Future-Proofing Social Enterprises in Malaysia: Examining Internal and External Drivers of Performance Through Social Innovation

Social enterprises (SEs) in Malaysia face persistent challenges in achieving financial sustainability and scalable impact despite increasing policy support and stakeholder involvement. This study examines how internal drivers (digitalization and earned-income generation) and external drivers (government support and stakeholder engagement) influence SE performance, with social innovation acting as a mediating mechanism. A sequential mixed-method approach was employed, combining focus group discussions with 155 accredited SEs and quantitative analysis using Partial Least Squares Structural Equation Modelling (PLS-SEM). The findings reveal that digitalization and stakeholder engagement have significant positive effects on SE performance, while earned-income generation demonstrates a negative direct relationship. Social innovation emerges as the strongest predictor of performance and significantly mediates the relationships between key organizational drivers and performance. In contrast, government support does not exhibit a significant direct or indirect effect. These findings highlight the critical role of social innovation as a capability that transforms resources into performance outcomes. This study contributes to the literature by advancing a capability-based explanation of SE performance in emerging economies and provides practical insights for strengthening innovation-driven strategies among social enterprises.