Eco-Innovation and Sustainability in Halal SMEs: The Role of Dynamic Capabilities in Emerging Economies

Abstract

The increasing environmental challenges and evolving regulatory expectations have intensified the need for sustainable practices among small and medium-sized enterprises (SMEs), particularly within the rapidly expanding halal industry in emerging economies. Halal SMEs face unique dual pressures of maintaining strict compliance with halal standards while simultaneously addressing sustainability and environmental concerns. Despite growing awareness, many halal SMEs encounter significant challenges in implementing eco-innovation due to resource limitations, capability constraints, and operational complexities, which may hinder their long-term competitiveness and resilience.
This study aims to develop a conceptual framework that explains how halal SMEs can enhance sustainability performance through eco-innovation by leveraging internal organisational capabilities. The paper adopts a qualitative conceptual research design based on a structured and systematic review of existing literature on eco-innovation, SME sustainability, halal industry practices, and dynamic capabilities. Relevant studies were critically analysed and synthesised to identify key theoretical constructs and relationships influencing eco-innovation adoption in halal SME contexts.
Drawing on the dynamic capabilities’ perspective, the study proposes that sensing, seizing, and reconfiguring capabilities enable halal SMEs to overcome structural, technological, and institutional barriers associated with eco-innovation. The findings suggest that eco-innovation acts as a critical mechanism linking organisational capabilities to improved sustainability outcomes while preserving halal integrity. Furthermore, the framework highlights the strategic role of capability development in aligning environmental sustainability with religious compliance requirements.
This study contributes to the literature by contextualising dynamic capabilities within the halal SME sector and extending eco-innovation research into emerging economy settings. It also provides practical insights for SME managers and policymakers to support capability development, innovation readiness, and sustainable growth in the halal industry.