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Abstract

Firms use frugal innovations—affordable, functional and long-lasting solutions—to address issues in developing markets. These innovations aid businesses in providing valuable customer services, opening new markets and achieving sustainable goals that add value and stimulate the economy. However, our understanding of the link between frugal innovation and business performance is limited. To address this issue, the authors used a resource-based view and stakeholder theories to investigate the link between frugal innovation and firm financial and environmental performance and the moderating role of managerial proactiveness. The study analysed data from 580 CEOs in emerging markets, and the findings revealed that frugal innovation significantly enhances a firm’s financial and environmental performance. Managerial proactiveness also moderates the impact of frugal innovation on financial and environmental performance. The article concludes by discussing the theoretical and managerial implications, highlighting the importance of frugal innovation and the role of managerial proactiveness in driving firm performance.

Keywords

Frugal innovation environmental performance financial performance proactiveness orientation emerging markets

Introduction

Products that are affordable, functional and sustainable to use are referred to as frugal innovation (FI) (Dost et al., 2019). Firms employ FIs as a problem-solving strategy in emerging markets (Cai et al., 2019). This is because innovative product development for underserved customers is limited in these contexts (Corsini et al., 2021; Hossain, 2020). In addition, these firms engage in FI to make various contributions. For instance, becoming better at serving customers, creating new market opportunities and contributing to sustainable outcomes (Dost et al., 2019; Hossain, 2020), creating considerable value (Sarkar & Mateus, 2022) or contributing to economic growth (Thun, 2018). Academically speaking, the conceptualisation and antecedents of FI have been widely discussed (Hossain et al., 2023). However, the literature needs empirical evidence regarding FI’s influence on firms’ environmental and financial performance.

In order to achieve a competitive advantage (Barney, 1991; Freeman et al., 2021; Porter, 1985), firms recognise the significance of human health and living conditions as an essential component of their core activities (Jiang et al., 2018; Leoncini et al., 2019). This is due to the growing attention given to addressing environmental-related issues (Jiang et al., 2018; Khadria & Mishra, 2023). FIs offer sustainable solutions (Dost et al., 2019; Sarkar & Mateus, 2022) and probably offer environmental protection. The extant literature covers the conceptualisation, development and case-based outcomes of FIs (Hossain, 2020; Hossain et al., 2023), types of knowledge as antecedents, contingencies and business models for sustainable innovation (Rosca et al., 2017), and sustainability (Albert, 2019) and economic development (Cai et al., 2019; Dost et al., 2019; Hossain, 2020; Leoncini et al., 2019; Thun, 2018). However, there is a lack of empirical investigation on the outcomes of FI (Tesfaye & Fougère, 2021), on the firm’s financial and environmental performance.

FIs may contribute to the firm’s superior financial and environmental performance through several procedures. First, the characteristics of FIs may address ecological issues by producing environmentally friendly products (Hossain, 2021; Sarkar & Mateus, 2022). Second, reducing dangerous emissions and toxic materials improves employees’ workplace safety and health (Jiang et al., 2018; Xie et al., 2015). Similarly, FIs enable a firm to enhance financial performance through various mechanisms. First, serving in emerging markets creates opportunities for a firm to cater to many un(der)served customers. It also enables firms to develop economies of scale by manufacturing products in large quantities to gain cost leadership advantage and enhance financial performance. Taken together, FI may improve a firm’s financial and environmental performance. This leads to the first research question:

RQ1: Does FI help firms to achieve better environmental and financial performance?

Depending on whether managers are proactive, there might be a variety of relationships between FI and firm performance. Anticipating client demands and rival actions is a key component of managerial proactiveness, which can assist businesses in seizing new chances (Blesa & Ripollés, 2003; Dost et al., 2018). Firms could benefit from making use of these new prospects (Jiang et al., 2018; Woldesenbet et al., 2012). There is continuous discussion regarding the relationship between managerial proactiveness and business performance, and its exact influence is still unknown (Gao et al., 2018). Therefore, it is crucial to examine the importance of managerial proactiveness and how it amplifies/attenuates the link between FI and firm performance. This leads to the second research question:

RQ2: To what extent does the moderating role of managerial proactiveness amplify/attenuate the relationship between FI and firm environmental and financial performance?

Theoretical Background and Hypotheses

Resource-based View and Stakeholder Theories

The present study relies on resource-based view (RBV) and stakeholder theories to conceptualise a research framework and develop hypotheses on the link between FI, managerial proactiveness and firm performance. The RBV theory provides a valuable framework for understanding how a firm’s distinctive capabilities and resources can become a source of competitive advantage (Barney, 1991). RBV theory can be leveraged to support FI efforts for the following reasons. First, it facilitates firms in identifying and exploiting their valuable resources (Helfat et al., 2023) that can be harnessed for FI. These resources can include knowledge, technologies, expertise, relationships, networks and intellectual property. By thoroughly analysing the resources, firms can choose those that are rare, valuable, difficult to imitate and cannot be substituted (Collis & Montgomery, 2008), which is particularly useful for FI. Second, it guides firms in leveraging their valuable resources to innovate and create value in a frugal context. Firms can analyse how available resources can be combined, repurposed or boosted to develop affordable solutions that meet the needs of resource-constrained markets. Third, it emphasises the long-term sustainability of competitive advantage. They are applying the principle of RBV to FI. Firms can develop resource configurations and capabilities that are difficult for the rivals to replicate. This can help firms to achieve a sustained competitive advantage in frugal markets. Fourth, it assists firms in the effective prioritisation and utilisation of resources. In the FI context, resource constraints are prominent challenges firms face; they can be a helpful guide for making strategic decisions on the allocation of resources. In other words, firms decide which resources need investment and further development and how businesses can use resources optimally to enhance FI initiatives.

The stakeholder theory emphasises the importance of considering the interests of several stakeholders, such as employees, customers, suppliers, communities and the environment (Freeman, 2010). When applied to FI, stakeholder theory can offer valuable insights and guidance for the following reasons. First, the focus of FIs is to develop products that are affordable and accessible in resource-constrained markets. Stakeholder theory helps firms understand and identify the market’s needs in this context. Considering the interests and concerns of the stakeholders can provide insights to firms to produce affordable, functional and sustainable products for FI initiatives. Second, FIs create value for various stakeholders, including un(der)served and low-income consumers. Stakeholder theory aligns with the inclusive development goals of FI by emphasising the importance of including diverse stakeholders in the innovation process to ensure the needs are met. This also contributes to poverty mitigation, empowerment of marginalised communities and sustainable development. Third, stakeholder theory pins ethical considerations and responsible business practices. When applied to FI, it ensures that the practices of the firms are socially responsible, environmentally sustainable and respectful of the stakeholder’s rights, culture and norms in the target communities.

Resource-based and stakeholder theories offer strategic frameworks that guide firms in identifying and leveraging resources to create value for stakeholders. When combined with FI principles, these theories can facilitate the development of sustainable and inclusive strategies that will likely address challenges such as affordability and accessibility while achieving a competitive advantage. Figure 1 presents the conceptual framework for research.

Figure 1.

Conceptual Framework.

Frugal Innovation and Firm Performance

FIs offer three main characteristics: (they) are easy to afford, offer core functionalities and are sustainable to use (Cai et al., 2019; Dost et al., 2019; Hossain, 2020; Jabbour et al., 2019; Leoncini et al., 2019; Thun, 2018). Affordability features may help firms serve a large segment of customers who need more economic opportunities to afford luxurious products. Meanwhile, core functionalities offer relevant solutions to the customers, avoiding aesthetic features as the cost is low. Sustainability in use facilitates the recycling and reuse of products. Based on the characteristics of FIs, they may contribute to a firm’s environmental performance through various mechanisms.

First, frugal products are developed in a way that they embed with sustainability features. Innovations with sustainable features provide essential environmental progress (Rosca et al., 2017). Second, firms that operate in emerging markets where resources are scarce, and people have limited income-generating opportunities manufacture frugal products (Quintino Sant’Ana et al., 2024). Therefore, such products offer firms options to utilise resources to meet requirements and market demand. Considering the characteristics, it can be argued that FIs are environmentally friendly (Hossain et al., 2023), as they are the outcome of minimising material and financial resources. These products are often associated with more affordability and sustainability. Such features minimise resource utilisation and are readily available (Albert, 2019). Building on the above premise, it is argued that FIs result from the sustainable utilisation of available natural and financial resources to improve firms’ environmental performance. Thus, it is hypothesised that:

H₁: FI is positively related to a firm’s environmental performance.

Emerging economies are home to large populations (Hansen & Wethal, 2014). Firms operating in emerging markets cater to many customers by offering various products (Shankar & Narang, 2020). Serving many customers in the market may benefit them by allowing them to gain a competitive advantage through economies of scope. In other words, serving many customers with various products by keeping costs low may improve a firm’s financial performance. FIs can improve market performance by offering high value for customers, enhancing the firm’s competitiveness, accrediting cost effects and enhancing sales revenues (Albert, 2019).

FIs maximise value for customers, shareholders and society while reducing the use of financial and natural resources. At the same time, reverse innovations are frugal products/services that are successful in developing markets and return to industrialised countries by creating new market segments (Rosca et al., 2017). FI and reverse innovation concepts are crucial for facing sustainability challenges in developing countries (Rosca et al., 2017). Firms that innovate frugal products may improve financial performance by adopting a cost leadership strategy. Firms can improve financial performance from economical products using cost leadership. Usually, firms in emerging markets adopt a cost leadership strategy to expand market shares by creating low-cost positions compared to their competitors. A cost leadership strategy can facilitate achieving superior performance. Alternatively, businesses can achieve cost leadership by adopting different resource allocation methods, such as minimising cost, process improvements, large-scale facilities, overhead controls, benchmarking and total quality management (Banker et al., 2014). It may result in improving financial performance. In other words, FIs improve market performance by attracting customers, remaining cost-effective, and increasing sales to enhance financial performance. Thus, it is hypothesised that:

H₂: FI is positively related to a firm’s financial performance.

Moderating Role of Managerial Proactiveness

FIs offer a cost advantage to firms that face challenges of resource constraints (D’Angelo & Magnusson, 2020), which results in superior environmental and financial performance. Managerial proactiveness is pivotal to capitalising on cost advantage (financial) and resource (environmental) decisions. Managerial proactiveness indicates the ability to anticipate marketplace needs and predict competitors’ actions (Blesa & Ripollés, 2003). This also results in the firm’s ability to acquire a first-mover advantage in the market. Managerial proactivity is implicitly assumed to affect firm performance positively, but to what extent it amplifies/ attenuates the link between FI and environmental and financial performance is missing.

Managerial proactivity enables firms to be qualified for marketplace opportunities. Knowing or relatively predicting what may be demanded by potential customers and how the competitors may solve those needs helps firms position themselves better. In the context of FI, firms operating in emerging markets may compete on cost, efficiency and effective use of available resources. As argued earlier, both strategies benefit firms to improve environmental and financial performance. However, managers’ expertise in being vigilant about what market demand might be in the near and further future and how competitors may tend to address it may further improve their firms’ environmental performance. Besides, managerial proactiveness may facilitate firms’ enhancement of the environmental performance of FIs through gaining the first-mover advantage and proper utilisation of resources—human capital, methods of production or resources required. These resources become the firm’s source of competitive advantage (Barney, 1991) and environmental performance. In sum, managerial proactiveness can offer the first-mover advantage by predicting customer needs and competitors’ next moves, which, as a result, can enhance the influence of FI on a firm’s environmental performance. Thus, it is hypothesised that:

H₃: Manager proactiveness positively moderates the relationship between FI and a firm’s environmental performance.

Like environmental performance, the authors argue that the same holds for the link between FI and the firm’s financial performance. Firms that produce frugal products can cater to a large market segment. Serving a large customer base will likely increase sales and enhance the firm’s financial benefits. However, if the firm’s managers use a proactive strategy, this effect will strengthen further. In this strategy, they design and offer frugally characterised products ahead of their competitors in the market. Besides that, these firms may also apply the strategy of economies of scope and cost leadership (D’Angelo & Magnusson, 2020) to increase financial performance. The managerial ability to accurately predict the current market needs and anticipate competitors’ next moves can help gain an advantage in improving financial gains. Thus, it is hypothesised that:

H₄: Managerial proactiveness positively moderates the relationship between FI and a firm’s financial performance.

Methodology

Sample

Acknowledging the significance of the emerging market situation, the authors collected pertinent quantitative data from a suitable sample. Five of Pakistan’s large industrial cities—Karachi, Hub, Faisalabad, Multan and Peshawar—were part of the data collection procedure. These cities are well known for being home to a large number of Small and Medium Enterprises (SMEs) and for being the nation’s hubs for the production of goods with a frugal aesthetic. These clusters were chosen for data gathering for two main reasons.

First, Pakistan is an emerging economy with approximately 220 million people and around 3.3 million SMEs. These SMEs are crucial in meeting local demand, creating employment opportunities and contributing to economic development. Second, recent studies have indicated that SMEs actively engage in FI (Hossain et al., 2023). Therefore, by focusing on these specific industrial areas, the present research aims to gain insights into the practices and impact of FI within the context of emerging SMEs (Arshad, 2021; Bhatti & Ventresca, 2013; Iqbal et al., 2022). As a result, it offers an excellent opportunity to collect relevant data from the industry concerned. The authors first randomly selected 250 firms for each cluster in the local firm directory, approaching an aggregate of 1,250 firms. Table 1 presents the details of the firms chosen from various industries and sectors.

Table 1.

Profile of Responding Firms.

Characteristics	Frequency	Percentage
Type of industry
Plastic	33	5.7
Chemical manufacturing	45	7.7
Apparel and textile	30	5.2
Mineral products	21	3.6
Chocolate producers	34	5.8
Industrial services	57	9.8
Transport part producers	76	13.1
Computer parts manufacturers	78	13.4
Toy producers	67	11.5
Electric equipment and machinery	101	17.4
Others	38	6.5
Firm size
<100	88	15.1
100–150	140	24.1
150–200	163	28.1
200–250	120	20.7
≥250	69	11.9
Firm age (years)
<5	124	21.3
5–15	140	24.1
15–25	127	21.9
25–35	133	22.9
≥35	56	9.6

The research employed the essential informant technique, as described by Kumar et al. (1993), to collect the data for this research. Specifically, CEOs/presidents or managers responsible for the firm’s overall strategy and performance were approached as key informants.

However, during the research in January 2020, the outbreak of COVID-19 led to government-imposed lockdowns, including in the country’s industries. As a result, alternative methods had to be adopted for data collection. Contact details, such as emails and telephone numbers, were utilised to reach out to the participants, and a questionnaire survey was sent via e-mail (Google Docs). Each survey included a clear description to ensure that respondents understood the purpose of the research.

After two weeks, respondents were reminded and thanked for their participation in the survey. They were also allowed to report any issues they encountered during the process. Initially, the questionnaire survey was designed in English. However, during the pilot survey, it was noted that some respondents had difficulty understanding the specific jargon used in the survey. To address this issue, the survey instrument was translated into Urdu, the country’s national language. A pilot survey was conducted with a random selection of 10 managers/CEOs and 10 fresh master’s graduates. Feedback from the pilot survey mainly focused on simplifying jargon and using shorter sentences. Based on these comments, a few sentences were modified. The responses were measured using a 7-point Likert scale ranging from 7 = strongly agree, 4 = neutral to 1 strongly disagree.

The authors obtained 580 valid questionnaires, resulting in a response rate of 46.4%. The descriptive statistics and correlation analysis are presented in Table 2. Regarding firm size, the average number of employees in the participating firms ranged from 100 to 150 (SD = 0.893). Furthermore, the average age of the firms included in the research was approximately 15 years (SD = 1.368). Table 2 provides additional information on the descriptive statistics of the variables and their correlations, which are relevant to the research analysis.

Table 2.

Descriptive Statistics and Pearson’s Correlations.

S. No.	Variable	Mean	SD	1	2	3	4	5	6	7	8
1	Firm size	1.333	0.893	1
2	Firm age	3.05	1.368	–0.234	1
3	Industry type	3.947	1.715	–0.093	–0.204	1
4	Number of innovations	1.807	1.076	0.458**	–0.078	–0.083	1
5	Frugal innovation	2.169	0.504	0.165	0.239	–0.085	0.286*	1
6	Managerial proactivity	2.655	0.912	–0.061	0.029	0.011	–0.166	–0.072	1
7	Financial performance	2.375	0.553	–0.113	0.381**	–0.143	0.085	0.376**	0.253	1
8	Environmental performance	2.543	0.689	0.201	0.191	–0.021	0.258	0.312*	0.067	0.203	1

Note: n = 580. *, **Correlations are significant at the 0.05 and 0.01 levels (two-tailed), respectively.

The research followed the three-way procedure recommended by researchers (Podsakoff, 2003)—first, we separated dependent and independent variables by varying scale endpoints. Second, we performed Herman’s one-factor analysis. The data revealed that the first factor accounted for 22.433% of the variance, and other factors were lower than the mentioned variance. Lastly, the confirmatory factor analysis (CFA) was used. The CFA results suggest that one-factor model (χ² = 551.11, DF = 575, NNFI = 0.95, CFI = 0.921, SRMR = 0.082, RMSEA = 0.065) is satisfactory. Thus, it indicates no common variance bias issue with the method used in this research.

Measures

Frugal Innovation: This research analysed FI as an independent variable by examining its dual effects on the firm’s environmental and financial performance. The variable has 11 items adopted from previous research sources (Dost et al., 2019; Weyrauch & Herstatt, 2017; Zeschky et al., 2011). These items assessed frugally characterised products in terms of their value to customers, focus on core functionality, ease of use, adherence to quality standards, provision of ‘good and cheap’ solutions, cost reduction in operational processes, reduction in the final price, sustainability in working processes and during product/service development, engagement in partnerships with local companies in operational processes and offering solutions to customers’ environmental needs.

Firm Performance: In the study, firm performance was assessed through two dependent variables: financial performance and environmental performance. The items measuring these variables were adapted from the research conducted by Jiang et al. (2018). The environmental performance variable comprised four items that measured the extent of pollution reduction, energy and material consumption reduction, reduction in the use of hazardous, toxic or harmful materials, and decreased environmental accidents. The financial performance variable assessed various aspects of a firm’s financial performance, including sales growth, profit growth, return on assets, return on investment, return on sales, market share growth and overall operational efficiency.

Managerial Proactiveness: The variable of managerial proactiveness was adapted from previous research (Blesa & Ripollés, 2003; Dost et al., 2018). It consisted of three items: measuring whether a firm typically initiates actions that competitors respond to, usually adopts a competitive, ‘undo-the-competitors’ posture, and is often the first business to introduce new product technologies.

Table 3 presents constructs, items, factor loadings, correlated item-total correlation (CITC), average variance extracted (AVE), Cronbach’s alpha and composite reliability.

Table 3.

Measures of Variables and CFA Results.

Construct	Item	Factor Loading	CITC	AVC	Cronbach’s Alpha	Composite Reliability
Frugal innovation	Products offer value	0.73	0.68	0.534	0.805	0.831
	… focus on core functionality	0.81	0.76
	… can easily be used	0.81	0.78
	… meet prescribed quality standards	0.83	0.78
	… offer “good and cheap” solutions	0.63	0.59
	… require significant cost reduction in the operational process	0.72	0.67
	… offer a reduction in the final price	0.75	0.71
	… have sustainability in the operational process	0.68	0.63
	During product/service development, our organisation partners with local companies in the operational process	0.93	0.88
	… offer solutions to customers’ environmental needs	0.81	0.87
	The firm environment promotes the development of durable, low cost and maintaining products	0.83	0.79
Environmental performance	The firm’s outputs reduce pollution	0.63	0.58	0.782	0.922	0.943
	The firm’s outputs reduce energy and consumption of materials	0.72	0.59
	The firm’s outputs reduce the consumption of materials that could be dangerous, toxic or harmful	0.81	0.67
	The firm’s outputs reduce the frequency of environmental accidents	0.83	0.71
Financial performance	The firm’s sales growth	0.63	0.63	0.835	0.940	0.951
	The firm’s profit growth	0.72	0.59
	Firm’s return on assets	0.75	0.59
	Firm’s return on investment	0.68	0.67
	Firm’s return on sales	0.93	0.71
	The firm’s market share growth	0.81	0.63
	The firm’s overall efficiency of operations	0.83	0.59
Managerial proactiveness	The firm typically initiates actions that competitors then respond to	0.63	0.67	0.671	0.833	0.875
	The firm typically adopts a very competitive, ‘undo-the-competitors’ posture	0.72	0.71
	A firm is very often the first business to introduce new products or technologies	0.75	0.63

Reliability and Validity

To ensure that the measures incorporated in the context are reliable and valid, the authors conducted an exploratory factor analysis. The research used Varimax rotation and cut-off of an eigenvalue 1 to determine an item’s loadings (Hair et al., 2010). The factor analysis results displayed four factors with eigenvalues near 1.0 or above, explaining 80.51% of the total variance. All items had loadings that were within the threshold.

Cronbach’s alpha coefficients were used to assess the reliability of the constructs. The results presented in Table 2 suggest that all four constructs had a value above a threshold of 0.70, which offers adequate reliability (Carmines & Zeller, 1979). All items had loadings above 0.4; therefore, none was removed from the final analysis. The authors calculated composite reliability (CR) to ensure the effects of scale reliability. Values of all CR were above 0.80, which provides the reliability of the constructs (Farrell, 2010).

The research employed CFA to compute convergent and discriminant validity. The results of AVE values suggest that all contracts have values above the recommended value of 0.5, suggesting adequate convergent validity (Farrell, 2010). Table 3 presents variable measures and CFA results.

Results

Regression analysis is often used in statistics to establish a relationship between different parameters (Gupta et al., 2017). Therefore, this research used the hierarchical multiple regression technique to analyse the four hypothesised relationships. It revealed a significantly positive influence of FI on the firm’s environmental (β = 0.28, p < .001, Model 2) and financial performance (β = 0.35, p < .001, Model 2), confirming H₁ and H₂ (see Table 4). The moderating results demonstrate that managerial proactiveness amplifies the influence of FI on a firm’s environmental performance (β = 0.216, p < .05, Model 3) and attenuates a firm’s financial performance (β = −0.194, p < .05, Model 3), confirming H₃ and rejecting H₄ (see Table 4, Figure 2 and Figure 3).

Table 4.

Regression Analysis.

Variables	Financial Performance						Environmental Performance
	Model I		Model II		Model III		Model I		Model II		Model III
	Coef	SE	Coef	SE	Coef	SE	Coef	SE	Coef	SE	Coef	SE
Firm size	–.068	[0.091]	–0.095	[0.08]4	–0.105	[0.084]	0.135**	[0.11]6	0.114*	[0.115]	0.120*	[0.117]
Firm age	0.143**	[0.054]	0.104	[0.052]	0.084	[0.054]	0.132	[0.069]	0.101	[0.071]	0.113*	[0.075]
Industry type	–0.022	[0.042]	–0.023	[0.039]	–0.025	[0.039]	0.027	[0.054]	0.026	[0.053]	0.028	[0.054]
Number of innovations	0.081	[0.073]	0.064	[0.070]	0.084	[0.072]	0.131	[0.093]	0.110*	[0.096]	0.099	[0.099]
Frugal innovation			0.350***	[0.139]	0.799***	[0.405]			0.280***	[0.191]	0.013	[0.563]
Managerial proactivity			0.170**	[0.071]	0.543***	[0.324]			0.085	[0.098]	–0.136**	[0.450]
Frugal innovation × proactivity					–0.194**	[0.165]					0.216**	[0.229]
R ²	17.0		32.7		34.5		13.6		18.2		18.7
F-value	12.666		24.041		27.688		12.053		11.869		13.606
ΔR²			17.7		2.3				4.6		0.5

Note: Financial performance and environmental performance are dependent variables. Values are unstandardised regression coefficients with standard errors. *p = .05; **p = .01; ***p = .001 (all two-tailed tests).

Figure 2.

The Moderating Role of Managerial Proactivity Amplifies the Link Between Frugal Innovation and Environmental Performance.

Figure 3.

The Moderating Role of Managerial Proactivity Attenuates the Link Between Frugal Innovation and Financial Performance.

Besides its moderating effects, managerial proactiveness directly influences a firm’s environmental and financial performance. It positively influenced environmental performance (β = 0.170, p < .05, Model 2). On the other hand, it had a positive but insignificant influence on a firm’s financial performance.

Discussion

This research examined the relationship between FI and the firm’s financial and environmental performance and the moderating role of managerial proactiveness in emerging markets. We analysed the hypothesised relationships with data obtained from managers responsible for innovation and decision processes in their respective firms.

Findings revealed the positive influence of FI on the firms’ financial and environmental performance. Suggesting that affordable, functional and user-friendly innovations have the potential to cater to customers in grassroots-level and low-income segments of emerging markets. Previous studies by Dost et al. (2019) support this notion. By targeting emerging markets, FIs contribute to firms’ financial and environmental performance. As mentioned earlier, FI meets the criteria of being cost-effective, providing essential functionalities and promoting sustainability in product use, as emphasised by researchers (Dost et al., 2019; Rao & Liefner, 2023; Weyrauch & Herstatt 2017). These characteristics of FI contribute to the overall performance of firms. Specifically, FI contributes to environmental performance (Hossain, Shahid, et al., 2023). FIs contribute to financial performance by minimising resource usage in product manufacturing. Additionally, their affordability (economies of scale) and easy availability contribute to financial performance. In other words, FIs focus on meeting essential local needs at the required quality in a low-cost and innovative way, often by re-prioritising features to improve financial and environmental performance.

The moderating role of managerial proactiveness amplified the link between FI and environmental performance but attenuated financial performance. It may be interpreted as showing that proactive firms that actively embrace and implement FI practices can maintain a competitive advantage in the market. In today’s business landscape, sustainability issues encompassing social, economic and ecological concerns are gaining increasing importance in product development processes. Jabbour et al. (2019) have highlighted that adopting technologies and innovations that promote sustainability is crucial for firms to stay ahead in the competitive market. Therefore, firms that strive to enhance their environmental performance, as indicated by Iqbal et al. (2022), must remain proactive in seeking out and implementing FI solutions. By doing so, they can address sustainability concerns (Hossain et al., 2023) and gain a competitive edge over their industry rivals.

While being ahead of competitors in managerial strategy may contribute to superior environmental performance, it may not necessarily improve financial performance. Acquiring monetary benefits from FI may take time, especially when reaching economies of scale. Initially, investing in human capital, infrastructure and production methods to manufacture affordable, functional and sustainable products may not immediately translate into improved financial performance for a firm. In other words, the findings indicate that while managerial proactiveness may enhance a firm’s environmental performance, it may not significantly impact financial performance in the short term. The initial investments required for FI to yield financial benefits, such as economies of scale, may take time to materialise.

Another explanation for the finding could be the diffusion of innovation. According to innovation management researchers, innovations typically diffuse from developed to developing countries, focusing on high-income customers (Rogers, 2010). However, in the case of FIs, the diffusion pattern is reversed. FIs tend to originate from emerging markets and diffuse towards developed markets, targeting low-income customers (Hossain, 2020). In this context, managerial proactiveness can help firms enhance their environmental performance by adopting and implementing FIs. However, it may have a small impact on financial performance. It can be argued that it takes time for FIs to reach a level where they start yielding financial benefits as a first mover in the market.

The diffusion of FIs tends to be slower than other types of innovations. Therefore, it may require additional time for firms to reap the financial rewards of their investments in FIs. As a result, the expected moderating effect of managerial proactiveness on the relationship between FI and financial performance may not be immediately evident.

Implications: Theoretical and Managerial

The theoretical contributions of this study are twofold: First, frugal products enhance a firm’s sustainability and financial performance. They suggest that products with unique characteristics facilitate stakeholders by meeting their needs and offering features that can be reused. The findings align with prior studies, which indicate that the RBV and stakeholder theories complement each other to utilise resources to maintain the relationship with stakeholders. For example, stakeholders are essential for establishing a sustainable relationship. The firms exist as stakeholders are the primary purpose (Coase, 1995). The stakeholders are the source of the firm’s survival and success (Freeman, 2010). Others (Donaldson & Preston, 1995) also consider this relationship important from an ethical perspective. At the same time, building an RBV of the firm is a robust framework for building sustainable stakeholder relationships (Tantalo & Priem, 2016), and facilitate a firm’s success (Barney, 1991; Freeman et al., 2021), by performing in an environmentally friendly and profitable manner. In other words, firms that use valuable resources in FI can cater to local customer demand and improve financial and environmental performance.

Furthermore, this research also addresses an ongoing notion that both for-profit and not-for-profit firms look to serve underserved and resource-constrained contexts (Collier, 2008; Prahalad, 2005). In that context, further research was suggested to learn how firms from social, technological and institutional fields negotiate for FIs (Novogratz, 2010). Taking on the suggestions, this research drew upon theories of RBV (Barney, 1991; Peteraf, 1993) and resource dependence (Pfeffer & Salancik, 2003), by investigating how firms in emerging markets navigate resources (Bhatti, 2012), for FIs to derive financial and environmental performance. This theory informs us that firms acquire competitive advantage from possessing and exploiting distinctive resources and capabilities (Barney, 1991). It can offer exciting insights into the strategy formation process for emerging markets—low-income and rapidly growing countries (Hoskisson et al., 2000). Stakeholder theory contributed to our understanding of how firms in emerging markets can create and trade value by innovating frugally characterised products to enhance financial and environmental performance.

Second, the degree of changes (innovation) made to the products that characterise them as cheap, functional and sustainable (frugal) offer to the firm’s environmental and financial performance. However, these firms can improve performance when managers apply their managerial proactiveness strategy. A managerial proactivity strategy enhances the firm’s ability to assess current and anticipate the customer’s future needs and predict the competitors’ next moves. Improving FI performance through managerial proactiveness can help firms gain a competitive advantage. Understanding the sources of acquiring competitive advantage for the firms has become the agenda of researchers in strategic management (Barney, 1991; Freeman et al., 2021; Porter, 1985). However, to enhance FIs’ financial performance, the firms need to wait for a certain period. This is because FIs’ diffusion will take time to reach the maximum number of customers in the market.

The managerial implications of this research are threefold: First, FIs are characterised as cheap (D’Angelo & Magnusson, 2020), functional and sustainable in use (Prahalad, 2005). Frugally innovating firms operate in resource-constrained contexts (Agarwal et al., 2021). The firms involved in FI facilitate job creation, poverty mitigation and economic development and save labour market skills; these firms also contribute to environmental protection strategies. These findings can help managers improve existing products to further contribute to environmental protection. At the same time, FI also enhances a firm’s financial performance. Managers need to understand the extent to which this innovation can improve their firms’ financial performance.

Second, these findings offer implications for managers to analyse when and where to apply the proactiveness strategy while innovating frugally. It was observed that being proactive improves the effects of FI on environmental performance, but is inversely associated with the firm’s financial performance. Managers need to ponder whether their firm’s financial performance may improve when they use the innovation diffusion strategy suggested by Hossain (2020). Hossain explains that firms other than FIs diffuse from developed to emerging markets. However, the diffusion of FI travels in the opposite direction. This means that FIs diffuse in emerging markets and reach developed markets. Therefore, a proactive managerial strategy facilitates the firm’s achievement of a first-mover competitive advantage through enhancing environmental performance.

Third, one of the critical purposes of firms is to maximise financial performance. However, the research results revealed that firms that innovate frugal products and strive to achieve first-mover advantage in the market fail to increase financial performance. In other words, the effects of proactiveness weaken FI’s influence on a firm’s financial performance. This finding offers alternative implications to managers. They can evaluate the quality of existing methods of production used for FI and the process of predicting customer demand for frugal products and competitors’ next moves, assuming that these firms might be using conventional production methods and cannot take advantage of the proactiveness strategy for improving their financial performance. Therefore, they may adopt novel approaches such as objective conflict resolution to develop frugal and radical innovations (Weyrauch et al., 2020) or look for university–industry collaborations for novel solutions (Walden & Lie, 2020). Managers may also investigate using green methods of production to improve financial performance. Previous research has demonstrated that green production methods enhance firms’ financial performance (Chen et al., 2006; Xie et al., 2015).

Limitations and Future Research

This research has a few limitations that future researchers have opportunities to address. First, the context of data is limited to the emerging markets. Therefore, the findings may have limited applicability to more established economies. Thus, future research could examine this model in established economies to generalise the findings. Second, the research analysis was limited to FI, environmental performance and managerial proactiveness variables. Future researchers might investigate the influence of process innovation generation and adoption to understand the effects of FI. It will help to understand how production methods are developed within the firm and brought from outside impact, such as innovating frugal products and how that enhances or weakens environmental and financial performance. Third, this research incorporated the moderating role of proactiveness in the link between FI and performance. Future researchers can investigate the moderating role of risk-taking and proactiveness to measure the effects. The other contingency variables, such as market and technology (Dost et al., 2019), may be used to investigate moderating or mediating effects between FI and performance. Fourth, the paper investigated the direct impact of FI on firm performance. Therefore, future researchers use green entrepreneurial orientation to predict FI and its performance. Jiang et al. (2018) investigated the influence of green entrepreneurial orientation on the firm’s environmental and financial performance. It would be exciting to compare the results by incorporating the mediating effects of FI on the link between FI and firm performance.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research,authorship and/or publication of this article.

Funding

The authors received no financial support for the research,authorship and/or publication of this article.

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