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Open Innovation Strategies and SMEs’ Performance: The Mediating Role of Eco-Innovation in Environmental Uncertainty

Open Innovation Strategies and SMEs’ Performance: The Mediating Role of Eco-Innovation in... The current increasing topic around empirical study is environmental issues. Several previous studies examined how open innovation strategies could affect eco-innovation amid research debates about environmental conser- vation in corporate innovation. This study aims to prove the effect of open innovation strategies on creating eco- innovation to affect SMEs’ sustainable competitive advantage and performance empirically. This study developed and empirically tested the mediating role of eco-innovation on sustainable competitive advantage and perfor- mance. A quantitative approach in testing the empirical research model was implemented. A total of 223 SMEs in the batik sector in Yogyakarta were examined. We used purposive sampling approach to select the research sam- ple. The criteria used in the sampling is SMEs batik which has been operating for three years or more. The results revealed that open innovation strategies significantly positively affected eco-innovation while eco-innovation sig- nificantly positively affected competitive advantage and SMEs performance. Environmental uncertainty strength- ened the eco-innovation relationship on competitive advantage, but not on the SMEs’ performance. Key words: open innovation strategies, eco-innovation, competitive advantage, and SMEs’ performance INTRODUCTION strengthen strategies through open innovation patterns Small and medium-sized enterprises (SMEs) contributes [8] to improve performance. to economic development and increasing environmental An open innovation strategy is vital for SMEs in increasing sustainability, so they need proper management through their competitive advantage [9]. Open innovations out- increasing competitiveness and superior performance side and inside the company could boost growth and prof- creation. However, SMEs also have limitations on market itability. In addition, companies with sufficient absorption access [1], human resources, relational capital [2], and a capacity can achieve financial sustainability through open low ability to innovate and create value-added products innovation. Ratten [10] found that environmental ad- through business networks [3, 4]. It takes a solid capability vances and regional wine clusters helped wine enterprises and strategy for SMEs to achieve a sustainable competi- succeed better internationally. Furthermore, due of the tive advantage amidst the current limitations and uncer- wine industry's importance in the global economy, envi- tainties in the environment. ronmental issues are essential. In the last decade, SMEs have competed to create envi- The industrial sector and SMEs are growing faster and ronmentally friendly products. Global warming has influ- concerned about consumer behavior and accompanying enced the awareness of SMEs actors to care about envi- consumption patterns and environmental sustainability ronmental conservation and change [5]. SMEs survive and and production systems that are not environmentally respond to changing customer tastes during environmen- friendly. Several researchers have emphasized production tal uncertainty by creating environmentally friendly prod- processes oriented towards environmental awareness by ucts [6]. They can also make eco-innovation [7] and utilizing environmentally friendly technologies [11]. Sev- © 2022 Author(s). This is an open access article licensed under the Creative Commons BY 4.0 (https://creativecommons.org/licenses/by/4.0/) NURYAKIN et al – Open Innovation Strategies and SMEs’ Performance… 215 eral studies have seen that SMEs’ sustainability works ef- Chesbrough [25] explained that the critical factors to en- fectively through eco-innovation [7], and policymakers courage open innovation include increased technology encourage companies to practice eco-innovation [12, 13]. costs. The eco-innovation issue also affects SMEs’ strategy Information from external organizations will accelerate the choices in maintaining business sustainability [14]. company’s internal innovation [26]. Yun et al. [27] ex- Currently, customers also have an awareness of green man- plained that corporate culture as a driver of open innova- agement practices developed by SMEs through their con- tion activities is essential. Having a solid network [28] and cern for preserving business, the natural environment, and technology capability [29, 30, 31] also enhances open inno- start modifying the behavior of company stakeholders to vation in the company. Companies that focus on open in- address social, ethical, and environmental sustainability is- novation will impact improving the company’s perfor- sues [15, 16]. Therefore, eco-innovation has emerged in de- mance [32, 33, 34]. veloping SMEs strategies to achieve sustainability and mar- Eco-Innovation ket growth [17]. Juarez and Vergara [18] emphasized eco- Eco-innovation combines ecological, economic, and social innovation as part of the SMEs’ strategy and the oppor- aspects in the company’s innovation activities [13]. The tunity to achieve resilience in the future. Meanwhile, other company seeks to integrate eco-innovation into its busi- researchers explained that many companies need to carry ness strategy [35]. This concept used in various industries out open innovation, technological innovation, and absorp- includes automotive [36, 37], wine [10], and various other tion [19]. industries [38]. The ability of a company to apply or em- This research contributes two new findings to the previous brace new products, processes or ideas, is referred to as studies. First, the findings have enriched the scientific un- eco-innovation capability, to simultaneously maximize en- derstanding of open innovation strategies on creating eco- vironmental, positive economic outcomes [39], contrib- innovation to affect sustainable performance and compet- uting to environmental degradation and sustainability goals itive advantage in the SMEs sphere. Second, this study de- [40]. veloped and examined the critical mediating eco-innova- Eco-innovation is same as environmental innovation and tion’s role on sustainable performance and competitive ad- green innovation in achieving competitive advantage [10]. vantage in an uncertain environment. The concept was Companies need to use a more holistic approach in com- tested on SMEs batik in Bantul, Yogyakarta, Indonesia. prehending social change and the dynamics of an ever- Yogyakarta is a center of batik made from natural ingredi- changing environment [41]. Ghisetti et al. [42] revealed ents. The batik industry in Yogyakarta has experienced that environmentally friendly open innovation becomes an rapid growth. After the reformation era, batik recognition essential factor in improving company performance. by UNESCO began to grow in Indonesia. Indonesian batik Research interest that focuses on environmental innova- export value also increased. In 2008, these products export tion in the industry in recent years has increased, empha- value reached USD 32 million until 2012 to USD 278 million. sizing environmental sustainability practices [43]. The main In 2013, Indonesia’s batik exports grew by 18.49%. Data focus of environmental issues is to reduce the negative role from the Ministry of Industry showed that batik SMEs from of human activities with environmental destruction and 2011 to 2015 grew 14.7% from 41,623 units to 47,755 units. business sustainability. Eco-innovation focuses on creating In 2011-2015. Workers in this sector also increased by new products or improving existing ones, and promoting 14.7%, from 173,829 to 199,444. Batik consumers from environmental improvements in logistics processes [44]. abroad have also increased, seen from batik exports, rising Eco-innovation impacts sustainability development [45] 14.7% from 2011 valued at Rp. 43.96 trillion to Rp. 50.44 and sustainable competitive advantage [46]. trillion in 2015 [20]. Environmental Uncertainty LITERATUR REVIEW AND HYPHOTESES Companies must develop the ability to adapt [47] and de- Open Innovation strategy velop strategies to cope with environmental uncertainty Open innovation is essential for the company’s develop- [48]. The company’s external environment is full of uncer- ment. It is an approach where knowledge sources and ex- tainty. This environmental uncertainty makes it difficult for changes tend to be cross-organizational [21]. Open innova- companies to predict [49] and anticipate the future [50]. tion can develop through inbound and outbound Environmental uncertainty refers to conditions of uncer- knowledge in achieving organizational competitiveness. tainty, the absence of unexpected patterns and changes Organizations view their growing importance in building in- from the environment around the company and related to novation strategies with the dynamics and complexity of changes in technology, consumer preferences, and actions the availability and transfer of organizational knowledge taken by competitors [51]. Zhang et al. [52] explained that and resources to achieve maximum efficiency and sustain- competition, product/process changes, and changes in cus- able performance [9, 22]. Huang et al. [23] explained that tomer needs are the primary sources of environmental un- open innovation will achieve business growth by optimizing certainty. Environmental uncertainty is a dynamic and un- business ideas sourced from external factors. Organizations predictable condition where changes occur rapidly in the need to consider open innovation practices such as posi- dynamics of business competition [53]. tioning, product life cycle, technology adoption, and added value through introducing new products [24]. Meanwhile, 216 Management Systems in Production Engineering 2022, Volume 30, Issue 3 An uncertain environment drives organizations to develop strong influence between eco-innovation on competitive- operational capacity and innovation with information tech- ness. nology support [54]. Wang et al. [55] mentioned that in un- Ratten [62] investigated the significance of eco-innovation certain environmental conditions where there is potential in the Barossa Valley wine region's competitiveness, which and ambiguity, and high risk, companies need to optimize is one of Australia's best wine areas. The results found that strategies and achievements through collaboration. While environmental innovation and wine clusters affected per- Atuahene-Gima et al. [53] explained that environmental formance and increased competitiveness in the global uncertainty makes companies reach completely uncertain economy. Companies must maintain a competitive ad- and unpredictable conditions, resulting in changes in cus- vantage [63]. Companies must strengthen their product tomer preferences and needs, production technology in lines to survive in a competitive market by creating green the dynamics of business competition. Companies need to innovations in a rapid and unavoidable change [43]. respond to conditions in an uncertain environment. Nandakumar et al. [64] explained that companies could achieve competitive advantage through adaptation to the Open Innovation Strategy Impacts on Eco-Innovation environment and competitive dynamics. Companies can Srisathan et al. [56] explained that growing companies con- adapt to environmental conditions, are accessible in oper- stantly strive to develop open innovation, design sustaina- ational cost efficiency, and create excellence. At the same bility, and create a more innovative corporate culture. The time, Jamsa et al. [4] stated that the ability of SMEs to cre- company needs to be open to the surrounding environ- ate environmentally friendly products is also impacted by ment. Open innovation always absorbs information and their networks and internal capacities. knowledge external to the company and increases innova- Therefore, the researchers proposed the following hypoth- tion [26]. Since a company's external examination is fre- esist: quently focused on customers and competitors, growth, H2: Eco-innovation has a positive effect on the sustainable profit, and other indicators of success can be influenced by competitive advantage of SMEs. factors outside the industry [57]. Companies allow access to external capabilities to develop Eco-Innovation Impacts on SMEs Performance their technology [58]. One factor is the demand for busi- Eco-innovation changes rapidly in environmental condi- ness sustainability through an environmental approach. tions. Several studies are currently still providing debate in Companies should strive to absorb all information and the literature in defining eco-innovation with an analysis of knowledge so that their companies can carry out eco-inno- internal factors that allow companies to increase competi- vation. The company thinks that creating a better world is tiveness when investing in eco-innovation [65]. Further- vital and will impact innovation in greener products [59]. more, when a corporation invests in eco-innovation, the Therefore, open innovation will increase eco-innovation. study discovered a positive relationship between financial The open innovation in this study was around the scope of performance and resource investment. SMEs. Small and medium enterprises (SMEs) in rapidly Cheng et al. [66] examined eco-innovation impacts on the changing environmental conditions can adapt quickly to business performance of various innovations linked to en- changes through collaboration with external resources vironmental associations in Taiwan. The results showed a [19]. SMEs can also readily explore new knowledge and strong impact of eco-innovation on business performance. promptly achieve innovation through organizational learn- In addition, environmentally friendly process innovation ing processes and explore innovation creation. Another and environmentally friendly product innovation mediate study also found that the adaptation carried out by SMEs the impacts of eco-innovation on business performance. was through their strategic role in developing eco-innova- Furthermore, eco-innovation consists of external and inter- tion through an open innovation strategy [41]. nal eco-innovation. External eco-innovation includes the Therefore, the researchers proposed the following hypoth- company’s external activities on green and sustainable ac- esis. tivities, such as suppliers, regulators, and market demand. H1: Open innovation strategy can increase eco-innovation Meanwhile, internal eco-innovation relates to practices to positively and significantly. manage the eco-innovation process effectively and effi- ciently in organizations, including organizational manage- Eco-Innovation Impacts on Companies Excellence ment. In most economies around the world, small and medium- Dong et al. [67] revealed that various eco-innovation ap- sized businesses (SMEs) play an essential role [18]. SMEs proaches significantly influenced performance and com- seek technology-based competitiveness and increase their petitiveness. However, this effect depends on company capabilities in innovation activities to survive. Open innova- size and has a different and positive impact on environmen- tion is their preferred strategy in achieving organizational tal performance and competitiveness. In addition, the pol- goals. icy of creating environmental regulations causes a signifi- Eco-innovation refers to innovations that reduce pollution cant effect on performance and competitiveness. from the company’s operational activities on the environ- Studi Alos-Simo et al. [68] tested 2094 companies and ana- ment and the company’s potential to utilize environmen- lyzed the company’s earnings when implementing environ- tally friendly raw materials [60]. Using a sample of 54 Italian mental innovations. The results revealed that eco-innova- industrial clusters, Daddi et al. [61] investigated the impact tion positively affected income in all analyzed sectors and of eco-innovation on competitiveness. The results found a confirms the technological differences among enterprise NURYAKIN et al – Open Innovation Strategies and SMEs’ Performance… 217 sectors. Eco-innovation also had a positive and significant METHODOLOGY effect on business volume. Therefore, the researchers pro- Sample design and data collection posed the following hypothesis. The sample of this research is batik SMEs owners in Yogya- H3: Eco-innovation has a positive effect on SMEs’ perfor- karta, Indonesia. Batik SME uses natural resources in its mance. production and is developing a production system that is environmentally sustainable. A quantitative approach em- Environmental Uncertainty as Moderator pirically tested the open innovation strategy’s effect on Eco-innovation can improve performance [30, 32, 69] and eco-innovation, sustainable competitive advantage, and competitiveness [10]. It allows companies to assess their SMEs’ performance. This study also studied the mediating environmental performance and continually improve it role of environmental uncertainty between eco-innovation [70]. However, the role of environmental uncertainty is crit- and sustainable competitive advantage and SMEs’ perfor- ical to increasing the impact of eco-innovation and perfor- mance. In contrast, the sample in this study was taken by mance. Several studies explained that environmental un- purposive sampling by considering the approach to the pro- certainty moderated various relationships/influences be- duction process of SMEs Batik and environmentally friendly tween variables [48, 71, 72]. materials in the process. Many companies’ success depends on how well they re- To achieve the research objectives, data were collected spond to changes in the external macro-environment, e.g., from SMEs batik owners. We used purposive sampling ap- macro social, economic, technological, or political/regula- proach to select the research sample. The criteria used in tory [73]. Environmental uncertainty in environmental the sampling is SMEs batik which has been operating for management is associated with inadequate expert three years or more. Sampling was based on the distribu- knowledge of green technologies and an inability to make tion of batik SME centers in the Yogyakarta area. This study accurate predictions about green market demand [21]. The was distributed to 223 batik SME owners in Yogyakarta, In- more companies can respond to environmental uncer- donesia. However, only 202 respondents completed and tainty; the more impact eco-innovation will increase its im- filled out the research instrument. Meanwhile, the unit of pact on company performance and competitive advantage. analysis chosen was the owner or manager of batik SMEs. Tsai and Yang [74] investigated the role of the innovation The data collecting process was done by distributing ques- strategy developed by the company in promoting perfor- tionnaires directly to respondents. After collecting the data, mance improvement in a dynamic environment. Further- then the researchers continued testing the research hy- more, the more vibrant the organizational environment is, pothesis. the more innovation will impact growth. Conversely, low in- novation performance will make the company’s condition Development construct and measurement stagnant. Several other studies have found a strong influ- As a first step for analyzing the reliability and validity of the ence between performance achieved in conditions of an measurement scale used in this study, the measurement uncertain business environment [49, 75, 76]. scale of the four constructs was determined by conducting The dynamics of a changing environment and technological a literature review on previous studies. It was prepared by turbulence impact the adaptability of SMEs in responding referring to earlier studies with inbound and outbound in- to change [77]. An intense competition requires increasing novation [79]. Eco-innovation with indicators on product capabilities during an uncertain environment that will influ- eco-innovation and process eco-innovation referred to ence the innovation and growth of small-scale companies [36]. Sustainable competitive advantage referred to [80], [78]. SMEs need to improve their innovation and competi- and SMEs performance referred to [81]. Environmental un- tiveness in the turbulent and dynamic competitive environ- certainty referred to previous studies with environmental ment. In contrast, Tsai and Yang [74] found that innovation activities indicators to reduce cost and lead time and im- would be easy to achieve in high market turbulence and in- prove product quality and reputation [82]. The construct of tense competition. Therefore, the researchers proposed open innovation, eco-innovation, sustainable competitive the following hypotheses. advantage, SMEs’ performance, and environmental uncer- H4: Environmental uncertainly can moderate the impact of tainty was measured by four items. A five-point Likert-type eco-innovation on competitive advantage. scale was used to establish a balance between respond- H5: Environmental uncertainly can moderate the impact of ents' constructs and analysis accuracy. In this study we use eco-innovation on performance. a five-point Likert-type scale researcher. The questionnaire Based on previous research studies and literature reviews, was designed to measure the constructs using 1-5 Likert- an empirical research model is built as follows: type scale on the respondents’ answers [83]. Score 1 repre- sented the most Likert-type scale very disagreed answer and Score 5 represented the most very agre answer. Validity and Reliability Testing This study measured the validity with Confirmatory Factor Analysis (CFA) seen from the loading factor value. Reliability testing was conducted by looking at Cronbach’s Alpha value Fig. 1 Empirical research Source: [8, 9, 78]. 218 Management Systems in Production Engineering 2022, Volume 30, Issue 3 with a standard calculation result of a value above 0.70. The model suitability test had good results, as shown in Figure results of each indicator in each construct are explained in 2. Table 1. Table 2 Model fit test Table 1 x /df GFI AGFI NFI CFI RMSEA Validity and Reliability Measure of Variable Structure model 1.578 0.896 0.860 0.899 0.960 0.058 Recommended value < 3 > 0.9 > 0.8 > 0.9 > 0.9 < 0.1 Figure 2 and Table 3 reveal that all paths estimated in this study are significant. The test on H1 shows the impact of open innovation strat- OIS1 0.828 egy on eco-innovation (β = 0.542, p = 0.000 < 0.05). H1 re- OIS2 0.764 Open innovation 0.861 0.907 0.561 veals that the open innovation strategy has a significant OIS3 0.817 positive effect on eco-innovation. Thus, H1 is supported. OIS4 0.709 ECI1 0.743 ECI2 0.740 Eco-innovation 0.837 0.894 0.579 ECI3 0.700 ECI4 0.721 SCA1 0.821 Sustainable competitive SCA2 0.763 0.852 0.905 0.565 advantage SCA3 0.771 SCA4 0.723 SMP1 0.785 SMP2 0.789 SMEs performance 0.876 0.910 0.556 SMP3 0.809 SMP4 0.806 Fig. 2 The results of the full model ENU1 0.764 Environmental ENU1 0.687 0.851 0.888 0.586 The test on H2 shows a significant positive effect between uncertainty ENU1 0.704 ENU1 0.616 eco-innovation on competitive advantage (β = 0.369, p < 0.05). Thus, H2 is supported. The test on H3 shows a signif- RESULT icant positive effect of eco-innovation on SMEs perfor- Hypothesis testing implemented the AMOS program as an mance (β = 0.386, p < 0.05). Thus, H3 was supported. Test- empirical equation model test. The theoretical model’s va- ing on the moderating effect of environmental uncertainty lidity on the constructs of open innovation strategy, eco-in- on the relationship between eco-innovation and competi- novation, sustainable competitive advantage, SMEs’ per- tive advantage shows the value of (β = 0.345, p = 0.002 > formance, and environmental uncertainty was through 0.05). Thus, H4 is supported. Meanwhile, the moderating tests by comparing the results obtained between the theo- role of environmental uncertainty on the relationship be- retical model and the measurement model. tween eco-innovation and SMEs’ performance shows the In this study, the insignificant results obtained allowed an value of (β = 0.027, p = 0.713 > 0.05). Thus, H5 is rejected. explanation of the observed relationship in the latent con- Table 3 shows the results of testing each research hypoth- struct [84]. Table 2 presents the results obtained from esis from H1 to H5. SEM testing on the four constructs. While the model suita- Meanwhile, the interaction moderating test between envi- bility test used several calculated criteria, including good- ronmental uncertainty on the relationship between eco-in- ness-of-fit index (GFI), x2/df, normed fit index (NFI), ad- novation on competitive advantage and SMEs’ perfor- justed goodness-of-fit index (AGFI), comparative fit index mance are presented in Figure 3. (CFI), and the root mean square of approximation (RMSEA). The overall size of the SEM in this study revealed that the Table 3 The results of hypothesis testing Hypothesis Structural relationship β p-value Supported H1 Open innovation strategy eco-innovation 0.542 0.000 H1 is supported H2 eco-innovation sustainable competitive 0.369 0.000 H2 is supported advantage 0.525 0.000 H3 eco-innovation SMEs performance 0.386 0.000 H3 is supported H4 Interaction moderating 1 0.345 0.002 H4 is supported H5 Interaction moderating 2 0.027 0.713 H5 is rejected Construct Indicator Factorial Loading Cronbach’ s Alpha Composite Reliability AVE NURYAKIN et al – Open Innovation Strategies and SMEs’ Performance… 219 Cheng et al. [66] supported the conclusion that eco-innova- tion affected performance. Dong et al. [67] also found that eco-innovation encourages performance and competitive- ness. This study discovered that environmental uncertainty strengthened the relationship between competitive ad- vantage and eco-innovation. Meidute-Kavaliauskiene et al. Fig. 3 Moderation effect testing [21] had similar findings that the more companies respond COCLUSIONS to environmental uncertainty, the more eco-innovation will The results of empirical testing found that the first to fourth increase their competitive advantage and company perfor- hypotheses tested were positively significant. At the same mance. Other studies also supported the conclusion that in- time, the fifth hypothesis testing showed insignificant re- novation strategies encourage improved performance in a sults. The results indicate that empirically the previous dynamic environment [74]. studies in testing this construct did not all support the find- Managerial Implication and Limitation ings. This study proved the purpose of research on eco-innova- The results of this study were tested empirically research tion mediation between open innovation strategy on SMEs’ with batik SMEs scope, where this industry has developed performance and competitive advantage. The researchers an eco-innovation strategy in the environmental uncer- also examined the moderating effect of environmental un- tainty condition. This study is specifically limited to the certainty on the relationship between eco-innovation and scope of batik SMEs. Moreover, the competition in the SMEs’ competitive advantage and performance empiri- scope of SMEs is currently very tight amid environmental cally. uncertainty. The sample in this study was very limited to The open innovation strategies concept is crucial for SMEs batik SMEs. in developing innovation by adopting ideas from external The study is an empirical testing conducted scope of re- companies. Therefore, this study also offers a solution to search sample of SMEs business in an effort to investigate “eco-innovation” and emphasizes that open innovation and measures of open innovation strategy construct and strategy and eco-innovation are essential keys to increasing eco-innovation and examine the effect on competitive ad- SMEs’ competitive advantage and performance amidst en- vantage and performance of SMEs. The empirical research vironmental uncertainty and preservation issues. model are developed through of research designs and This study conducted an in-depth review of the previous lit- measurement scales that are designed during the data col- erature on open innovation strategy and eco-innovation lection process and research instruments through measur- and their impact on competitive advantage and perfor- ing validity and reliability. The final instrument listed in this mance. study can be seen in Table 2. Further testing was carried out This research observed the batik SMEs environment in Yog- to measure the validity of the instrument through construct yakarta, Indonesia, and had limited samples with different reliability testing which was developed in the research in- characteristics in developing environmentally friendly strument so that it could be used in future research. products. Educational background was still low according The results of this study indicate that open innovation strat- to the result. Thus, some questionnaires were not complete egies has a positive, direct, and statistically significant effect in the distribution process. This study recommends further on eco-innovation. This study also explain that eco-innova- research considering the limitations of the research sample tion has a positive, direct, and statistically significant effect also to take samples from other locations to represent good on competitive advantage and SMEs results. 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Ferrara, "The environmental conditions of Italian cities: A spatial analysis of the smartness rd components”, in 23 International Conference on Living and Walking in Cities, LWC 2017, 2018, pp. 327-340. Nuryakin (corresponding author) Universitas Muhammadiyah Yogyakarta Brawijaya street, Tamantirto Kasihan Bantul 55183 Yogyakarta, Indonesia e-mail: nuryakin@umy.ac.id Adhianty Nurjanah Universitas Muhammadiyah Yogyakarta Brawijaya street, Tamantirto Kasihan Bantul 55183 Yogyakarta, Indonesia e-mail: adhianty@umy.ac.id Elia Ardyan Sekolah Tinggi Ilmu Ekonomi Ciputra Indonesia e-mail: elia.ardyan@ciputra.ac.id http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Systems in Production Engineering de Gruyter

Open Innovation Strategies and SMEs’ Performance: The Mediating Role of Eco-Innovation in Environmental Uncertainty

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de Gruyter
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© 2022 Nuryakin et al., published by Sciendo
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2450-5781
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10.2478/mspe-2022-0027
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Abstract

The current increasing topic around empirical study is environmental issues. Several previous studies examined how open innovation strategies could affect eco-innovation amid research debates about environmental conser- vation in corporate innovation. This study aims to prove the effect of open innovation strategies on creating eco- innovation to affect SMEs’ sustainable competitive advantage and performance empirically. This study developed and empirically tested the mediating role of eco-innovation on sustainable competitive advantage and perfor- mance. A quantitative approach in testing the empirical research model was implemented. A total of 223 SMEs in the batik sector in Yogyakarta were examined. We used purposive sampling approach to select the research sam- ple. The criteria used in the sampling is SMEs batik which has been operating for three years or more. The results revealed that open innovation strategies significantly positively affected eco-innovation while eco-innovation sig- nificantly positively affected competitive advantage and SMEs performance. Environmental uncertainty strength- ened the eco-innovation relationship on competitive advantage, but not on the SMEs’ performance. Key words: open innovation strategies, eco-innovation, competitive advantage, and SMEs’ performance INTRODUCTION strengthen strategies through open innovation patterns Small and medium-sized enterprises (SMEs) contributes [8] to improve performance. to economic development and increasing environmental An open innovation strategy is vital for SMEs in increasing sustainability, so they need proper management through their competitive advantage [9]. Open innovations out- increasing competitiveness and superior performance side and inside the company could boost growth and prof- creation. However, SMEs also have limitations on market itability. In addition, companies with sufficient absorption access [1], human resources, relational capital [2], and a capacity can achieve financial sustainability through open low ability to innovate and create value-added products innovation. Ratten [10] found that environmental ad- through business networks [3, 4]. It takes a solid capability vances and regional wine clusters helped wine enterprises and strategy for SMEs to achieve a sustainable competi- succeed better internationally. Furthermore, due of the tive advantage amidst the current limitations and uncer- wine industry's importance in the global economy, envi- tainties in the environment. ronmental issues are essential. In the last decade, SMEs have competed to create envi- The industrial sector and SMEs are growing faster and ronmentally friendly products. Global warming has influ- concerned about consumer behavior and accompanying enced the awareness of SMEs actors to care about envi- consumption patterns and environmental sustainability ronmental conservation and change [5]. SMEs survive and and production systems that are not environmentally respond to changing customer tastes during environmen- friendly. Several researchers have emphasized production tal uncertainty by creating environmentally friendly prod- processes oriented towards environmental awareness by ucts [6]. They can also make eco-innovation [7] and utilizing environmentally friendly technologies [11]. Sev- © 2022 Author(s). This is an open access article licensed under the Creative Commons BY 4.0 (https://creativecommons.org/licenses/by/4.0/) NURYAKIN et al – Open Innovation Strategies and SMEs’ Performance… 215 eral studies have seen that SMEs’ sustainability works ef- Chesbrough [25] explained that the critical factors to en- fectively through eco-innovation [7], and policymakers courage open innovation include increased technology encourage companies to practice eco-innovation [12, 13]. costs. The eco-innovation issue also affects SMEs’ strategy Information from external organizations will accelerate the choices in maintaining business sustainability [14]. company’s internal innovation [26]. Yun et al. [27] ex- Currently, customers also have an awareness of green man- plained that corporate culture as a driver of open innova- agement practices developed by SMEs through their con- tion activities is essential. Having a solid network [28] and cern for preserving business, the natural environment, and technology capability [29, 30, 31] also enhances open inno- start modifying the behavior of company stakeholders to vation in the company. Companies that focus on open in- address social, ethical, and environmental sustainability is- novation will impact improving the company’s perfor- sues [15, 16]. Therefore, eco-innovation has emerged in de- mance [32, 33, 34]. veloping SMEs strategies to achieve sustainability and mar- Eco-Innovation ket growth [17]. Juarez and Vergara [18] emphasized eco- Eco-innovation combines ecological, economic, and social innovation as part of the SMEs’ strategy and the oppor- aspects in the company’s innovation activities [13]. The tunity to achieve resilience in the future. Meanwhile, other company seeks to integrate eco-innovation into its busi- researchers explained that many companies need to carry ness strategy [35]. This concept used in various industries out open innovation, technological innovation, and absorp- includes automotive [36, 37], wine [10], and various other tion [19]. industries [38]. The ability of a company to apply or em- This research contributes two new findings to the previous brace new products, processes or ideas, is referred to as studies. First, the findings have enriched the scientific un- eco-innovation capability, to simultaneously maximize en- derstanding of open innovation strategies on creating eco- vironmental, positive economic outcomes [39], contrib- innovation to affect sustainable performance and compet- uting to environmental degradation and sustainability goals itive advantage in the SMEs sphere. Second, this study de- [40]. veloped and examined the critical mediating eco-innova- Eco-innovation is same as environmental innovation and tion’s role on sustainable performance and competitive ad- green innovation in achieving competitive advantage [10]. vantage in an uncertain environment. The concept was Companies need to use a more holistic approach in com- tested on SMEs batik in Bantul, Yogyakarta, Indonesia. prehending social change and the dynamics of an ever- Yogyakarta is a center of batik made from natural ingredi- changing environment [41]. Ghisetti et al. [42] revealed ents. The batik industry in Yogyakarta has experienced that environmentally friendly open innovation becomes an rapid growth. After the reformation era, batik recognition essential factor in improving company performance. by UNESCO began to grow in Indonesia. Indonesian batik Research interest that focuses on environmental innova- export value also increased. In 2008, these products export tion in the industry in recent years has increased, empha- value reached USD 32 million until 2012 to USD 278 million. sizing environmental sustainability practices [43]. The main In 2013, Indonesia’s batik exports grew by 18.49%. Data focus of environmental issues is to reduce the negative role from the Ministry of Industry showed that batik SMEs from of human activities with environmental destruction and 2011 to 2015 grew 14.7% from 41,623 units to 47,755 units. business sustainability. Eco-innovation focuses on creating In 2011-2015. Workers in this sector also increased by new products or improving existing ones, and promoting 14.7%, from 173,829 to 199,444. Batik consumers from environmental improvements in logistics processes [44]. abroad have also increased, seen from batik exports, rising Eco-innovation impacts sustainability development [45] 14.7% from 2011 valued at Rp. 43.96 trillion to Rp. 50.44 and sustainable competitive advantage [46]. trillion in 2015 [20]. Environmental Uncertainty LITERATUR REVIEW AND HYPHOTESES Companies must develop the ability to adapt [47] and de- Open Innovation strategy velop strategies to cope with environmental uncertainty Open innovation is essential for the company’s develop- [48]. The company’s external environment is full of uncer- ment. It is an approach where knowledge sources and ex- tainty. This environmental uncertainty makes it difficult for changes tend to be cross-organizational [21]. Open innova- companies to predict [49] and anticipate the future [50]. tion can develop through inbound and outbound Environmental uncertainty refers to conditions of uncer- knowledge in achieving organizational competitiveness. tainty, the absence of unexpected patterns and changes Organizations view their growing importance in building in- from the environment around the company and related to novation strategies with the dynamics and complexity of changes in technology, consumer preferences, and actions the availability and transfer of organizational knowledge taken by competitors [51]. Zhang et al. [52] explained that and resources to achieve maximum efficiency and sustain- competition, product/process changes, and changes in cus- able performance [9, 22]. Huang et al. [23] explained that tomer needs are the primary sources of environmental un- open innovation will achieve business growth by optimizing certainty. Environmental uncertainty is a dynamic and un- business ideas sourced from external factors. Organizations predictable condition where changes occur rapidly in the need to consider open innovation practices such as posi- dynamics of business competition [53]. tioning, product life cycle, technology adoption, and added value through introducing new products [24]. Meanwhile, 216 Management Systems in Production Engineering 2022, Volume 30, Issue 3 An uncertain environment drives organizations to develop strong influence between eco-innovation on competitive- operational capacity and innovation with information tech- ness. nology support [54]. Wang et al. [55] mentioned that in un- Ratten [62] investigated the significance of eco-innovation certain environmental conditions where there is potential in the Barossa Valley wine region's competitiveness, which and ambiguity, and high risk, companies need to optimize is one of Australia's best wine areas. The results found that strategies and achievements through collaboration. While environmental innovation and wine clusters affected per- Atuahene-Gima et al. [53] explained that environmental formance and increased competitiveness in the global uncertainty makes companies reach completely uncertain economy. Companies must maintain a competitive ad- and unpredictable conditions, resulting in changes in cus- vantage [63]. Companies must strengthen their product tomer preferences and needs, production technology in lines to survive in a competitive market by creating green the dynamics of business competition. Companies need to innovations in a rapid and unavoidable change [43]. respond to conditions in an uncertain environment. Nandakumar et al. [64] explained that companies could achieve competitive advantage through adaptation to the Open Innovation Strategy Impacts on Eco-Innovation environment and competitive dynamics. Companies can Srisathan et al. [56] explained that growing companies con- adapt to environmental conditions, are accessible in oper- stantly strive to develop open innovation, design sustaina- ational cost efficiency, and create excellence. At the same bility, and create a more innovative corporate culture. The time, Jamsa et al. [4] stated that the ability of SMEs to cre- company needs to be open to the surrounding environ- ate environmentally friendly products is also impacted by ment. Open innovation always absorbs information and their networks and internal capacities. knowledge external to the company and increases innova- Therefore, the researchers proposed the following hypoth- tion [26]. Since a company's external examination is fre- esist: quently focused on customers and competitors, growth, H2: Eco-innovation has a positive effect on the sustainable profit, and other indicators of success can be influenced by competitive advantage of SMEs. factors outside the industry [57]. Companies allow access to external capabilities to develop Eco-Innovation Impacts on SMEs Performance their technology [58]. One factor is the demand for busi- Eco-innovation changes rapidly in environmental condi- ness sustainability through an environmental approach. tions. Several studies are currently still providing debate in Companies should strive to absorb all information and the literature in defining eco-innovation with an analysis of knowledge so that their companies can carry out eco-inno- internal factors that allow companies to increase competi- vation. The company thinks that creating a better world is tiveness when investing in eco-innovation [65]. Further- vital and will impact innovation in greener products [59]. more, when a corporation invests in eco-innovation, the Therefore, open innovation will increase eco-innovation. study discovered a positive relationship between financial The open innovation in this study was around the scope of performance and resource investment. SMEs. Small and medium enterprises (SMEs) in rapidly Cheng et al. [66] examined eco-innovation impacts on the changing environmental conditions can adapt quickly to business performance of various innovations linked to en- changes through collaboration with external resources vironmental associations in Taiwan. The results showed a [19]. SMEs can also readily explore new knowledge and strong impact of eco-innovation on business performance. promptly achieve innovation through organizational learn- In addition, environmentally friendly process innovation ing processes and explore innovation creation. Another and environmentally friendly product innovation mediate study also found that the adaptation carried out by SMEs the impacts of eco-innovation on business performance. was through their strategic role in developing eco-innova- Furthermore, eco-innovation consists of external and inter- tion through an open innovation strategy [41]. nal eco-innovation. External eco-innovation includes the Therefore, the researchers proposed the following hypoth- company’s external activities on green and sustainable ac- esis. tivities, such as suppliers, regulators, and market demand. H1: Open innovation strategy can increase eco-innovation Meanwhile, internal eco-innovation relates to practices to positively and significantly. manage the eco-innovation process effectively and effi- ciently in organizations, including organizational manage- Eco-Innovation Impacts on Companies Excellence ment. In most economies around the world, small and medium- Dong et al. [67] revealed that various eco-innovation ap- sized businesses (SMEs) play an essential role [18]. SMEs proaches significantly influenced performance and com- seek technology-based competitiveness and increase their petitiveness. However, this effect depends on company capabilities in innovation activities to survive. Open innova- size and has a different and positive impact on environmen- tion is their preferred strategy in achieving organizational tal performance and competitiveness. In addition, the pol- goals. icy of creating environmental regulations causes a signifi- Eco-innovation refers to innovations that reduce pollution cant effect on performance and competitiveness. from the company’s operational activities on the environ- Studi Alos-Simo et al. [68] tested 2094 companies and ana- ment and the company’s potential to utilize environmen- lyzed the company’s earnings when implementing environ- tally friendly raw materials [60]. Using a sample of 54 Italian mental innovations. The results revealed that eco-innova- industrial clusters, Daddi et al. [61] investigated the impact tion positively affected income in all analyzed sectors and of eco-innovation on competitiveness. The results found a confirms the technological differences among enterprise NURYAKIN et al – Open Innovation Strategies and SMEs’ Performance… 217 sectors. Eco-innovation also had a positive and significant METHODOLOGY effect on business volume. Therefore, the researchers pro- Sample design and data collection posed the following hypothesis. The sample of this research is batik SMEs owners in Yogya- H3: Eco-innovation has a positive effect on SMEs’ perfor- karta, Indonesia. Batik SME uses natural resources in its mance. production and is developing a production system that is environmentally sustainable. A quantitative approach em- Environmental Uncertainty as Moderator pirically tested the open innovation strategy’s effect on Eco-innovation can improve performance [30, 32, 69] and eco-innovation, sustainable competitive advantage, and competitiveness [10]. It allows companies to assess their SMEs’ performance. This study also studied the mediating environmental performance and continually improve it role of environmental uncertainty between eco-innovation [70]. However, the role of environmental uncertainty is crit- and sustainable competitive advantage and SMEs’ perfor- ical to increasing the impact of eco-innovation and perfor- mance. In contrast, the sample in this study was taken by mance. Several studies explained that environmental un- purposive sampling by considering the approach to the pro- certainty moderated various relationships/influences be- duction process of SMEs Batik and environmentally friendly tween variables [48, 71, 72]. materials in the process. Many companies’ success depends on how well they re- To achieve the research objectives, data were collected spond to changes in the external macro-environment, e.g., from SMEs batik owners. We used purposive sampling ap- macro social, economic, technological, or political/regula- proach to select the research sample. The criteria used in tory [73]. Environmental uncertainty in environmental the sampling is SMEs batik which has been operating for management is associated with inadequate expert three years or more. Sampling was based on the distribu- knowledge of green technologies and an inability to make tion of batik SME centers in the Yogyakarta area. This study accurate predictions about green market demand [21]. The was distributed to 223 batik SME owners in Yogyakarta, In- more companies can respond to environmental uncer- donesia. However, only 202 respondents completed and tainty; the more impact eco-innovation will increase its im- filled out the research instrument. Meanwhile, the unit of pact on company performance and competitive advantage. analysis chosen was the owner or manager of batik SMEs. Tsai and Yang [74] investigated the role of the innovation The data collecting process was done by distributing ques- strategy developed by the company in promoting perfor- tionnaires directly to respondents. After collecting the data, mance improvement in a dynamic environment. Further- then the researchers continued testing the research hy- more, the more vibrant the organizational environment is, pothesis. the more innovation will impact growth. Conversely, low in- novation performance will make the company’s condition Development construct and measurement stagnant. Several other studies have found a strong influ- As a first step for analyzing the reliability and validity of the ence between performance achieved in conditions of an measurement scale used in this study, the measurement uncertain business environment [49, 75, 76]. scale of the four constructs was determined by conducting The dynamics of a changing environment and technological a literature review on previous studies. It was prepared by turbulence impact the adaptability of SMEs in responding referring to earlier studies with inbound and outbound in- to change [77]. An intense competition requires increasing novation [79]. Eco-innovation with indicators on product capabilities during an uncertain environment that will influ- eco-innovation and process eco-innovation referred to ence the innovation and growth of small-scale companies [36]. Sustainable competitive advantage referred to [80], [78]. SMEs need to improve their innovation and competi- and SMEs performance referred to [81]. Environmental un- tiveness in the turbulent and dynamic competitive environ- certainty referred to previous studies with environmental ment. In contrast, Tsai and Yang [74] found that innovation activities indicators to reduce cost and lead time and im- would be easy to achieve in high market turbulence and in- prove product quality and reputation [82]. The construct of tense competition. Therefore, the researchers proposed open innovation, eco-innovation, sustainable competitive the following hypotheses. advantage, SMEs’ performance, and environmental uncer- H4: Environmental uncertainly can moderate the impact of tainty was measured by four items. A five-point Likert-type eco-innovation on competitive advantage. scale was used to establish a balance between respond- H5: Environmental uncertainly can moderate the impact of ents' constructs and analysis accuracy. In this study we use eco-innovation on performance. a five-point Likert-type scale researcher. The questionnaire Based on previous research studies and literature reviews, was designed to measure the constructs using 1-5 Likert- an empirical research model is built as follows: type scale on the respondents’ answers [83]. Score 1 repre- sented the most Likert-type scale very disagreed answer and Score 5 represented the most very agre answer. Validity and Reliability Testing This study measured the validity with Confirmatory Factor Analysis (CFA) seen from the loading factor value. Reliability testing was conducted by looking at Cronbach’s Alpha value Fig. 1 Empirical research Source: [8, 9, 78]. 218 Management Systems in Production Engineering 2022, Volume 30, Issue 3 with a standard calculation result of a value above 0.70. The model suitability test had good results, as shown in Figure results of each indicator in each construct are explained in 2. Table 1. Table 2 Model fit test Table 1 x /df GFI AGFI NFI CFI RMSEA Validity and Reliability Measure of Variable Structure model 1.578 0.896 0.860 0.899 0.960 0.058 Recommended value < 3 > 0.9 > 0.8 > 0.9 > 0.9 < 0.1 Figure 2 and Table 3 reveal that all paths estimated in this study are significant. The test on H1 shows the impact of open innovation strat- OIS1 0.828 egy on eco-innovation (β = 0.542, p = 0.000 < 0.05). H1 re- OIS2 0.764 Open innovation 0.861 0.907 0.561 veals that the open innovation strategy has a significant OIS3 0.817 positive effect on eco-innovation. Thus, H1 is supported. OIS4 0.709 ECI1 0.743 ECI2 0.740 Eco-innovation 0.837 0.894 0.579 ECI3 0.700 ECI4 0.721 SCA1 0.821 Sustainable competitive SCA2 0.763 0.852 0.905 0.565 advantage SCA3 0.771 SCA4 0.723 SMP1 0.785 SMP2 0.789 SMEs performance 0.876 0.910 0.556 SMP3 0.809 SMP4 0.806 Fig. 2 The results of the full model ENU1 0.764 Environmental ENU1 0.687 0.851 0.888 0.586 The test on H2 shows a significant positive effect between uncertainty ENU1 0.704 ENU1 0.616 eco-innovation on competitive advantage (β = 0.369, p < 0.05). Thus, H2 is supported. The test on H3 shows a signif- RESULT icant positive effect of eco-innovation on SMEs perfor- Hypothesis testing implemented the AMOS program as an mance (β = 0.386, p < 0.05). Thus, H3 was supported. Test- empirical equation model test. The theoretical model’s va- ing on the moderating effect of environmental uncertainty lidity on the constructs of open innovation strategy, eco-in- on the relationship between eco-innovation and competi- novation, sustainable competitive advantage, SMEs’ per- tive advantage shows the value of (β = 0.345, p = 0.002 > formance, and environmental uncertainty was through 0.05). Thus, H4 is supported. Meanwhile, the moderating tests by comparing the results obtained between the theo- role of environmental uncertainty on the relationship be- retical model and the measurement model. tween eco-innovation and SMEs’ performance shows the In this study, the insignificant results obtained allowed an value of (β = 0.027, p = 0.713 > 0.05). Thus, H5 is rejected. explanation of the observed relationship in the latent con- Table 3 shows the results of testing each research hypoth- struct [84]. Table 2 presents the results obtained from esis from H1 to H5. SEM testing on the four constructs. While the model suita- Meanwhile, the interaction moderating test between envi- bility test used several calculated criteria, including good- ronmental uncertainty on the relationship between eco-in- ness-of-fit index (GFI), x2/df, normed fit index (NFI), ad- novation on competitive advantage and SMEs’ perfor- justed goodness-of-fit index (AGFI), comparative fit index mance are presented in Figure 3. (CFI), and the root mean square of approximation (RMSEA). The overall size of the SEM in this study revealed that the Table 3 The results of hypothesis testing Hypothesis Structural relationship β p-value Supported H1 Open innovation strategy eco-innovation 0.542 0.000 H1 is supported H2 eco-innovation sustainable competitive 0.369 0.000 H2 is supported advantage 0.525 0.000 H3 eco-innovation SMEs performance 0.386 0.000 H3 is supported H4 Interaction moderating 1 0.345 0.002 H4 is supported H5 Interaction moderating 2 0.027 0.713 H5 is rejected Construct Indicator Factorial Loading Cronbach’ s Alpha Composite Reliability AVE NURYAKIN et al – Open Innovation Strategies and SMEs’ Performance… 219 Cheng et al. [66] supported the conclusion that eco-innova- tion affected performance. Dong et al. [67] also found that eco-innovation encourages performance and competitive- ness. This study discovered that environmental uncertainty strengthened the relationship between competitive ad- vantage and eco-innovation. Meidute-Kavaliauskiene et al. Fig. 3 Moderation effect testing [21] had similar findings that the more companies respond COCLUSIONS to environmental uncertainty, the more eco-innovation will The results of empirical testing found that the first to fourth increase their competitive advantage and company perfor- hypotheses tested were positively significant. At the same mance. Other studies also supported the conclusion that in- time, the fifth hypothesis testing showed insignificant re- novation strategies encourage improved performance in a sults. The results indicate that empirically the previous dynamic environment [74]. studies in testing this construct did not all support the find- Managerial Implication and Limitation ings. This study proved the purpose of research on eco-innova- The results of this study were tested empirically research tion mediation between open innovation strategy on SMEs’ with batik SMEs scope, where this industry has developed performance and competitive advantage. The researchers an eco-innovation strategy in the environmental uncer- also examined the moderating effect of environmental un- tainty condition. This study is specifically limited to the certainty on the relationship between eco-innovation and scope of batik SMEs. Moreover, the competition in the SMEs’ competitive advantage and performance empiri- scope of SMEs is currently very tight amid environmental cally. uncertainty. The sample in this study was very limited to The open innovation strategies concept is crucial for SMEs batik SMEs. in developing innovation by adopting ideas from external The study is an empirical testing conducted scope of re- companies. Therefore, this study also offers a solution to search sample of SMEs business in an effort to investigate “eco-innovation” and emphasizes that open innovation and measures of open innovation strategy construct and strategy and eco-innovation are essential keys to increasing eco-innovation and examine the effect on competitive ad- SMEs’ competitive advantage and performance amidst en- vantage and performance of SMEs. The empirical research vironmental uncertainty and preservation issues. model are developed through of research designs and This study conducted an in-depth review of the previous lit- measurement scales that are designed during the data col- erature on open innovation strategy and eco-innovation lection process and research instruments through measur- and their impact on competitive advantage and perfor- ing validity and reliability. The final instrument listed in this mance. study can be seen in Table 2. Further testing was carried out This research observed the batik SMEs environment in Yog- to measure the validity of the instrument through construct yakarta, Indonesia, and had limited samples with different reliability testing which was developed in the research in- characteristics in developing environmentally friendly strument so that it could be used in future research. products. Educational background was still low according The results of this study indicate that open innovation strat- to the result. Thus, some questionnaires were not complete egies has a positive, direct, and statistically significant effect in the distribution process. This study recommends further on eco-innovation. This study also explain that eco-innova- research considering the limitations of the research sample tion has a positive, direct, and statistically significant effect also to take samples from other locations to represent good on competitive advantage and SMEs results. 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Ferrara, "The environmental conditions of Italian cities: A spatial analysis of the smartness rd components”, in 23 International Conference on Living and Walking in Cities, LWC 2017, 2018, pp. 327-340. Nuryakin (corresponding author) Universitas Muhammadiyah Yogyakarta Brawijaya street, Tamantirto Kasihan Bantul 55183 Yogyakarta, Indonesia e-mail: nuryakin@umy.ac.id Adhianty Nurjanah Universitas Muhammadiyah Yogyakarta Brawijaya street, Tamantirto Kasihan Bantul 55183 Yogyakarta, Indonesia e-mail: adhianty@umy.ac.id Elia Ardyan Sekolah Tinggi Ilmu Ekonomi Ciputra Indonesia e-mail: elia.ardyan@ciputra.ac.id

Journal

Management Systems in Production Engineeringde Gruyter

Published: Sep 1, 2022

Keywords: open innovation strategies; eco-innovation; competitive advantage; and SMEs’ performance

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