This study investigates how financial constraints influence environmental innovation and how such innovation contributes to business sustainability and competitive advantage. Existing research has primarily examined financial constraints in isolation, leaving a gap in understanding how firms can transform financial challenges into a strategic opportunity through environmental innovation. Drawing on data from 280 firms across six countries (2012–2024), this study employed a quantitative panel regression approach to test the mediating role of environmental innovation and the moderating effects of management quality and institutional pressures. The analysis revealed that financial constraints significantly hinder environmental innovation, while environmental innovation strongly enhances business sustainability and competitiveness. Furthermore, both management quality and institutional pressures weakened the negative impact of financial constraints, and environmental innovation partially mediates the relationship between financial constraints and business sustainability. The findings demonstrate that firms can achieve sustainability-driven competitive advantage even under financial stress through effective leadership and supportive institutional environments. This study contributes to theory by integrating the Resource-Based View, Institutional Theory, and Stakeholder Theory to explain innovation resilience under constraint. The study offers novel insights into the financial–sustainability interface.
Kajejy et al. (Sat,) studied this question.