Driving sustainable performance: Digital transformation, technological capability, and innovation in MSMEs

Micro, Small, And Medium Enterprises (MSMEs) play a crucial role in contemporary environmental issues. This research examines the role of digital transformation, technological capability, and innovation in driving the sustainable performance of Using data from 136 MSMEs across various sectors, the study employs Structural Equation Modelling (SEM) to evaluate relationships among variables. Results indicate that technological capability significantly enhances digital transformation and innovation, which in turn have a positive and direct impact on sustainable performance. However, technological capability does not directly influence sustainable performance, highlighting the critical mediating roles of digital transformation and innovation. Despite its contributions, this study is limited to the Solo Raya region, and the use of cross-sectional data restricts long-term causal inferences. Nevertheless, the findings offer valuable insights for policymakers and MSME leaders, emphasizing the need for strategic investments in IT infrastructure, digital skills training, and innovation processes to sustain growth. Future research should adopt a longitudinal approach and explore additional regions to validate these results. This study establishes a critical framework for understanding how technology and innovation drive sustainable MSMEs performance in a rapidly digitalizing world.