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Article

Harnessing Green Dynamic Capabilities for Sustainable Tourism Performance: The Mediating Role of Green Service Innovation in Bali’s Tour and Travel SMEs

by
Elizabeth Elizabeth
*,
Harjanto Prabowo
,
Agustinus Bandur
and
Rini Setiowati
Doctor of Research in Management, Management Department, Bina Nusantara University, Jakarta 11480, Indonesia
*
Author to whom correspondence should be addressed.
Tour. Hosp. 2025, 6(3), 156; https://doi.org/10.3390/tourhosp6030156
Submission received: 23 June 2025 / Revised: 16 July 2025 / Accepted: 5 August 2025 / Published: 15 August 2025
(This article belongs to the Special Issue Small Island Developing Countries (SIDS): Tourism Between Innovation and Authenticity for Better Sustainable Developing Paths)
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Abstract

In response to increasing global sustainability demands, this study examines how green dynamic capabilities influence business performance in Bali Island’s tour and travel SMEs, with green service innovation as a mediating mechanism. Drawing on the resource-based view (RBV) and dynamic capability theory, the research adopts a quantitative approach using survey data from 387 SMEs and employs structural equation modeling (SEM) to analyze the relationships among green dynamic capabilities, green service innovation, and business performance. Findings reveal that green dynamic capabilities significantly enhance both green service innovation and business performance. Notably, green service innovation partially mediates this relationship, underscoring its pivotal role in transforming internal sustainability-oriented capabilities into tangible performance outcomes. The key contribution of this study lies in extending RBV by integrating green service innovation as a strategic conduit that links eco-centric capabilities to competitive advantage in a tourism SME context—a perspective that remains underexplored in emerging economies. Practically, the study provides actionable insights for SME owners and policymakers to prioritize innovation in service design and delivery as a pathway to sustainable tourism performance.

1. Introduction

Sustainable tourism plays a crucial role in achieving the United Nations Sustainable Development Goals (SDGs) by serving as a framework to balance economic growth, environmental protection, and social equity within the tourism sector. The Sustainable Development Goals (SDGs), introduced by the United Nations in 2015, comprise 17 interrelated objectives designed to tackle pressing global issues such as poverty, social inequality, climate change, environmental harm, and the promotion of peace and justice. Within this framework, sustainable tourism emerges as a critical contributor to several of these targets, especially those that prioritize inclusive economic development, environmentally responsible consumption, the sustainability of local communities, and long-term ecological resilience (Nguyen & Hoàng, 2023; Silva, 2024). The tourism sector has significant potential to contribute to this goal through job creation and opportunities for local communities, especially in developing nations where tourism can be a vital source of income. Travel businesses can adopt strategies such as reducing plastic use, enhancing recycling efforts, and promoting local sourcing to align their operations with sustainable development principles.
Sustainable tourism in Bali has become closely associated with green dynamic capabilities, which enable businesses to adapt to environmental challenges and innovate in eco-friendly practices. Particularly in sensitive areas like Bali, these capabilities help firms align economic objectives with ecological sustainability. Research indicates that a robust framework of green dynamic capabilities can significantly enhance sustainable tourism practices, enabling businesses to preserve cultural and natural resources while improving their market positioning (Ariyanto, 2022). These phenomena demonstrate that the relationship between green dynamic capabilities and green service innovation is vital for enhancing the performance of the travel industry, particularly in the realm of sustainable tourism. As pressures continue to mount for environmentally responsible practices in the tourism sector, leveraging green dynamic capabilities will be crucial for ensuring long-term success and sustainability in the travel industry.
However, one of the major unresolved issues in the last few decades is that researchers have found mixed results with regards to how green dynamic capabilities have a significant effect on business performance. On the one hand, several studies have established a significant relationship effect between green dynamic capabilities and business performance. Evidence to support this effect was derived from quantitative research conducted in manufacturing industries in several countries such as Abu Dhabi, Vietnam, Pakistan, China, and Bangladesh (Bresciani et al., 2022; Chen et al., 2023; Hoai et al., 2023; X. Li et al., 2022; Makhloufi et al., 2023; Singh et al., 2022; Y. Zhu et al., 2023). On the other hand, the assertion that green dynamic capabilities have no significant effect on business performance is grounded in several academic studies that reveal mixed or non-significant results regarding the influence of these capabilities on operational effectiveness and competitive advantage. Research examining the relationship between dynamic capabilities, specifically in a green context, and business performance has yielded inconsistent findings, suggesting that while the concept holds theoretical promise, practical outcomes may vary based on context and implementation. One pertinent study found that one dynamic capability dimension, specifically, “seizing”, showed no significant effect on sustainable tourism performance (Sukaris et al., 2021). This suggests that merely having dynamic capabilities in place is insufficient to drive notable business performance in this context, thereby challenging the notion that green dynamic capabilities inherently confer advantages. Similarly, the role of dynamic capabilities and competitive advantage is significant, but these capabilities do not consistently lead to significant improvements in business performance (Correia et al., 2020). Researchers observed that while dynamic capabilities can foster market responsiveness, their direct impact on performance metrics is often unclear and context dependent, which aligns with the idea that green dynamic capabilities may not yield the expected outcomes universally. Furthermore, while environmental management systems could optimize green performance through dynamic capabilities, these frameworks do not necessarily translate to enhanced overall business performance across all sectors (Bresciani et al., 2022). This reinforces the notion that the effectiveness of green dynamic capabilities can be contingent upon various factors, including industry, organizational maturity, and external market conditions. Moreover, research in small and medium-sized tourism businesses in Vietnam indicates that while dynamic capabilities play a role in enhancing performance, the magnitude and significance of this relationship can be moderated by factors such as innovation and entrepreneurial orientation. These results suggest that these mediators can diminish the expectation of a direct link between dynamic capabilities and business performance (Phong & Tam, 2024). There remains a clear need for further investigation into the complex and sometimes inconsistent relationship between green dynamic capabilities and business performance. In response to this gap, the present study aims to provide greater conceptual clarity by addressing the divergent findings reported in the current body of literature.
Furthermore, even though studies linking dynamic capabilities and performance have been conducted in various settings, such as sustainable business in rural tourism (Duarte et al., 2023; Sukaris et al., 2021), Portuguese firms (Correia et al., 2020), small and medium businesses in tourism in Vietnam (Phong & Tam, 2024), Chinese construction enterprises (Zhang et al., 2020), tourist destinations (Ridho, 2024), and certified tourism operators (Bozdaglar, 2023), within the context of travel industries, no studies were found in the Scopus database to explain the mediating effect of green service innovation on the relationship between green dynamic capabilities and business performance.
This study contributes significantly to both theory and practice by demonstrating how green service innovation mediates the relationship between green dynamic capabilities and business performance in Bali’s travel industry. It offers practical insights for SMEs, industry associations, and policymakers to enhance sustainability and competitiveness. The findings highlight the importance of green capabilities in fostering innovation and improving performance, suggest initiatives like training and collaboration for industry associations, and inform government policies on incentives and regulations to support sustainable tourism. The study also aligns with Indonesia’s SDGs and advances the resource-based view and dynamic capability theory by showing how internal green capabilities lead to improved business outcomes through innovation.

2. Literature Review

2.1. Green Dynamic Capabilities

Green dynamic capabilities (GDCs) integrate traditional dynamic capability frameworks with sustainability objectives, emphasizing the importance of environmentally conscious practices in organizational processes. GDCs emphasize how firms can develop capabilities to orient themselves toward sustainable innovations and practices within their industries, thereby enhancing their competitive advantages while committing to environmental and social responsibilities. GDCs significantly impact social innovation behavior, indicating that organizations harness their dynamic capabilities to promote green initiatives among employees, leading to enhanced sustainable outcomes (C. Li et al., 2023). Furthermore, a systematic literature review elucidates how the measurement of dynamic capabilities related to sustainability can provide frameworks through which organizations can better navigate their green objectives, such as green product development and process innovation (Buzzao & Rizzi, 2020). The literature also indicates that firms investing in GDCs can achieve operational efficiencies, allowing for better alignment with sustainable business practices, which is essential in today’s conscious consumer environment (Chatterjee et al., 2022; Hadi, 2023).
The concept of absorptive capacity is another critical element within GDCs. Absorptive capacity within organizations aids in the assimilation, transformation, and application of external knowledge to foster sustainability initiatives (Gamero et al., 2024). In this context, firms become adept at sensing environmental shifts and seizing opportunities, thereby embodying a proactive approach to sustainability (Elf et al., 2022). The cultivation of sustainable dynamic capabilities not only drives corporate sustainability but also fosters a sustained competitive advantage. Their work emphasizes a focus on best practices related to integrating sustainability into operational strategies, demonstrating how these capabilities can be converted into long-term successes for firms (Bari et al., 2024). Thus, organizations that prioritize developing GDCs are better positioned to adapt to challenges and regulatory pressures, ultimately achieving a balance between profitability and ecological stewardship (Wu et al., 2022).
We argue that GDCs serve as a foundational element for organizations striving to achieve sustainability. By integrating GDCs into strategic frameworks, firms can navigate the complexities of environmental challenges while ensuring competitive sustainability. The recent literature underscores the critical nature of these dynamic capabilities in reshaping how organizations innovate and adapt, ultimately contributing to a more sustainable future.

2.2. Green Service Innovation

Green service innovation (GSI) encompasses the development of innovative services that emphasize sustainability while enhancing organizational performance. It integrates various elements, including environmental considerations, service delivery efficiency, and the incorporation of renewable resources and practices, into service businesses, particularly in sectors like hospitality. GSI is underpinned by the need to align with sustainability goals while addressing consumer demand for eco-friendly practices and regulatory pressures around environmental sustainability. One significant aspect of GSI is its relationship with green innovation strategies. GSI includes components such as environmental service delivery and environmental service design, which distinguish it from traditional service innovations (Wang & Liu, 2022). Smart services enhance both the quality and quantity of green innovation, particularly within the digital economy, thus facilitating a firm’s transition to more sustainable practices (Chen et al., 2023).
Additionally, employee creativity plays a pivotal role in fostering a culture of innovation that is vital for the success of GSI initiatives (Luu, 2022). An essential consideration for the implementation of GSI is the regulatory environment and the influence of external stakeholders. Firms must navigate complex supply chain risks while establishing green service practices, indicating that stakeholder engagement and compliance with environmental regulations are critical in shaping service innovation outcomes (Wang & Liu, 2022). This is echoed by other studies that highlight how environmental pressures and customer expectations drive the need for organizations to innovate in their service offerings to maintain competitive relevance in an increasingly sustainability-focused market (Dang et al., 2023; Khan et al., 2023).
We argue that green service innovation is a multidisciplinary approach that merges sustainability goals with service delivery innovations. It thrives on the integration of leadership, employee engagement, effective knowledge management, and responsiveness to regulatory frameworks. By embedding sustainability into their service innovation strategies, organizations are better positioned to enhance their overall performance while contributing to broader environmental objectives.

2.3. Business Performance

The theory of business performance is a multifaceted concept that integrates elements of both financial performance and market performance. Understanding this theory requires recognizing how these two constructs interact and influence broader corporate outcomes, including profitability, market share, and overall viability in competitive landscapes. Comprehensive evaluations of business performance often distinguish between financial metrics, such as return on assets (ROA) and profit margins, and market performance indicators like market share and customer satisfaction. Financial performance is primarily concerned with a firm’s ability to generate profit relative to its revenue and costs. This dimension typically employs quantitative metrics, offering a clear view into the organization’s economic health. For instance, financial performance is influenced significantly by market conditions, including business strategies aimed at fostering an online market orientation, which in turn directly affects the overall business performance of companies (Tjahjadi et al., 2020). These relationships highlight the interdependent nature of market dynamics and financial health, suggesting that effective market strategies not only enhance brand visibility but also improve financial outcomes.
Market performance, on the other hand, focuses on a company’s position and effectiveness in its respective markets. It is essential to recognize that success in market performance does not strictly rely on financial metrics; rather, market performance can also indicate a company’s growth potential and competitive advantages (Mbowe, 2024). Therefore, while financial performance is essential for assessing profitability, market performance provides insights into customer engagement, brand positioning, and long-term sustainability. Effective customer relationship management (CRM) strategies can enhance customer satisfaction and, consequently, a firm’s overall business performance (Kerdpitak, 2021). Furthermore, competitive environments play critical roles in bridging financial and market performance. A firm’s ability to adapt its strategies in response to competitive pressures significantly affects both its market standing and its financial results, reinforcing the idea that performance should be evaluated from a holistic standpoint valuing strategic alignment between market actions and financial goals (Ndegwa et al., 2020).
We argue that the theory of business performance ideally integrates financial performance with market performance, providing a comprehensive framework that reflects a firm’s overall success and sustainability. By understanding how these dimensions interrelate and are influenced by various factors such as marketing orientation and competitive strategies, organizations can enhance their operational efficiencies and adapt dynamically to market changes, ultimately ensuring long-term profitability.

3. Research Hypotheses

3.1. Green Dynamic Capabilities and Green Service Innovation

Research indicates that green dynamic capabilities can enhance green innovation practices, positively impacting organizational performance and environmental outcomes (Buzzao & Rizzi, 2020; Hoai et al., 2023). Several studies elucidate the relationship between green dynamic capabilities and innovation in products and services. For instance, dynamic capabilities significantly contribute to the creation of green products within manufacturing firms (Borah et al., 2024). Moreover, strong dynamic capabilities enable firms to leverage empirical pressures and fiscal incentives, thereby stimulating eco-innovation, including green services (Long & Liao, 2021). Furthermore, organizational improvisation, a facet of dynamic capabilities, can bolster green innovation efforts (Chen et al., 2023).
On the other hand, the effectiveness of green dynamic capabilities in promoting green service innovation may vary significantly based on external market conditions, rather than being a straightforward relationship (Makgopa, 2023). In environments where market demands and environmental resources align differently, the expected impact of dynamic capabilities can diminish. Moreover, there may be a specific misalignment between innovation capabilities, especially among micro, small, and medium enterprises (MSMEs), and the specific requirements necessary to facilitate effective green business innovation. This suggests that even if a firm possesses green dynamic capabilities, they may not translate into successful service innovations if they do not align with market needs or resource availability (Megawati et al., 2024). The disconnect between capabilities and contextual needs can thus lead to a situation where green dynamic capabilities fail to drive significant green service innovation. Thus, the following hypothesis was proposed:
H1: 
Green dynamic capabilities have a significant influence on green service innovation.

3.2. Green Dynamic Capabilities and Business Performance

The research presents evidence that organizations harnessing their green dynamic capabilities can achieve superior green performance, particularly in sectors such as chemicals, textiles, and automobiles (Bresciani et al., 2022). This suggests that the integration of environmental management systems (EMSs) with dynamic capabilities enhances firms’ ability to drive green initiatives, translating to better business outcomes. Green market orientation and green supply chain management significantly mediate the relationship between green dynamic capabilities and business performance, reinforcing the idea that proactive environmental strategies lead to improved operational results (Tjahjadi et al., 2022). This mediation indicates that firms successfully implementing green practices not only enhance their own capabilities but also align their operational processes toward sustaining business performance. Moreover, organizations leveraging these capabilities are better positioned to innovate and develop environmentally friendly products, thus enhancing market competitiveness (Borah et al., 2024).
On the other hand, the effectiveness of dynamic capabilities in achieving sustainable outcomes may depend on various mediating factors that complicate their influence on performance (Buzzao & Rizzi, 2020). They indicate that organizations might possess dynamic capabilities but fail to translate them into improved performance due to a lack of alignment with strategic goals or insufficient integration within the business model. Moreover, the inclusion of mediation in the analysis reveals only a weak indirect effect of dynamic capabilities on business performance, implying that while dynamic capabilities can contribute to performance, they do not act as standalone drivers, and their efficacy may depend on the presence of complementary resources and strategies (Prester, 2023). Thus, the following hypothesis was developed:
H2: 
Green dynamic capabilities have a significant influence on business performance.

3.3. Green Service Innovation and Business Performance

Research indicates that green service innovation is directly linked to enhanced business performance. For instance, service innovation tends to enhance business performance, especially when moderated by factors such as environmental dynamism and market competitiveness (Makgopa, 2023). These findings suggest that businesses that innovate in their service offerings can achieve better performance outcomes through enhanced customer engagement and operational efficiencies. Moreover, the interplay between green innovation and organizational performance has been substantiated in multiple industry contexts. Green innovation significantly contributes to financial performance, particularly in sectors such as mining, demonstrating that environmentally focused initiatives not only meet compliance standards but also yield economic benefits (Yuniarti et al., 2022). Organizations embracing eco-innovation often see greater sustainability in business performance, illustrating the long-term value derived from adopting green practices (Almeida & Wasim, 2022).
On the other hand, while green product and process innovations show various influences on company performance, the direct effects of green service innovation may be less robust than anticipated (Ramadhan & Widiastuty, 2023). They highlight the need for a more nuanced understanding, considering intermediary factors that could mediate the relationship between service innovations and performance. Additionally, the effects of green service innovation may only emerge over time or under specific conditions, making immediate performance impacts less significant than expected (Skordoulis et al., 2022). Moreover, while green initiatives are crucial for sustainability, they often do not lead directly to financial performance improvements in every context. Thus, the following hypothesis was developed:
H3: 
Green service innovation has a significant influence on business performance.

3.4. Mediating Role of Green Service Innovation

One crucial mediating factor identified in the literature is the role of green service innovation. Green innovation serves as a vital mediator between green dynamic capabilities and business performance, where firms leverage their dynamic capabilities to innovate environmentally friendly products and processes, thus enhancing their market position (Singh et al., 2022). Evidence indicates that these capabilities markedly strengthen organizations’ efforts to drive green innovation, particularly in service-oriented sectors where customer involvement is critical (Chen et al., 2023; Luu, 2022).
Moreover, green service innovation serves as a key mechanism linking green dynamic capabilities with improved business performance. This innovative approach allows organizations to deliver services that mitigate environmental impacts while addressing customer needs, thus enhancing customer loyalty and satisfaction (Dang et al., 2023; Wang & Liu, 2022). Research consistently shows that the implementation of green service innovations correlates positively with firms’ overall performance metrics, suggesting that firms that harness green dynamics often benefit from service-oriented innovations (Rashid, 2024; Tariq, 2023). Furthermore, green service innovations are associated not only with process efficiency but also with improved environmental performance, contributing to better financial outcomes (Imran et al., 2021; Yuniarti et al., 2022). Thus, the following hypothesis was proposed:
H4: 
Green service innovation significantly mediates the effects of green dynamic capabilities on business performance.
Figure 1, based on the resource-based view and dynamic capability theory, proposes that green dynamic capabilities (GDCs) significantly influence both green service innovation (GSI) (H1) and business performance (BP) (H2), with GSI also having a significant impact on BP (H3). Furthermore, GSI is posited to mediate the relationship between GDCs and BP (H4), highlighting its strategic role in translating internal environmental capabilities into improved market and financial outcomes.

4. Materials and Methods

4.1. Data Collection

This study employed a quantitative survey using a census method, targeting all 416 tour and travel SMEs registered with the Bali Provincial Tourism Office (2019–2023). Data were collected between August 2024 and May 2025. Bali was chosen due to its central role in Indonesia’s sustainable tourism agenda, where all tour and travel businesses are classified as SMEs, reflecting the government’s policy to involve local communities in tourism to improve livelihoods. Participation from non-local operators is restricted unless they collaborate with Bali-based SMEs. The research instruments were adapted to the Balinese SME context through expert validation and pilot testing to ensure cultural relevance and clarity. Of the 416 questionnaires distributed, 387 valid responses were retained after data cleaning. Structural equation modeling (SEM) was applied to analyze the conceptual model due to its robustness in testing complex and mediating relationships. Respondent demographics are presented in Table 1.

4.2. Measurement Development

This study utilized a structured survey questionnaire as the principal instrument for data collection, consisting of two distinct sections. The first section was designed to capture respondents’ demographic characteristics, including variables such as gender, age, level of education, work experience, length of business operation, duration of managerial involvement, total number of employees, and total sales. The second section comprised items measuring the latent variables examined in this study, namely green dynamic capabilities (organizational green strategic capability, R&D green innovation capability, organizational green management capability), green service innovation (new practices and service improvements), and business performance (financial perspective and market perspective). The list of questions posed to the respondents can be found in Appendix A, Table A1. The measurement items were adapted from validated scales previously established in the scholarly literature, with modifications made to ensure alignment with the specific context of tour and travel SMEs operating in Bali. This study employed a six-point Likert scale consisting of (1) strongly disagree, (2) disagree, (3) tend to disagree, (4) tend to agree, (5) agree, and (6) strongly agree. The use of a six-point scale was intended to ensure continuous and consistent gradation across response options.
The scale utilized to assess green dynamic capabilities in this study was carefully adapted from established literature to ensure its contextual appropriateness and validity within the research setting (Singh et al., 2022). The construct of green dynamic capabilities was operationalized through eleven indicators, structured across three key dimensions: first, organizational green strategic capability, encompassing elements such as the firm’s competitive agility within the industry, its ability to identify potential business opportunities and threats, the entrepreneurial orientation of its leadership, and the shared employee vision and knowledge; second, green innovation capability in research and development, which includes the ability to assess organizational strengths and weaknesses, determine appropriate directions and timing for green R&D initiatives, and develop environmentally friendly products or technologies; and third, organizational green management capability, involving competencies such as understanding customer needs, facilitating effective cross-departmental communication and coordination, maintaining a balance between employees’ work and personal lives, and fostering collaboration with local communities to achieve mutual benefits.
The measurement scale for green service innovation was adapted from a previous study (Lin & Chen, 2017). To assess green service innovation, eight indicators were utilized and categorized into two dimensions: new practices and service improvements. The new practices dimension encompassed four items evaluating the extent to which the company had implemented environmentally oriented innovations in recent years. These included the introduction of novel methods for selling products or services with environmental considerations, new promotional approaches aimed at environmentally conscious offerings, the development of eco-friendly products or services, and the adoption of environmentally driven changes in internal administration and operational procedures. The service improvement dimension also comprised four items, assessing the frequency with which companies had repackaged existing offerings to enhance their environmental image, provided customer consultation or information services related to environmental issues, revised and enhanced existing products or services to align with environmental values, and introduced innovations in extended services grounded in environmental responsibility. These items collectively aimed to capture both proactive and adaptive aspects of green service innovation within the operational context of tour and travel SMEs in Bali.
The scale of business performance was adapted from a previous study (Singh et al., 2022). Business performance was assessed using eight measurement items, divided into two key dimensions: the financial perspective and the market perspective. The financial perspective included four indicators reflecting core financial outcomes, namely sales growth, profitability, customer retention, and overall financial performance. The market perspective was represented by four items evaluating competitive positioning, which comprised the speed of entering new markets relative to competitors, the ability to introduce new products or services more rapidly than rivals, the success rate of these innovations in comparison to competitors, and achieving a higher market share than competitors. These dimensions collectively provide a comprehensive evaluation of performance outcomes relevant to tour and travel SMEs within a competitive and sustainability-driven tourism environment.

5. Analysis and Results

5.1. Assessment of the Measurement Model

The data analysis procedures in this study were conducted using SPSS version 29.0 and AMOS version 26.0. Initially, descriptive statistics were employed via SPSS to examine the demographic characteristics of the respondents. The first phase of the structural equation modeling (SEM) process involved evaluating the measurement model to determine whether the theoretically derived observed indicators appropriately represented the corresponding latent constructs within the research framework. At this stage, both validity and reliability assessments were performed using the Confirmatory Factor Analysis (CFA) approach.
Validity was assessed by examining the Standardized Factor Loadings (SFLs), with values exceeding 0.5 indicating acceptable levels of indicator validity (Byrne, 2016; Hair et al., 2019). Additionally, the Average Variance Extracted (AVE) was calculated, where values equal to or greater than 0.5 were deemed satisfactory (Hair et al., 2019). Reliability was assessed through the Construct Reliability (CR) metric, with values above 0.7 regarded as acceptable (Hair et al., 2019). The model’s overall fit was also evaluated using the Comparative Fit Index (CFI), where values above 0.9 were considered indicative of a well-fitting model (Hair et al., 2021).
As shown in Figure 2, Figure 3 and Figure 4, the green dynamic capabilities construct was initially measured with eleven items, but three were excluded due to low validity. The green service innovation construct started with eight items, of which five were retained after validation. Similarly, the business performance construct was reduced from eight to five valid items following the assessment.
Figure 2, Figure 3 and Figure 4 and Table 2 show that all measurement indicators have Standardized Factor Loadings (SFLs) above 0.5, confirming construct validity. The Comparative Fit Index (CFI) exceeds 0.9, indicating a good model fit. Additionally, Average Variance Extracted (AVE) values are above 0.5 and Construct Reliability (CR) values exceed 0.7 for all constructs. These results confirm that the measurement model is both valid and reliable, meeting the requirements for SEM analysis.

5.2. Assessment of the Structural Model

The structural model analysis involved evaluating model fit and examining path coefficients to test causal relationships among latent constructs. As shown in Figure 5 and Table 3, the modified model met the acceptable fit criteria, with at least four fit indices—covering absolute, incremental, and parsimony measures—indicating a good fit (Hair et al., 2021). This suggests that the data align well with theoretical expectations.
The hypotheses were tested at a 5% significance level, using t-values (critical ratios) and p-values. A hypothesis was accepted if the t-value > 1.96 or p < 0.05; otherwise, it was rejected. Direct effect estimates between variables are presented in Table 4.
As presented in Table 4, the relationship between green dynamic capabilities (GDCs) and green service innovation (GSI) yields a positive path coefficient of 0.263, with a t-value (critical ratio) of 4.546 (>1.96) and a p-value of 0.000 (<0.05). These findings indicate that GDCs exert a statistically significant influence on GSI, thereby supporting the first hypothesis (H1), which posits that “green dynamic capabilities have a positive and significant influence on green service innovation.”
Furthermore, the second hypothesis (H2) is also supported, with the GDC-to-business performance (BP) relationship showing a positive path coefficient of 0.612, a t-value of 10.545 (>1.96), and a p-value of 0.000 (<0.05). This suggests that GDCs have a positive, significant, direct impact on BP.
Similarly, the third hypothesis (H3) is confirmed, as the GSI-to-BP relationship presents a positive path coefficient of 0.293, accompanied by a t-value of 5.251 (>1.96) and a p-value of 0.000 (<0.05). These results demonstrate that GSI significantly contributes to enhancing business performance. Thus, all three hypothesized relationships in the structural model are statistically supported.
As shown in Table 5, the indirect relationship between GDCs and BP through GSI exhibits a positive path coefficient of 0.077 and a p-value of 0.000 (<0.05). These results indicate that GDCs have a statistically significant effect on BP when mediated by GSI. In other words, GSI plays a mediating role in strengthening the positive influence of GDCs on business performance. Accordingly, the fourth hypothesis (H4), which proposes that “green service innovation significantly mediates the effect of green dynamic capabilities on business performance,” is supported. Furthermore, the mediating role of GSI is identified as partial mediation. This is because, with or without passing through GSI, GDCs still have a direct influence on BP among tour and travel SMEs in Bali (as demonstrated in the results of H1).

6. Discussion and Conclusions

6.1. Theoretical Implications

The findings of this study provide significant theoretical implications for the fields of strategic management, sustainability, and tourism business performance by expanding the understanding of the relationship between green dynamic capabilities, green service innovation, and business performance. These implications contribute to the resource-based view (RBV) and dynamic capability theory, particularly in the context of sustainable tourism SMEs. Firstly, the confirmation of H1, which establishes that green dynamic capabilities significantly influence green service innovation, aligns with and adds depth to prior research (Abrudan et al., 2024; Borah et al., 2024; Buzzao & Rizzi, 2020; Chen et al., 2023; Hoai et al., 2023; Huang et al., 2023; Long & Liao, 2021; L. Zhu & Wang, 2023). This research reinforces the theoretical perspective that firms with well-developed green capabilities are more likely to innovate in their service offerings. This finding aligns with the dynamic capability theory, which posits that organizations that effectively integrate, build, and reconfigure their resources in response to environmental changes can develop innovative solutions that enhance their market positioning. In the tourism sector, this means that travel SMEs with strong sustainability-oriented capabilities are better positioned to implement eco-friendly service innovations, such as carbon-neutral travel packages, digitalized green services, and waste reduction initiatives.
Secondly, the validation of H2, which confirms that green dynamic capabilities significantly influence business performance, extends the application of RBV by demonstrating that sustainability-driven capabilities are a critical source of competitive advantage. This study aligns with and adds depth to prior research (Aftab et al., 2023; Borah et al., 2024; Bresciani et al., 2022; Tjahjadi et al., 2022). The findings suggest that businesses that cultivate green knowledge, environmental responsiveness, and sustainable operational practices can achieve superior performance outcomes. This theoretical insight strengthens the argument that integrating sustainability into core strategic capabilities is not just an ethical necessity but also a business imperative. In the context of tourism SMEs, firms that proactively develop green dynamic capabilities can enhance operational efficiency, improve brand reputation, and increase market demand from environmentally conscious travelers.
Furthermore, the confirmation of H3, which asserts that green service innovation significantly influences business performance, adds to the eco-innovation literature by demonstrating that sustainable service innovations are key drivers of competitive advantage and financial success. The study supports the notion that firms that integrate green service innovations—such as renewable energy usage, digital transformation for eco-tourism, and eco-certified tourism packages—are better positioned to attract environmentally responsible consumers, achieve cost efficiency, and strengthen customer loyalty. This aligns with previous studies (Almeida & Wasim, 2022; Cong, 2023; Makgopa, 2023; Yuniarti et al., 2022), suggesting that service-oriented innovations based on sustainability principles contribute to improved customer satisfaction, market differentiation, and long-term profitability.
Lastly, the confirmation of H4, which establishes that green service innovation significantly mediates the effect of green dynamic capabilities on business performance, aligns with and adds depth to prior research (Ahmed et al., 2023; Chen et al., 2023; Dang et al., 2023; Imran et al., 2021; Luu, 2022; Rashid, 2024; Singh et al., 2022; Tariq, 2023; Wang & Liu, 2022; Yuniarti et al., 2022). This research provides new theoretical insights into the indirect pathways through which green dynamic capabilities contribute to business success. This finding suggests that while green capabilities serve as a foundation for sustainability-oriented competitiveness, their impact on business performance is enhanced when firms actively engage in service innovation. This advances the discussion within RBV and dynamic capability theory by illustrating that capabilities alone do not automatically translate into superior performance; firms must effectively apply their capabilities through innovative green service offerings to realize tangible business benefits.

6.2. Practical Implications

The findings of this study offer several important practical implications for tour and travel SMEs operating in Bali’s sustainability-driven tourism landscape. First, SME managers should not only invest in general green innovation but should also adopt specific, actionable strategies, such as implementing low-emission transport solutions, integrating energy-efficient digital booking platforms, and developing eco-education tourism packages that appeal to environmentally conscious travelers. These practices can directly enhance customer satisfaction and brand positioning in competitive markets increasingly shaped by sustainability expectations.
Second, to operationalize green dynamic capabilities effectively, SMEs should foster internal capacities such as cross-functional green research and development teams and embed sustainability goals into organizational routines. However, internal efforts must be reinforced through external support. Policymakers and tourism stakeholders should play a proactive role in facilitating access to green certification schemes (e.g., CHSE or EarthCheck), offering financial incentives for sustainable investments, and streamlining regulations that encourage SME innovation. Collaborations with local environmental NGOs, community groups, and sustainable tourism networks could also foster knowledge sharing and create synergistic partnerships that enable long-term transformation.
Moreover, government agencies should provide targeted training programs to build entrepreneurial leadership with a sustainability mindset, equipping SME owners to respond adaptively to market uncertainty while recognizing and exploiting green opportunities. Platforms for digital adoption support, such as subsidies for technological upgrades or user-friendly digital tools, would further amplify the effectiveness of green service innovation in driving business performance.
Taken together, these implications suggest that sustainable tourism outcomes cannot be achieved through isolated firm-level actions alone. Rather, they require a coordinated approach involving institutional enablers, capacity building, and accessible tools that support SMEs in translating their green capabilities into tangible business value.

6.3. Limitations and Future Research

This study is not without limitations, which provide meaningful directions for future research. First, the use of a cross-sectional design restricts the ability to draw causal inferences from the observed relationships between green dynamic capabilities, green service innovation, and business performance. While significant associations were identified, longitudinal studies are needed to examine how these relationships evolve over time, particularly as firms respond to ongoing environmental, market, and regulatory changes. A temporal perspective could offer stronger evidence for causality and enrich our understanding of the dynamic nature of innovation in sustainable tourism contexts.
Second, the geographic scope of this study is confined to SMEs operating within the unique socio-cultural and environmental context of Bali. While this focus allows for a deep exploration of tourism SMEs in a globally recognized sustainable destination, it also limits the generalizability of the findings. Future studies should consider comparative analyses across different regions or countries to test the model’s applicability in varying institutional, policy, and market environments. Such comparative research could account for differences in tourism infrastructure, policy enforcement, and cultural attitudes toward sustainability.
Third, although this study focused on internal capabilities, it did not formally integrate potential moderating or contextual factors, such as organizational size, market orientation, or government support, which may influence the strength or direction of the relationships examined. Future research could incorporate these moderators into the analytical framework to offer more nuanced insights. For instance, it would be valuable to explore whether smaller firms with limited resources derive different benefits from green service innovation compared to larger SMEs, or how access to policy incentives shapes the translation of green capabilities into performance outcomes.
Finally, while the study acknowledged the theoretical role of institutions and policy in the broader tourism ecosystem, it did not empirically test their effects. Future research should explore how tourism regulations, stakeholder pressures, or green certification schemes interact with firm-level innovation strategies. Integrating institutional and policy dimensions into the framework would provide a more holistic view of sustainable tourism development and offer actionable insights for both practitioners and policymakers aiming to strengthen the resilience and sustainability of the tourism sector.

Author Contributions

Conceptualization, E.E.; methodology, E.E., and H.P.; software and formal analysis, E.E.; validation, H.P., R.S., and A.B.; writing—original draft preparation, E.E.; writing—review and editing, H.P., R.S., and A.B.; supervision, H.P., R.S., and A.B. All authors have read and agreed to the published version of the manuscript.

Funding

The authors declare that financial support was received for the research, authorship, and publication of this article. This research was funded by the Beasiswa Pendidikan Indonesia (BPI) program under Lembaga Pengelola Dana Pendidikan (LPDP), Pusat Pembiayaan dan Asesmen Pendidikan Tinggi (PPAPT) Kemdiktisaintek with grant number 202101130718 (approval date 10 September 2021 and approval No. 0474/J5.2.3./BPI.06/10/2021).

Institutional Review Board Statement

This study was conducted in accordance with the Declaration of Helsinki and approved by the Institutional Review Board of Bina Nusantara University (approval No. 061/HoP.DRM/VII/2025 and approval date 22 May 2025).

Informed Consent Statement

Informed consent was obtained from all subjects involved in the study.

Data Availability Statement

The original contributions presented in the study are included in the article; further inquiries can be directed to the corresponding author.

Conflicts of Interest

The authors declare no conflicts of interest.

Appendix A

Table A1. List of quantitative questions.
Table A1. List of quantitative questions.
ConstructDimensionItems
Green dynamic
capabilities		Organizational
green strategic
capability		Q1: I possess competitive flexibility capabilities.
Q2: The knowledge of our tour and travel employees aligns with the company’s vision and mission.
Q3: I possess entrepreneurial characteristics.
Q4: I have the ability to recognize business opportunities or threats.
R&D green innovation capabilityQ5: I am able to evaluate the strengths and weaknesses of the company.
Q6: I am able to develop new environmentally friendly products or services.
Q7: I have a clear direction and dedicated time allocation for conducting environmentally friendly research and development initiatives.
Organizational
green management
capability		Q8: I am able to communicate and coordinate effectively with business partners.
Q9: I am able to coordinate with the community to meet shared needs.
Q10: I am able to balance work, family life, and leading employees effectively.
Q11: I am able to understand customer needs.
Green service
innovation		New practicesQ1: Our tour and travel business introduces new environmentally conscious practices in selling tour packages and services.
Q2: Our tour and travel business introduces new environmentally conscious practices in serving customers.
Q3: Our tour and travel business introduces new environmentally conscious practices in internal operations and administration.
Q4: Our tour and travel business introduces new environmentally conscious practices in internal operations and administration.
Service
improvement		Q5: Our tour and travel business improves and enhances environmentally based tour packages and services.
Q6: Our tour and travel business repackages environmentally based tour packages and services.
Q7: Our tour and travel business provides environmentally conscious after-sales services.
Q8: Our tour and travel business provides environmentally conscious after-sales services.
Business
performance		Financial
performance		Q1: Over the past two years, our tour and travel sales have increased.
Q2: Over the past two years, our tour and travel revenue has increased.
Q3: Over the past two years, the number of our tour and travel customers has increased.
Q4: Over the past two years, there has been an overall improvement in our financial performance.
Business
performance		Market
performance		Q5: Our tour and travel business has entered new markets more quickly than our competitors.
Q6: Our tour and travel business has introduced new products/services more quickly than our competitors.
Q7: The success rate of our tour and travel business in introducing new products/services is higher than that of our competitors.
Q8: Our tour and travel market share has increased over the past two years.

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Tourismhosp 06 00156 g001
Figure 1. The research model.
Figure 1. The research model.
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Figure 2. CFA of green dynamic capabilities.
Figure 2. CFA of green dynamic capabilities.
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Figure 3. CFA of green service innovation.
Figure 3. CFA of green service innovation.
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Figure 4. CFA of business performance.
Figure 4. CFA of business performance.
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Figure 5. Structural model test results.
Figure 5. Structural model test results.
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Table 1. Profile of respondents (n = 387).
Table 1. Profile of respondents (n = 387).
VariableCategoryFrequencyPercentage (%)
GenderMale27972
Female10828
GenerationBaby boomers00
X15139
Millennials23661
Z00
EducationMaster’s8121
Bachelor’s26368
Associate’s4311
Work experience<3 years00
3–5 years25566
6–10 years12033
>10 years123
Duration of business<6 years00
Operation6–10 years8923
11–20 years13936
>20 years15941
Length of time <3 years00
Managing business3–5 years195
6–10 years16342
11–20 years11630
>20 years8923
Number of employees0–5 peoples00
6–19 peoples10527
20–99 peoples28273
>99 peoples00
Total sales<IDR 300 million00
IDR 300 million–2.5 billion10527
IDR 2.5 billion–50 billion28273
>IDR 50 billion00
Table 2. Validity and reliability of the scales.
Table 2. Validity and reliability of the scales.
ConstructDimensionItemsSFLAVECRCFI
Green dynamic capabilitiesOrganizational
green strategic
capability		GDC110.7930.7990.9690.938
GDC130.868
GDC140.775
R&D green innovation capabilityGDC210.786
GDC230.802
Organizational
green management
capability		GDC310.691
GDC320.660
GDC340.673
Green service innovationNew practicesGSI110.8010.7820.9470.962
GSI120.858
Service
improvement		GSI220.753
GSI230.690
GSI240.711
Business performanceFinancial
performance		BP110.6100.6940.9180.961
BP120.702
BP130.767
Market
performance		BP210.809
BP240.600
Table 3. Model fit statistics summary.
Table 3. Model fit statistics summary.
Goodness of Fit IndexCriteriaValueDescription
Absolute fit indicesChi squareLow number370.092Poor fit
Probability>0.050.000Poor fit
CMIN/DF<22.961Marginal fit
RMSEA≤0.080.071Good fit
GFI≥0.900.905Good fit
Incremental fit indicesAGFI≥0.900.870Marginal fit
CFI≥0.900.930Good fit
TLI≥0.900.914Good fit
NFI≥0.900.898Marginal fit
RFI≥0.900.875Marginal fit
IFI≥0.900.930Good fit
Parsimonious fit indicesPGFIThe bigger, the better0.661Good fit
PNFIThe bigger, the better0.734Good fit
Table 4. Results of direct influence relationship test.
Table 4. Results of direct influence relationship test.
HypothesisRelationshipEstimateS.E.t-Valuep-Value
H1GDC → GSI0.2634.5460.000Positive, significant
H2GDC → BP 0.61210.5450.000Positive, significant
H3GSI → BP0.2935.2510.000Positive, significant
Table 5. Results of indirect influence relationship test (mediation).
Table 5. Results of indirect influence relationship test (mediation).
HypothesisRelationshipEstimatep-ValueDescription
H4GDC → GSI → BP0.0770.000Positive, significant
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MDPI and ACS Style

Elizabeth, E.; Prabowo, H.; Bandur, A.; Setiowati, R. Harnessing Green Dynamic Capabilities for Sustainable Tourism Performance: The Mediating Role of Green Service Innovation in Bali’s Tour and Travel SMEs. Tour. Hosp. 2025, 6, 156. https://doi.org/10.3390/tourhosp6030156

AMA Style

Elizabeth E, Prabowo H, Bandur A, Setiowati R. Harnessing Green Dynamic Capabilities for Sustainable Tourism Performance: The Mediating Role of Green Service Innovation in Bali’s Tour and Travel SMEs. Tourism and Hospitality. 2025; 6(3):156. https://doi.org/10.3390/tourhosp6030156

Chicago/Turabian Style

Elizabeth, Elizabeth, Harjanto Prabowo, Agustinus Bandur, and Rini Setiowati. 2025. "Harnessing Green Dynamic Capabilities for Sustainable Tourism Performance: The Mediating Role of Green Service Innovation in Bali’s Tour and Travel SMEs" Tourism and Hospitality 6, no. 3: 156. https://doi.org/10.3390/tourhosp6030156

APA Style

Elizabeth, E., Prabowo, H., Bandur, A., & Setiowati, R. (2025). Harnessing Green Dynamic Capabilities for Sustainable Tourism Performance: The Mediating Role of Green Service Innovation in Bali’s Tour and Travel SMEs. Tourism and Hospitality, 6(3), 156. https://doi.org/10.3390/tourhosp6030156

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