From Risk to Sustainability: Dynamic Capability and Local Wisdom as Strategic Pathways for MSMEs in East Java

Entrepreneurial financial risk-taking is often assumed to support business sustainability, yet its contribution may depend on adaptive organizational capability and the cultural context in which MSMEs operate. This study examines how Financial Risk-Taking contributes to MSME Sustainability through Dynamic Capability and investigates the contextual role of Local Wisdom among environmentally friendly MSMEs in East Java, Indonesia. Drawing on Dynamic Capability Theory and Cultural Embeddedness Theory, it proposes that Financial Risk-Taking does not automatically generate sustainable outcomes but requires adaptive capability. Data from 739 owners and managers were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) with SmartPLS 4. Financial Risk-Taking has a positive and significant effect on Dynamic Capability, whereas its direct effect on MSME Sustainability is not significant. Dynamic Capability positively and significantly influences MSME Sustainability, and the indirect effect is significant, indicating indirect-only mediation. Local Wisdom has a positive direct effect on MSME Sustainability, but its interaction with Dynamic Capability is negative and significant, indicating that stronger cultural embeddedness attenuates the marginal contribution of Dynamic Capability to MSME Sustainability. The study extends Dynamic Capability Theory by positioning Dynamic Capability as the mechanism linking Financial Risk-Taking to Sustainability, and contributes to Cultural Embeddedness Theory by revealing the dual role of Local Wisdom as both a direct cultural resource and an attenuating boundary condition. Sustainability thus emerges not from financial risk-taking alone, but from transforming it into adaptive capabilities within culturally embedded business environments.