DIGITAL TRANSFORMATION AND SUSTAINABLE PERFORMANCE OF RURAL MSMES: THE MEDIATING ROLE OF INNOVATION CAPABILITY

Abstract

This study addresses a critical paradox in rural micro, small, and medium enterprises (MSMEs), where the availability of digital technologies and financial resources does not necessarily translate into sustainable performance. Drawing upon the Resource-Based View (RBV) and Dynamic Capability Theory, this research examines how digital transformation and financial literacy influence sustainable performance through the mediating role of innovation capability. A quantitative approach is employed using data collected from 215 rural MSME owners in Indonesia. The analysis is conducted using Partial Least Squares Structural Equation Modeling (PLS-SEM), enabling the assessment of both direct and indirect relationships. The findings reveal that digital transformation and financial literacy significantly enhance innovation capability, which in turn exerts the strongest effect on sustainable performance. Moreover, innovation capability is confirmed as a significant mediating mechanism, indicating that the impact of resources is realized only when they are effectively transformed into capabilities. This study contributes to the literature by shifting the focus from mere resource ownership to capability transformation in explaining sustainable performance. Practically, the findings suggest that policies should integrate digital initiatives, financial education, and innovation support to enhance the sustainability of rural MSMEs.