From ecosystem conditions to sustainable performance: role of dynamic capability and digital transformation in MSMEs

Purpose Despite entrepreneurial ecosystems (EE) being viewed as enablers of competitiveness and performance, the firm-level mechanism through which EE conditions translate into sustainable outcomes remains ambiguous, particularly in manufacturing micro, small and medium-sized enterprises (MSMEs). This study aims to examine the effect of EE conditions on sustainable performance (SP), and effect of dynamic capability (DC) as a mediating mechanism and digital transformation (DT) as a boundary condition moderator. Design/methodology/approach This study uses cross-sectional survey data from 257 manufacturing MSMEs in an emerging market such as India. EE conditions are modelled as a second-order formative construct, estimated using the disjoint two-stage approach. The hypothesized relationships were analysed using partial least squares structural equation modelling (PLS-SEM), with predictive relevance assessed using PLSpredict. Findings The findings show that EE conditions exert a significant positive effect on both DC and SP. DC significantly influences SP and partially mediates the EE−SP relationship. The interactions between DT and EE significantly strengthen the EE−SP relationship, confirming DT’s role as a boundary condition. Practical implications MSMEs aiming for sustainable outcomes should focus on developing DC alongside ecosystem engagement. Digital preparedness should be viewed as an enhancement of overall capabilities rather than a separate performance driver. Furthermore, policy interventions should integrate digital readiness into broader ecosystems, rather than treating the two separately. Originality/value This study contributes to the research on EE and DC capability theory by examining the EE−SP relationship in the MSME context, which is jointly controlled by an internal capability mechanism and a digital contingency condition.