The Role of Digital Transformation in Driving Sustainable Innovation among MSMEs

This study examines how the adoption of digital technologies can enhance innovation and sustainability among Micro, Small, and Medium-Sized Enterprises (MSMEs). Grounded in the resource-based view (RBV) framework, MSMEs are conceptualized as heterogeneous organizations with diverse capacities, resources, and strategic orientations. To explore the impact of digitalization on key firm performance metrics, Structural Equation Modelling (SEM) was applied to analyse survey data obtained from MSMEs in Indonesia. The findings indicate that digitalization strengthens innovation performance, particularly in manufacturing, logistics, and value chain digitalization, although its influence on product and process innovation remains moderate. Furthermore, compared with small and medium-sized enterprises, microenterprises exhibit lower levels of adoption of big data and Artificial Intelligence (AI). Theoretically, this research advances the understanding of digitalization as a dynamic capability that shapes innovation outcomes in different ways depending on firm size. From a practical standpoint, the study emphasizes the importance of government support in developing policies that align with the distinct characteristics and needs of MSMEs.