Social innovation and financial performance of social enterprises: the mediating role of social and environmental performance

Abstract

The primary objective of social enterprises is to address multifaceted societal and environmental challenges such as poverty, inequality, and joblessness. This research examined how social innovation contributes to enhancing the financial performance of social enterprises, considering social and environmental performance as mediating variables. The study was conducted on social enterprises including Waste Banks, Cooperatives, and Health Clinics in Riau Province, Indonesia. The primary data were collected from a total of 228 respondents. The data was gathered using questionnaires and analyzed with Partial Least Squares Structural Equation Modeling (PLS-SEM) assisted by SmartPLS software. The results reveal that social innovation does not directly impact financial performance. However, it has an indirect effect via improvements in social and environmental performance. These findings support the Resource-Based View and Stakeholder Theory, emphasizing the importance of internal resource management and meeting stakeholder expectations. The findings of this research offer policy implications, highlighting the importance of government support through appropriate regulations, incentives, and guidance to foster social innovation that effectively enhances social and environmental performance, thereby ensuring the financial sustainability of social enterprises. Social enterprise managers are also advised to align innovation with measurable social and environmental performance strategies.