Sustainable innovation in craft-based SMEs: a mixed-method study of Indonesian batik communities

Abstract Drawing on institutional theory, this study explores underexamined factors that shape sustainable innovation in craft-based SMEs. It focuses on batik craft communities in Indonesia, which represent a constrained institutional environment for innovation. Batik – a traditional Indonesian textile art known for its intricate patterns and dye-resist techniques – holds significant cultural and economic value. Three focal factors – digitalisation, the institutional environment, and sustainability orientation – are identified from the literature and investigated using a convergent mixed-methods design. The qualitative phase comprises 22 semi-structured interviews across nine batik SMEs in prominent batik communities on Java, offering diverse perspectives and rich contextual depth. The quantitative phase applies Interpretive Structural Modelling (ISM) and Cross-Impact Matrix Multiplication Applied to Classification (MICMAC), with input from ten experts, to assess the salience and interrelationships among these factors. We find that cultural values shape digitalisation in craft-based SMEs: batik SMEs widely adopt digital tools for market-facing activities, yet remain cautious about advanced production technologies that may threaten craft authenticity. Our analysis reveals that association- and community-led support, as well as normative expectations, exert greater influence on sustainable innovation than limited government incentives. At the same time, while sustainability awareness is rising, it is not yet matched by consistent practices across the value chain. Our study offers new theoretical insights into SME sustainable innovation within craft communities and contributes a relational, normative, and dynamic process-oriented understanding of rural entrepreneurship that transcends static geographic boundaries. Additionally, it operationalises a multilevel lens for understanding how sustainable innovation unfolds in culturally rooted, craft-based SMEs.