Driving green innovation in SMEs: The mediating role of digital green supply chains and complementary capabilities

Small and medium-sized enterprises (SMEs) are increasingly recognized as key contributors to the European Union's twin digital and green transitions, as their engagement in innovation, technological adoption, and resource-efficient practices can support progress toward the 2050 net-zero emissions target. However, prior studies have largely examined technological adoption and internal firm resources in isolation, often overlooking the transmission mechanisms through which digital innovation translates into green innovation. To address this gap, this study develops an integrated framework that combines the Technological-Organization-Environment-Human (TOEH) perspective, the Resource-Based View (RBV), and institutional theory to examine how digital innovation contributes to green innovation performance. Specifically, internal innovation capability is proxied by research and development (R&D) intensity, along with digital green supply chain (DGSC) integration and digital institutional quality (DIQ), as key transition mechanisms and conditional factors. Using a balanced panel dataset of 800 SMEs across 27 EU countries from 2003 to 2023, the study employs advanced static (AMG, CCEMG and DK) and dynamic (Sys-GMM and AAH) panel estimators to address cross-sectional dependence, potential endogeneity, and slope heterogeneity. Panel threshold regression is further applied to capture regime-specific nonlinear effects across varying levels of R&D intensity, DIQ, and DGSC cooperation, while mediation analysis is conducted to identify the mechanisms through which digital innovation influences green innovation via DGSC. Results from the system generalize the method of moments (Sys-GMM) and Augmented Anderson-Hsiao (AAH) estimators indicate that digital innovation exhibits a positive and statistically significant effect on green innovation performance. Threshold estimates indicate that the effect of digital innovation on green innovation performance is markedly stronger at higher levels of R&D intensity, DIQ, and DGSC. Mediation analysis further indicates that DGSC serves as a key transmission channel through which digital innovation contributes to green innovation performance. The effect of digital innovation is significantly strengthened by higher R&D intensity and digital institutional quality, showing the complementary interaction between firm capabilities and institutional governance. Firm age and size are positively associated with green innovation performance, whereas financial leverage is negatively associated with it. This study contributes to the literature by integrating SMEs' internal capability (R&D) and external factors (DIQ and DGCS) within a unified theoretical and empirical framework, and by identifying DGCS as a key transition mechanism through which DII translates into GII. These findings offer important policy implications, suggesting that digital transformation alone may be insufficient to enhance green innovation performance and highlighting the need for complementary investments in R&D, institutional quality, and digital supply chain integration in aligning firm-level strategies with the European Green Deal (2019) and Sustainable Development Goals (SDGs) 9 and 13.