Entrepreneurial Leadership, Dynamic Capabilities, Employee Creativity, and Knowledge Sharing as Drivers of SME Performance: The Mediating Role of Innovation Capability in Indonesian Pesantren-Based SMEs

Abstract

Small and medium enterprises (SMEs) embedded in Indonesian pesantren (Islamic boarding schools) are increasingly expected to deliver inclusive growth while navigating technological and market turbulence. Building on contingency, resource-based, and dynamic capability perspectives, this study examines how entrepreneurial leadership, dynamic capabilities, employee creativity, and knowledge sharing jointly shape SME performance, with innovation capability as a mediator. We survey SME managers participating in East Java’s One Pesantren One Product (OPOP) program and analyze the data using partial least squares structural equation modeling (PLS-SEM). Conceptually, we argue that entrepreneurial leadership provides vision, risk taking, and opportunity framing that mobilize innovation processes; dynamic capabilities enable sensing, seizing, and transforming to reconfigure resources; employee creativity supplies novel, workable ideas; and knowledge sharing diffuses know-how across actors, together building the firm’s innovation capability and, in turn, improving performance. This work contributes by integrating people-, process-, and capability-level antecedents into a single mediated model in a faith-based SME setting that is under-studied yet socio-economically important. Practically, it highlights complementary levers—leadership development, capability building, creativity climates, and systematic knowledge practices—to raise innovation capability and performance among pesantren SMEs. Policy implications for OPOP programming include targeted capacity-building around data-driven sensing, collaborative learning, and product/process renewal to sustain competitiveness in constrained environments.