The study offers an important message for policymakers in emerging economies: government support matters, but business performance determines whether that support leads to sustainable growth. In countries like Indonesia, where SMEs form the backbone of the economy, this finding has major implications for public policy and regional development strategies.
SMEs Are Vital but Vulnerable
SMEs contribute more than 60 percent of Indonesia’s gross domestic product and absorb around 97 percent of the national workforce, making them one of the country’s most critical economic sectors. Yet despite their strategic role, many SMEs continue to struggle with limited access to capital, weak managerial skills, low technological adoption, and volatile market conditions.
To address these challenges, governments have introduced a range of support programs, from subsidized loans and entrepreneurship training to simplified regulations and market access initiatives. But according to the authors, those interventions often produce uneven outcomes.
The problem is not the lack of support—it is the lack of internal capacity to convert that support into better business performance.
As the researchers explain, firms must be able to transform external policy assistance into operational gains before sustainability becomes possible. Without stronger internal performance, government aid alone has limited long-term value.
Research Conducted Among SMEs in Lampung
To examine how policy support affects sustainability, the research team surveyed 143 SME owners and managers in Lampung Province, Indonesia, focusing on sectors such as agribusiness, food processing, and creative industries. The study used structured questionnaires and statistical modeling to evaluate three main variables:
- Government policy support, including financing, training, regulation, and market facilitation
- Firm performance, including profitability, efficiency, innovation, and sales growth
- SME sustainability, including economic, social, and environmental continuity
The researchers analyzed the data using Partial Least Squares Structural Equation Modeling (PLS-SEM), a statistical method designed to identify both direct and indirect relationships among variables.
This approach allowed the researchers to determine not only whether government policy affected SME sustainability, but how that effect occurred.
Firm Performance Has the Strongest Effect on Sustainability
The findings revealed that government policy has a strong positive effect on firm performance, with a path coefficient of 0.684, indicating that support measures significantly improve how SMEs operate.
However, the direct effect of government policy on sustainability was much weaker, with a coefficient of 0.274.
By contrast, firm performance had the strongest direct effect on SME sustainability, with a coefficient of 0.656, making it the most influential predictor in the model.
The study also found a significant mediation effect: government policy improved sustainability indirectly through firm performance, with an indirect effect value of 0.449.
In practical terms, this means:
- Government support improves business performance
- Better business performance improves sustainability
- Therefore, government policy sustains SMEs mainly by strengthening performance
This makes firm performance the bridge between policy intervention and long-term sustainability.
The authors emphasize that “government interventions contribute directly to sustainability, but their largest impact occurs by improving firm performance first.”
Why This Matters for Public Policy
The findings suggest that many SME support programs are too focused on distributing assistance rather than ensuring that businesses can use that assistance effectively.
For example, providing credit to a business that lacks managerial capability may increase debt without improving performance. Likewise, training programs without follow-up mentoring may not translate into productivity gains.
According to the study, the most effective government policies are those that build business capability, not just deliver financial support. These include:
- Ongoing mentoring for SME owners
- Sector-specific business training
- Digital transformation assistance
- Management capacity building
- Better integration between finance and market access programs
Policies designed in this way are more likely to strengthen internal business performance, which then drives sustainability.
This is especially relevant in non-metropolitan regions like Lampung, where SMEs often face structural barriers such as limited infrastructure, weak institutional support, and low digital readiness.
Implications Beyond Indonesia
Although the research focused on SMEs in Lampung, the findings are relevant for policymakers across emerging economies.
Many governments invest heavily in SME support programs but measure success based on the number of loans distributed or workshops delivered. This study suggests those metrics are not enough.
Instead, policymakers should evaluate whether those interventions improve:
- Productivity
- Innovation capacity
- Financial resilience
- Long-term operational performance
Only when those internal improvements occur can SMEs achieve durable economic, social, and environmental sustainability.
For business owners, the message is equally clear: external support creates opportunity, but internal performance creates sustainability.
Author Profile
Warsiyah, the lead author, is a doctoral researcher at Asia e University, Malaysia, specializing in SME sustainability, government policy, and business development in emerging economies.
She collaborated with:
- Prof. Juhari Aly, Asia e University
- Prof. Tulus Suryanto, UIN Raden Intan Lampung, Indonesia
- Dr. Zulkarnain Kedah, Asia e University
Their collaborative research focuses on how public policy can be translated into stronger outcomes for small businesses through better organizational performance.
Source
Warsiyah, Juhari Aly, Tulus Suryanto, and Zulkarnain Kedah
Government Policy and SME Sustainability: Unveiling the Mediating Role of Firm Performance in Emerging Economies
International Journal of Economic, Finance and Business Statistics, 2026
DOI: https://doi.org/10.59890/ijefbs.v4i1.367
URL: https://dmimultitechpublisher.my.id/index.php/ijefbs
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