Why Agile Small Firms Still Fail to Go Green: New Evidence From Indonesia

Small and medium enterprises make up roughly nine in ten of all firms on the planet, and their environmental footprint adds up to something enormous. Yet when researchers measure how sustainably these businesses actually operate, one pattern keeps recurring: the environmental pillar of the triple bottom line lags behind the economic and social pillars. A new study from Indonesia now offers one of the most methodologically careful explanations yet for why that gap persists, and the answer is uncomfortable for anyone who believes that good management alone can push small firms toward sustainability.

The research, published in the journal Discover Sustainability, was conducted by Harimukti Wandebori, Anak Agung Ngurah Tata Pinandhika, and Bernadetta Nadya Amarani Sitompul of the School of Business and Management at Bandung Institute of Technology. Their starting point was a long-standing unresolved question in the sustainability literature: do the very capabilities that keep small firms viable in volatile markets also move them toward greener practices? Most previous studies could not answer this because they collapsed economic, social, and environmental performance into a single composite score, obscuring exactly the differences that matter most for policy and practice.

The team focused on strategic agility, a dynamic capability that combines two distinct components: market responsiveness, meaning the speed with which a firm detects and reacts to changes in customer needs, competitor moves, and emerging threats; and resource fluidity, meaning the ease with which money, people, and equipment can be redeployed across activities. They also modelled three separate channels through which agility might indirectly influence sustainability: managerial ties with buyers, ties with suppliers, and ties with government officials. Crucially, each channel was specified separately, and each of the three sustainability pillars was treated as a distinct outcome rather than blended into an index.

The survey gathered responses from 179 strategic decision makers in Indonesian micro and small enterprises. The measurement design showed unusual care for a survey study of this kind. Predictor and outcome blocks used deliberately differentiated response anchors so that, for example, economic performance was rated relative to competitors while environmental practices were rated on frequency of use. Two attention check items with prescribed answers were embedded at separate points, completion times were recorded automatically, and a marker variable built from questions about attitudes toward the colour blue allowed the researchers to test statistically whether common method bias was inflating their estimates. Analysis proceeded with partial least squares structural equation modelling, a technique suited to complex path models with modest samples.

The headline result was a clear asymmetry. Strategic agility predicted economic performance with a path coefficient of 0.409 and social performance with 0.365, both medium effect sizes, but environmental performance at only 0.218, roughly half the strength of the other two. Because the outcome scales used different anchors, the team checked the gap on scale-free metrics. On latent correlations, the environmental pillar separated from the economic pillar by 0.229 and from the social pillar by 0.196, with bootstrap intervals that excluded zero in both cases. On the metric of partial coefficients, only the separation from the economic pillar was statistically distinguishable, and the authors are explicit that their title claims only that contrast. The gap also passed a battery of robustness checks: the environmental block showed the lowest ceiling rate and the most symmetric response distribution of the three, which is the opposite of what a ceiling effect or social desirability bias would produce, and correcting for unequal reliability across blocks widened rather than narrowed the difference.

Perhaps the most sobering finding concerned prediction. The model achieved out-of-sample predictive relevance for the economic and social pillars, meaning the estimated structure genuinely anticipated new observations, but it achieved none for the environmental pillar. In other words, the capability-and-ties framework that works for explaining how small firms prosper and serve their communities simply does not contain enough signal to forecast their environmental behaviour. The indirect effect of agility on environmental performance through managerial ties was statistically equivalent to zero against a triviality bound of 0.10, tested with two one-sided tests on the bootstrap distribution.

The tie-based channels themselves fared almost entirely empty. Of the nine paths running from the three tie types to the three pillars, only one, buyer ties to social performance, reached significance at a coefficient of 0.193. The authors handle this carefully: one significant result out of nine tests is a count compatible with chance, and it does not survive correction for multiplicity. They report it as a pattern to be tested in future work rather than as an established mechanism, a level of statistical honesty that stands out in a literature where such a result might otherwise be presented as a discovery.

The study also probes what the gap means mechanistically, and here an item-level analysis delivers a subtle twist. One plausible explanation for weak environmental performance would be simple economics: environmental practices cost money without returning it, so agile firms invest where returns register. If pricing were the boundary, the one environmental practice that pays for itself, reducing waste and resource inefficiency, should attract agility’s influence more strongly than the two that do not. The item-level estimates ordered the three environmental items exactly as that reward-boundary argument predicts, but no within-block difference was statistically distinguishable. Pricing alone, therefore, is not the whole story; the boundary appears to lie in whether a firm’s existing routines register any return at all, and environmental returns rarely do for a small enterprise.

There is an important design caveat the authors state plainly: because a cross-sectional sample contains only surviving firms, the strong economic association is consistent with two competing accounts. Under a capability account, agility genuinely produces better economic outcomes; under a selection account, agile firms simply survive longer and therefore appear in the sample more often. The design cannot separate the two, and the researchers do not pretend otherwise. Nor could the study resolve whether the agility gap differs between resource-rich and resource-poor firms: multigroup comparisons across six operationalisations of resource endowment produced signs that flipped between splits and no significant differences, and a power analysis showed the observed differences all fell below the minimum the sample could detect.

The policy implication, the authors argue, follows directly from the pattern of results. If capability building alone does not reach the environmental pillar, because the returns from environmental practices are invisible to the routines that small firms already have, then progress will depend on instruments that make those returns visible and required: regulations that set minimum standards, incentives that convert environmental savings into financial ones, and market mechanisms that reward green practices through the buyers small firms already depend on. For the vast population of micro and small enterprises in emerging economies, the path to environmental sustainability is not a matter of becoming more agile. It is a matter of changing the payoffs the environment of business, rather than the natural one, currently provides.

Subject of Research: The relationship between strategic agility, managerial ties, and the three pillars of sustainability in Indonesian micro and small enterprises

Article Title: Strategic agility reaches the environmental pillar of small firm sustainability more weakly than the economic pillar: disaggregated evidence from Indonesian micro and small enterprises

Article References: Wandebori, H., Pinandhika, A. A. N. T., & Sitompul, B. N. A. (2026). Strategic agility reaches the environmental pillar of small firm sustainability more weakly than the economic pillar: disaggregated evidence from Indonesian micro and small enterprises. Discover Sustainability. https://doi.org/10.1007/s43621-026-04788-0

Image Credits: AI Generated

DOI: 10.1007/s43621-026-04788-0

Keywords: strategic agility, small and medium enterprises, sustainability, triple bottom line, environmental performance, managerial ties, Indonesia, PLS-SEM, dynamic capabilities, emerging economy, green practices, business strategy