Digital transformation as a catalyst: synergising dynamic capabilities and TOE frameworks for MSME sustainability

Purpose This study aims to integrate the technology–organisation–environment (TOE) framework with the dynamic capability theory to address three research questions. First, do the dynamic capability and TOE framework have a positive effect on the digital transformation of micro, small and medium enterprises (MSMEs)? Second, does digital transformation have a positive effect on the economic sustainability and social sustainability of MSMEs? Third, does digital transformation mediate the relationship between the TOE framework and sustainability, and does digital transformation mediate the relationship between dynamic capability and sustainability? Design/methodology/approach This study uses a quantitative, cross-sectional research design using an online survey. To obtain a suitable sample, this study used a purposive sampling method. The final sample used for analysis consisted of 202 respondents. Data analysis was conducted using Partial Least Squares Structural Equation Modelling (PLS-SEM). Findings Compatibility, relative advantage, sensing capability, and seizing capability have significant positive effects on digital transformation. Digital transformation significantly mediates the relationship between relative advantage, compatibility, sensing capability, and seizing capability with economic sustainability and social sustainability. Practical implications MSME owners should prioritise developing sensing and seizing capabilities through simple, practical routines such as monitoring market trends via social media, collecting customers’ feedback and flexibly reallocating limited resources to digital transformation initiatives. They should favour technologies that offer clear relative advantages and strong compatibility with current workflows. The government must redesign its support programmes away from fragmented, one-off basic training towards sustained, capability-building interventions and connect directly to MSMEs’ daily digital practices, thereby enabling government assistance to exert a meaningful influence. Originality/value First, it applies the integrated TOE framework and dynamic capability theory to Indonesian MSMEs, a developing-country context that remains under-represented in digital transformation research. Second, it empirically reveals a conditional dimensionality within the TOE framework, which only the technology dimension directly drives digital transformations, whereas organisational and environmental factors are contingent, exerting influence only when channelled through sensing and seizing capabilities. Third, it uncovers a transforming capability lag. Fourth, it demonstrates that digital transformation fully mediates the relationships between these significant antecedents and both economic and social sustainability, firmly positioning it as the central operational mechanism linking internal strengths to sustainability outcomes.