ESG Practices and SME Performance in Surabaya: Moderating Effects of Digital Transformation and Government Support

Abstract

This study examines the effect of Environmental, Social, and Governance (ESG) practices on SME performance in Surabaya, Indonesia, and evaluates the moderating roles of digital transformation and government support. Using a quantitative cross-sectional design, data from 100 Small and Medium-sized Enterprises (SME) owners and managers were collected through purposive sampling and analyzed using PLS-SEM with SmartPLS 4. The measurement model met reliability and validity criteria after removing two weak ESG indicators. ESG practices positively affected SME performance (β=0.348, t=3.137, p=0.002), and government support also had a significant effect (β=0.342, t=3.621, p<0.001), while digital transformation showed a positive but non-significant effect (β=0.219, t=1.802, p=0.072). The moderating effects of digital transformation (β=0.108, t=1.423, p=0.155) and government support (β=-0.085, t=0.863, p=0.388) were not significant. The model explained 51.3% of SME performance variance (R²=0.513) and showed positive predictive relevance (Q² predict=0.457). This study is limited by its cross-sectional design and focus on SMEs in a single urban context, which may affect generalizability. The findings contribute to the resource-based and dynamic-capability perspectives by demonstrating that ESG and government support directly enhance SME performance, while digital transformation does not automatically strengthen ESG outcomes.

Keywords

Digital Transformation ESG Government Support PLS-SEM SME Performance