended threshold of 0.90 (Henseler et al., 2015). These results provide additional evidence that the latent constructs exhibit adequate discriminant validity and are empirically distinct from one another.

Table 6. Discriminant validity assessment (HTMT ratio).

Source: Research data (2026).

Having established satisfactory indicator reliability, construct reliability, convergent validity, and discriminant validity, the structural relationships among the constructs were subsequently estimated using the PLS algorithm. The standardized path coefficients estimated using the PLS algorithm are presented in Table 7.

Table 7. Structural model results (PLS algorithm).

Source: Research data (2026).

The PLS algorithm results indicate that both entrepreneurial capabilities contribute positively to Sustainable Competitive Advantage, although with different magnitudes. Innovation Culture exhibits the strongest relationship with Sustainable Competitive Advantage (β = 0.569), followed by Business Creativity (β = 0.288). Sustainable Competitive Advantage, in turn, demonstrates a substantial positive relationship with Sustainable Business Performance (β = 0.465), supporting the theoretical proposition that competitive advantage functions as the mechanism through which entrepreneurial capabilities are translated into superior organizational outcomes.

Business Creativity also shows a positive direct relationship with Sustainable Business Performance (β = 0.327), suggesting that, as a generative capability, it contributes not only to competitive positioning but also directly to organizational performance. In contrast, the direct relationship between Innovation Culture and Sustainable Business Performance is negligible (β = −0.011), indicating that the strategic value of Innovation Culture is primarily realized through its contribution to Sustainable Competitive Advantage. These findings provide preliminary empirical support for the Strategic Differentiation Perspective of Entrepreneurial Capabilities, which proposes that entrepreneurial capabilities perform distinct strategic functions within the capability deployment process. The statistical significance of these relationships is further examined through the bootstrapping analysis presented in the following section.

5.3 Structural model assessment

Following confirmation of the reliability and validity of the measurement model, the structural model was evaluated to assess its explanatory power, effect size, and predictive relevance before testing the proposed hypotheses. Consistent with the recommended PLS-SEM evaluation procedure (Hair et al., 2022), the assessment included collinearity diagnostics using the Variance Inflation Factor (VIF), the coefficient of determination (R²), effect size (f²), and predictive relevance (Q²).

Prior to evaluating the structural relationships, collinearity among the predictor constructs was examined using the Variance Inflation Factor (VIF). The VIF values ranged from 2.373 to 5.856, remaining below the commonly accepted threshold of 10.0, indicating that multicollinearity was not a serious concern and that the predictor constructs could be simultaneously included in the structural model estimation. These findings confirm that collinearity is unlikely to bias the estimation of the path coefficients.

The explanatory power of the proposed model was assessed using the coefficient of determination (R²). As presented in Table 8, Business Creativity and Innovation Culture jointly explain 63.0% of the variance in Sustainable Competitive Advantage (R² = 0.630; Adjusted R² = 0.626). Furthermore, Business Creativity, Innovation Culture, and Sustainable Competitive Advantage collectively explain 51.6% of the variance in Sustainable Business Performance (R² = 0.516; Adjusted R² = 0.509). According to Hair et al. (2022), these values indicate that the proposed research model possesses moderate to substantial explanatory power, supporting its capability to explain sustainable entrepreneurial value creation among MSMEs in Indonesia and the Philippines.

Table 8. Coefficient of determination (R²).

Source: Research data (2026).

The effect size analysis (f²) was conducted to determine the relative contribution of each exogenous construct to the endogenous variables. Following the guidelines of Hair et al. (2022), values of 0.02, 0.15, and 0.35 indicate small, medium, and large effects, respectively. As shown in Table 9, Innovation Culture exhibits a large effect on Sustainable Competitive Advantage (f² = 0.472), indicating that it plays a dominant role as an enabling capability in strengthening firms' competitive positions. Sustainable Competitive Advantage demonstrates a medium effect on Sustainable Business Performance (f² = 0.166), supporting its role as the Capability Conversion Mechanism through which entrepreneurial capabilities are translated into superior organizational performance. Business Creativity shows small but meaningful effects on both Sustainable Competitive Advantage (f² = 0.121) and Sustainable Business Performance (f² = 0.106). In contrast, Innovation Culture has no meaningful direct effect on Sustainable Business Performance (f² = 0.000), suggesting that its strategic contribution is realized primarily through the development of Sustainable Competitive Advantage.

Table 9. Effect size (f²).

Source: Research data (2026).

The predictive relevance of the proposed structural model was evaluated using the blindfolding procedure. As presented in Table 10, the Q² values for Sustainable Competitive Advantage (0.482) and Sustainable Business Performance (0.397) are substantially greater than zero, indicating that the model possesses satisfactory predictive relevance. Moreover, both values exceed the benchmark of 0.35, suggesting strong predictive capability for the endogenous constructs. These findings further confirm that the proposed Strategic Differentiation Perspective of Entrepreneurial Capabilities demonstrates robust predictive power in explaining Sustainable Competitive Advantage and Sustainable Business Performance among MSMEs operating in Indonesia and the Philippines.

Table 10. Predictive relevance (Q²).

Source: Research data (2026).

Figure 2 presents the estimated structural model generated using the PLS algorithm. The standardized path coefficients indicate positive relationships between Business Creativity and Sustainable Competitive Advantage, as well as between Innovation Culture and Sustainable Competitive Advantage. Sustainable Competitive Advantage also demonstrates a positive relationship with Sustainable Business Performance, supporting its conceptual role as the Capability Conversion Mechanism proposed in this study. The statistical significance of these structural relationships is subsequently evaluated through the bootstrapping procedure presented in the following section.

5.4 Hypothesis testing

The proposed hypotheses were evaluated using the bootstrapping procedure with 5,000 resamples, following the recommendations of Hair et al. (2022). The significance of each structural relationship was assessed based on the standardized path coefficient (β), t-statistic, and p-value. A hypothesis was considered supported when the t-value exceeded 1.96 and the corresponding p-value was below 0.05. The results of the hypothesis testing are presented in Table 11.

Table 11. Structural model significance testing (bootstrapping results).

Source: Research data (2026).

The bootstrapping results indicate that four of the five direct hypotheses are supported. Business Creativity demonstrates significant positive effects on both Sustainable Competitive Advantage (β = 0.288, p < 0.001) and Sustainable Business Performance (β = 0.327, p < 0.001). Similarly, Innovation Culture exhibits a significant positive relationship with Sustainable Competitive Advantage (β = 0.569, p < 0.001), representing the strongest structural relationship identified in the model. In addition, Sustainable Competitive Advantage significantly influences Sustainable Business Performance (β = 0.465, p < 0.001). However, the direct relationship between Innovation Culture and Sustainable Business Performance is not statistically significant (β = −0.011, p = 0.914). These findings provide initial empirical support for the proposed structural model and indicate that Sustainable Competitive Advantage plays an important role in explaining how entrepreneurial capabilities contribute to organizational performance.

To further examine the proposed Capability Conversion Mechanism, mediation analysis was conducted using the same bootstrapping procedure. The indirect effects were evaluated based on the standardized indirect coefficients, t-statistics, and p-values. The results are presented in Table 12.

Table 12. Indirect effects (mediation analysis).

Source: Research data (2026).

The mediation analysis demonstrates that both indirect effects are statistically significant. Innovation Culture has a significant indirect effect on Sustainable Business Performance through Sustainable Competitive Advantage (β = 0.265, p < 0.001), while Business Creativity also exhibits a significant indirect effect through Sustainable Competitive Advantage (β = 0.134, p = 0.001). These findings indicate that Sustainable Competitive Advantage serves as an important mediating construct linking entrepreneurial capabilities with Sustainable Business Performance.

A comparison of the direct and indirect effects reveals different mediation patterns for the two entrepreneurial capabilities. Business Creativity retains both significant direct and indirect effects on Sustainable Business Performance, indicating partial mediation. In contrast, Innovation Culture demonstrates a significant indirect effect through Sustainable Competitive Advantage while its direct effect on Sustainable Business Performance is not significant, indicating full mediation. Accordingly, Hypotheses H6 and H7 are supported. The theoretical implications of these mediation patterns are discussed in the following discussion section.

5.5 Multi-group analysis

To examine whether the proposed capability deployment framework operates similarly across different entrepreneurial contexts, a Partial Least Squares Multi-Group Analysis (PLS-MGA) was conducted to compare the structural relationships between MSMEs in Indonesia and the Philippines. Prior to comparing the structural paths, Measurement Invariance of Composite Models (MICOM) was assessed following the procedure proposed by Henseler et al. (2016a). Establishing measurement invariance is an essential prerequisite for multi-group analysis because it ensures that the latent constructs are measured consistently across groups, allowing meaningful comparisons of the structural relationships. The detailed results of the MICOM assessment are presented in Table 13.

Table 13. Measurement invariance of composite models (MICOM).

Source: Research data (2026).

The MICOM results indicate that configural invariance was established because identical measurement models, indicators, estimation procedures, and data treatment were applied to both country groups. Furthermore, all constructs demonstrate very high compositional invariance, with correlation coefficients ranging from 0.994 to 0.999, indicating that the composite scores were constructed consistently across Indonesian and Philippine MSMEs. Although the equality of means and equality of variances tests were not supported, the results satisfy the criteria for partial measurement invariance, which is sufficient to permit meaningful comparisons of structural relationships using PLS-MGA (Henseler et al., 2016b). Accordingly, the structural paths between the two country groups can be validly compared.

Following the establishment of partial measurement invariance, the structural relationships were compared using PLS-MGA. The results are presented in Table 14.

Table 14. Multi-group analysis (PLS-MGA results).

Source: Research data (2026).

The PLS-MGA results indicate that four of the five structural relationships do not differ significantly between Indonesian and Philippine MSMEs, as both the PLS-MGA and permutation p-values exceed the 0.05 significance level. Specifically, the relationships involving Business Creativity → Sustainable Business Performance, Business Creativity → Sustainable Competitive Advantage, Sustainable Competitive Advantage → Sustainable Business Performance, and Innovation Culture → Sustainable Business Performance demonstrate comparable strengths across the two countries. These findings suggest that the proposed capability deployment framework exhibits a high degree of cross-country robustness, indicating that the strategic roles of Business Creativity, Sustainable Competitive Advantage, and their contribution to Sustainable Business Performance are generally consistent across the two entrepreneurial ecosystems.

In contrast, the relationship between Innovation Culture and Sustainable Competitive Advantage differs significantly between Indonesia and the Philippines (PLS-MGA p = 0.0255; Permutation p = 0.0270). This finding indicates that the contribution of Innovation Culture to the development of Sustainable Competitive Advantage is contingent upon the national context. Although Innovation Culture functions as an enabling capability in both countries, its effectiveness in strengthening competitive advantage appears to vary according to differences in institutional support, innovation ecosystems, organizational practices, or broader business environments. Consequently, while the overall capability deployment framework demonstrates substantial cross-country generalizability, the strategic influence of Innovation Culture on Sustainable Competitive Advantage appears to be context dependent.

Overall, the multi-group analysis provides additional empirical support for the proposed Strategic Differentiation Perspective of Entrepreneurial Capabilities. The largely consistent structural relationships across Indonesia and the Philippines suggest that the proposed framework possesses strong cross-context applicability, while the significant difference observed for the Innovation Culture–Sustainable Competitive Advantage relationship highlights the importance of considering contextual factors when examining the deployment of enabling capabilities in different entrepreneurial ecosystems. The theoretical implications of these findings are discussed in the following section.

6 Discussion

6.1 Business creativity as a generative capability

The empirical findings provide strong support for the proposition that Business Creativity functions as a generative capability within the Strategic Differentiation Perspective of Entrepreneurial Capabilities proposed in this study. Business Creativity exhibits significant positive effects on both Sustainable Competitive Advantage (β = 0.288, p < 0.001) and Sustainable Business Performance (β = 0.327, p < 0.001), indicating that creative capability contributes simultaneously to competitive positioning and long-term organizational performance. These findings confirm H1 and H2 while providing empirical support for the theoretical argument that entrepreneurial capabilities perform differentiated strategic functions throughout the capability deployment process. Rather than representing merely an organizational attribute, Business Creativity serves as the capability that initiates sustainable value creation by expanding entrepreneurial opportunities through opportunity recognition, creative problem solving, strategic experimentation, and innovation. This interpretation is fully consistent with the conceptual framework developed in the literature review, which positions Business Creativity as the starting point of capability deployment rather than simply another organizational resource.

From a capability-based perspective, these findings suggest that MSMEs strengthen long-term competitiveness not primarily through the possession of valuable resources but through their ability to continuously generate new entrepreneurial opportunities. In resource-constrained environments such as Indonesia and the Philippines, Business Creativity enables firms to overcome financial, technological, and institutional limitations by developing differentiated products, adaptive business models, and innovative strategic responses that competitors find difficult to replicate. Consequently, creativity becomes a strategic mechanism through which entrepreneurial firms transform environmental uncertainty into opportunities for sustainable value creation rather than merely responding to competitive pressures. This finding reinforces Dynamic Capability Theory, which emphasizes continuous capability renewal as the foundation of sustainable competitiveness, while simultaneously extending the theory by identifying the specific strategic function performed by Business Creativity within entrepreneurial capability deployment.

An important contribution of the present findings lies in demonstrating that Business Creativity influences Sustainable Business Performance through both direct and indirect pathways. In addition to its direct contribution to organizational performance, Business Creativity also enhances Sustainable Competitive Advantage, which subsequently strengthens Sustainable Business Performance through the Capability Conversion Mechanism. This pattern of partial mediation indicates that entrepreneurial creativity generates immediate organizational benefits while simultaneously creating longer-term strategic value through competitive positioning. Such evidence supports the proposed Capability Deployment Process, whereby entrepreneurial opportunities generated through creativity are progressively transformed into differentiated customer value, resilient market positions, and sustainable organizational performance. Rather than treating competitive advantage as merely an intermediate statistical construct, the findings empirically validate its role as a strategic capability conversion process linking entrepreneurial potential with sustainable business outcomes.

The present findings also contribute to the broader entrepreneurship literature by extending previous studies that primarily associate Business Creativity with innovation capability and organizational performance. While earlier research has generally concluded that creativity enhances innovation, strategic flexibility, and firm performance, the current study demonstrates why these relationships occur by positioning Business Creativity as a generative capability within a broader capability deployment process. This theoretical refinement moves beyond conventional capability-based explanations that focus on resource possession, capability integration, or capability orchestration toward a function-oriented explanation of entrepreneurial capability deployment. Accordingly, the Strategic Differentiation Perspective proposed in this study provides a more comprehensive explanation of sustainable entrepreneurial value creation by distinguishing the strategic role of Business Creativity from other complementary entrepreneurial capabilities operating within the same organizational system.

6.2 Innovation culture as an enabling capability

The findings demonstrate that Innovation Culture functions as an enabling capability rather than a direct driver of organizational performance. Innovation Culture exerts a significant positive influence on Sustainable Competitive Advantage (β = 0.569, p < 0.001), while its direct relationship with Sustainable Business Performance is not statistically significant (β = −0.011, p = 0.914). These results support H3 but do not support H4, indicating that the strategic value of Innovation Culture lies primarily in strengthening the firm's competitive position rather than directly enhancing business performance. This finding is consistent with the Strategic Differentiation Perspective of Entrepreneurial Capabilities, which argues that enabling capabilities facilitate the deployment and institutionalization of entrepreneurial initiatives instead of generating immediate organizational outcomes.

This finding extends previous capability-based research by demonstrating that Innovation Culture contributes to sustainable competitiveness through organizational processes such as collaboration, continuous learning, knowledge sharing, and innovation implementation. Rather than functioning as an independent source of competitive advantage, Innovation Culture creates the organizational conditions that enable firms to effectively transform entrepreneurial initiatives into differentiated market positions. For MSMEs operating in resource-constrained environments, this organizational support becomes particularly important because sustained competitiveness depends not only on generating innovative ideas but also on the firm's ability to coordinate and embed those ideas into everyday business practices.

The absence of a significant direct effect on Sustainable Business Performance further strengthens the theoretical contribution of this study. While previous studies have generally assumed that innovation-oriented cultures directly improve organizational performance, the present findings suggest that their contribution is largely indirect, operating through the development of Sustainable Competitive Advantage. This interpretation is reinforced by the mediation analysis, which shows that Sustainable Competitive Advantage fully mediates the relationship between Innovation Culture and Sustainable Business Performance. Consequently, Innovation Culture should be understood as a strategic capability that enhances the effectiveness of capability deployment rather than as a capability that independently produces superior organizational performance. This distinction provides empirical support for the proposed Strategic Differentiation Perspective by demonstrating that entrepreneurial capabilities perform different but complementary strategic functions within the sustainable value creation process.

6.3 Sustainable competitive advantage as the capability conversion mechanism

The findings provide strong empirical support for the central theoretical proposition of this study that Sustainable Competitive Advantage functions as the Capability Conversion Mechanism linking entrepreneurial capabilities to Sustainable Business Performance. Consistent with H5, Sustainable Competitive Advantage exerts a significant positive influence on Sustainable Business Performance (β = 0.465, p < 0.001), while the mediation analysis further demonstrates that it significantly transmits the effects of both Business Creativity and Innovation Culture to organizational performance. These findings indicate that entrepreneurial capabilities do not automatically generate superior business outcomes; rather, they create strategic potential that must first be converted into differentiated customer value, resilient market positions, and enduring competitive advantages before sustainable performance can be realized. This interpretation extends the capability deployment process developed throughout the literature review and provides empirical evidence that Sustainable Competitive Advantage represents the critical mechanism through which entrepreneurial capabilities are transformed into long-term organizational value.

This finding advances existing capability-based research in an important way. Previous studies have generally positioned competitive advantage as either an organizational outcome or an intervening variable connecting capabilities with firm performance. In contrast, the present study reconceptualizes Sustainable Competitive Advantage as a dynamic capability conversion process through which internally developed entrepreneurial capabilities become externally recognized market value. From this perspective, competitive advantage is not simply the result of possessing superior capabilities but reflects the firm's ability to deploy, coordinate, and translate complementary entrepreneurial capabilities into customer value, market differentiation, organizational resilience, and sustainable competitive positions. This reconceptualization extends capability-based theory by shifting analytical attention from capability possession toward capability conversion, thereby providing a more comprehensive explanation of sustainable entrepreneurial value creation.

The mediation analysis further strengthens this theoretical argument by revealing two complementary capability deployment pathways. Business Creativity influences Sustainable Business Performance through partial mediation, indicating that generative capabilities create value both directly and indirectly through Sustainable Competitive Advantage. In contrast, Innovation Culture demonstrates full mediation, suggesting that enabling capabilities contribute to organizational performance only after strengthening the firm's competitive position. These contrasting mediation patterns provide empirical evidence that entrepreneurial capabilities perform different but complementary strategic functions, thereby validating the Strategic Differentiation Perspective of Entrepreneurial Capabilities proposed in this study. Rather than assuming that all entrepreneurial capabilities contribute through identical mechanisms, the findings demonstrate that sustainable entrepreneurial success emerges from the interaction between generative capabilities, enabling capabilities, and the Capability Conversion Mechanism represented by Sustainable Competitive Advantage. Consequently, the present study offers a more refined theoretical explanation of how MSMEs generate sustainable organizational value under conditions of resource constraints and environmental uncertainty.

6.4 Cross-country robustness of the strategic differentiation perspective of entrepreneurial capabilities

An additional contribution of this study lies in demonstrating the cross-country applicability of the proposed Strategic Differentiation Perspective of Entrepreneurial Capabilities. The Multi-Group Analysis (PLS-MGA) reveals that four of the five structural relationships do not differ significantly between MSMEs operating in Indonesia and the Philippines, indicating that the capability deployment process is largely consistent across the two entrepreneurial contexts. These findings suggest that the complementary roles of Business Creativity as a generative capability, Sustainable Competitive Advantage as the Capability Conversion Mechanism, and their contribution to Sustainable Business Performance are sufficiently robust to transcend differences in national business environments. Consequently, the proposed theoretical framework exhibits a high degree of generalizability across emerging Southeast Asian economies characterized by comparable institutional conditions and resource constraints.

Nevertheless, the relationship between Innovation Culture and Sustainable Competitive Advantage differs significantly between the two countries, indicating that the effectiveness of enabling capabilities remains sensitive to contextual conditions. This finding suggests that although Innovation Culture performs the same strategic function within the capability deployment process, its contribution to competitive advantage depends on factors such as institutional support, organizational practices, innovation ecosystems, and the broader entrepreneurial environment. Rather than weakening the proposed framework, this result reinforces the argument that enabling capabilities are inherently contingent upon the organizational and institutional contexts in which they are deployed. Accordingly, the study demonstrates that the strategic function of Innovation Culture is stable across countries, whereas the magnitude of its contribution to Sustainable Competitive Advantage may vary according to contextual differences.

From a theoretical perspective, these findings strengthen the generalizability of the proposed framework while simultaneously acknowledging the importance of contextual heterogeneity in entrepreneurship research. Existing capability-based studies have primarily focused on explaining firm-level differences within individual countries, whereas the present study provides evidence that the Strategic Differentiation Perspective remains applicable across national contexts while accommodating differences in the effectiveness of specific capability deployment processes. By integrating cross-country evidence from Indonesia and the Philippines, this study extends the emerging literature on sustainable entrepreneurship and capability-based management beyond single-country settings and provides a stronger empirical foundation for understanding how entrepreneurial capabilities create sustainable organizational value in emerging economies.

7 Conclusion

This study examined how entrepreneurial capabilities contribute to sustainable organizational success by proposing the Strategic Differentiation Perspective of Entrepreneurial Capabilities. Unlike conventional capability-based studies that treat entrepreneurial capabilities as strategically homogeneous, this study differentiates Business Creativity as a generative capability that creates entrepreneurial opportunities and Innovation Culture as an enabling capability that facilitates the deployment and institutionalization of those opportunities. The empirical findings demonstrate that Business Creativity positively influences both Sustainable Competitive Advantage and Sustainable Business Performance, whereas Innovation Culture contributes indirectly to organizational performance by strengthening Sustainable Competitive Advantage. These findings indicate that entrepreneurial capabilities create sustainable organizational value through complementary rather than identical strategic functions.

A major theoretical contribution of this study is the reconceptualization of Sustainable Competitive Advantage as the Capability Conversion Mechanism through which entrepreneurial capabilities are transformed into long-term organizational value. Rather than viewing competitive advantage merely as an intermediate outcome, the findings demonstrate that it represents the strategic process through which internally developed entrepreneurial capabilities are converted into differentiated customer value, resilient market positions, and sustainable business performance. This perspective extends capability-based and sustainable entrepreneurship research by shifting analytical attention from capability possession toward capability deployment and capability conversion, thereby providing a more comprehensive explanation of sustainable entrepreneurial value creation among MSMEs.

The cross-country analysis further strengthens the proposed framework by demonstrating that most structural relationships remain consistent across MSMEs operating in Indonesia and the Philippines, suggesting that the Strategic Differentiation Perspective possesses substantial cross-context applicability. At the same time, the significant difference observed in the relationship between Innovation Culture and Sustainable Competitive Advantage indicates that enabling capabilities remain sensitive to institutional and organizational contexts. These findings highlight the importance of considering contextual conditions when designing strategies to strengthen innovation capabilities and sustainable competitiveness within emerging economies.

From a practical perspective, the findings suggest that policymakers, entrepreneurship support agencies, and MSME managers should not focus solely on developing entrepreneurial skills but should also strengthen organizational environments that facilitate the effective deployment of entrepreneurial capabilities. Programs aimed at enhancing sustainable competitiveness should therefore simultaneously foster business creativity, strengthen innovation-supportive organizational cultures, and improve firms' ability to transform entrepreneurial capabilities into sustainable competitive advantage. Such an integrated capability development approach is expected to improve the long-term resilience and sustainability of MSMEs operating in increasingly dynamic and competitive environments.

8 Research limitations and future research

Despite its theoretical and empirical contributions, this study has several limitations that provide opportunities for future research. First, the study employed a cross-sectional research design, which limits the ability to examine how entrepreneurial capabilities evolve over time. Future studies could adopt longitudinal designs to investigate the dynamic development of generative and enabling capabilities and their long-term effects on sustainable competitive advantage and business performance.

Second, the empirical analysis focused exclusively on MSMEs in Indonesia and the Philippines. Although these countries provide an appropriate context for examining sustainable entrepreneurship in emerging economies, caution should be exercised when generalizing the findings to other institutional or economic settings. Future research could extend the proposed framework to developed economies or other emerging regions to further evaluate its cross-context validity.

Third, this study concentrated on two entrepreneurial capabilities—Business Creativity and Innovation Culture—as representative dimensions of the proposed Strategic Differentiation Perspective. Future studies may incorporate additional entrepreneurial capabilities, such as entrepreneurial orientation, digital capability, absorptive capacity, organizational learning, or dynamic managerial capabilities, to further refine and extend the proposed theoretical framework.

Finally, while the present study conceptualizes Sustainable Competitive Advantage as the Capability Conversion Mechanism, future research may explore alternative conversion mechanisms or boundary conditions that influence the effectiveness of entrepreneurial capability deployment. Integrating institutional factors, digital transformation, sustainability orientation, or ecosystem support into the proposed framework may provide a richer understanding of how entrepreneurial capabilities generate sustainable organizational value across different business environments.

9 Practical and policy implications

The findings of this study provide important practical implications for MSME managers, entrepreneurship support organizations, and policymakers. For practitioners, the results demonstrate that Business Creativity and Innovation Culture should not be developed independently but managed as complementary entrepreneurial capabilities. While Business Creativity generates entrepreneurial opportunities through creative problem-solving and opportunity recognition, Innovation Culture provides the organizational environment necessary to implement and sustain these opportunities. Accordingly, MSME managers should invest not only in strengthening creative capability but also in cultivating innovation-supportive organizational cultures that promote collaboration, continuous learning, knowledge sharing, and adaptive decision-making. Such an integrated capability development strategy is essential for transforming entrepreneurial potential into Sustainable Competitive Advantage and long-term business performance.

From a policy perspective, the findings suggest that entrepreneurship development initiatives should extend beyond supporting innovation activities or business start-up programs alone. Government agencies and business development institutions should strengthen organizational capabilities through managerial training, innovation ecosystem development, digital transformation support, and collaborative learning programs that enhance MSMEs' capacity to deploy entrepreneurial capabilities effectively. Policies designed to strengthen both generative and enabling capabilities are likely to improve entrepreneurial resilience, sustainable competitiveness, and inclusive economic development across emerging economies.

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Supplementary material

The Supplementary Material for this article can be found online at: https://www.frontiersin.org/articles/10.3389/frsus.2026.1931564/full#supplementary-material

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Footnotes

Edited by: Sady Mazzioni, Regional Community University of Chapecó, Brazil

Reviewed by: Wahyudin Maguni, Institut Agama Islam Negeri Kendari, Indonesia

Maria Imelda Novita Susiang, Universitas Dian Nusantara, Indonesia