1. Introduction
Industries worldwide are undergoing significant transformations owing to the advent of Industry 4.0 (I4.0). I4.0 integrates the latest digital technologies and ensures their interoperability, enabling enterprises to transmit real-time information about their behavior and performance. These technologies facilitate significant improvements in productivity, efficiency, and innovation (Ghobakhloo et al., 2021; Lemstra and de Mesquita, 2023; Proksch et al., 2024). I4.0 technologies represent a crucial shift for organizations seeking to enhance their innovative capacities and compete in increasingly digitized markets.
Small and medium-sized enterprises (SMEs) are considered engines of innovation, growth, and job creation in national economies (Chatterjee et al., 2022; Ibarra-Morales et al., 2020; Verdolini et al., 2018). SMEs can develop new products, organizational forms, and business models (Meijer et al., 2019). Given the importance of SMEs, governments have established public policies that promote their development (Choi and Lim, 2017; Pincheira Varas and Mata, 2023). However, these firms are more vulnerable than large and multinational firms to constantly changing technological environments, which often requires them to adopt I4.0 technologies to remain competitive (Ng et al., 2020; Ur Rahman et al., 2020).
In developing economies, SMEs face additional barriers to adopting these new technologies because of insufficient skills and networks, communication difficulties, limited access to adequate technologies, and limited funding (Hernandez-Pardo et al., 2012; Singh et al., 2010). Given such barriers, adopting I4.0 technologies can offer competitive advantage, enhance other business capabilities, and enable value creation (Gaviria-Marin et al., 2021). Firms implementing digital transformation have reported higher net margins and better performance than the industry average (Woerner et al., 2022). Understanding the factors that influence this adoption process, especially in developing economies, is crucial for improving SMEs’ innovation performance and contributing to the theoretical development of digital capabilities and sociotechnical systems (Teece et al., 1997; Bednar and Welch, 2020).
This study aimed to grasp the relationships between SMEs’ digital capabilities, I4.0 technology adoption, and SMEs’ innovation performance, providing actionable recommendations to improve SMEs’ competitiveness in the context of digital transformation (Singh et al., 2023
