Environmental strategy and competitive advantage: the role of small- and medium-sized enterprises’ dynamic capabilities

Drawing on the resource-based theory and institutional theory, we develop a framework to explain the processes by which the environmental strategy of small- and medium-sized enterprises (SMEs) contributes to their competitive advantage. We test our assumption using data collected from 214 UK-based SMEs in the technology sector. We find that the effects of environmental strategy can lead to the development of their marketing competence, as well as research and development (R&D) competence, which ultimately contributes to superior financial performance. We also find that a reciprocal causal relationship exists between SMEs’ marketing and R&D competences. Combined, we reveal that the presence of a serial multiple mediation relationship between SMEs’ environmental strategy and financial performance mediates through marketing competence and then R&D competence, or vice versa. Our study offers important academic and managerial implications, and also points out future research directions.