Navigating MSMEs' performance through innovation and digital IT capabilities in business strategy

The rapid advancement of digital transformation has significantly reshaped the business environment, presenting both opportunities and challenges for Micro, Small, and Medium Enterprises (MSMEs). In Indonesia, where MSMEs operate in an increasingly digitized economy, this transformation is particularly critical as MSMEs strive to remain competitive and resilient. Among the most influential aspects of digital transformation are digital platforms, which continue to evolve rapidly and demand constant adaptation. While existing studies have largely focused on platform adoption and interactions with specific digital services, limited attention has been given to the dynamic nature of these platforms and how MSMEs strategically respond to such changes to improve their performance. To address this gap and draw on the Resource-Based View (RBV) and Dynamic Capability Theory (DCT), the present study investigates the mediating roles of innovation capabilities and digital IT capabilities in the relationship between business strategy and MSME performance. A total of 257 MSME owners and managers in Indonesia participated in the survey. Participants were selected using purposive sampling based on their involvement with digital platforms and their strategic decision-making roles. Using Structural Equation Modeling–Partial Least Squares (SEM-PLS), the results indicate that both innovation capabilities and digital IT capabilities serve as partial mediators in the relationship between business strategy and MSME performance. Theoretically, this study highlights the crucial role of these capabilities in navigating digital transformation. Practically, it underscores the importance of developing technological adaptability to ensure the long-term sustainability of Indonesian MSMEs. Policymakers can further leverage these findings by designing targeted training programs and financial incentives that simultaneously build MSMEs' innovation competencies and digital capabilities, thereby strengthening their resilience and growth potential in an increasingly digital marketplace.