Digital transformation and sustainable competitive advantage in SMEs: unpacking the mediating role of absorptive capacity in emerging economies

Despite the growing recognition of digital transformation as a driver of sustainable competitive advantage, empirical evidence from small and medium-sized enterprises (SMEs) in developing economies remains limited. This study examines the mediating role of absorptive capacity in the relationship between digital transformation and sustainable competitive advantage among SMEs in Southern Ethiopia. Drawing on the Resource-Based View, Dynamic Capabilities Theory, and Absorptive Capacity Theory, the study employed an explanatory cross-sectional design using data collected from 267 SME owners and managers through stratified random sampling. The data were analyzed using partial least squares structural equation modeling (PLS-SEM). The findings reveal that digital transformation significantly enhances sustainable competitive advantage both directly and indirectly through absorptive capacity, indicating a complementary mediation effect. The study contributes to the literature by integrating three complementary theoretical perspectives to explain how digital transformation creates sustainable competitive advantage in resource-constrained SMEs. The findings further suggest that SMEs should complement digital investments with strong knowledge acquisition, assimilation, and application capabilities to sustain long-term competitiveness.