External Responsibility and Internal Innovation: Drivers of Innovative Performance in Indonesian SMEs

Abstract

In the contemporary global economy, innovative performance of firms is increasingly driven by the effective management of human resources, as employees’ knowledge, skills, and behaviors play a central role in improving processes, and responding to dynamic market demands. Despite the critical contribution of SMEs to the Indonesian economy, many continue to exhibit low levels of innovative performance, thereby constraining their competitiveness and long-term sustainability. Addressing this issue, this study adopts a human resource perspective to investigate how corporate social responsibility (CSR) orientations influence innovative performance through employee-driven organizational mechanisms. Using data collected from 297 SME owners and managers in Indonesia, this study employs partial least squares structural equation modeling to examine the proposed relationships. The findings indicate that environmental CSR orientation and social CSR orientation positively influence innovative performance by strengthening pro-social and pro-environmental values and supporting HR-driven organizational practices. Organizational innovation significantly enhances SMEs’ ability to develop and implement new products and processes and mediates the relationship between CSR orientations and innovative performance. However, innovative work behavior, as an employee-level discretionary behavior, does not significantly moderate these relationships. This study contributes to the literature by integrating stakeholder and dynamic capability perspectives with HRM insights, demonstrating that CSR orientations function as internal signals that shape employee attitudes and behaviors, which in turn drive innovation outcomes. From a practical standpoint, the findings highlight the importance for SME managers and policymakers to align CSR initiatives with HR practices such as employee development and engagement to effectively translate social responsibility into innovation performance.