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Firms are engaging in eco-innovation as a response to environmental concerns. Due to its complexity, firms are searching, absorbing and using externally acquired knowledge toward implementing eco-innovation. Thus, this study aims to examine how different external knowledge sources affect the eco-innovation of small and medium-sized enterprises (SMEs) in developing economies.

The study uses an Ordered Probit regression analysis for 318 developing economy SMEs to examine the impact of vertical flows (suppliers and customers) and horizontal flows (competitors and scientific organisations) on eco-innovations.

On the vertical dimension, the results show that external knowledge from suppliers is positively associated with eco-product and eco-process innovations. However, external knowledge from customers is positively associated with eco-product innovation, but not eco-process innovation. On the horizontal dimension, external knowledge from competitors contributes to eco-process innovation, but not to eco-product innovation. Finally, external knowledge from scientific organizations is positively related to eco-product and eco-process innovations.

First, the study contributes to the external knowledge literature by focusing on developing country SMEs. Second, the methodology used in this study constitutes a novelty as it provides a tool that categorizes firms according to the extent of emphasis they placed on both eco-product and eco-process innovations. Finally, it offers new evidence by revealing that the effects of external knowledge on eco-innovations are differentiated and not equally beneficial to firms.