INNOVATION AND FINANCIAL RESILIENCE AS TWIN PILLARS OF MSME SUSTAINABILITY: RETHINKING THE ROLE OF DIGITAL TRANSFORMATION IN INDONESIA

Abstract

This study examines the roles of innovation, digital transformation, and financial resilience in shaping the sustainability of Micro, Small, and Medium Enterprises (MSMEs) in Indonesia. It also investigates the mediating role of financial resilience in these relationships. Using a quantitative approach, data were collected from 352 MSME owners and managers in West Java through a structured questionnaire and analyzed using Structural Equation Modeling (SEM). The findings reveal that innovation has a positive and significant effect on both financial resilience and business sustainability. Financial resilience also significantly enhances business sustainability and partially mediates the relationship between innovation and sustainability. These results confirm the critical role of innovation as a strategic capability and highlight financial resilience as a key mechanism linking internal capabilities to long-term performance. In contrast, digital transformation does not show a significant effect on either financial resilience or business sustainability, nor does it exhibit a mediating effect. This unexpected finding suggests that digital transformation among MSMEs remains at a superficial adoption stage and has not yet translated into measurable performance outcomes. This study contributes to the literature by emphasizing the context-dependent nature of digital transformation and reinforcing the importance of innovation-driven capability building and financial strengthening as primary drivers of MSME sustainability in emerging economies.