The impact of digital transformation on the performance of small and medium-sized enterprises: The mediating role of innovation capabilities in emerging markets
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Digital transformation has become a strategic priority for small and medium-sized enterprises (SMEs), particularly in emerging markets, where companies face intense competition and limited resources. Although interest in this topic continues to grow, there is limited empirical evidence on how digital transformation impacts SME performance. Using the Resource-Based View and the Dynamic Capabilities perspective, this paper explores the effects of digital transformation on SME performance and examines the mediating role of innovation capabilities. Data was collected through a structured questionnaire from 269 SMEs operating in Malaysia. Partial Least Squares Structural Equation Modeling (PLS-SEM) was employed to test the proposed research model. The results show that digital transformation has a positive and significant direct effect on SME performance, and innovation capabilities also have a strong positive impact. Furthermore, innovation capabilities significantly influence SME performance and partly mediate the relationship between digital transformation and performance. These findings suggest that digital technologies lead to better performance when SMEs simultaneously develop innovation-driven capabilities that support knowledge sharing, process adaptation, and continuous improvement. This research contributes to the literature by providing empirical data from an emerging-market context and clarifying the capability-based processes underlying digital transformation. Practical recommendations for SME managers and policymakers emphasize aligning digital efforts with the development of innovation capabilities to achieve sustainable performance benefits.
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© 2026 Horizons Intermediary Journal of Business Research. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND 4.0). All rights reserved by the journal.
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