Enhancing Digital Service Performance through Transformation Capability and Knowledge Sharing in MSMEs

Abstract

This study addresses the growing need for manufacturing Micro, Small, and Medium-Sized Enterprises (MSMEs) to transform digital technology investments into sustainable business performance. Grounded in the Knowledge-Based View and Dynamic Capability Theory, this study aims to examine the effect of Digital Transformation Capability on Business Performance through the mediating roles of Absorptive Capacity and Knowledge Sharing among metal machining MSMEs in Bekasi City and Bekasi Regency, Indonesia. A quantitative explanatory research design was employed using a structured questionnaire distributed to 289 owners and managers selected through purposive sampling. The data were analyzed using Covariance-Based Structural Equation Modeling with IBM SPSS AMOS. The structural model demonstrated a good fit with the empirical data, indicated by CFI = 0.982, TLI = 0.960, and RMSEA = 0.027. The findings show that Digital Transformation Capability positively strengthens organizational capabilities, while Absorptive Capacity plays a critical mediating role in translating digital transformation into improved Business Performance. The mediation analysis confirms that Absorptive Capacity fully mediates the relationship between Digital Transformation Capability and Business Performance, indicating that digital investments generate greater value when firms can effectively acquire, assimilate, transform, and exploit strategic knowledge. The study extends the Knowledge-Based View and Dynamic Capability Theory by integrating digital transformation, Absorptive Capacity, and knowledge sharing within a unified MSME performance framework. The findings also highlight the importance of combining digital adoption with organizational learning, employee capability development, and knowledge-sharing practices to achieve sustainable competitiveness.