Abstract:
Due to global development agendas pushing for more climate-responsive and inclusive approaches and global markets shifting toward the integration of sustainable practices, sustainability is not only ethical but also a competitive necessity. Theoretically, the relationship between sustainability and innovation is well-supported by Porter’s Hypothesis, Resource-Based View, and Dynamic Capabilities Theory. Yet empirical evidence from developing countries remains limited. This study addresses that gap by examining whether the integration of sustainability practices affects firm-level innovation. 2023 firm-level data from the World Bank Enterprise Survey (WBES) in Nepal, focusing on 211 manufacturing firms, is used. Innovation is measured through product and process innovations. Nepal is selected as a proxy to represent the broader developing country context, including countries like Sri Lanka. Descriptive analysis indicated uneven adoption of environmental, social, and economic sustainability practices. Larger firms are more engaged, while smaller firms have limitations with financial and institutional constraints. Descriptive analysis of innovation by firm size, age, and region revealed that many firms were still building capacity but had not yet converted this into new products or processes. Innovation was more common in larger, older, and centrally located firms, highlighting structural barriers like limited access to finance, skilled labor, and institutional support faced by smaller, younger, and peripheral firms. The study employs a logit model with firm size, age, and region as control variables.
Social sustainability indicators, female representation, and labor stability increased innovation probability by 12.1 and 17.7 percentage points, respectively, suggesting inclusive and adaptive labor structures stimulate innovation. Yet, environmental and economic sustainability did not show a significant relationship, suggesting sustainability is still treated as compliance rather than strategy in developing country manufacturing firms. A key limitation is the use of cross-sectional data and the exclusion of some relevant variables due to missing values. Findings offer valuable insights for similar economies like Sri Lanka, where aligning sustainability with firm innovation processes is essential. As policy recommendations, integrating industrial and environmental policies to align firm incentives with innovation goals, strengthening SME capacity through improved access to finance, technology, and global networks, and promoting inclusive labor structures, like gender- diverse leadership and workforce stability.
