The innovation paradox: the role of knowledge heterogeneity in frugal innovation

Chen, Jingwu; Zhang, Fan Article The innovation paradox: the role of knowledge heterogeneity in frugal innovation Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Chen, Jingwu; Zhang, Fan (2024) : The innovation paradox: the role of knowledge heterogeneity in frugal innovation, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-20, https://doi.org/10.1080/23311975.2024.2431646 This Version is available at: https://hdl.handle.net/10419/326707 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 The innovation paradox: the role of knowledge heterogeneity in frugal innovation Jingwu Chen & Fan Zhang To cite this article: Jingwu Chen & Fan Zhang (2024) The innovation paradox: the role of knowledge heterogeneity in frugal innovation, Cogent Business & Management, 11:1, 2431646, DOI: 10.1080/23311975.2024.2431646 To link to this article: https://doi.org/10.1080/23311975.2024.2431646 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group View supplementary material Published online: 26 Nov 2024. Submit your article to this journal Article views: 781 View related articles View Crossmark data Citing articles: 1 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 EntrEprEnEurship & innovation | rEsEarch articlE Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2431646 The innovation paradox: the role of knowledge heterogeneity in frugal innovation Jingwu chen and Fan Zhang school of economics and Management, Hebei university of technology, tianjin, China ABSTRACT With the worsening environmental crisis and the rapid advancement of industry 4.0, more enterprises are recognizing the importance of sustainable development, yet practical challenges remain. to better understand how internal knowledge sources and knowledge heterogeneity impact firms’ sustainable performance through frugal innovation, this study investigates the moderating role of internal and external knowledge heterogeneity and the mediating role of frugal innovation, drawing on organizational learning theory and contingency theory. the findings reveal that (1) internal and external knowledge sources positively influence sustainable performance; (2) frugal innovation mediates the relationship between these knowledge sources and sustainable performance; and (3) the moderating effect of internal and external knowledge heterogeneity is not significant. the study explores the reasons behind this non-significant finding and offers theoretical and empirical insights into how companies can effectively leverage knowledge resources and innovation strategies in the context of a green economy. 1. Introduction the rapid growth of industry 4.0 and escalating environmental challenges are compelling governments and businesses worldwide to prioritize sustainable economic transitions. Major initiatives, such as the united nations climate change conference and the European union’s focus on technological innovation, reflect this shift (Kazak, 2022). in china, policies aimed at reducing carbon emissions and boosting resource efficiency highlight sustainable development as crucial for high-quality enterprise growth (huang & Zhai, 2021). these measures not only enhance business sustainability (Khaled et al., 2021), but also promote green development. achieving sustainable performance is more complex and expensive than traditional business metrics, requiring diverse knowledge resources, especially in pollution reduction and decarbonization (Dubey et al., 2023). internal and external knowledge sources provide access to valuable expertise, enabling companies to adapt to environmental changes and enhance sustainability (Goyal et al., 2020; shahzad et al., 2021). although studies have examined the separate impacts of internal and external knowledge on innovation and performance, little research addresses their combined effects across various contexts. this limited view overlooks the complexity of firms’ knowledge networks, necessitating a deeper understanding of how these knowledge sources interact to influence performance. While internal and external knowledge sources offer diverse ideas for innovation, transforming these ideas into sustainable outcomes is essential. small and medium-sized enterprises (sMEs), particularly in © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group CONTACT Fan Zhang [email protected] school of economics and Management, Hebei university of technology, tianjin, China. supplemental data for this article can be accessed online at https://doi.org/10.1080/23311975.2024.2431646. https://doi.org/10.1080/23311975.2024.2431646 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY received 1 september 2024 revised 11 november 2024 accepted 14 november 2024 KEYWORDS Frugal innovation; sustainability performance; knowledge heterogeneity; knowledge sources; partial least squares structural equation modelling SUBJECTS Business, Management and accounting; sustainable Development; Environment & the Developing World; Economics and Development; industry & industrial studies 2 J. chEn anD F. ZhanG manufacturing, often face financial and resource constraints (lamperti et al., 2024). these limitations necessitate maximizing output with minimal input to maintain innovation and competitive advantage. Frugal innovation, a resource-efficient model, has gained attention as a solution (iqbal & piwowar-sulej, 2023). research has primarily examined the role of organizational capabilities (chatterjee et al., 2021), environmental factors (adomako etal., 2024), and social networks in driving frugal innovation (Xuecheng & iqbal, 2022). however, the influence of internal and external knowledge sources remains underexplored, especially regarding long-term sustainable performance. understanding this relationship can guide firms in balancing economic, environmental, and social goals. Effective use of knowledge for innovation depends on knowledge heterogeneity (F.-s. tsai, 2023). homogeneous knowledge is insufficient for addressing complex, cross-domain problems (chaithanapat et al., 2022). organizational learning theory suggests that diverse knowledge enhances innovation and adaptability in complex environments (De toni & pessot, 2021). however, excessive internal knowledge heterogeneity can hinder coordination, while too much external heterogeneity complicates integration and decision-making (santoro et al., 2020). current research often treats knowledge heterogeneity as a single entity, overlooking the distinct roles of internal and external types in various contexts. this makes it challenging for firms to allocate knowledge resources effectively and prioritize heterogeneity to optimize performance. Exploring the balance of internal and external knowledge heterogeneity can help firms transform knowledge into frugal innovations and avoid barriers from excessive diversity. in conclusion, this article analyzes how internal and external knowledge sources influence sustainable performance within the green economy. it examines the roles of knowledge heterogeneity and frugal innovation in this relationship. By applying organizational learning and contingency theories, the study aims to offer a comprehensive framework for businesses to improve sustainability through knowledge resource utilization. the structure of the article is as follows: section 2 reviews existing literature and outlines the theoretical framework. section 3 introduces the research hypotheses. section 4 details the research design, including sample selection, variables, and analysis methods. section 5 presents empirical findings and discusses their implications. section 6 concludes with contributions and directions for future research. 2. Conceptual and theoretical frameworks 2.1 Sustainability performance in the green-economy context sustainable performance measures a company’s achievements in sustainable development, encompassing economic, environmental, and social outcomes (Baumgartner & rauter, 2017). research on corporate sustainability began in the 1970s with a focus on environmental responsibility, evolving into corporate social responsibility (csr). in 1997, Elkington and rowlands, (1999) highlighted the need to assess corporate performance across economic, environmental, and social dimensions. recently, digital transformation has accelerated interest in green technology strategies and dynamic capabilities, as scholars explore how technological innovation can enhance sustainable performance and foster long-term competitiveness (Ghosh et al., 2022). studies on sustainable performance often examine its antecedents from the perspectives of firm capabilities (hart, 1995; hong etal., 2018), strategic management (stubbs & cocklin, 2008), and external relationships (awasthi et al., 2018; Edwin cheng et al., 2022; roh et al., 2021; velenturf & Jopson, 2019). at the micro-level, these factors can be categorized into internal and external dimensions (Yin etal., 2024). For instance, lee and roh (2023) found that digital capabilities help firms achieve sustainable performance by improving resource integration, decision-making flexibility, and fostering open innovation. tosi et al. (2023) emphasized the importance of integrating sustainability into strategic decisions, particularly for resource-based cities. sudusinghe and seuring (2022) highlighted that collaboration within the circular economy framework enhances economic and social sustainability by optimizing resource use and reducing waste. Existing empirical research primarily addresses internal management and external relationships (cillo et al., 2019), as shown in table 1. While existing research has examined factors influencing corporate sustainability, it often overlooks the role of knowledge as a critical resource. this article addresses this gap by exploring how both coGEnt BusinEss & ManaGEMEnt 3 internal and external knowledge sources contribute to sustainable performance. some studies suggest that internal knowledge is crucial in the early stages of business development when resources are limited, whereas external knowledge helps overcome internal limitations as companies grow (Dubey et al., 2023). in high-tech and information-intensive industries, external knowledge is especially important for driving disruptive innovations, such as digital and green innovations (pinto et al., 2023; Yin & Zhao, 2024b). this raises key questions: Do internal and external knowledge sources impact sustainable performance differently? how can firms balance these sources to optimize sustainable outcomes? considering the effects of internal and external knowledge on sustainable performance, it is essential to account for not just the sources but also the quality, characteristics, and diversity of the knowledge, as noted by iqbal and piwowar-sulej (2023). Knowledge heterogeneity—diverse types and sources of knowledge—plays a critical role in driving innovation and sustainability. however, findings on its impact vary. some researchers suggest that diverse knowledge flows enhance knowledge sharing, integration, and innovation, thereby boosting performance (Gan et al., 2023). others argue that knowledge heterogeneity’s impact is context-dependent, influenced by factors like environmental volatility. in unstable markets, firms rely more on diverse knowledge to adapt and innovate quickly (shehzad et al., 2023). Moreover, the benefits of knowledge heterogeneity depend on organizational capabilities, particularly leadership’s ability to manage and coordinate knowledge effectively (iqbal & piwowar-sulej, 2023). current research on knowledge factors is fragmented, and the role of knowledge heterogeneity in sustainable performance has not been fully explored. thus, it is crucial to thoroughly examine the impact of knowledge sources and heterogeneity on sustainable performance to provide enterprises with comprehensive guidance for continuous learning and sustainable competitive advantage. 2.2 Organisational learning theory organisational learning is the process of integrating tacit and explicit knowledge in an organisation. this is actually an inter-organisational knowledge-transfer activity that reveals the need for organisations to continuously acquire and integrate knowledge to adapt to market needs (Garvin etal., 2008). Knowledge acquisition, understanding, absorption, and use are all important elements of organisational learning. Focusing on knowledge sources and knowledge heterogeneity, we assume that the assimilation of internal and external knowledge sources helps achieve organisational learning goals (cyert et al., 1959). high-quality organisational learning can help organisations learn lessons and integrate them into their operations (Goh et al., 2004). organisations embody organisational learning by acquiring heterogeneous knowledge to innovate as they adapt to the market environment. organisational learning theory focuses on the learning process of an organisation as a whole, covering the whole process of knowledge absorption, integration, and use. this can help explain the complex effects of knowledge sources and knowledge heterogeneity on organisational innovation. it is consistent with the background of the limited resources of smalland medium-sized enterprises (sMEs) in the green-economy context. therefore, we select organisational learning theory to explain the roles of knowledge heterogeneity and knowledge sources in frugal innovation. Table 1. Mainstream perspectives on sustainability performance. Perspectives Mainstream views Research sources internal management Corporate capabilities contribute to sustainability performance ① Dynamic capabilities②supply chain dynamic capability③Digital capability Hart (1995), Hong et al. (2018), Lee and Roh (2023) strategic integration is relevant to sustainability performance ① strategic operations②strategy content, process, andcontext③strategic planning stubbs and Cocklin (2008), Baumgartner & Rauter (2017), tosi et al. (2023) external relations Longitudinal perspectives are usually related to suppliers ① supplier risk②supply chain flexibility awasthi et al. (2018), edwin Cheng et al. (2022) Horizontal studies focus on stakeholder engagement ① government collaboration②open innovation Velenturf and Jopson (2019), Roh et al. (2021) 4 J. chEn anD F. ZhanG 2.3 Contingency theory contingency theory emphasises the need for organisations to adapt management to specific environmental factors to achieve optimal performance (otley, 2016). it rejects the ‘one size fits all’ premise. instead, contingency theory proposes that organisations need to continually integrate and reallocate resources to meet the demands of the environment. Based on contingency theory, volberda et al. (2012) found that organisational performance can be improved by updating practices to match changes in practice, as in the case of the lean model of production (tortorella et al., 2019). Donaldson (2006) empirically demonstrated that organisations improve performance by effectively managing resources. organisations can reduce costs and achieve environmental and economic sustainability through the effective management and use of resources. contingency theory focuses on the effect of external environmental and resource constraints, which is particularly important for the study of frugal innovation. it provides a theoretical framework for explaining how organisations can innovate frugally to achieve sustainability in environments where resources are constrained, markets are volatile, or competition is high. 3. Research hypotheses 3.1 Knowledge sources and sustainable performance Knowledge sources encompass the various ways organisations acquire and use knowledge, which can be classified as internal or external (Menon & pfeffer, 2003). internal sources originate from interactions among supervisors, colleagues, and subordinates, while external sources include customers, stakeholders, and the supply chain. internal knowledge sources can positively influence sustainable performance. First, a strong organisational culture promotes knowledge sharing, continuous innovation, and the effective use of internal knowledge. in technology companies, for example, internal r&D and knowledge-sharing mechanisms foster an innovative culture that keeps firms ahead of technological changes (isensee et al., 2020). second, the company’s experience, technology, and process optimisation drive incremental innovation and continuous improvement, leading to steady performance gains (pinto et al., 2023). For instance, toyota’s implementation of a ‘lean manufacturing’ approach has provided significant advantages in cost control and quality management. additionally, internal knowledge sourcing enhances resource and environmental management. With a deeper understanding of resource utilisation and process management, firms can develop more efficient environmental strategies, thereby boosting sustainable performance (shahzad et al., 2020). Based on this, we propose the following: H1a: internal knowledge sources positively affect sustainability performance. External knowledge sources also significantly contribute to sustainable performance. First, while internal knowledge influences corporate culture and sustainable innovation, external knowledge has a stronger impact on breakthrough innovations (Du, 2021). research indicates that external knowledge helps companies access cutting-edge technologies and market trends beyond their internal capabilities, driving breakthrough innovations and enhancing innovation performance (law et al., 2021). For example, apple’s collaboration with supply chain partners has enabled it to continuously introduce products featuring advanced technologies. second, external knowledge allows firms to stay updated on market trends and customer preferences, enabling timely strategy adjustments to boost performance (liao et al., 2024). in the fashion industry, for instance, Zara maintains its market competitiveness by partnering with suppliers and fashion organisations to quickly respond to trends and launch new products. We therefore propose the following: H1b: External knowledge sources positively affect sustainability performance. 3.2 The mediating role of frugal innovation Frugal innovation involves creatively developing products and services to meet market needs in resource-constrained environments (Goh etal., 2015; hossain, 2018), characterized by low cost, core functionality, and affordable quality (awasthi etal., 2017). according to organisational learning theory, a firm’s coGEnt BusinEss & ManaGEMEnt 5 learning extends beyond knowledge accumulation to include applying knowledge and fostering innovation. Frugal innovation, as a way to apply internal knowledge, encourages firms to use existing resources more efficiently, improving market adaptability and sustainable performance (pinto et al., 2023). contingency theory, meanwhile, suggests that firms should adapt their strategies and innovation paths to external conditions. thus, frugal innovation helps companies adjust to complex environments and achieve efficient resource allocation by leveraging internal knowledge (lim & Fujimoto, 2019). research across different regions and cultures shows that frugal innovation plays a significant role in resource-limited areas. For instance, a study of sMEs in india found that lean, sustainability-oriented frugal innovation enhanced supply chain sustainability and competitiveness (De et al., 2020). similarly, in south africa, frugal innovation involved developing advanced in-house manufacturing capabilities through a collaborative, bottom-up approach to product design, which proved essential for success (chakravarty, 2022). however, if a firm struggles with internal issues like poor knowledge management, implementing frugal innovation effectively can be a significant challenge, impacting its ability to compete (s. M. abbas & liu, 2022). Based on this, we assume that: H2a: Frugal innovation mediates the relationship between internal knowledge sources and sustainability performance. organizational learning theory posits that a firm’s learning capability involves continuously absorbing external knowledge and transforming it into innovations. integrating both external and internal knowledge allows firms to stay agile in dynamic markets. similarly, contingency theory emphasizes the need for firms to adapt to external changes, with frugal innovation offering a resource-efficient approach that meets market demands. a study of saudi arabian sMEs found that external knowledge sources significantly influenced frugal innovation, with innovation capabilities enhancing this effect (alMulhim, 2021). additionally, research on pakistani firms demonstrated that external knowledge positively impacts thrift practices and ecosystems, contributing to the improved performance of sMEs (shehzad et al., 2023). these findings indicate that external knowledge sources have a substantial positive effect on frugal innovation, which in turn enhances firms’ sustainable performance. thus, we propose the following hypothesis: H2b: Frugal innovation mediates the relationship between external knowledge sources and sustainability performance. 3.3 The moderating role of knowledge heterogeneity organisational learning theory suggests that a diverse knowledge structure boosts a firm’s learning ability and fosters knowledge integration and innovation from various perspectives (lane & lubatkin, 1998). Knowledge heterogeneity provides firms with a broad resource base, aiding in the transformation of internal knowledge into innovation. it refers to the diversity of knowledge, skills, and experiences across departments, teams, or individuals within an organisation (Ye et al., 2016). a study on emerging market firms found that high knowledge heterogeneity supports cost-effective innovation in complex, resource-constrained environments. Frugal innovation depends on employees’ creativity and optimal resource use, with knowledge heterogeneity enabling them to discover unique innovation paths using varied experiences and skills (iqbal etal., 2024). research shows that intra-firm knowledge heterogeneity enhances innovation capabilities, improving exploratory and open innovation outcomes. as heterogeneity increases, firms can better identify opportunities and achieve diverse innovation results more swiftly (iqbal & piwowar-sulej, 2023). thus, internal knowledge heterogeneity positively influences innovation performance, facilitating frugal innovation (tsai, 2023). We hypothesise: H3a: internal knowledge heterogeneity positively moderates the relationship between internal knowledge sources and frugal innovation. External knowledge heterogeneity involves the variety of knowledge, skills, and information that firms obtain from external sources (Ye etal., 2016). according to organisational learning theory, firms enhance their learning and innovation capabilities by continuously incorporating external knowledge. this heterogeneity offers a diverse resource base, enabling firms to be more flexible in innovation, especially when 6 J. chEn anD F. ZhanG resources are limited, by achieving efficient allocation and application through frugal innovation. santoro et al. (2020) found that external knowledge heterogeneity positively impacts innovation performance, while alMulhim (2021) noted that diverse external knowledge sources help firms optimize resources and adapt to market changes, particularly in emerging markets. likewise, liu et al. (2023) demonstrated that external knowledge heterogeneity significantly boosts innovativeness and sustainability in chinese manufacturing firms. Based on this, we hypothesise: H3b: External knowledge heterogeneity positively moderates the relationship between external knowledge sources and frugal innovation. Figure 1 depicts this study’s theoretical framework. 4. Research design 4.1 Data this study employed self-selection sampling (El-Manstrly et al., 2020) to distribute a questionnaire to employees in chinese manufacturing sMEs. the surveys were shared via an online platform using electronic links. to ensure comprehensive and high-quality data, respondents were primarily located in Guangdong, Jiangsu, shandong, Zhejiang, and hunan, where china’s manufacturing industries are concentrated. Employees across all levels and departments completed the survey, as frugal innovation can occur anywhere within a company. their familiarity with manufacturing processes increases the likelihood of process and technological innovations. to enhance the validity of the responses, the study targeted participants with an adoption rate exceeding 80% and included screening questions to filter out invalid responses. Questionnaires with inappropriate completion times were also excluded, resulting in 834 valid responses. the analysis considered factors such as respondents’ gender, age, company size, industry type, and company characteristics. table 2 presents the demographic data, while table 3 displays the statistical data on business nature. 4.2 Measures the scales used in this study are all mature scales and are rated on five-point likert scales, with 1 meaning ‘strongly disagree’, 3 meaning ‘not sure’, and 5 meaning ‘strongly agree’. the specific questions are given in appendix a. all scale translations were done by a professional holding a phD with a Figure 1. Model diagram. coGEnt BusinEss & ManaGEMEnt 7 background in studying abroad, using a translation and back-translation process. the questionnaire was optimised and improved by forming a discussion group among the researchers to ensure its expert validity. additionally, a pretest was conducted after the questionnaire was designed. the final questionnaire was obtained based on the pretest results. table 4 presents the specific variable descriptions. 1. internal and external knowledge sources: here, we draw on laursen and salter (2014) scale. internal knowledge sources pertain to acquiring knowledge from within the firm, including superiors, subordinates, and the knowledge base. External knowledge sources concern knowledge acquisition from sources outside the firm, such as customers and competitors. there are seven question items for each internal and external knowledge source. 2. internal and external knowledge heterogeneity: there are various ways to measure knowledge heterogeneity, including econometric analyses of collaborative networks and questionnaires on knowledge management. however, regarding this study’s respondents, manufacturing sMEs might have unique characteristics in their knowledge management and innovation practices. We therefore refer to nieto and Quevedo (2005) scale to examine heterogeneity in firms’ knowledge in terms of the breadth of technological domains, the convergence of technological knowledge, the diversity of technological investments, and the diversity of technicians’ backgrounds. internal knowledge heterogeneity is based on the diversity of patents and technological knowledge within the firm. External knowledge heterogeneity is mainly based on the diversity of knowledge acquired from the external environment. internal knowledge heterogeneity includes four topics, and external knowledge heterogeneity includes five topics. 3. Frugal innovation: to better investigate the effect of knowledge sources and knowledge heterogeneity as a whole on frugal innovation and the extent to which frugal innovation is achieved, we draw on Dost et al.’s (2019) scale to measure the specific performance of different firms in terms of frugal innovation. Measurements include ‘practical and focused on essential elements’, ‘significantly reduced Table 2. Demographic data. Characteristics Range number Percentage (%) sex Male 431 51.68 Female 403 48.32 age 18–25 years 137 16.43 26–30 years 214 25.66 31–40 years 250 29.98 41–50 years 134 16.07 51–60 years 99 11.87 Table 3. statistical data on the nature of enterprises. nature of enterprise Percentage (%) Characteristics With iso14001 certification 462 55.4% Without iso14001 certification 371 44.5% industry Category automobile Manufacturing 69 8.3% software and information technology services 115 13.8% general equipment Manufacturing 82 9.8% Computer Communication equipment Manufacturing 75 9.0% electrical machinery and equipment manufacturing 80 9.6% Metal Products Manufacturing 70 8.4% special Purpose equipment Manufacturing 77 9.2% non-metallic Mineral Products 115 13.8% Rubber and Plastic Products 79 9.5% scientific Research and technical services 71 8.5% others 1 0.1% Company size (number of employees) 1–50 205 24.6% 51–100 193 23.1% 101–250 191 22.9% 251–500 131 15.7% over 500 113 13.5% 14 J. chEn anD F. ZhanG innovation. Finally, internal and external knowledge sources do not play a significant role in moderating knowledge heterogeneity’s effect on frugal innovation in sMEs. above, we discussed the various reasons for this non-significant effect. 6.1 Theoretical and practical contributions the theoretical contribution of this article lies in three main areas. First, it explores the impact of internal and external knowledge sources on firms’ sustainable performance, emphasizing the difference in their influence. this analysis clarifies how different mechanisms drive the effect of knowledge sources on firm performance. While prior research has often focused on a single source or has not distinguished between the two, there has been limited systematic consideration of how both sources independently impact frugal innovation (otoo etal., 2024; tippakoon etal., 2023). overlooking the distinct ways internal and external knowledge affect firm performance can lead to a narrow understanding of knowledge management strategies and missed opportunities for enhancing innovation and competitiveness. through a detailed comparison, this study reveals the different roles of internal and external knowledge in contributing to sustainable performance. this not only introduces new theoretical perspectives but also provides practical guidance on knowledge management strategies, stressing the importance of integrating both knowledge sources to improve firm performance. second, the article integrates both knowledge sources and knowledge heterogeneity into a unified theoretical framework to examine their impact on frugal innovation. previous studies have tended to treat them separately, focusing on only one attribute of knowledge (shehzad etal., 2023). however, with the rapid pace of technological advancement and globalization, firms are increasingly exposed to diverse knowledge sources, making it essential to understand how these interact, particularly in the context of frugal innovation. the framework in this article highlights the interplay between knowledge sources and heterogeneity, offering an integrative perspective that deepens research in this field and provides valuable insights for practical knowledge management. the article’s innovation lies in introducing internal and external knowledge heterogeneity as moderating variables and exploring their respective impact on the relationship between knowledge sources and frugal innovation. this approach deepens research on how knowledge sources influence frugal innovation. the findings regarding the impact of knowledge heterogeneity differ from existing studies: while some scholars suggest that internal and external knowledge heterogeneity significantly affects firm performance, this study indicates that under certain conditions, the impact of knowledge heterogeneity on sustainable performance may vary. recognizing these differences can help firms develop more effective knowledge management strategies and provide valuable insights for building competitive advantage. the practical insights of this article focus on three key areas: Firstly, this article finds that while both internal and external knowledge sources enhance the sustainable performance of sMEs, external knowledge has a more substantial impact. therefore, sMEs should prioritize acquiring and using external knowledge, particularly when resources are constrained. they can stay informed about technology and market trends by collaborating with universities, research institutes, industry experts, and supply chain partners. regular participation in industry seminars, forums, and exhibitions also allows sMEs to absorb best practices and emerging technologies, positioning them to lead in innovation. secondly, the study emphasizes that frugal innovation acts as a key mediator between internal and external knowledge sources and sustainable performance, with external knowledge having a particularly strong influence on frugal innovation. as a result, manufacturing sMEs can create cost-effective, high-efficiency solutions by leveraging existing resources alongside external knowledge, especially when r&D budgets are limited. additionally, companies can establish internal innovation awards or incentive programs to motivate employees to generate frugal and innovative ideas. By consistently integrating external knowledge, sMEs can further optimize their operations and product development processes. third, although the study found that knowledge heterogeneity does not significantly moderate frugal innovation, it does not mean that knowledge heterogeneity has no role in innovation. sMEs should still focus on balancing the integration of internal and external knowledge to avoid over-relying on a single source. it is recommended that firms create knowledge-sharing platforms to facilitate the exchange and integration of internal and external knowledge, ensuring that insights from different domains can coGEnt BusinEss & ManaGEMEnt 15 effectively circulate and contribute to innovation. Encouraging the formation of cross-functional teams, including both internal and external experts, will also help maximize the use of diverse knowledge in the innovation process. 6.2 Limitations and future research Due to the data sample being limited to manufacturing sMEs, the findings may have limited applicability to other industries or regions. significant differences exist between manufacturing and other sectors (e.g., services or technology) in terms of innovation needs, knowledge acquisition methods, and market dynamics. as a result, the influence of internal and external knowledge sources on sustainable performance may not be entirely relevant to non-manufacturing firms or larger companies. Moreover, this study does not fully account for the role of digital technology in knowledge management, which may have led to an underestimation of modern firms’ ability to acquire, integrate, and apply knowledge. in the current digital economy, many companies are improving knowledge management efficiency through tools like big data analytics, cloud computing, and artificial intelligence (Yin & Zhao, 2024a). Failing to consider this aspect may have prevented the results from capturing the true innovation capabilities and performance improvements driven by digital transformation. Future research should broaden the industry and geographic scope of the sample to include sMEs from different sectors (e.g., services, high-tech industries) and regions. this expansion will allow for a more comprehensive understanding of how internal and external knowledge sources impact various types of firms, enhancing the broader applicability of the findings. additionally, studies could be extended to large firms to compare how knowledge sources and performance differ by company size. Future research should also incorporate digital technologies into the analysis to explore their mediating or moderating role in knowledge management. For instance, examining how companies’ use of digital tools, such as big data and artificial intelligence, facilitates knowledge acquisition, integration, and application could provide valuable insights. By including digital-related variables, future studies will better reflect the technological landscape of modern enterprises and enhance the practical relevance of the findings, particularly in the context of rapid digital transformation. Acknowledgment We did not receive any funding. Authors’ contributions Fan Zhang was responsible for conceptualizing the research, developing the theoretical framework, collecting and analyzing data, and drafting the manuscript. Jingwu chen provided guidance on research design, contributed to the interpretation of the results, and reviewed and revised the manuscript critically for important intellectual content. all authors have read and approved the final version of the manuscript. Funding details We did not receive any funding. Disclosure statement no potential conflict of interest was reported by the author(s). Informed consent statement Written informed consent for this study was obtained from the participating researchers. Ethical approval the study was approved by the Ethics committee of the Faculty of Economics and Management of hebei university of technology under approval number 20240828. 16 J. chEn anD F. ZhanG About the authors Jingwu Chenis a professor at the school of Economics and Management, hebei university of technology, with research interests in engineering economics and project management. Fan Zhang is a master’s student at the school of Economics and Management, hebei university of technology, with a research interest in innovation management. ORCID Fan Zhang http://orcid.org/0009-0005-3076-2932 Data availability statement Data will be made available on reasonable request to the corresponding author. References abbas, a., & riaz, M. t. (2018). the effect of internal marketing dimensions on organizational commitment of employees: an investigation among private banks. European Online Journal of Natural and Social Sciences, 7(1), article 1. hossain, M. (2018). 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