“The effect of digital transformation and innovation on SMEs’ performance in times of COVID-19”

This study examines the impact of digital capabilities and digital orientation on the digital transformation and digital innovation of small and medium enterprises (SMEs) during the COVID-19 pandemic. In addition, this study assesses how the role of digital transformation and digital innovation mediates the relationship between digital capabilities, digital orientation, and SME performance during the COVID-19 pandemic. Using a sample of 247 SMEs managers, data were analyzed using the structural equation modeling with a partial least square approach. The findings demonstrate the significant and positive influence of digital capability and orientation on SMEs’ digital transformation and innovation during the pandemic. Additionally, the study confirms that digital transformation and innovation positively affect SMEs’ performance during the pandemic. Furthermore, the study reveals that digital transformation and innovation mediate the relationship between digital orientation and capability on SMEs’ performance during the pandemic. However, digital innovation was not found to significantly mediate the link between digital capability and SMEs’ performance.


INTRODUCTION
The performance of small and medium enterprises (SMEs) during periods of crisis holds immense significance as it encapsulates the resilience and adaptability of these enterprises in the face of adversity.Crises, such as the COVID-19 pandemic, bring unprecedented challenges that test the very fabric of SMEs -from their operational strategies to their capacity for innovation and survival.Understanding how SMEs navigate and excel within such tumultuous scenarios is pivotal for their individual sustainability and crucial for the broader economic landscape.The ability of SMEs to maintain operations, retain their workforce, and continue contributing to the economy despite crisis-induced disruptions underscores their importance as dynamic engines of growth and job creation.Investigating the factors that drive SMEs to effectively weather crises and emerge stronger is thus of paramount importance, as it not only informs strategies for their survival but also enriches the broader understanding of business resilience and recovery in the face of unprecedented challenges.
In 2019, data from the Indonesian Ministry of Cooperatives and Small and Medium Enterprises (Kemenkopukm, 2022) demonstrated the significance of SMEs to the nation's economy.These enterprises con-tributed 60.51% or approximately Rp9.58 trillion to the Gross Domestic Product (GDP) and employed approximately 119.56 million people, or 96.92% of the nation's workforce.By June 2022, nearly 19.5 million small and medium-sized enterprises, or 30.4% of the total, had already integrated e-commerce platforms.Despite economic fluctuations, these numbers have remained remarkably stable, demonstrating the resilience of small and medium-sized businesses.Nonetheless, the COVID-19 pandemic has handed micro, small, and medium-sized enterprises (MSMEs) a severe blow.In 2020, the production of micro and small industries (MSIs) declined by 17.63% due to the cessation of numerous MSMEs caused by restrictions on mobility.These difficulties were exacerbated by the subsequent implementation of large-scale social restrictions (PSBB) during the pandemic.A survey of 2,944 MSMEs conducted by the Mandiri Institute (2021) revealed that 19.3% were forced to cease operations due to COVID-19 policies, while 47.0% operated under constraints during the PSBB.The restrictions on business hours had a negative impact on the revenue of MSMEs, with 72.04% reporting decreased earnings in July and August 2021.
Furthermore, in the context of crisis, the role of digital capability and orientation on digital transformation and innovation becomes pivotal in driving the performance of SMEs.As external shocks disrupt traditional business models, the ability of SMEs to harness digital tools and technologies can provide a transformative advantage.Digital capability refers to the technical competence of SMEs in utilizing digital solutions effectively.This capability empowers SMEs to swiftly transition to online platforms, maintain communication with customers, and optimize their operations despite mobility restrictions.In parallel, digital orientation plays a crucial role in aligning digital strategies with market demands and emerging trends.SMEs with a clear digital orientation can adapt their products, services, and processes to cater to evolving consumer behaviors, thereby staying relevant and responsive in dynamic markets.The synergy between digital capability and digital orientation enables SMEs to survive and thrive by exploiting the potential of digital transformation and innovation, ultimately bolstering their overall performance during times of crisis.
In essence, the symbiotic relationship between digital capability, digital orientation, digital transformation, and digital innovation catalyzes SMEs to navigate through challenges and seize opportunities amid crises.By effectively leveraging digital tools, SMEs can maintain their operations, connect with customers, and explore new revenue streams despite limitations imposed by external factors.Digital orientation then ensures that these digital strategies remain agile and adaptable, enabling SMEs to address shifting market dynamics and capitalize on emerging trends.Together, these elements empower SMEs to weather the storm of crisis and position them for sustained growth and competitive resilience in an increasingly digitized business landscape.

LITERATURE REVIEW AND HYPOTHESES
Digital capability plays a crucial role as a driving force behind digital innovation and transformation.The foundation for long-term competitive advantage lies in a firm's technological capability, encompassing knowledge, trade secrets, patents, and technology-specific intellectual property (Lee et al., 2001).Technological capability acts as the driving force behind a firm's innovation efforts (Hsieh & Tsai, 2007).
Digital technology capability has become essential in the current business landscape, defined as a com-pany's ability to develop and formulate digital products and processes (Khin & Ho, 2020).Effective management and leveraging of digital technology significantly enhance business performance by integrating and mobilizing human resources and technology (Liu et al., 2011).Technology affordances describe digital capacity, in which businesses design and maintain processes with knowledge assets and use human capital to connect with particular digital technologies (Saputra et al., 2022).A company's capabilities play a crucial role in determining its overall business performance, and the concept of company capability is rooted in dynamic capabilities and the organization's flexibility, including its digital capability.On the other hand, digital transformation plays a more significant role in influencing operating performance than financial performance (Guo & Xu, 2021).Its impact on firm performance requires favorable policy and innovation environment conditions.Technology adoption in the financial sector directly contributes to firm performance, particularly in the long term, due to the complexity of technology implementation (Scott et al., 2017).Furthermore, IT capabilities, represented by social media and e-commerce, have been empirically shown to enhance a firm's performance (Braojos et al., 2019).However, a competitive environment can influence innovation's effect on firm performance, with a stronger effect on process innovation (Prajogo, 2016;Turulja & Bajgoric, 2019).Tajvidi and Karami (2021) found that innovation has a substantial mediating function in the relationship between social media usage and company performance.
Despite the positive impact of digital innovation on firm performance, challenges arise due to the high externalities of digital technology (Teece, 2018).Nonetheless, digital innovation has been found to significantly impact corporate performance (Wang et al., 2022).The mediating role of digital innovation in the relationship between digital capability and firm performance highlights the importance of leveraging digital resources for successful innovation and ultimately improved performance.Alongside digital innovation, digital transformation also mediates the effect of digital capability on firm performance, emphasizing the need for companies to adapt to the digital landscape to achieve sustainable competitive advantage and success in the digital era.
Effective technology management is essential for organizations in the dynamic business landscape (Lu & Ramamurthy, 2011).Digital capability, as a firm's skill and expertise in managing digital technologies for new product development (Moorman & Slotegraaf, 1999), is fundamental for transforming customer experiences, operational processes, and business models (Westerman et al., 2012).Successful digital transformation requires companies to develop capabilities tailored to their specific sectors and needs (Carcary et al., 2016).Developing dynamic capabilities is vital for a firm's ability to adapt to changes and achieve a competitive advantage in the digital era (Karimi & Walter, 2015).Dynamic capabilities provide a consistent approach to studying digital transformation, considering the powerful impact of digital technologies on business performance ( H3: There is a positive relationship between digital orientation and digital transformation of SMEs.
H4: There is a positive relationship between digital orientation and digital innovation of SMEs.
H5: There is a positive relationship between digital transformation and firm performance of SMEs.
H6: There is a positive relationship between digital innovation and firm performance of SMEs.
H7: Digital transformation of SMEs mediates the influence of digital capabilities on firm performance.
H8: Digital transformation of SMEs mediates the influence of digital orientation on firm performance.
H9: Digital innovation of SMEs mediates the influence of digital capabilities on firm performance.
H10: Digital innovation of SMEs mediates the influence of digital orientation on firm performance.

METHOD
This study explored the interplay between digital transformation, digital capability, digital orientation, digital innovation, and company performance.The research methodology involved adapting existing measurement scales and employing a variance-based analysis method through PLS to assess the model's validity and relationships between the variables.The findings from this study contribute to a deeper understanding of the factors influencing company performance in the context of digital transformation and innovation.
This study employed various variables to investigate the relationship between digital orientation, digital capability, digital innovation, and digital transformation on company performance.
Company performance was the dependent variable, while digital capability and digital orientation were the independent variables.Digital transformation and digital innovation acted as mediating variables in the study.A survey was designed and distributed to managers of small and medium enterprises (SMEs) in Indonesia from July to December 2021 to collect data.The participants were selected through purposive random sampling.A total of 247 responses were collected, and preliminary processing was conducted to ensure data accuracy and sufficiency.
The survey was divided into two sections.The first section collected demographic information such as age, gender, number of employees, level of education, and duration of business operation; the second section contained the values of all variables.
The collected data were analyzed using a variance-based method, specifically partial least squares (PLS), known for its flexibility and fewer assumptions.When examining the length of business operation, 43.7% of respondents had been operating their businesses for 5 to 10 years, 33.2% had been in operation for 3 to below 5 years, and 23.1% had more than 10 years of business experience.As for the size of the businesses represented, the majority (61.9%) had less than 10 employees, followed by 24.7% with 10 to less than 25 employees, 9.7% with 25 to less than 50 employees, and only 3.6% with over 50 employees.These demographic insights provide crucial context for this study and contribute to a more comprehensive understanding of the characteristics of participants.The examination of R-square outcomes, as depicted in Table 4, delves into the interconnectedness between the significant values and the constructs, unraveling their underlying relationships.These estimations offer insights into the degree to which the constructs contribute to explaining the variations in their respective dependent variables.The R-square values unveil the portion of variability accounted for by the constructs within the structural models.Within this context, the analysis reveals that digital innovation (DII), digital transformation (DIT), and company performance (PER) possess R-square values of 0.273 or 27.3%, 0.184 or 18.4%, and 0.180 or 18%, respectively.The residual variances of 72.7%, 81.6%, and 82% within the respective constructs are attributable to external factors beyond the scope of the study model.It is noteworthy that company performance (PER) appears to be influenced by digital transformation (DIT) and digital innovation (DII).Simultaneously, digital transformation (DIT) and digital orientation (DIO) are inclined to be influenced by digital capability (DIC) and digital orientation (DIO).This complicated interaction between variables emphasizes their complexity.The Q-square test size and structural path coefficients are synchronized with R-square values as the inner model is evaluated.Within partial least squares (PLS) analysis, the Q-square measurement gauges the structural component's predictive capacity within the model.Computed as 1 -(1 -0.273) (1 -0.184) (1 -0.180) = 0.513, the Q-square value indicates that the model adeptly elucidates around 51.3% of the variability in DII, DIT, and PER.The remaining 48.7% of the variance is subject to influences from Table 5 provides a comprehensive overview of the summary of path coefficient values, elucidating the relationships between different constructs.This systematic presentation allows for a structured understanding of the outcomes, enabling robust interpretations of the hypotheses.Commencing with H1, which postulates the influence of digital capability on digital transformation, the results indicate a positive effect with a path coefficient of 0.199.This is substantiated by a significant t-statistic of 2.788, surpassing the threshold of 1.96 and a low P-value of 0.006.As such, H1 is accepted, signifying that digital capability indeed affects digital transformation.Moving on to H2, which explores the relationship between digital capability and digital innovation, the analysis reveals a path coefficient of 0.150.This is accompanied by a substantial t-statistic of 2.528, exceeding the critical value, and a P-value of 0.012.Consequently, H2 is supported, highlighting the positive influence of digital capability on digital innovation.Concerning H3, which proposes the impact of   Table 6 provides a structured summary of the mediation effects, shedding light on the intricate relationships between the variables and their potential mediating roles.This systematic presentation enhances the clarity and interpretability of the study's outcomes, enabling meaningful insights into the hypotheses.Beginning with H7, which postulates the mediation of digital transformation in the relationship between digital capability and company performance, the analysis reveals a path coefficient of 0.047.This is complemented by a substantial t-statistic of 2.189, surpassing the threshold of 1.96, and a P-value of 0.029.As a result, H7 is supported, indicating that digital transformation mediates the influence of digital capability on company performance.Moving on to H8, which explores the mediating function of digital orientation on the relationship between digital transformation and company performance, the results demonstrate a significant and positive mediating role.The path coefficient is 0.075, and the associated t-statistic stands at a noteworthy 3.259, accompanied by an impressively low P-value of 0.001.Consequently, H8 is accepted, signifying that digital orientation indeed mediates the effect of digital transformation on company performance.However, the outcomes do not provide sufficient support for H9, which examines the mediating influence of digital innovation in the relationship between digital capability and company performance.The path coefficient is 0.043, the t-statistic is 1.931, and the P-value is 0.054.Thus, H9 is rejected, indicating that digital innovation does not mediate the effect of digital capability on company performance.Conversely, the analysis demonstrates a positive and significant mediating effect for H10, which suggests the mediating role of digital innovation in the relationship between digital orientation and company performance.The path coefficient is 0.128, supported by a t-statistic of 3.750 and a P-value below 0.000.Therefore, H10 is accepted, highlighting that digital innovation indeed mediates the influence of digital orientation on company performance.

DISCUSSION
This study analyzes how digital capacity and direction affect SMEs' digital transformation and innovation during the COVID-19 pandemic.The study also examines how digital transformation and innovation mediate the effects of digital orientation and competence on SME

CONCLUSION
This study aimed to investigate the impact of digital capability and orientation on SMEs' digital transformation and digital innovation during the COVID-19 pandemic in Indonesia.The research methodology involved a sample of 247 managers of SMEs who were selected through purposive random sampling between July and December 2021.Data collection utilized a survey comprising two parts: the first capturing profile information and the second containing variable values.The collected data underwent variance-based analysis using PLS.
The outcomes of this investigation were found to be statistically significant.The study revealed that the presence of both digital capacity and digital orientation significantly and positively impacted SMEs' digital transformation and digital innovation during the COVID-19 pandemic.Moreover, the study supported the notion that digital transformation and digital innovation positively impact SME performance during the pandemic.This suggests that adept implementation of digital transformation and innovative strategies contributes to SMEs' improved performance, enabling them to adapt and thrive amid pandemic-induced challenges.
Furthermore, the study indicated that digital transformation and digital innovation play pivotal roles in mediating the relationship between digital orientation and capability on SME performance during the COVID-19 pandemic.While digital transformation and digital innovation successfully mediate the influence of digital capability and digital orientation, digital innovation was not found to significantly mediate the relationship between digital capability and SME performance during the pandemic.
The empirical findings support the conceptual understanding of these interrelated factors' roles in generating sustainable competitive advantages and fostering positive business outcomes.They align with previous research that underscores the strategic significance of digital capability and orientation in driving innovation and transformation, especially in the face of dynamic challenges like the COVID-19 pandemic.These results bear implications for policymakers and SMEs, emphasizing the importance of embracing digital transformation and cultivating digital innovation to enhance SME performance in evolving business landscapes.
For future research, exploring potential moderating factors that could impact the relationships identified in this study would be valuable.Investigating how contextual factors, industry characteristics, or organizational attributes interact with digital orientation, capability, transformation, innovation, and SME performance could enhance the understanding of the underlying mechanisms.Furthermore, conducting longitudinal studies to monitor the evolution of these relationships over an extended timeframe and across diverse conditions could yield more profound insights into the lasting effects of digital strategies on SME performance within dynamic environments.

I
am prepared to adapt to the changes brought about by the adoption of digital technology in our business (DIO5) Digital transformation (DIT) I actively utilize digital technology such as websites, social media, or business applications in my business operations (DIT1) Rupeika-Apoga et al. (2022), Priyono et al. (2020), Ziółkowska, (2021) I have an online store or participate in e-commerce platforms to sell my products or services (DIT2) I engage with customers and promote products or services through social media (DIT3) My employees possess relevant digital skills and contribute to the business's digital transformation (DIT4) I maintain a responsive online presence and continuously adapt to evolving technological developments (DIT5) Digital innovation (DII) I creatively and innovatively utilize limited digital resources to support my business activities (DII1) Wang et al. (2022), Byukusenge et al. (2017), Paladino (2007), Khin and Ho (2020) I adopt relevant and efficient digital technologies to support my business processes without burdening the budget (DII2) I collaborate with others or form partnerships to access digital resources at affordable costs (DII3) I use open-source solutions or free software to gain benefits from digital technologies without significant expenses (DII4) I align my business strategies with digital trends without incurring significant expenses technology, I have experienced a significant increase in sales (PER1) Wang et al. (2022), Hogan and Coote (2014) I feel that my business operates more efficiently since implementing digital technology (PER2) I have observed an improvement in profitability and profit margins after adopting digital technology (PER3) My customers provide positive feedback and are satisfied with the services after digital technology adoption (PER4) Digital technology adoption has enabled me to create new products or services or enhance the existing ones (PER5)

Table 1 .
The outer model assessed the reliability and validity of the variables, including measures like convergent and discriminant validity and composite reliability (Hair et al.Measurement items , 2016).The cutoff values for composite reliability, Cronbach's alpha, factor loading, and AVE were set at 0.70 to ensure the model's reliability.The model's convergent validity was confirmed with factor loadings above 0.70 and average variance extracted (AVE) above 0.50 for each construct.The inner model examined the relationship between the study concepts, significance values, and R-square, shedding light on the mediating influence of digital transformation and innovation on digital orientation, capability, and organizational performance.

Table 3 .
Validity and reliability result

Table 6 .
Summary of mediation effects However, the study did not find a significant mediating role for digital innovation in the relationship between digital capability and SME performance during the COVID-19 pandemic.This means that digital innovation did not mediate in translating digital capability into improved SME performance in the context of the pandemic.As a result, hypothesis 9, which suggested the mediating effect of digital innovation, was rejected.The study's findings provide empirical support for the mediating roles proposed in the hypotheses.The mediating effect of digital innovation and digital transformation on the relationship between digital capability or digital orientation and firm performance aligns with the conceptual understanding that these factors work together to create sustainable competitive advantages and drive positive business outcomes(Khin  etal., 2012; Ziółkowska, 2021; Kindermann et al., 2021; Liu et al., 2020; Rupeika-Apoga et al., 2022; Yudaruddin, 2023b; Yudaruddin et al., 2023; Zhang et al., 2021).