The Impact of Digital Transformation on the Innovation Performance of SME through Employees’ Digital Capabilities: The Moderating Effect of Digital Transformation

Abstract

In the digital age, small and medium-sized enterprises (SMEs) face significant challenges and opportunities in adopting digital transformation (DT) to enhance their innovation performance. This study investigates the critical role of employee digital capabilities and digital transformational leadership (DTL) in driving innovation within SMEs. By leveraging a theoretical framework that integrates digital adoption, digital drive, and digital culture, this paper explores how these factors influence innovation performance. Using Partial Least Squares Structural Equation Modeling (PLS-SEM) to analyze survey data from SMEs, the findings reveal that employee digital capabilities significantly mediate the relationship between digital transformation and innovation performance. Furthermore, digital transformational leadership is found to moderate this relationship, amplifying the positive effects of employee digital capabilities on innovation. The study contributes to the literature by highlighting the interconnectedness of digital transformation, leadership, and employee competencies in fostering innovation in SMEs. The results underscore the importance of strategic leadership and employee skill development in navigating digital transformation processes. Implications for managers and policymakers are discussed, particularly in the context of fostering a digital culture and enhancing organizational agility through leadership and employee capabilities.