DIGITAL TRANSFORMATION AND ORGANIZATIONAL PERFORMANCE: THE MEDIATING ROLE OF INNOVATION CAPABILITY
Abstract
Digital transformation has become a strategic imperative for small and medium-sized enterprises seeking stronger innovation and organizational performance. This study examined the direct effect of digital transformation on organizational performance, its effect on innovation capability, and the mediating role of innovation capability. A quantitative, explanatory, cross-sectional design was applied to secondary survey data from 200 SMEs across food and beverage, textile and fashion, services, craft and creative, and light manufacturing sectors. Partial least squares structural equation modelling was used to assess the measurement model, structural paths, explained variance, and mediation effects. Digital transformation significantly improved organizational performance (β = 0.316, p < 0.001), strongly enhanced innovation capability (β = 0.676, p < 0.001), and innovation capability significantly predicted organizational performance (β = 0.464, p < 0.001). The indirect effect through innovation capability was significant (β = 0.314, p < 0.001), with a variance accounted for of 49.8%, confirming complementary partial mediation. Digital transformation explained 45.7% of the variance in innovation capability, while digital transformation and innovation capability jointly explained 51.4% of organizational performance. The findings indicate that SMEs achieve stronger outcomes when digital investments are combined with innovation-oriented routines, employee capability development, and strategic alignment, highlighting innovation capability as a central mechanism linking digital transformation with performance and organizational adaptability.
Downloads
References
2.Barba-Sánchez, V., Meseguer-Martínez, A., Gouveia-Rodrigues, R., & Raposo, M. L. (2024). Effects of digital transformation on firm performance: The role of IT capabilities and digital orientation. Heliyon, 10(6).
3.Bhatti, S. H., Ahmed, A., Ferraris, A., Hirwani Wan Hussain, W. M., & Wamba, S. F. (2025). Big data analytics capabilities and MSME innovation and performance: A double mediation model of digital platform and network capabilities. Annals of Operations Research, 350(2), 729-752.
4.Bresciani, S., Huarng, K. H., Malhotra, A., & Ferraris, A. (2021). Digital transformation as a springboard for product, process and business model innovation. Journal of Business Research, 128, 204-210.
5.Chen, P., & Kim, S. (2023). The impact of digital transformation on innovation performance-The mediating role of innovation factors. Heliyon, 9(3).
6.Eller, R., Alford, P., Kallmünzer, A., & Peters, M. (2020). Antecedents, consequences, and challenges of small and medium-sized enterprise digitalization. Journal of Business Research, 112, 119-127.
7.Gupta, S., Modgil, S., Bhushan, B., Kamble, S., & Mishra, J. (2024). Digital innovation and transformation capabilities in a large company. Expert Systems, 41(7), e13452.
8.Hanelt, A., Bohnsack, R., Marz, D., & Antunes Marante, C. (2021). A systematic review of the literature on digital transformation: Insights and implications for strategy and organizational change. Journal of management studies, 58(5), 1159-1197.
9.Matarazzo, M., Penco, L., Profumo, G., & Quaglia, R. (2021). Digital transformation and customer value creation in Made in Italy SMEs: A dynamic capabilities perspective. Journal of Business research, 123, 642-656.
10.Melo, I. C., Queiroz, G. A., Junior, P. N. A., de Sousa, T. B., Yushimito, W. F., & Pereira, J. (2023). Sustainable digital transformation in small and medium enterprises (SMEs): A review on performance. Heliyon, 9(3).
11.Qiu, P., & Chang, B. (2025). The impact of digital transformation on open innovation performance: The intermediary role of digital innovation dynamic capability. PloS one, 20(3), e0317785.
12.Rubio-Andrés, M., Linuesa-Langreo, J., Gutiérrez-Broncano, S., & Sastre-Castillo, M. Á. (2025). Tackling digital transformation strategy: how it affects firm innovation and organizational effectiveness. The Journal of Technology Transfer, 50(5), 1893-1918.
13.Rupeika-Apoga, R., Petrovska, K., & Bule, L. (2022). The effect of digital orientation and digital capability on digital transformation of SMEs during the COVID-19 pandemic. Journal of Theoretical and Applied Electronic Commerce Research, 17(2), 669-685.
14.Sousa-Zomer, T. T., Neely, A., & Martinez, V. (2020). Digital transforming capability and performance: a microfoundational perspective. International Journal of Operations & Production Management, 40(7-8), 1095-1128.
15.Teng, X., Wu, Z., & Yang, F. (2022). Research on the relationship between digital transformation and performance of SMEs. Sustainability, 14(10), 6012.
16.Usai, A., Fiano, F., Petruzzelli, A. M., Paoloni, P., Briamonte, M. F., & Orlando, B. (2021). Unveiling the impact of the adoption of digital technologies on firms’ innovation performance. Journal of business research, 133, 327-336.
17.Verhoef, P. C., Broekhuizen, T., Bart, Y., Bhattacharya, A., Dong, J. Q., Fabian, N., & Haenlein, M. (2021). Digital transformation: A multidisciplinary reflection and research agenda. Journal of business research, 122, 889-901.
18.Wang, S., & Zhang, H. (2025). Digital transformation and innovation performance in small-and medium-sized enterprises: A systems perspective on the interplay of digital adoption, digital drive, and digital culture. Systems, 13(1), 43.
19.Wang, S., & Zhang, H. (2025). Enhancing SMEs' sustainable innovation and performance through digital transformation: Insights from strategic technology, organizational dynamics, and environmental adaptation. Socio-Economic Planning Sciences, 98, 102124.
20.Xu, M., Zhang, Y., Sun, H., Tang, Y., & Li, J. (2024). How digital transformation enhances corporate innovation performance: The mediating roles of big data capabilities and organizational agility. Heliyon, 10(14).
21.Yustian, Okky Rizkia; Ratnapuri, Chyntia (2026), “Digital Capability and Green Innovation as Drivers of Sustainable SME Performance”, Mendeley Data, V1. https://data.mendeley.com/datasets/rbwyfhvb9k/1.
This work is licensed under a Creative Commons Attribution 4.0 International License.
By submitting a manuscript to IJRDO – Journal of Business Management, the author(s) confirm that the work is original and does not infringe upon any existing copyrights or third-party rights.
Authors retain responsibility for the content of their work. In cases of proven ethical misconduct such as plagiarism or duplicate publication, the journal reserves the right to take appropriate action, which may include correction or retraction, in accordance with publication ethics.
