Purpose The purpose of this paper is to determine the effect of service quality and innovation on competitive advantage and sustainable local economy, with marketing mix strategy as the mediating variable (Study in small and medium enterprise (MSME) in Java and Sumatera). Design/methodology/approach The study population of this paper is the MSME in Sumatera and Java Islands in Indonesia, as the highest population in Indonesia in 2010–2016 (portion of MSME in Indonesia: Java 58.29 percent and Sumatera 22.22 percent, or total 80.51 percent), and total 16 province in Indonesia: Aceh, Sumatera Utara, Riau, Sumatera Barat, Jambi, Sumatera Selatan, Bengkulu, Lampung, Kep Riau, Kep Bangka Belitung (Sumatera Island), and Banten, DKI Jakarta, Jawa Barat, Jawa Tengah, Jawa Timur, DI Yogyakarta (Java Island). The analysis used in this study is a quantitative approach, namely, structural equation modeling based on variance, also known as the WarpPLS method. Findings The findings of this study are as follows: first, service quality has an influence on marketing mix strategies, meaning the application of service quality according to customer needs will create satisfaction. In other words, the better the quality of service provided, the higher the customer satisfaction will be. Second, the quality of service has a direct influence on creating a sustainable local economy, meaning that improving service quality to understand customer needs can enhance sustainable economic growth and competitive advantage through marketing mix strategies. This means that improving service quality in accordance with customer needs will improve the marketing mix strategy leading to a sustainable local economy. Third, the marketing mix strategy has a positive influence on the sustainable local economy, meaning that the higher the marketing mix strategy, the better the strategy for sustainable economic growth and competitive advantage will be. Originality/value The effect of marketing mix strategy as mediation (using the Sobel test) on the influence of service quality and product innovation on sustainable local economy and competitive advantage is shown in this study. No previous research studies this relationship at the research location: MSME in Indonesia, especially in Java and Sumatra Islands. Hence, this is one of few studies comprehensively evaluating the effect of service quality and innovation, toward competitive advantages and local sustainable economic: marketing mix strategy as mediating variable (study in MSME in Java and Sumatera).

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