The Impact of Digital Capability on Firm Performance and Growth in Incumbent SMEs

Abstract

This study examines the effect of digital capability on firm performance and firm growth. We apply the resource-based view and especially its expansion of the dynamic capabilities perspective to illustrate how digital capability is positively related to firm performance and firm growth, and how firm size is a relevant factor in explaining digital capability in incumbent SMEs. The context of this study is Finnish SMEs. The data were gathered from 242 SME owner-managers and analysed with structural equation modelling. The results show that smaller firms have less digital capability than larger SMEs and that smaller firms struggle with performance indicators. Digital capability is positively related to firm performance and firm growth. Our results indicate that although several factors explain and alter the course of firm growth, digital capability can boost the opportunity creation process, and aid survival in the face of competition. Digital capability is an important resource in SMEs and allows firms to safeguard the sustainability of their business model. We argue that digital capability is strongly related to SME’s management practices and SME owner/manager’s commitment to responding to digital transformation. This research sheds light on the importance of strategic leaders’ perceptions of digital capability on incumbent SMEs’ competitive advantage, and contributes both entrepreneurship theory and practice.