Sustainability meets digital culture: the influence of ESG on financial performance in Malaysian manufacturing SMEs

The rise of new technologies presents both opportunities and challenges for firms typically using conventional methods, particularly in emerging economies. Countless firms have adopted digitalization strategies to elevate their market standing (Wen et al., 2022). This shift, however, raises questions about its influence on financial performance. Digitalization has affected large firms and SMEs differently. In Malaysia, SMEs mainly operate in the service and manufacturing sectors, while agriculture, mining, quarrying and construction contribute to a lesser extent. The manufacturing sector drives SME growth and GDP increase (Musa and Chinniah, 2016) and is strategically significant to the country’s economy. In the contemporary age, industrial competitiveness requires digital transformation demanding widespread restructuring of organizational culture and business processes (Jones et al., 2021). The manufacturing sector, despite its importance for emerging economies, faces challenges like knowledge gaps and resource constraints while thwarting digitalization efforts. Nevertheless, the sector’s agility and fewer bureaucratic hurdles position it well for digital adaptation. A consensus has emerged on the significance of shifting from traditional to digital culture paradigms in firms (Gonzalez-Mohino et al., 2023). Unlike previous IT-driven changes, digital transformation is characterized by its abstract and overarching nature. Successful integration of cultural factors can either promote or inhibit digital initiatives, subject to firms’ recognition of these factors. Studies have focused on domains like performance, motivation, leadership, innovation, IT governance and climate change adaptation (Alkhalaf and Al-Tabbaa, 2024; Díaz Tautiva et al., 2024). However, literature on the impact of digital organizational culture on firms’ financial performance in emerging economies remains limited. Amid the fourth industrial revolution, digital organizational culture remains complex and poorly understood, especially in emerging economies. This paper investigates whether digital organizational culture enhances a firm’s financial performance by means of ESG initiatives and intellectual capital. As Proksch et al. (2024) suggest, higher digitalization in ventures and processes can significantly boost marketing and scalability, potentially improving firm performance.

Examining the influence of digital organizational culture on manufacturing SMEs’ financial performance is crucial for two reasons. First, research indicates that organizational culture differs between large enterprises and SMEs (Gray et al., 2003). SMEs, often constrained by limited resources and manpower, possess distinct traits, including higher autonomy, simpler hierarchies and flexible operational models, facilitating efficient decision-making and adaptability (Klat and Matejun, 2012). These characteristics shape SMEs’ approach toward digitalization. Research continues to debate the extent to which organizational culture shapes the digitalization process across large corporations and SMEs, with emergent indications supporting its substantial effect (Gurbaxani and Dunkle, 2019). Second, for manufacturing SMEs, digitalization involves integrating technology into core operations and altering employee behaviors and interactions. Their innate flexibility and minimal hierarchies may facilitate rapid adaptation compared to larger firms. In a rapidly evolving global market, digitalization is unavoidable for organizational survival, particularly for agile SMEs. Apart from this, in manufacturing, digital transformation is enabling SMEs to evolve into smart factories, environments where human resources, assets, information and automated technologies are integrated seamlessly into interconnected systems (Classen and Friedli, 2019). Overall, SMEs constitute majority of businesses, create approximately 70% of all jobs, and are solid contributors to value creation, offering between 50-60% of value added (Laila et al., 2023). Particularly in Malaysia, intellectual capital emerges as a pivotal source in enhancing competitive advantage among SMEs, which, unlike larger firms, often face resource constraints (Hanifah et al., 2022). Simultaneously, SMEs in emerging economies still struggle to reach this level of technological sophistication. Industry 4.0 is promoting the contemporary style of manufacturing, introducing new business models, sustainable practices and advanced technologies like the Internet of Things (IoT) and AI to monitor environmental impacts (Rath et al., 2024; Folgado et al., 2024). It requires implementing transformative features such as updated tools, knowledge, interconnectivity standards, technical support and decentralized decision-making (Folgado et al., 2024). SMEs benefit from agility and adaptability, enabling quicker responses to market changes (Taghizadeh et al., 2024). This allows SMEs to achieve a sustainable competitive advantage by capitalizing on valuable, rare, inimitable and non-substitutable (VRIN) resources.

As Malaysia pursues developed nation status, small and medium-sized enterprises (SMEs), which account for 98.5% of business establishments (Mohamad et al., 2021) must remain competitive in the global economy. The manufacturing sector, a core driver of Malaysia’s economy, has a significant multiplier effect on national growth, receiving MYR 91.3 bn out of MYR 164 bn in approved investments (Singh, 2021). With the easing of restrictions in 2021 under Phase 4 of the National Recovery Plan (Tang, 2021), economic activity resumed; however, the manufacturing sector was hit hard, showing a steep decline in growth and struggling to bounce back to its former strength (Husaini and Lean, 2022). While developed countries could enable business recovery through digitalization, emerging economies like Malaysia faced challenges in Industry 4.0 adoption. Their limited grasp of financial benefits driven by digitalization deters effective digitalization initiatives, highlighting an obvious gap in the growth of digitalization between developed and emerging economies. Whereas large firms in emerging economies like Malaysia have progressed in digital adoption, SMEs struggle in terms of organizational culture reforms required for effective digitalization (Al Koliby et al., 2024; Martínez-Caro et al., 2020). The study addresses six research questions, including: does digital organizational culture affect intellectual capital, ESG and financial performance? Do intellectual capital and ESG affect financial performance? Does ESG and intellectual capital mediate the digital organizational culture-financial performance relationship? Does government policy affect financial performance? Does government policy moderate the digital organizational culture-financial performance relationship? Lastly, the paper is structured as follows: first, a literature review and theoretical framework outline how the variables of the study (discussed above) influence financial performance; second, the research methodology is elucidated; third hypotheses are introduced and developed; fourth the results of the empirical analysis are then detailed and last, the study concludes by discussing its limitations, outlining future research directions, and highlighting its implications.

Research on productivity, sustainability and financial performance has mainly applied RBV, dynamic capabilities theory, institutional theory and stakeholder theory. RBV and dynamic capabilities theory focus on managing resources to enhance performance, while institutional theory and stakeholder theory highlight how industry norms drive organizational practices. Modern success in digital business is tightly linked to developing both tangible and intangible resources, accelerated by shifts in organizational culture. As the global economy shifts from capital to knowledge-intensive industries, cultural transformations within organizations are gaining significance. Recent studies emphasize intellectual capital’s direct impact on financial performance (Akkas and Asutay, 2023); nonetheless, its mediating role in the relationship between digital organizational culture and financial performance in emerging economies context remains underexplored. Hence, this study addresses this gap. In this context, theoretical development reveals that organizations hold critical responsibilities in workforce development within stakeholder networks, including employees, customers and regulators. By fostering human, structural and relational capital, firms support innovation, knowledge sharing and sustainable competitive advantages. Hence, prioritizing intellectual capital cultivates agility, collaboration and continuous learning, essential for digitalization and adapting to rapid market changes. Intellectual capital also enhances organizational legitimacy and stakeholder trust by aligning with societal expectations and industry norms, supported by institutional isomorphism, which explains firms’ adherence to standards for competitive advantage. According to Deephouse (1996), institutional isomorphism further suggests that firms often adopt prevailing strategies and policies, reflecting a uniformity in business practices across industries. Organizational behavior aligned with industry norms strengthens the link between firm actions and accepted standards. It seems plausible to assume that organizations are expected to operate within a social framework that dictates appropriate behavior, thereby securing legitimacy among stakeholders. Organizations promote legitimacy and stakeholder trust by observing the established norms and aligning with the expectations of the stakeholders and institutions. Apart from this, dynamic capability theory, an extension of RBV, emphasizes the need for firms to adapt and evolve capabilities for sustained competitive advantage. A firm’s resource base strategically yields competitive benefits, the ability to reconfigure skills, resources and competencies is essential for addressing environmental changes. In this respect, dynamic capabilities, requiring a synergy of multiple abilities, emphasize the significance of frequent adaptation. One of the pioneers of RBV, Barney, accentuated the diverse resources and capabilities, such as human, structural and relational that support financial performance and intellectual capital, such as technology transfer, innovation and community commitment. Stakeholders demand transparency and new management systems, integrating intangible assets like intellectual capital, further driving innovation and competitive advantage through enhanced knowledge and relationships. This approach benefits firms by reducing costs, building reputation and fostering growth, especially in emerging economies.

Traditional management literature emphasizes financial measures for firm performance, but such an approach with an exclusive focus on profitability has its limitations. To address this, a multidimensional approach that integrated both financial and nonfinancial measures for the organization’s health was developed. Environmental practices may initially strain finances (Baah et al., 2021); they ultimately benefit reputation and long-term financial outcomes, as stakeholders increasingly favor sustainable firms. Responding to stakeholder and regulatory pressures and challenges for ESG practices help firms establish stakeholder trust, gain legitimacy, augmenting market share. Manufacturing sub-sectors exhibit significant variations in their digital maturity and ESG implementation levels (Yucel and Yucel, 2024). High-tech and knowledge-intensive manufacturing industries exhibit a stronger digital organizational culture adoption and emphasis on digital innovation resources compared to the traditional manufacturing sectors (Xie et al., 2024). While ESG has gained global prominence over the last two decades, its development in Malaysia remains nascent compared to its Western counterparts (Li and Gong, 2024). This developmental gap mirrors sector-specific variations in ESG’s financial performance impact (Alexandra et al., 2024).

For example, studies on the construction sector in emerging economies where research remains limited. Sector risk profiles substantially influence ESG outcomes, with high-risk sectors benefiting from strong governance whereas medium-risk sectors gain superior returns through social initiatives (Li and Gong, 2024). Firms with robust resource foundations exhibit better ESG implementation, although the relationship between ESG and financial performance varies across sectors and risk profiles, particularly in emerging markets where ESG interest is still developing. The nascent stage of ESG development in Asian emerging markets highlights the need to examine these practices within Malaysian SMEs specifically. Exploring sector-specific challenges in ESG implementation and its link with digitalization in Malaysian SMEs addresses a significant research gap while offering valuable insights for similar institutional environments. The findings reinforce that digital organizational culture and ESG practices’ impact varies across manufacturing sub-sectors, determined by firms’ financial and human resource capacities, mediated by digitalization intensity and regulatory compliance capacity (Song et al., 2022) in the form of ESG disclosures. Figure 1 exhibits a model hypothesizing relationships based on theories discussed above.

Along with a descriptive research design with a cross-sectional approach, the authors developed a structured questionnaire to scientifically capture the key factors influencing financial performance in Malaysian manufacturing SMEs. Measures for digital organizational culture were adapted from Martínez-Caro et al. (2020) and Hadi and Baskaran (2021). Financial performance measures were from Nasiri et al. (2020), AlMulhim (2021). Measures for intellectual capital were from Rehman et al. (2022), ESG was from Van Duuren et al. (2016) and government policy: Lessing et al. (2017) and Sanni-Anibire et al. (2022). The authors conducted a pilot study with 40 respondents from Perak, yielding a reliability score of 0.980. Thus, a standard survey was conducted, employing both online and offline data collection methods to maximize response rates and represent a diverse respondent demographic. The authors also implemented the exclusion criteria, and out of 387 responses, the authors found 360 valid after excluding 27 unfinished entries. For preliminary descriptive statistics, the Statistical Package for Social Sciences (SPSS) was used. Besides, the demographic characteristics of respondents are displayed in Table 1, which features the sample composition and ensures the data representation’s transparency.

The study utilized a stratified proportionate sampling technique that warranted robust generalizability to the Malaysian manufacturing SME population. The study’s sampling frame draws from the Federation of Malaysian Manufacturing (FMM) 2023 directory, comprising 3,675 manufacturing SMEs across five key Malaysian states: Selangor (19.8%), Kuala Lumpur (14.7%), Johor (10.8%), Perak (8.3%) and Penang (7.4%). These states jointly represent 61% of Malaysia’s manufacturing SMEs, according to the 2016 Economic Census (SME Corp. Malaysia, 2023). The sample size of 360 firms was determined by applying Yamane’s (1973) formula, providing a statistically precise representation of the population. Allotted questionnaires proportionately based on each state’s representation. Within each stratum, the authors applied simple random sampling to choose individual firms, warranting impartial representation.

To capture various factors affecting financial performance, the authors developed a structured questionnaire. A questionnaire was utilized to evaluate the validity of the measurement scales. For the construct of digital organizational culture, measures were adapted from Martínez-Caro et al. (2020) and Hadi and Baskaran (2021), while those for financial performance were adapted from Nasiri et al. (2020), AlMulhim (2021). Measures for intellectual capital were based on Rehman et al. (2022), and measures on ESG were adapted from Van Duuren et al. (2016). Measures for government policy were adapted from Lessing et al. (2017) and Sanni-Anibire et al. (2022). The content validity index (CVI) was 0.87. Based on the assessment, essential adjustments were made to the items affected before initiating the final data collection phase. In addition, the reliability, internal consistency and stability of the instrument were evaluated using Cronbach’s alpha coefficient (Clarke et al., 2011). The Cronbach’s alpha values were 0.913 for the construct of digital organizational culture, 0.957 for the construct of ESG, 0.874 for the construct of financial performance, 0.929 for the construct of government policy and 0.881 for the construct of intellectual capital. All the values signify that the scales used in the study were reliable for all coefficients that exceeded the threshold of 0.75 (see Table 2). Therefore, the conditions for Cronbach’s alpha, as suggested by Clarke et al. (2011), were fully satisfied.

After establishing reliability and validity, a survey was conducted, gathering quantitative data. Data collection comprised a combination of both online and offline methods, with 360 responses deemed valid after excluding 27 incomplete entries. Data analysis was performed using SPSS and SmartPLS, enhancing sample representation and minimizing bias. Table 1 presents the demographic characteristics of respondents. The unit of analysis for the research was the firm, with one representative chosen from each firm to share insights. These representatives comprised individuals such as the owner/entrepreneur, CEO, managing director, manager, assistant manager and supervisor. Their responses were considered reflective of the firm’s various dimensions under investigation, including digital organizational culture, financial performance, intellectual capital employment and ESG disclosure. Besides, most respondents (85%) occupy managerial roles, ensuring a substantial representation of managerial perspectives (Table 1). The selection of representatives was guided by the assumption that the individuals at these managerial levels possess adequate knowledge of the firm’s different dimensions and are involved in the preparation of the organizational reports. About 45% were female and 55% were male. About 67.3% were 31 or older. In terms of academic qualifications, most respondents held a bachelor’s degree (36.1%) or higher degrees, including a master’s (32.8%) and a doctorate (4.2%). Henceforth, a substantial proportion of the respondents (73.1%) were degree holders (see Table 1), implying they were well-equipped to comprehend and respond effectively to the questionnaire.

Our study implemented a comprehensive bilingual approach for the survey instrument from English to Bahasa Malaysia. Such a dual-language approach offered respondents flexibility to pick their preferred language of response, thereby enhancing response accuracy and participant engagement. The availability of both English and Bahasa Malaysia versions of the questionnaire not only incorporated linguistic diversity but also enriched the validity of responses by allowing participants to voice their views in their most comfortable language. The choice of translation process from a professional translator comprised cautious deliberation of local business terminology and cultural distinctions specific to the Malaysian manufacturing industry, warranting that the questionnaire items maintained their intended meaning while being culturally pertinent to the target population.

The relationship between digital organizational culture and financial performance has drawn substantial scholarly attention; however, the findings remain inconsistent (Ahmed et al., 2022; Duerr et al., 2018). As digitalization permeates business landscapes, examining its implications on financial performance is essential, especially from unique theoretical perspectives. Enterprises increasingly invest in digital infrastructure to enhance information flow along supply chains, enhancing competitiveness and business value (Azarov and Leokhin, 2020; Ritter and Pedersen, 2020). Digitalization aims to enhance financial performance by reconfiguring operations and automating traditional processes, a shift that shapes organizational culture and employee interactions (Fadhilah and Subriadi, 2019). However, digital investments often yield varying performance benefits even within similar industries, underscoring the “digital productivity paradox,” where estimated productivity gains from digital culture remain elusive (Karpunina et al., 2024). The RBV and dynamic capabilities theory support that firm performance is closely tied to internal capabilities, which can enhance competitive advantage (Salim et al., 2019). This study, hence, hypothesizes:

The RBV also posits that a firm’s competitive advantage stems from its internal resources rather than external positioning. This view emphasizes that competitive advantage and superior financial performance are gained through managing valuable, rare, inimitable and non-substitutable resources. Resources, encompassing both tangible and intangible ones, collectively generate value through synergies, making it challenging to isolate individual resource effects (Huemer and Wang, 2021). To approach it from this angle intellectual capital encompassing organizational knowledge, skill and expertise, is also classified as human structural and relational capital by numerous scholars, and has thus, gained strategic prominence, particularly in the digital era (Obeidat et al., 2017). Investing in intellectual capital increases an organization’s digital capabilities, supporting innovation and fostering a culture that embraces digital transformation, especially with SMEs (Arena et al., 2022; Demartini and Beretta, 2020; Maji and Goswami, 2017). It is, therefore, presumable that through enhanced knowledge-sharing and employee development, intellectual capital strengthens an SME’s digital organizational culture, which can improve employee performance and innovation potential (Murray and Palladino, 2021). Therefore, this study hypothesizes:

Human capital, as a crucial component of intellectual capital, includes the knowledge, skills and characteristics of organizational members, enabling value creation (Nassirzadeh et al., 2023). Despite limited ownership control, human capital remains integral to business success (Paunović, 2021). Chen et al. (2021) posited that human capital mediates the link between human resource development and firm performance, as investments in this area boost knowledge acquisition, application as well as sharing; all are keys to intellectual capital’s growth. In this respect, this study also explores how digitalization enhances financial performance by enhancing intellectual capital, supported by the findings of Abou-Foul et al. (2021) that digitalization fosters productivity through human capital and resource efficiency. One could claim that intellectual capital, measured by the value-added intellectual capital coefficient, quantifies human, structural and relational capital’s contributions to performance (Maji and Goswami, 2017). RBV highlights the mediating role of intellectual capital in linking digital organizational culture with financial performance and competitive advantage. Thus, this study hypothesizes:

The rapid advancement of information and communication technologies necessitates supportive macroeconomic policies and regulatory mechanisms to enable effective digitalization efforts (Dufrénot, 2023), especially in emerging economies. The role of government policies in enhancing the financial performance of SMEs is inevitable and crucial, such that they facilitate digital adoption through strategic planning, regulatory frameworks and investments in digital infrastructure (Tudose and Avasilcai, 2020). Research has also highlighted that those conventional practices and procedures in organizational culture, when shifted to digital, can boost firms’ operational and financial performance. But their effectiveness depends on the level of government support, including incentives for digital adoption, technical guidance and capacity-building (Spence, 2021; Rajamani et al., 2022). Past research emphasizes the significance of government policies that provide financial assistance, digital skills development and innovation support, shaping SMEs’ ability to leverage digital technologies effectively (Lutfi et al., 2022). Therefore, this study hypothesizes:

Digital organizational culture is increasingly identified as a key driver of financial success for SMEs, sparking creativity, adaptability and value for customers by weaving digital technology into the very fabric of a firm’s value and daily practices. This cultural shift not only builds resilience but also helps small businesses stay agile and connected to their customers’ needs in a digital world (Duerr et al., 2018). However, this connection remains complex and underexamined. ESG disclosures may serve as a mediating factor that clarifies this link, given their role in conveying nonfinancial data on environmental influence, social responsibility and governance practices (Niu et al., 2022). By building a firm’s reputation, lowering risk and drawing in investors, ESG disclosures can play a powerful role in boosting financial performance (Chen and Xie, 2022; Adenan et al., 2024). Though there is still an overwhelming debate, and recent research suggests that ESG practices can help SMEs perform better by making them more transparent and resilient to risks (Sandberg et al., 2023; Al Amosh et al., 2022). This study, therefore, explores how ESG disclosures might bridge the link between digital organizational culture and financial performance and hypothesizes:

The sample consists of respondents aged 31–40 (35.6%), followed by two older age groups (23.9 and 7.8%). Most respondents (85%) occupy managerial roles. Gender distribution demonstrates a near-even split between female (45%) and male (55%) participants. Educational backgrounds range from bachelor’s degrees (36.1%) to master’s degrees (32.8%), with a smaller proportion holding doctoral degrees (4.2%) (see Table 1).

This study using SmartPLS demonstrated high Cronbach’s alpha values, confirming reliable measurement of latent variables. Composite reliability (rho_and rho_c) further affirmed the constructs' internal consistency and reliability. Rho_a values between 0.878 and 0.958 and rho_c values from 0.910 to 0.963, exceeding the recommended thresholds of 0.7 for rho_a and 0.8 for rho_c. The average variance extracted (AVE) values, ranging from 0.628 to 0.722, are above the 0.5 threshold, affirming good convergent validity. The collinearity matrix using the variance inflation factor (VIF) shows multicollinearity is minimal, with values ranging from 1.76 to 2.28, providing a reliable foundation for structural modeling and hypothesis testing (Table 2). Table 3 presents the heterotrait-monotrait ratio (HTMT), essential for evaluating discriminant validity within the SmartPLS framework in SEM. All HTMT values fall below the 0.85 threshold, confirming strong discriminant validity. Table 4 provides a discriminant validity assessment using the Fornell–Larcker criterion in SmartPLS, which tests construct distinction in SEM. The AVE values along the diagonal are greater than the respective off-diagonal elements, confirming distinct constructs. Each construct’s AVE exceeds its squared correlations with other constructs, reinforcing the model’s validity. Structural model analysis and hypothesis testing are conducted through the PLS-SEM algorithm and bootstrapping procedure, which assess structural relationships. The model’s fitness was assessed using VIF, R² and standardized path coefficients, showing no multicollinearity concerns and high R² values. Exogenous variables explained 36.5% of the variance in financial performance, with strong explanatory power in ESG. SmartPLS analysis summarizes path coefficients, T statistics and p-values (p-value <0.05) for various relationships in SEM. The analysis (see Table 5) yielded significant insights into factors affecting firms’ financial performance with a path coefficient (β) of 0.208 and a T statistic of 2.430 (p-value = 0.015 < 0.05), thus supporting Hypothesis 1.

Table 5 further reveals that digital organizational culture significantly influenced intellectual capital, with a path coefficient (β) of 0.649 and a T statistic of 16.314, confirming statistical significance (p-value = 0.000 < 0.05) and supporting Hypothesis 2. Additionally, the digital organizational culture showed a positive association with ESG, with a β of 0.505 and a T statistic of 10.989 (p-value = 0.000 < 0.05), supporting Hypothesis 3. Intellectual capital positively impacted financial performance (β = 0.191, T = 2.503, p-value = 0.012 < 0.05), validating Hypothesis 4. ESG was also positively related to financial performance, with a β of 0.184 and a T statistic of 2.588 (p-value = 0.010 < 0.05), thus supporting Hypothesis 5. Government policy had a positive effect on financial performance (β = 0.169, T = 2.713, p-value = 0.007 < 0.05) supporting Hypothesis 6. Lastly, the interaction between government policy and digital organizational culture had a significant positive impact on financial performance, as evidenced by a β of 0.139 and a T statistic of 3.001 (p-value = 0.003 < 0.05), validating Hypothesis 7.

See Figure 2, for a detailed visualization of the hypotheses results, as outlined in Table 5.

This study examines intellectual capital as a mediator between digital organizational culture and financial performance, using SmartPLS bootstrapping to assess direct and indirect effects, along with variance accounted for (VAF) to evaluate mediation strength. VAF values over 80% indicate full mediation, between 20 and 80% indicate partial mediation and below 20% suggest no mediation. In the first mediation analysis, intellectual capital significantly mediated the relationship (β = 0.124, t = 2.508, p = 0.012, p < 0.05), with a VAF of 29.17%, indicating partial mediation. In the second analysis, ESG also showed a significant mediating effect between digital organizational culture and financial performance (β = 0.093, t = 2.574, p = 0.010, p < 0.05), with a VAF of 21.89% (see Table 5). These results suggest intellectual capital and ESG as partial mediators, emphasizing their roles in strengthening the influence of digital organizational culture on financial performance and thereby supporting Hypotheses 8 and 9 (see Table 5).

Based on the results of the study, digital organizational culture, intellectual capital, ESG and government policy significantly influence financial performance in Malaysian manufacturing SMEs. Firstly, digital organizational culture positively influences financial performance, signifying that integrating digital practices within the organizational structure enhances financial outcomes. This association is further strengthened by the positive effect of digital organizational culture on intellectual capital, signifying that fostering digital culture enables the development of intangible assets contributing to a competitive edge and a firm’s financial gains. These findings are supported by the study conducted by Doulamis et al. (2017), which stressed the growing significance of effectively managing digital assets. As organizations digitize both tangible and intangible assets, they encounter challenges such as setting standards, handling metadata and addressing copyright issues. Efforts to address these challenges, such as adopting structured digital practices, linked data and cloud technologies, help organizations maintain and improve their knowledge base. By incorporating a strong digital culture, firms not only preserve valuable information but also make it convenient to access and use, thereby fostering the growth of intellectual capital. Such an approach aligns with the best practices in managing data and heritage, signifying that digital culture can foster the long-term development of intangible assets.

Moreover, the relationship between digital organizational culture and financial performance is supported by the work of Wang and Esperança (2023), who indicated that managing digital resources, adopting new technologies and building competitiveness can indirectly boost ESG efforts by strengthening market performance.

Substantially, firms do not need strict preconditions to execute ESG practices; simply being competitive can drive these initiatives, with market performance offering a solid base. In addition to that, a culture of digital innovation acts as a catalyst in enhancing the link between digital adoption and both competitiveness and management practices. Furthermore, intellectual capital and ESG are shown to independently enhance financial performance, confirming the significance of the mediating factors. These findings resonate with Nirino et al. (2022), highlighting that intellectual capital partially mediates the link between corporate social responsibility (CSR) and financial performance, signifying that CSR initiatives can foster a firm’s intellectual capital and, in turn, its competitive advantage. In addition, the impact of government policy, particularly when aligned with the digital organizational culture, highlights the supportive role of regulatory frameworks in improving the financial growth of a firm. In parallel, the significance of government policy identified in this study underscores the significance of the policies and support mechanisms, such as Malaysian Industry4WRD initiatives that have formed a favorable environment for embracing digital technologies and innovating business models. These results suggest that government policy directly influences financial performance by offering incentives such as enhancing access to alternative financing options for small and medium businesses so they move swiftly to the digital culture (Kurniawan et al., 2023; Najib et al., 2021). The findings are also supported by the work of Kurniawan et al. (2023), who suggested that recognizing the influence of government policy on financial performance is essential so the policymakers better develop strategies that meet the specific needs of the SMEs to foster growth.

Conclusively, extant research also suggests that manufacturing sub-sectors may differ substantially in their digital maturity, capabilities of executing ESG reporting practices and how variations in one pillar might impact the others (Yucel and Yucel, 2024). For instance, Xie et al. (2024) posited that high-tech manufacturing sub-sectors and highly knowledge-intensive industries typically display a stronger digital culture and intensity of digital innovation sources than conventional manufacturing industries. The findings of this study may relate to the above in a way that the impact of digital organizational culture practices may vary across manufacturing sub-sectors primarily shaped by firms’ financial and intellectual capital employment. A stronger capital base or resource foundations improve responsiveness to environmental regulations and digital advancements, while adaptability is impacted by the intensity of digital adaptation as well as regulatory compliance capacity (Song et al., 2022).

Conclusively, this research brings to light the elaborate and multi-layered landscape of the Malaysian manufacturing industry by offering valuable insights and understanding of the key factors influencing the manufacturing firms’ financial performance, notably the role of determinants such as digital organizational culture, intellectual capital, ESG practices, and government policy. The findings reveal that digital organizational culture significantly influences financial performance, with ESG factors and intellectual capital acting as mediators that strengthen the association. On the other hand, the interaction of government policy accentuated the significance of supportive regulatory frameworks, which bolster organizational stability and foster innovation. Such findings are in line with past studies emphasizing how digital practices, sustainability initiatives and intellectual resources contribute to financial performance, reinforcing the strategic role of these factors in influencing the financial performance of the manufacturing industry, which contributes substantially to the country’s GDP, as a key driver of Malaysia’s economic growth. From a practical perspective, Malaysian manufacturing enterprises can optimize their ESG initiatives and boost financial performance through several key digitally steered strategies (Tan et al., 2023; Adenan et al., 2024). Firstly, firms could prioritize the integration of digital tools and platforms that strengthen the implementation and monitoring of ESG activities. Precisely, firms can use cloud-based platforms to centralize their sustainability data across multiple dimensions, for example, energy consumption, usage of water, management of waste and monitoring emissions.

A real-world example highlighted by Božić (2023) in his study is Schneider Electric’s “EcoStruxure™ Resource Advisor,” which is a cloud-based platform demonstrating how digital technology can work hand-in-hand with ESG efforts. Božić (2023) further highlighted in his findings that by utilizing simple tools like sensors and smart meters, firms could monitor their energy usage, carbon emissions and consumption of water. The platform also helps them measure their progress and form reports, making it convenient to improve resource use and adopt more sustainable practices. Secondly, SMEs should also focus on developing tailored ESG frameworks that align with their limited resource capabilities and sector-specific requirements. A reasonable example is the execution of cost-effective waste management systems improved by machine learning technology while allowing businesses to gradually expand their ESG efforts based on the availability of resources (Munir et al., 2023). Identifying that SMEs often operate with limited resources, the government itself must intervene in designing and developing targeted policies and support programs. These initiatives will be designed to help SMEs simultaneously modernize their digital operations and ESG practices to allow them to contend in today’s market. This integrated approach may help the Malaysian manufacturing industry in breaking the resource limitations while maximizing the synergistic benefits of both digitalization and ESG execution, eventually contributing to their strategic growth.

While this research adds to the existing knowledge, it is not devoid of its limitations and offers promising research avenues. This study’s major limitation stems from its reliance on self-reported quantitative data, which might initiate a potential bias despite methodological justification. The quantitative design, though vigorous, limits the profound assessment of nuanced dimensions of digital organizational culture and ESG reporting within manufacturing SMEs. Likewise, the focus of the study on Malaysian manufacturing enterprises possibly confines the generalizability of the findings to other industrial sectors and other geographical regions. Therefore, future research directions pose numerous avenues for addressing these limitations. Firstly, espousing a mixed-method approach integrating qualitative data through stakeholder interviews would offer richer and more in-depth insights into digital organizational culture and ESG reporting. Secondly, expanding the scope to diverse industries, for instance, services, agriculture or construction and linking digitalization and sustainability practices across diverse economies would lead to an upsurge in-depth and real-time knowledge of sector-specific effects on financial performance. Lastly, longitudinal inquiries across diverse cultural settings might track the temporal evolution of digitalization initiatives and ESG reporting practices. Such studies may illuminate three essential features: the maturing process and stages of digital organizational culture and its implications on performance, long-term financial profits on ESG investments and firms’ adaptive policies in response to dynamic market conditions and regulatory requirements. This temporal lookout can improve our understanding of how these combined influences affect SMEs’ financial performance over time.

The findings of the study offer numerous implications for SME managers, policymakers and the research community. For SME managers, prioritizing digital organizational culture and integrating intellectual capital can be a strategic move for them to achieve a competitive edge and financial stability. Policymakers can draw on these insights to formulate policies and programs that support the integration of digitalization along with a boost in intellectual capital employment. Moreover, policies that encourage the disclosure of ESG information, particularly within the manufacturing sectors, for them to attract potential investors and encourage sustainable growth. Finally, the research community may consider exploring emerging trends, such as digital transformation strategies, and sustainable initiatives, to deepen the understanding of the readers of the impact of those factors on financial performance across various economic contexts.