Frugal innovation as a socially embedded capability system: Evidence from MSMEs

Micro-, small, and medium-sized enterprises (MSMEs) in resource-constrained economies increasingly use frugal innovation to serve bottom-of-the-pyramid markets. This study examines how grassroots MSMEs in Central Java, Indonesia, enact and sustain frugal innovation, addressing an empirical gap in MSME-focused evidence. Drawing on semistructured interviews with owners and managers and thematic analysis, we find that frugal innovation operates as a socially embedded capability system that converts scarcity into resilience-oriented outcomes. We identify six interrelated dimensions: resource efficiency, affordability, cost-effectiveness, simplicity and functionality, sustainability, and social and community support. These dimensions are sustained through microstrategies, such as local sourcing, input substitution, tool bricolage, order-paced production, and low-cost promotion. The study highlights social embeddedness as a key mechanism of capability building and offers implications for MSME strategy and support policy in resource-constrained settings.