How Do Startups Drive Innovations Towards Sustainability?

Startups face significant challenges in balancing survival with sustainability, as approximately 90% of them fail. Sustainability is often perceived as a short-term cost, yet turbulent business environments—driven by climate change, environmental regulations, and evolving social expectations—are compelling startups to align their innovations with Environmental, Social, and Governance (ESG) principles. These efforts aim to attract investors, customers, and other stakeholders. Despite resource constraints and the liabilities of smallness and newness, understanding how startups leverage innovation to achieve sustainability performance is of both theoretical and practical importance, particularly within the framework of triple bottom line theory. This study empirically examines the roles of absorptive capacity, appropriability, and openness in mediating and moderating the relationship between innovation activities and sustainability performance in startups. Using data from the Korean Innovation Survey 2018—a structured tool aligned with global standards for tracking innovation activities—we analyze 278 young manufacturing firms. Regression analyses reveal that product innovation and organizational innovation are significantly associated with sustainability performance. Furthermore, absorptive capacity mediates the relationship between these types of innovation and sustainability performance. To explore the contingencies influencing these relationships, we test appropriability (measured by protection mechanisms) and openness (quantified by external partnerships). Moderated mediation analysis indicates that openness strengthens the direct relationship between product innovation and sustainability performance up to a threshold but weakens it beyond this point. Organizational innovation’s impact on sustainability performance is fully mediated by absorptive capacity, while appropriability moderates this mediation by enhancing absorptive capacity’s effectiveness when limited protection mechanisms are used. These findings contribute to sustainability research by highlighting that startups’ sustainability efforts are driven by innovation activities mediated by absorptive capacity and contingent upon specific factors such as appropriability and openness. The study confirms the paradox of openness in startup contexts pursuing triple bottom line objectives. Practically, this research provides actionable insights for corporate leaders and policymakers on fostering absorptive capacity through external knowledge acquisition while carefully managing appropriability mechanisms and collaboration strategies to enhance sustainability outcomes.