Eco-Innovation Capabilities and Sustainable Business Performance during the COVID-19 Pandemic

Abstract

The COVID-19 pandemic has had a direct impact on the manufacturing industry in Malaysia because all economic activities had to be suspended for some time. This study explores the role that eco-innovation capabilities might play in improving sustainable business performance during the ongoing pandemic. This study employs a quantitative method by distributing online questionnaires to 80 small and medium enterprises (SMEs) in Klang Valley, Malaysia. In the study, the relationship between sustainable business performance and the three variables of eco-innovation capabilities, i.e., eco-product innovation, eco-management innovation and eco-logistic innovation, were determined using multiple regression analysis. The results indicate that two hypotheses are accepted and the other one is rejected. The findings indicate that most manufacturing SMEs in Klang Valley have adopted eco-management innovation and eco-logistic innovation as crucial capabilities for their businesses during the pandemic. However, due to the challenges faced by these SMEs during the pandemic, eco-product innovation was found to have an insignificant relationship with sustainable business performance. It is insignificant because of the low productivity rate observed during the pandemic. Hence, the COVID-19 pandemic has caused manufacturing SMEs in the Klang Valley to not be able to maintain their operations and stay on track. Therefore, this research may contribute to the efforts of policymakers, government agencies and managers of manufacturing SMEs in developing a strong innovation platform on which manufacturing SMEs may rely for support in enhancing their business capacity and performance.

1. Introduction

Small and medium-sized enterprises (SMEs) are often regarded as growth engines across the world. SMEs account for the vast majority of businesses in every country in the world, whether established or developing. In Malaysia, SMEs have long been regarded as the majority of firms. In 2006, SMEs accounted for 99.2% of all Malaysian businesses. According to the 2018/2019 SME Annual Report, 98.5% of the total businesses in Malaysia were in the SME category. SMEs make major contributions since they are the predominant type of company in the country. The Malaysian SME Masterplan has been a “game changer” in terms of increasing the growth of SMEs through innovation-led and productivity-driven growth. Therefore, it is apparent that Malaysian SMEs are vital to achieving economic growth. However, in early 2020, Malaysia was startled by the first cases of coronavirus disease (COVID-19), and this changed the direction of SME growth. The disease spread quickly and uncontrollably, disrupting economic operations in sectors such as manufacturing and services, among others. Tan Sri Muhyiddin Yassin, the eighth Prime Minister of Malaysia, announced in March 2020 that a movement control order (MCO) would be enforced in the country, covering various aspects of daily life such as social distance policies, community lockdowns, stay-at-home orders, and mobility restrictions. From the economic perspective, the manufacturing sector was especially affected by the enforcement of the MCO, where there were adverse effects on micro, small, and medium enterprises. From March 2020, all economic operations in Malaysia were halted for several months, which resulted in small and medium manufacturing enterprises experiencing a decline in their production rate.

At the same time, SMEs are struggling to stay in business and stabilise their finances while remaining competitive during the ongoing pandemic in Malaysia. The SME Association of Malaysia’s National Vice President, Chin Chee Seong, revealed that around 100,000 businesses have shut down since the first MCO [1]. Some Malaysian SMEs cannot be saved because they are unable to optimise production while reducing financial resources. The existence of this pandemic has had a significant impact on SMEs because they must continue to pay employees, utilities, and so on. Despite the fact that the government implemented the Prihatin SME Economic Stimulus Package during the COVID-19 pandemic, it could only help Malaysian SMEs for a limited time. Therefore, to remain competitive in the market, manufacturing SMEs, particularly those that are still new, must develop and implement their own initiatives. Competitiveness is crucial for businesses because it determines whether business performance can be increased or sustained. Thus, in the current context, it is even more critical to understand the aspects related to competitive capabilities.

A competitive strategy should reflect an organisation’s potential for growth and competitiveness [2]. That is to say, a competitive strategy must be prepared by the organisations for the purpose of expanding their market share during the COVID-19 pandemic. The resource-based view (RBV) is considered to be able to assist companies during the pandemic in achieving a better understanding of how their competitive capabilities can contribute to the attainment of sustainable business performance and a competitive edge. Companies must seek and integrate resources with a competitive advantage such as assets, skills, processes, information, and expertise in order to develop business capabilities that provide a competitive advantage. These resources can make business performance more sustainable. Manufacturing SMEs now tend to have more experience and skills because they have faced this severe crisis. These experiences and skills can serve as a foundation for SMEs in the manufacturing sector to develop and implement plans to recognise and adopt eco-innovation capabilities under ‘new normal’ procedures as well as to sustain business performance using the triple bottom line (TBL) method to measure their environmental, social, and economic impact and to sustain their performance from a broader perspective [3]. Thus, the TBL strategy is becoming increasingly crucial in order to sustain the business performance of SMEs.

It is argued that Malaysian SMEs should show more commitment to the TBL by focusing on the environmental and social aspects of their business. Moreover, companies must invest significantly in their economic, social, financial, and environmental sustainability by monitoring performance using either subjective or objective measures. Sustainable performance is crucial to the success and stability of SMEs during the pandemic. In this regard, the contribution of sustainability includes the acquisition or the improvement of the company’s ability to reduce long-term risks related to waste management and resource pollution [4]. Environmental issues have impacted the competitiveness of many companies because they can be seen as a financial and business burden. Thus, the companies are required to adopt a long-term perspective on eco-innovation’s effect on business performance [5], particularly during this pandemic since many SMEs in Malaysia have been deeply affected by MCO 1, even though they received a moratorium and incentives from the government in June 2021. This is due to the fact that many economic sectors were closed for almost two years. Therefore, it has been and continues to be very difficult for Malaysian SMEs to deal with environmental issues because many of their major suppliers were also affected by this issue. This issue has a long-term effect and makes it difficult for many manufacturing SMEs to be sustainable in the marketplace. Therefore, SMEs must create new ideas and gain expertise to remain competitive, such as developing or implementing eco-innovation capabilities in their manufacturing operations, since they can reduce the environmental impact. In other words, SMEs need to become eco-businesses and focus on reducing the environmental impact of their operations.

Eco-innovation capabilities include process innovation, product innovation, organisational innovation, and logistics innovation [6]. Using eco-innovation, the stakeholders and the management of manufacturing SMEs can generate more ideas about how best to produce eco-products. Therefore, Malaysian manufacturing SMEs can produce new goods that suit the consumers’ preferences and what they are willing to spend. Currently, the number of Malaysian residents making purchases online is increasing due to the stay-at-home orders, and manufacturing companies are taking the initiative to grow and to produce more products. Many SMEs are trying to look for new ways to keep their businesses operating, such as selling and promoting their goods through social media during MCOs [7]. When the demand for products increases, the demand for the raw materials that are used to produce these products also increases. This affects the environment and the availability of resources. Additionally, the level of waste disposal may also increase and large amounts of waste will adversely affect the Malaysian environment. This is not just a Malaysian problem; it is a global phenomenon because, generally, increasing industrialisation has damaged the environment and accelerated global warming [8].

In light of the above, it is very challenging for SMEs to maintain their business in what has become an increasingly challenging and competitive environment under this new normal. Therefore, in order to succeed, SMEs must undertake new initiatives to innovate. According to Fernando [9], waste from manufacturing production can be solved by eco-innovation. Moreover, as a result of the evolution of business opportunities in Malaysia, manufacturing companies will be able to gain market share and competitiveness [10]. Moreover, companies should focus more on the impact of the COVID-19 crisis on their business because it can affect sustainable business performance [7]. Therefore, SMEs from the manufacturing sector are the focus of this study because their product manufacturing process for the purpose of remaining competitive is influenced by the environment in Malaysia.

Moreno-Mondejar [11] (p. 98) mentioned “the most successful eco-innovators as having the better performance with regards to their sales growth and/or profitability”. The efficiency of an eco-business in terms of the skills of employees in producing and supplying the product to the consumer will allow companies to continue to survive in this COVID-19 era as well as increase sales. This will allow manufacturing SMEs to remain in the marketplace for a longer period of time. In order to gain a competitive edge, a business must establish a positive benefit that is comparable to or better than that of its competitors [12]. Furthermore, regulatory institutions are exerting undue pressure on businesses to participate in eco-innovation through environmental laws and regulations [5]. The Malaysian government is no exception, having introduced the National Priority Area with the focus on ‘enhancing environmental sustainability through green growth’ as a critical part of the Twelfth Malaysian Plan (12MP) (2021–2025). It represents a crucial platform for Malaysian SMEs, as SMEs are the backbone of the Malaysian economy. This feature of 12MP is intended to encourage SMEs to be greener in order for them to survive longer.

Nevertheless, some business managers are unconcerned about the positive results of eco-innovation for sustainable business, which can help a company become more responsible for the environment while exploiting new initiatives and knowledge in management to enhance the company’s competitive level [13]. In the Malaysian context, there is also a low level of awareness regarding eco-innovation and how it affects the sustainability of businesses. This is not surprising because only a few studies (e.g., [13,14,15,16]) have explored the enhancement of SME capability to implement eco-innovation in different aspects of business performance around the world. In Malaysia, this concern remains incipient in the current climate; thus, the eco-innovation capabilities of SMEs in the manufacturing sector are the focus of this research as a potential way to attain environmentally sustainable business growth and performance during the COVID-19 pandemic. Therefore, the purpose of this study is to examine the relationship between three eco-innovation capabilities, which are eco-management innovation, eco-logistics innovation, and eco-product innovation, and sustainable business performance among manufacturing SMEs in Klang Valley, Malaysia. This study can help policymakers plan the strategies that can enhance eco-innovation capabilities and sustainable business performance, and can also assist SMEs facing the COVID-19 pandemic.

The study is organised as follows. The first section explains the topic, including the objectives, and the uniqueness of the study. The second section reviews the literature including the resource-based view (RBV) theory, sustainable business performance, eco-innovation capabilities and the development of the hypotheses. The third section discusses the methodology used in the study. The fourth section discusses the data analysis and discussion of the study. Finally, in the fifth section, the conclusion and future recommendations are explored.

2. Literature Review

2.1. Resource-Based View Theory

This study uses the resource-based view (RBV) theory as the underpinning theory for its research model. As stated by Wernerfelt [17], the resource-based view theory describes resources, competitive advantage, and capabilities as the factors that give a company the ability to be more competitive. In order to sustain a company’s competitive advantage, competitive capabilities become the focus of the RBV. From the perspective of the RBV, according to Barney [18], a company that meets the criteria of value, rarity, inimitability, and non-substitutability, can gain a long-term competitive advantage. Thus, a deeper understanding on how business performance can be sustained and how a competitive edge can be established during the COVID-19 crisis by exploiting competitive capabilities can be obtained by companies through the RBV theory. As a result, the RBV theory was used in this research study to explain the sustainability of SMEs in Klang Valley by assessing their business performance. According to Lu et al. [19], companies that have unique resources can generate and retain competitive advantages in their company. Furthermore, as an element in goods manufacturing, these resources can be related to intangible and tangible assets, such as brand, capital, information, as well as technology. Thus, companies must seek and integrate resources that have a competitive advantage such as assets, skills, processes, information, and expertise in order to develop their capabilities.

Therefore, the ability to discover the right resources is vital in implementing the RBV in the context of the COVID-19 phenomenon. Furthermore, the RBV focuses on an industry’s structure by using the competitive five forces model [20]. According to the five forces model, a company that operates in a desirable industry has more opportunities and fewer risks. Thus, in this new era, a company must use the chance to sustain and improve its business performance while avoiding possible threats in order to remain competitive in this new era. Additionally, the employees of SMEs can develop and acquire skills that can help their company to succeed. According to Purnomo [21], Porter’s five forces concept is based on two major assumptions. Firstly, in a strategic group or industry, organisations are assumed to have homogenous tactics or resources. Secondly, resources for the implementation of strategy are assumed to be highly mobile. As a result, firms must have competencies and competitive advantage, particularly when pursuing a plan that is not concurrent with their rivals. This validates RBV’s prominence as the vital theory to becoming a successful business in the industry.

This study proposes that, for the sustenance of their business performance, SMEs must focus on eco-logistic innovation, eco-product innovation, and eco-management innovation with regards to opportunities. An understanding of whether all or some of these factors of eco-innovation capabilities will lead to a business performance that can be sustained can be achieved in this study with the help of the RBV.

2.2. Sustainable Business Performance

Since the outbreak of COVID-19, the Malaysian government has restricted business operations and only essential services have been allowed to operate. This has led to a decline in performance among manufacturing SMEs because they have been unable to process products optimally. At the end of 2020, expectations for the economy were grim in the short term, with 55 percent predicting that the economy would face difficult times in the next few months according to the CEO Confidence Index produced by Vistage-MIER for Q4 2020, which polled the chief executives of SMEs [22].

Small and medium enterprises are among the worst hit by the COVID-19 crisis because they face the reality of the difficulty of working from home and reduced production in the factories. It is extremely challenging for SMEs to continue to survive and sustain their business performance. Therefore, some actions must be taken so that SMEs can at least operate at previous levels. Furthermore, business performance must be evaluated in order to fulfil companies’ goals by determining what is successful or unsuccessful. According to Feng et al. [23], a company’s total performance encompasses a number of marketing and financial aspects such as sales growth, among other things. Small and medium enterprises can generate income through product sales by developing eco-innovation capabilities. Wood [24] supports this view and proposes a similar way forward in terms of increasing profitability by bolstering financial characteristics such as turnover, return on investment (ROI), and return on assets (ROA). Therefore, in order to maximise profits, companies must produce more products, specifically eco-products, while simultaneously increasing customer satisfaction.

In addition, social, environmental, and economic factors that are related to business must be considered by an organisation in its attempt to maintain performance. The operation of a business in a way that guarantees the survival and health of the business in the long run, as well as the environmental, social, and economic systems associated with it, for the sake of future and present stakeholders, is the definition of a sustainable business [25]. Therefore, in order to ensure the long-term existence of companies in the manufacturing and other industries during the COVID-19 pandemic, the stakeholders of all companies have an essential role to play. Furthermore, sustainability is a priority in any business strategy because it can contribute to a business’s long-term success while also reducing its environmental impact [26]. The crisis caused by the COVID-19 outbreak has compelled SMEs to explore eco-innovation capabilities as a means of remaining both sustainable and competitive. According to Haseeb [27] (p. 1), in the undertaking of fundamental actions in business for value maximisation, the harmonisation of environmental, social, and financial purposes is the definition of sustainable performance. In this regard, the key results that are related to the sustainability of a business are the environmental sustainability, social sustainability, and financial sustainability performance characteristics [13,28]. Thus, the three key outcomes of business sustainability must be measured either by subjective or objective measurements.

Several factors can impact SMEs’ productivity, efficiency, and structure, including expanding markets, changes in demographics, and customer behaviour [29]. As a result of these effects, many companies in the manufacturing industry must adapt by using the eco-environment idea to maintain their commercial performance while also conserving the local environment. Previous studies [30,31,32] show that eco-innovation is now widely regarded as being a way for manufacturing companies to achieve sustainability. A company’s ability to earn income in order to assure long-term viability and a company’s ability to manufacture goods using environmentally friendly methods are the two factors that determine sustainable business performance, according to Fernando et al. [13]. For the direct and indirect monitoring of the performance of the company during the pandemic, as well as to maintain business continuity and long-term commitment, it is vital that sustainability is practiced, and sustainable innovation is developed with regards to a company’s manufacturing process.

2.3. Eco-Innovation Capabilities

New challenges and opportunities for business innovation emerged just after the emergence of COVID-19. However, the pandemic has resulted in manufacturing SMEs not maximising their production levels sustainably as well as interfering with potentially biased activities. Therefore, SMEs must seize the opportunity to innovate and evolve by implementing eco-innovation to improve business performance and face future challenges. Manufacturing SMEs must adopt eco-innovation and not decelerate their operations. In addition, eco-innovation is critical to improving internal environmental management performance and necessitates changes to the organisational and management structures of companies [33]. As noted by Arranz et al. [6], eco-innovation is widely used by the manufacturing industry as compared to the service sector. At present, consumers are more interested in eco-friendly or innovative products than they are in existing products. Hence, companies must seize the chance to apply eco-innovation to the products they market in the marketplace. Furthermore, society and the environment can be positively affected by eco-innovation, while efficiency can also be increased through eco-innovation [34]. Recently, the growing realisation of the importance of eco-innovation has prompted the emergence of numerous studies on this topic.

Malaysia, as one of the developing countries experiencing significant economic growth, is emphasising green initiatives due to their importance in national development. Malaysia was ranked 35th in terms of innovation performance in 2019, and it has shown consistent growth in prior years. However, the manufacturing sector accounts for up to 30 percent of hazardous gas emissions [14]. According to Fernando [9], the right integration of eco-innovation and business strategy should be easy to understand and, more importantly, usable by all corporate stakeholders while increasing firm capabilities and minimising negative environmental effects during the manufacturing process. Eco-innovation activities were expanded during the COVID-19 pandemic [35]. Eco-innovation is expressed in Malaysia through the concept of green technology, and by combining the innovation process and technology into their business model, organisations can achieve long-term survival while simultaneously competing more effectively in the market [13]. In order to gain a competitive advantage and build plans for long-term success, Malaysian SMEs must approach strategic innovation with appropriate extended government support [36].

Manufacturing companies must adopt eco-innovation in every product they manufacture in order to improve product quality while minimising their environmental impact. Sales growth and profitability can enable SMEs to become more successful and perform better. Indeed, business performance can be positively impacted by eco-innovation. In this regard, it had been shown that the boosting of the economic performance of manufacturing companies in China is a long-term advantage of improving eco-innovation performance [37]. Apart from the increased danger of encountering higher hazards, businesses in Malaysia will become more proactive and innovative by incorporating eco-innovation into their operations. The coexistence of successful and unsuccessful eco-innovation is related through the success of eco-innovation businesses [5]. Thus, to compete and survive in the market, profit margins and sales must be boosted by the companies while risks must be lowered. Implementing eco-innovation capabilities can serve to accelerate the rate of reducing the environmental impact. Eco-innovation initiatives have been implemented by companies to increase the enhancement of environmental compliance, improve environmental performance, and develop financial performance [38]. According to Rashid [39], a study of the Malaysian automotive industry found that eco-management innovation was poorly implemented when compared to other sub-manufacturing sectors. It is created by the formation of non-recyclable solid waste during the manufacturing process [9]. According to the study, despite considerable contributions to economic development and better living conditions, solid waste management would persist until Malaysian SMEs support eco-innovation.

Although innovation has contributed to higher living standards and sustained economic expansion, it has also resulted in the widespread destruction of the natural environment [40]. Eco-innovation is gaining popularity among academics and practitioners, and its importance is being recognised internationally due to environmental and social challenges [41]. This growing awareness of the environment has been mirrored in the eco-products supplied to customers in recent years [32]. To examine environmental responsibility, the manufacturing industry has taken action towards the application of pollution reduction initiatives, and systematic waste and emission reduction [42]. When companies focus on the eco-innovation of products, for example, this results in increased competitive advantage, enhanced business productivity and excellent products [41]. Therefore, how sustainable business performance can be influenced by eco-innovation capabilities will be this study’s focus.

There is a scarcity of research on eco-innovation capabilities, notably among Malaysian SMEs. There are also few studies focusing on the relationship between eco-product innovation, eco-management innovation, and eco-logistics innovation that focuses on Malaysian manufacturing SMEs, and even fewer studies focusing on the relationship between eco-innovation capabilities and sustainable business performance during the COVID-19 pandemic (for example, Johl et al. [35], Toha et al. [43]). This study is important since most Malaysian manufacturing SMEs were severely impacted by the pandemic, and many of them were forced to close their operations. Eco-innovation’s internal boundaries are the focus of this study in order to attain the aforementioned goal. Eco-organisational innovation, eco-product innovation, and eco-process innovation are examples of eco-innovation capabilities that involve reducing environmental degradation as well as the manufacturing process [44,45]. The OECD [46] supports this definition, where market innovation, organisational innovation, process innovation, and product innovation are examples of innovation. Moreover, in this study, logistics are also included in eco-innovation capabilities because it is believed that logistics can provide a competitive advantage to companies [47]. Therefore, three eco-innovation capabilities are considered by this study, namely, eco-management innovation, eco-logistic innovation, and eco-product innovation.

Fernando et al. [13] stated that a company must have knowledge as a basic requirement in order to discover the best alternative when designing new green products or eco-product innovations and services that can constantly upgrade the quality of products while meeting the company objectives and the needs of the environment. An eco-product is an innovation in product design and product improvement that aims to reduce a product’s environmental impact [48]. In addition, reverse engineering and sustainable technologies can be classified as innovations in eco-products [48]. For example, the dUCk Group uses recycled materials to manufacture their products and practices sustainability in their business [49]. Customer satisfaction with products is essential because customers are concerned about product quality. Therefore, SMEs must pay close attention to the consumers’ needs and wants. The label on the product is important for eco-products. Additionally, the higher the quality of the label and product, the higher the likelihood that consumers will be attracted to the product. This in turn can encourage higher purchasing behaviour in consumers and raise consumer awareness. According to Gutierrez and Seva [50], consumers believe that purchasing eco-friendly items helps them save the environment by lowering the negative environmental effect of their consumption. Thus, companies that manufacture eco-products have a competitive advantage over companies that do not manufacture eco-products. At present, consumers are more interested in eco-products because these products preserve the environment and prevent or reduce the need for the disposal of contaminated materials [50].

Another type of eco-innovation capability, namely, eco-organisation innovation, is also known as eco-management innovation. This eco-innovation highlights the goal of a new firm in the market via access to difficult-to-replicate knowledge, which is critical for the environment with insufficient legal protections. According to Brasil et al. [48], eco-management refers to new initiatives and procedures assigned to organisational systems. It can boost productivity and lower administrative costs while sustaining business performance. It also determines the types of ideas of eco-techniques that should be used during the product manufacturing process so that the waste from the manufacturing of eco-products does not harm the environment. In addition, management innovations entail the implementation of new business practices that encompass new organisational procedures and routines [51], including, for example, knowledge, supply chains, and quality management. Thus, employees who are exposed to eco-management in the form of new knowledge may be more efficient during the manufacturing process. Activities related to the transformation or improvement of the manufacturing process, existing or new products, and activities coming from the establishment of organisation and management should be included in the use of eco-innovation in business, according to Cheng [45].

In today’s highly competitive market, the effective deployment of eco-innovation requires effective logistics skills. A competitive edge in the global market can be gained through the acceleration of eco-innovation by logistics [14], as well as competitive capabilities. Therefore, the stakeholders of a company must tackle the unique idea to seize opportunities as well as to increase the company’s productivity and business performance. Companies recognise that when logistics or supply chains are greener through innovation, they will provide benefits such as increased business productivity, opportunities to enter new markets, and environmental sustainability [33]. In addition, eco-logistics is a service that encourages the direct and inverse flow of materials while taking into consideration the outcomes of operations as well as the environmental impact of the eventual disposal of goods [52]. For manufacturing SMEs, the use of eco-logistical transactional processes to update the data on shipping status and shipping partners are very effective ways to track the flow of materials. Additionally, using biodegradable fuel to transport products to resellers can be more sustainable for business operations.

Eco-innovation is the answer to the problem of non-renewable solid wastes and usable recycled goods created by enterprises. In Malaysia, non-renewable solid wastes are created during the manufacturing activities, despite the fact that the manufacturing sector has contributed significantly to economic growth and the improvement of living conditions. In light of the above, eco-management innovation, eco-logistics innovation, and eco-product innovation are the three components of eco-innovation capabilities that can influence sustainable business performance. Therefore, companies must develop and apply these eco-innovation capabilities to gain a competitive advantage and maintain performance. Therefore, we developed a model to investigate how these capabilities could be applied. Moreover, it explored whether all or some of these capabilities are essential in the studied context.

2.4. Hypotheses Development

Based on the literature review, the development and validation of the research model and hypotheses are carried out in order to measure eco-management innovation, eco-logistic innovation, and eco-product innovation, which are the three eco-innovation capability variables. Moreover, this study investigates how these variables are related to sustainable business performance among the manufacturing SMEs in Klang Valley, Malaysia.

According to Brasil et al. [48], business performance is positively related to eco-product innovation. Chen et al. [53] stated that in order to increase resource productivity through eco-innovation, businesses should create and produce eco-products that grant them greater profits and improve their business performance. In addition, Rajaphatirana and Hui [29] stated that whether the product, process, and marketing are influenced or not is related to the company’s success. According to the study of Ch’ng et al. [14], eco-management innovation has a significant impact on business performance in terms of economic performance. Moreover, one of a company’s most important strategic resources or competencies is its logistics capabilities, including logistic innovation, which can have a significant impact on a company’s logistic competitiveness [54]. Therefore, the hypotheses of this study are:

Hypothesis 1 (H₁).

Eco-product innovation capability is significantly influenced the sustainable business performance of manufacturing SMEs in Klang Valley in Malaysia.

Hypothesis 2 (H₂).

Eco-management innovation capability is significantly influenced the sustainable business performance of manufacturing SMEs in Klang Valley in Malaysia.

Hypothesis 3 (H₃).

Eco-logistics innovation capability is significantly influenced the sustainable business performance of manufacturing SMEs in Klang Valley in Malaysia.

The theoretical framework developed for this research is presented in Figure 1.

3. Methodology

A quantitative research method was used in this study, where the answers to the research questions were obtained by using a questionnaire. The questionnaire was adapted from previous studies, such as Cai and Li [55], Jun et al. [8], and Yurdakul and Kazan [56]. The study aimed to explore how sustainable business performance is related to eco-innovation capabilities among SMEs from the manufacturing sector in Klang Valley by obtaining information directly from those SMEs. Thus, the questionnaire method was used to operationalise this study’s quantitative design. In compliance with the context of manufacturing SMEs in Klang Valley, the questionnaire was created and validated using face validity to ensure that the questionnaire instrument was appropriate for the study context. In addition, since a reliable measure is required for the measurement validity assessment, the construct validity was tested and verified [57].

A questionnaire that consisted of 29 items on sustainable business performance and eco-innovation capabilities was developed to explore the views on manufacturing SMEs in Klang Valley. Following a pilot test, some changes were made to the questionnaire items to make them more appropriate for the study. For the items on eco-innovation capabilities, a five-point Likert scale which ranged between 1 and 5 was utilised, with 1 denoting ‘extremely low’ and 5 denoting ‘extremely high’; this is an ordinal scale for determining the level of agreement or disagreement with statements. A five-point Likert scale was also utilised for the measurement of sustainable business performance, where the scale ranged from 1 (‘poor’) to 5 (‘excellent’).

The total population of the study was 167 manufacturing SMEs in Klang Valley. To be eligible for inclusion in the study, the manufacturing SMEs must be considered small and medium-sized enterprises as defined by the Malaysian National Entrepreneur and SME Development Council’s criteria, had to be registered and listed as a manufacturing organisation in the 2019 Federation of Malaysian Manufacturers (FMM) Directory, and employed 5 to 200 employees. Based on the sample size calculator in Raosoft [58], it was calculated that a sample of 117 respondents was the minimum sample size for the population of 167 Malaysian manufacturing SMEs from Klang Valley. Due to the non-zero and known chance for an organisation to be chosen as a sample subject, probability sampling, which is a simple random sampling method, was utilised for this research.

A pilot test was performed prior to data collection to confirm the validity and reliability of the survey instruments. The data were obtained using an online survey approach to assist in the survey process during the MCO period. The questionnaire was distributed to one top manager in each of the 120 selected manufacturing companies. Unfortunately, after following up with the respondents through phone calls and emails, the researcher received only 80 returned questionnaires. The respondents gave their full cooperation and completed the questionnaire since the researcher used an online survey. Hence, there was a 66.67% response rate for the questionnaires that were suitable for use in this analysis.

4. Data Analysis and Discussion

The researchers used email to distribute the questionnaire and request permission to conduct the survey. After seven working days, the researchers followed up by phone and email to make sure that the respondents realised the importance of the study and understood the purpose and content of the questionnaire. The collected data were analysed by utilising the IBM SPSS Statistics version 22.0, created by IBM in Chicago, USA. The demographic profile corresponding to the 80 manufacturing SMEs in Klang Valley that completed the questionnaire is shown in

Table 1. The respondents’ demographic profile.

Demographic Variables	Category	Frequency	Percent
Position of the respondent	Owner	20	25.0
	Chief executive officer	2	2.5
	General manager	9	11.3
	Managing director	4	5.0
	Manager	29	36.3
	Others	16	20.0
Length of the company’s establishment	Less than 5 years	15	18.8
	5–10 years	18	22.5
	11–15 years	10	12.5
	16–20 years	37	46.3
No. of employees	5–74 employees	56	70.0
	75–200 employees	24	30.0
Sub-sectors	Food products	15	18.8
	Beverages	2	2.5
	Tobacco products	2	2.5
	Textiles	1	1.3
	Wearing apparel	1	1.3
	Paper and paper products Chemical and chemical products	1 18	1.3 10.0
	Basic pharmaceutical products and pharmaceutical preparations	7	8.8
	Rubber and plastic products	4	5.0
	Non-metallic and mineral products	3	3.8
	Basic metals	4	5.0
	Fabricated metal products, except machinery and equipment	8	10.0
	Computer, electronic and optical products	1	1.3
	Electrical equipment	3	3.8
	Machinery and equipment N.E.C.	9	11.3
	Motor vehicles, trailers, and semitrailers	1	1.3
	Furniture	3	3.8
	Others	7	8.8

.

Table 1 shows that the majority of the respondents held the position of manager (36.3%) and that the chief executive officers represented the smallest proportion of respondents (2.5%). In regard to the number of years the companies had been operating, 46.3% (the highest proportion) were established 16–20 years ago and 12.5% (the lowest proportion) were set up 11–15 years ago. Companies with 5–74 employees (small enterprise category) constitute the highest proportion of respondents (70.0%) and the remaining respondents (30.0%) consisted of companies with 75–200 employees (medium enterprise category). Lastly, the sub-sector that was most represented in terms of the percentage of respondents was the food products sub-sector (18.8%), followed by computer, electronic and optical products (1.3%), textiles (1.3%), wearing apparel (1.3%), as well as paper and paper products (1.3%).

In order to ensure that the respondents had completely understood the research instrument, a scale reliability analysis was conducted using Cronbach’s alpha to determine internal consistency using SPSS version 22.0. The results are provided in

Table 2. Reliability and validity results.

	Eco-Product Innovation	Eco-Management Innovation	Eco-Logistic Innovation	Sustainable Business Performance
Cronbach’s alpha	0.858	0.902	0.945	0.821
Mean	3.603	3.610	3.155	3.398
Standard deviation	0.618	0.670	0.768	0.566
Median	3.750	3.500	3.000	3.428
Skewness	−0.286	0.151	−0.071	0.192
Kurtosis	−0.377	−0.401	0.188	−4.32
KMO	0.833	0.814	0.894	0.760

.

It can be seen from Table 2 that the Cronbach’s alpha values for eco-logistic innovation, eco-product innovation, and eco-management innovation are 0.945, 0.858, and 0.902, respectively, while for sustainable business performance, it is 0.821. These values are acceptable because Hair et al. [59] posit that the acceptable Cronbach’s alpha value should be more than 0.7. In terms of validity, the researchers utilised face validity, which accepted the mean and median of all variables. As for skewness and kurtosis, it is recommended for the value to be between ±2.0 for skewness and ±7.0 for kurtosis measures [59,60,61]. Furthermore, it is suggested that the Kaiser–Meyer–Olkin (KMO) value for constructs should be greater than 0.60 [62]. Thus, the factor analysis showed that the variables met the above criteria and could therefore be considered appropriate for this study. Therefore, the scale for the three factors of eco-innovation capabilities corresponds significantly with sustainable business performance, which is greater than 0.7, and these three factors of eco-innovation were therefore retained.

A multiple regression was calculated to predict sustainable business performance during the COVID-19 pandemic based on eco-product innovation, eco-management innovation, and eco-logistic innovation, which represent the three eco-innovation capability variables. R’s value is 0.621 and the value of R² is 0.386, as shown in

Table 3. Model summary.

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	0.621 a	0.386	0.362	0.45210

a. Predictors: (constant), eco-logistic, eco-product, eco-management.

. Therefore, the three factors of eco-innovation capabilities explain 38.6% of the variance in sustainable business performance. The remaining 61.4% was explained by the other factors. A significant regression equation was found (F (3, 76) = 15.915, p < 0.000), with an R² of 0.386 (see

Table 4. Multiple regression analysis.

Model	Unstandardised Coefficient		Standardised Coefficient	T	Sig.	Correlation	Collinearity Statistics
	B	SE B	Beta			Part	Tolerance	VIF
(Construct)	1.469	0.322		4.560	0.000
Eco-product	−0.024	0.111	−0.027	−0.219	0.827	−0.020	0.548	1.825
Eco-management	0.393	0.104	0.466	3.783	0.000	0.340	0.533	1.876
Eco-logistic	0.189	0.080	0.257	2.351	0.021	0.211	0.678	1.474

).

From Table 4, the tolerance value for each independent variable is no less than 0.10; therefore, the variables do not violate the multicollinearity assumption. This result is supported by the variation inflation factor (VIF) value for each variable, which is below 10. In addition, Table 4 demonstrates that respondents’ forecasted sustainable business performance is equal to 1.469 + 0.189 (eco-logistic innovation) + 0.393 (eco-management innovation) − 0.113 (eco-product innovation). For the evaluation of the independent variables’ statistical significance, the coefficients were tested, and the results are shown in Table 4. Referring to the multiple regression analysis, two variables, namely eco-management innovation (p = 0.000, p < 0.05) and eco-logistic innovation (p = 0.021, p < 0.05) contribute statistically to the prediction and offer empirical support to hypotheses 2 and 3. Furthermore, this study found strong support for eco-management innovation (p = 0.466), and it contributes the most to sustainable business performance. This is consistent with previous research, which found that eco-management innovation had a positive impact on sustainable business performance in terms of economic performance [14]. The other variable, eco-product innovation has no statistically significant effect on the sustainable business performance of SMEs in Klang Valley, as p = 0.827, i.e., p > 0.05, and our result contradicts prior research findings [14,53].

The component coefficient of determination for eco-product innovation is −0.0202, and (0.340)2 for eco-management innovation and (0.211)2 for eco-logistic innovation. When all the predictors’ contributions are added up, they account for roughly 16.02% (0.01 + 11.56 + 4.45) of the variation in the outcome variable, which diverges from the R² value of the model (38.6%). In addition, 22.58% of the overlap in the predicted sustainable business performance (38.6–16.02) is due to the predictors. Therefore, sustainable business performance’s relationships with eco-management innovation and with eco-logistic innovation for manufacturing SMEs in Malaysia are statistically significant (p < 0.05); thus, hypothesis 2 and hypothesis 3 are accepted.

This is supported by the study of Brasil [48], who discovered that eco-management innovation has a significant positive relationship with business performance, whereas Liu and Luo [54] discovered a significant relationship between logistic capability and firm performance. In this study, however, the relationship of another eco-innovation capability, namely, eco-product innovation, is statistically insignificant (p > 0.05) in terms of predicting sustainable business performance. This is not supported by the findings of Cai and Li [55], who discovered a positive impact on eco-product innovation and business performance in terms of the environmental aspect. Furthermore, Brasil [48] discovered a positive relationship between eco-product innovation and business performance.

SMEs that have adopted eco-innovation in their operations play an essential role in the economic sector, and innovation is one of the aspects that have allowed businesses to survive amid the COVID-19 outbreak. According to Bernama [63], in the midst of the COVID-19 epidemic, the country must adapt to the circumstances and create resilience in the face of unpredictability. Hence, Malaysian decision-makers believe that enterprises must innovate and respond rapidly to market opportunities and obstacles.

In regard to the three variables of eco-innovation considered in this study, sustainable business performance is related to both eco-management innovation and eco-logistic innovation in a positive manner. Eco-management innovation has the potential to increase productivity, minimise administrative expenses, and enhance paperless working while maintaining company performance and preserving the environment. Thenceforth, along with eco-logistic innovation, SMEs will reduce the environmental effect of their products throughout their full life cycle and will employ biodegradable fuels for product delivery to the marketplace. These actions have the potential to conserve resources and limit the usage of hazardous products, and as a consequence, this will enable them to maintain company growth during COVID-19.

On the other hand, sustainable business performance’s insignificant relationship with eco-product innovation can be explained by the lack of demand for eco-products, which had led to the low productivity rate observed during the COVID-19 pandemic. Malaysia’s purchasing managing index fell from 48.5 points in February 2020 to 48.4 points in March 2020, a fall of 0.01 points, due to a shortage of supply, a lack of demand, and a slowdown in import and export activity [64]. In addition, while the majority of SMEs in Klang Valley have been in operation for 16 to 20 years, there are SMEs that have been in operation for less than 5 years. Even though those companies produce good products for the consumer, the companies are still new to manufacturing and are not well-versed in eco-innovation.

In summary, the SMEs in Klang Valley are finding it increasingly difficult to stay on track in the wake of the COVID-19 pandemic crisis. This may explain why one of the hypothesised relationships was found to be insignificant and the other two relationships were found to be significant for sustainable business performance among these enterprises during the COVID-19 pandemic.

5. Conclusions and Further Recommendation

As the pandemic has had an effect on Malaysia since early 2020, manufacturing SMEs in Klang Valley in Malaysia have been facing some stumbling blocks in their attempts to preserve their businesses. Some companies have been forced to shut down because they were no longer able to survive in the current economic climate. Klang Valley was chosen because the number of COVID-19 cases registered in the region during the MCO was the greatest in Malaysia, and SMEs in the region were the most affected by the pandemic [65]. This situation motivated this research to examine how eco-innovation capabilities may be able to improve sustainable business performance during the COVID-19 pandemic. A small contribution is made when a product’s productivity rate is sufficient during the manufacturing process. It is believed that the decline in the productivity rate is due to fewer employees working in factories because some of them are working from home due to the pandemic. Moreover, there have been COVID-19 infections among employees who were ignorant of the standard operating procedures that were put in place to protect them. This has resulted in a drop in business performance. Nevertheless, with stable eco-logistic innovation and eco-management innovation, many of the manufacturing SMEs in Klang Valley have been able to continue their businesses.

This research’s purpose was to determine how the manufacturing SMEs in Klang Valley can sustain their business performance during and after the COVID-19 pandemic. To this end, sustainable business performance was measured as a dependent variable. At the same time, eco-product innovation, eco-management innovation, and eco-logistic innovation, which were the three eco-innovation capabilities, were measured as independent variables. The analysis of the proposed model revealed that sustainable business performance was affected by eco-management innovation and eco-logistic innovation.

The study provides data and information on the current status of the implementation of eco-innovation among SMEs in Klang Valley, and will serve as a useful resource for key stakeholders such as the government and industrial practitioners when making decisions and taking further action regarding the strategies of fostering, implementing, and enforcing environmental protection and social wellbeing. The research demonstrates, however, that significant adjustments or enhancements are necessary, notably in the internal recycling of materials, the substitution of non-environmentally friendly components, and the design of products with an emphasis on reducing energy and material consumption. In addition, the SMEs in Klang Valley must improve the implementation of other sustainable initiatives, such as the acquisition of clean equipment, the reduction of energy consumption, the augmentation of the use of natural resources during the manufacturing process, and the improvement of environmental compliance among stakeholders. These methods are necessary for strengthening the capability of eco-innovation in terms of eco-product, eco-management, and eco-logistics in order to assist those SMEs in sustaining their business performance, particularly in the event of future pandemics.

However, it should be emphasised that this study only included 80 respondents from Klang Valley, so possibly in the future, academics will analyse this topic utilising a sample of all Malaysian manufacturing SMEs or major manufacturing businesses. The results obtained may differ from those reported for manufacturing SMEs due to respondents’ profiles, but also because data for this study were acquired during the COVID-19 pandemic MCO, and it is difficult to obtain answers from the respondents. Nevertheless, given that the study’s findings indicate that additional factors influence eco-innovation capabilities, future research should include additional eco-innovation capabilities such as eco-technology innovation in order to assess their effects on sustainable business performance. The adoption of eco-innovation capability in Malaysian SMEs is extremely favourably regarded in the manufacturing sector. This framework should be expanded to other industries, primarily services, agriculture, construction, mining, and quarrying.

Ch’ng et al. [14] previously established that eco-management innovation was significant for business performance. This was supported by the findings of this study. According to the findings of Fernando et al. [13], eco-innovation capabilities are beneficial and influence sustainable business performance, in terms of its regulation, technology, cross-functional coordination, supplier engagement, and market focus. As the hypothesis that sustainable business performance is related to eco-product innovation was rejected, two government policies, namely the SME Masterplan and 12MP, should become the focus of SMEs from the manufacturing sector in Klang Valley with the purpose of achieving sustainable business performance by substantially ramping up the implementation of their eco-innovation capabilities. In particular, the stakeholders of SMEs should concentrate on the ‘Enhancing Environmental Sustainability through Green Growth’ programme. Organisations can improve their environmental performance and efficiency by raising awareness about sustainability among their employees and customers. This is an initiative that will increase the resilience of not only Malaysia but also of the world to climate change and natural disasters, as well as ensure the long-term sustainability of natural resources, while at the same time achieving greater economic growth.

Furthermore, SMEs in Klang Valley also need to exploit the initiative of innovation development provided by the government under the High Impact Programme 6 (HIP 6). Services or products developed by manufacturing SMEs for the improvement of the people’s quality of life are referred to as mass-market innovation, whereby it plays a key role in realising HIP 6. Hence, to determine HIP 6’s entire effect on the goals and targets, it is critical that its success is ensured. Therefore, it may assist these manufacturing SMEs to engage in collaboration with the government to achieve long-term success in their business. In conjunction with the SME Master Plan and 12MP, the HIP 6 would allow SMEs to experiment with new initiatives and ideas to help them sustain eco-innovation in their operations. Additionally, perhaps SME stakeholders should place a greater emphasis on other eco-innovation variables that could assist them in improving and sustaining their business success.

Finally, in order to build a robust innovation platform that provides SMEs from the manufacturing sector assistance in improving their business capabilities and performance during the COVID-19 pandemic as well as to reduce pollution, additional efforts can be made by policymakers who are interested in fostering eco-innovation capabilities. In this regard, we believe that the government must create an environment that puts pressure on SMEs from the manufacturing sector to embrace environmental responsibility and raises awareness. These efforts also act as guidelines for managers of Malaysian manufacturing SMEs to understand the capabilities of eco-innovation in order to effectively lead the companies’ strategies. Such strategies can be tailored to manufacturing SMEs while encouraging sustainable eco-innovation in the same industrial sector.