Digital transformation has emerged as a critical factor in the contemporary landscape of micro, small, and medium enterprises (MSMEs), which face inherent challenges to innovation, including resource constraints, competitive pressures, and complex innovation processes (Austin et al., 2021; Cichosz et al., 2020; OECD, 2020; Peillon & Dubruc, 2019).

Digital transformation is often perceived as a strategic business initiative focused on achieving financial outcomes, driving informed decision-making, and fostering changes in business models (Begnini et al., 2024). Strategies that aim to generate new processes, ideas, products, and services are particularly effective in creating value, especially in the context of technological advancements (Cennamo et al., 2023; Firmino et al., 2022; Furr & Shipilov, 2019). For instance, following the COVID-19 pandemic, many small and medium-sized enterprises adopted new technology usage strategies to enhance their business value (Mandviwalla & Flanagan, 2021), including expanding social networks, implementing telecommuting, utilizing digital banking, and engaging in e-commerce (FAEDPYME, 2022a).

Digital transformation involves developing strategies and employing technologies that fit the business innovation models of MSMEs. According to Castellar et al. (2021), successful business models and innovative technologies are those that target organizational strategies and align with strategic values. The adoption of information and communication technologies (ICTs) has positively influenced the economic growth of innovative countries within the OECD, highlighting the connection between innovation and digital technology use by individuals, businesses, and governments in developing European Union nations. This relationship boosts per capita GDP returns and enables MSMEs to strategically leverage ICTs (Gomes et al., 2022).

The use of big data tools, for example, has been shown to significantly impact both technological and market strategies, positively influencing the product innovation process (Pinochet et al., 2021). Similarly, the journey toward digital transformation requires a commitment to change, new ways of thinking, and the development of new strategies (Girardi, 2023). Furr and Shipilov (2019) suggest that each business segment can tailor its digital approach to its specific needs, thereby reducing the risk of disruption. To achieve growth in the digital environment, businesses must meet the needs of digital customers and redefine their value propositions (Subramaniam, 2022a).

Some studies have identified digital insecurity (Mohammadi, 2016; Papadopoulos et al., 2020) and a lack of financial resources (Austin et al., 2021; Cichosz et al., 2020; OECD, 2020; J. A. Pereira & Bernardo, 2016) as additional barriers to digital transformation. Resistance to change is another significant challenge, occurring among both employees, who may fear being replaced by technology, and managers, who often lack the technical expertise needed to effectively lead digital transformation efforts (Cichosz et al., 2020; Fountaine et al., 2019; Horváth & Szabó, 2019).

The use of technologies and digital strategies by MSMEs requires resources and competencies that reflect dynamic capabilities (Teece et al., 1997). As MSMEs operate in a dynamic environment, they must continually renew their competencies to remain competitive (Eisenhardt & Martin, 2000). Human and investment resources are influenced by past decisions and, when combined with the dynamism of the environment, establish new requirements for action in response to emerging digital business models. Dynamic capabilities are structured around three pillars: processes (routines or patterns of standard practices and learning), positions (assets, governance structures, customer base, and external relationships with suppliers and partners), and trajectory (the history of decisions and the identification of technological and market opportunities) (Meirelles & Camargo, 2014).

Dynamic capabilities are associated with digital transformation in the operating environment of MSMEs through the introduction of routine mechanisms that enable the reorganization of capabilities (Winter, 2003). In other words, employing digital mechanisms in management processes enhances the capacity for innovation. Furthermore, Kaban and Tukiran (2023) identify dynamic capabilities as the foundation upon which companies can build digital transformation and remain competitive in the market.

Also related to digital transformation and innovation, Ciasullo and Lim (2022) highlight several important open questions in the literature, which this article aims to address and discuss. The open questions identified by the authors include: Which elements act as motivators or barriers to an innovation model through digital transformation? How and to what extent does digital transformation create value? What capabilities are necessary for digitalization and innovation? To what extent does digitalization drive innovation according to company size and/or sector?

The BRICS countries (Brazil, Russia, India, China, and South Africa) require improvements in innovation, as it presents both significant opportunities and complex challenges (Andrade & Gonçalo, 2021; Castellar et al., 2021). In the Brazilian context, particularly among small and medium-sized enterprises, digital transformation is a widely discussed topic but lacks conceptual clarity in the literature (Vasconcellos, 2020). New studies are crucial to expanding knowledge and understanding of this topic. This study aims to contribute to addressing these gaps, particularly in the context of emerging countries and among types of companies that are under-researched.

Considering the benefits and challenges of digital transformation in MSMEs, as well as the focus on innovation and its potential for improvement, this article aims to address the following questions: What is the influence of digital transformation on innovation? What is the moderating role of barriers to digitalization in this relationship?

Thus, a study was conducted using data from a sample of 731 companies, collected by FAEDPYME researchers. Partial Least Squares Structural Equation Modeling (PLS-SEM) was employed for data analysis.

As a practical contribution, this study provides managers with valuable information to identify digitalization strategies and relevant technology usage that can drive innovation and competitiveness in small and medium-sized enterprises. The study also expands the discussion to include the difficulties encountered by MSMEs, which act as barriers to digitalization in the context of digital transformation. In Brazil, particularly in medium-sized enterprises, organizational culture emerges as a limiting and decelerating factor in the digital transformation process for innovation. Another finding of the research highlights the need for expansion and emphasizes the importance of technology usage in the business sphere, including areas such as e-commerce, data analysis software, cybersecurity, and process automation.

The research also contributes to academic advancement in the fields of digital transformation and innovation. The findings will be shared with the scientific community and the broader public, thereby enriching the academic debate and fostering further research in this area. This study addresses the existing gap in the literature regarding digitalization strategies and their application in innovative environments.

The ability to innovate is closely linked to the use of advanced technologies and market strategies. Big data tools have a notable positive influence on innovation processes in product development, highlighting the beneficial impact of technology and market strategies on innovation (Pinochet et al., 2021). The rapid evolution of digital technologies and their disruptive effects on stable economies underscore the parallels between digital transformation and reverse engineering, where product creation and analysis precede their recreation, fostering continuous cycles of innovation (McGrath & McManus, 2020). The COVID-19 pandemic accelerated digital transformation, with managers increasingly recognizing its necessity for crisis management. This shift is evident in the significant increase in the prioritization of digital transformation among managers, from 68% to 90% (Wade, 2021). The pandemic acted as an external catalyst for technology adoption in businesses, highlighting to owners the need to adapt to a new business framework (Costa et al., 2021).

While traditional companies collect data occasionally, companies like Google and Amazon capture a continuous stream of data on their platforms, thereby expanding business opportunities (Subramaniam, 2022a). Through digital platforms, companies such as Alibaba and Tencent provide various functionalities to SMEs, including digital payment services, e-commerce (digital stores), digital marketing, and logistics services (Subramaniam, 2022b). As a new business model, digital platforms leverage technology to connect resources, such as organizations and people (Parker et al., 2016).

Agile organizations rely on digital technology development metrics, market structuring, customer co-creation, and digital platform diversification (Verhoef et al., 2021). An example of this is the use of smart asthma inhalers, which not only provide medical benefits but also enable consumers to collect data that feeds predictive algorithms, showcasing a consumer achievement in leveraging technology (Mohammadi, 2017).

Furthermore, each business segment adapts to its digital needs without the risk of disruption (Furr & Shipilov, 2019). Addressing the digital challenge requires creating new business models to redefine relationships between companies, discovering innovative approaches, and leveraging social tools that engage customers and visionary leaders (Sanchez & Zuntini, 2018). In this context, dynamic capabilities enable companies to become more agile and achieve superior performance compared to their competitors (Mele et al., 2024).

However, the path to value creation for SMEs is unique, and expanding new digital businesses requires focus and adherence to the fundamental principles of the digital channel (Mandviwalla & Flanagan, 2021). Notably, the post-COVID-19 digital transformation has compelled small businesses in the food industry to remodel their operations to stay competitive, sometimes even without the owners’ initial approval (Costa et al., 2021). It is therefore crucial to invest time and resources in training people to achieve a successful digital transformation (Cichosz et al., 2020).

Furthermore, consumer-oriented companies are adopting hybrid models that integrate both physical and digital elements, ensuring that while digital usage increases, physical assets such as documents and infrastructure do not entirely disappear (Furr & Shipilov, 2019). Even though conservative customers may prefer personal interaction, companies find it easier to transition functionalities to the digital medium through information-intensive services (Sanchez & Zuntini, 2018).

This trend is leading to a rise in Brazilian SMEs, driven by the adoption of innovation, technological capabilities, and management technologies, which contribute to regional and national development and enhance global competitiveness, similar to that of developed countries (I. P. Pereira, 2021). Digital maturity positively influences the development of Brazilian retail businesses (Salume et al., 2021). The positive impact of ICT usage by small businesses is also recognized as a significant innovation strategy (Alves & Silva, 2022).

Information technology faces various challenges, yet digital technologies provide a range of mechanisms that enhance the flexibility of products offered (von Briel et al., 2018). However, the vast majority of SMEs do not utilize technological tools to optimize business management (J. A. Pereira & Bernardo, 2016). One way that SMEs gain visibility is through the digital environment, particularly by leveraging the effects of social networks, such as Instagram (Vale & Santos, 2022). For traditional companies to remain competitive in the market, it is essential to adopt digital systems and capitalize on network effects, prompting a rethinking of their strategies (Bem et al., 2022).

Digital transformation, through digitalization strategies and technology usage, offers opportunities in the digital world, such as enhanced flexibility, customer-centric orientation, the development of new skills, and the adoption of emerging technologies, enabling companies to innovate (Furr & Shipilov, 2019). Although digital transformation only reaches its full potential when the environment is adequately prepared, the widespread adoption of technologies provides significant benefits to both society and the economy (Aleksandrova et al., 2022).

Innovating in business models is essential for adding value and achieving desired outcomes, particularly in a capabilities-based environment (Girardi, 2023). SMEs must not overlook the opportunities presented by digitalization and should embrace digital transformation as a driving force that is both ongoing and inevitable (Peillon & Dubruc, 2019).

Innovation through the use of big data plays a crucial role in enhancing the understanding of information generated by advanced technologies (Subramaniam, 2022a). The use of innovative technology forms the foundation for digital transformation (Gonçalves et al., 2023). To achieve this, having trained personnel is essential for managing digital resources and adapting internal processes (Subramaniam, 2022a).

This approach, combined with market-centric external analysis and value generation, allows organizations to gain control over various aspects of digital transformation and, consequently, increase their innovation capacity (Peter et al., 2020). Digital transformation also serves as a facilitator for enhancing the sustainability, efficiency, and effectiveness of products and services. It provides a range of benefits, from offering new types of services to optimizing customer experience and integrating value chains (Castellar et al., 2021).

A lack of clear understanding of digital transformation may hinder companies from learning how to compete effectively, potentially rendering their business models economically unviable (Sanchez & Zuntini, 2018). However, the use of digital tools allows companies to communicate more easily with customers and compete even with minimal resources (Pratama et al., 2021). Therefore, the impact of digital transformation can only be realized if the environment is prepared to embrace it (Aleksandrova et al., 2022).

Thus, digital transformation requires the involvement of the entire business, as it has a significant and positive impact on innovation. By empowering companies to adapt, innovate, and thrive in an increasingly digitalized business environment, digital transformation promotes continuous improvement and competitiveness.

H1: Digital transformation exerts a positive influence on innovation.

Digital transformation is recognized as a complex and variable challenge for companies (Peillon & Dubruc, 2019). Several barriers can slow down or even halt the digital transformation process within companies (Vogelsang et al., 2019). Challenges such as a lack of resources, including time and technological infrastructure, can discourage companies from seeking external knowledge that could enhance their transformation efforts, ultimately limiting their entrepreneurial initiatives (J. A. Pereira & Bernardo, 2016).

Furthermore, the lack of security (Mohammadi, 2016; Papadopoulos et al., 2020) and financial resources (Austin et al., 2021; Cichosz et al., 2020; OECD, 2020; Peillon & Dubruc, 2019; J. A. Pereira & Bernardo, 2016) are significant barriers to digital transformation. Additionally, resistance to change is one of the major obstacles in the digital transformation journey. This resistance can stem from employees fearing job displacement due to technology and from managers who lack the technical knowledge necessary to effectively implement digital transformation (Cichosz et al., 2020; Fountaine et al., 2019; Horváth & Szabó, 2019; Töytäry et al., 2017).

The digitalization process in logistics service companies is often challenging and time-consuming (Cichosz et al., 2020). SMEs, especially those in the early stages of digitalization, may encounter organizational or cultural barriers that hinder their development; however, digital transformation remains unavoidable (Peillon & Dubruc, 2019). A lack of skills is identified as a central barrier to digital transformation (Vogelsang et al., 2019).

Companies need to focus on internal efficiency to achieve a lasting impact, while also developing new capabilities and resources (Töytäry et al., 2017). To overcome these challenges, companies, particularly smaller ones facing more constraints than their larger counterparts, require creative solutions tailored to their specific circumstances (Mandviwalla & Flanagan, 2021). Additionally, appropriate systems should provide a secure infrastructure and ensure full-time availability (Papadopoulos et al., 2020).

Therefore, given the challenges companies face in digital transformation, it is hypothesized that these digitalization development barriers have a negative and significant influence on the relationship between digital transformation and innovation.

H2: Digitalization development barriers negatively moderate the relationship between digital transformation and innovation.

Figure 1 illustrates the theoretical research model, incorporating the two hypotheses proposed in the study. Digital transformation is conceptualized as a second-order construct, comprised of digitalization strategies and technology use. The influence of this digital transformation construct on the innovation construct is examined. The construct of digitalization development barriers is introduced as a moderator in this relationship. Additionally, during the data analysis stage, the control variables “years of operation” and “size” were included.

This research is the result of the work of the Ibero-American Observatory of Micro, Small, and Medium-sized Enterprises, which focuses on business development and entrepreneurship in Spain and Latin American countries. The study was conducted from February to May 2022. This initiative represents a strategic effort to enhance collaboration between university networks through the Foundation for Strategic Analysis and Development of Small and Medium-sized Enterprises (FAEDPYME). Additionally, it aims to improve segmentation by business sectors (FAEDPYME, 2022b).

This study is quantitative and exploratory in nature and is characterized as cross-sectional, capturing data on digital transformation, which can change rapidly. Cross-sectional studies involve samples of various units, such as individuals, families, and businesses, at a specific point in time. This approach is crucial for testing microeconomic hypotheses and evaluating economic policies (Wooldridge, 2016).

The results are based on a representative sample of 731 Brazilian micro, small, and medium-sized enterprises. The characterization of the sample companies is provided, followed by the statistical results of the constructs. Hypothesis testing was subsequently performed using SmartPLS 4.0 software, applying structural equation modeling (Ringle et al., 2014). The section concludes with a discussion of the findings.

The research findings indicate that digital transformation, facilitated by digitalization strategies and the use of technologies, positively impacts innovation. While there are barriers in this process, they do not have sufficient strength to significantly impede it. This suggests that micro, small, and medium-sized enterprises (MSMEs) that invest in technology use and digitalization strategies are likely to enhance their levels of innovation.

The results validate the first hypothesis (H1), supporting the assertion that business models which are continually assessed and updated for digitalization, and those incorporating technologies in the corporate environment, facilitate improvements and innovations in products introduced to the market. This finding aligns with the study by Pinochet et al. (2021), which emphasizes the positive influence of technology and market strategies on the product innovation process.

With the validation of hypothesis H1, it is evident that digital transformation positively impacts innovation in Brazilian MSMEs. As noted by Furr and Shipilov (2019), digital transformation provides opportunities in the digital realm, such as developing new skills and adopting emerging technologies, enabling companies to innovate.

Previous studies, such as those by Vale and Santos (2022), have indicated that SMEs gain visibility through the digital environment and benefit from network effects, such as those seen on platforms like Instagram. These findings reinforce the idea that leveraging digital tools, including e-commerce and social networks, can facilitate organizational innovations.

However, this positive impact is not yet fully realized among SMEs, as the majority still do not utilize technological tools to enhance business management (J. A. Pereira & Bernardo, 2016). Our findings support this assertion, showing that 48.52% of MSMEs do not incorporate technologies in their operations. This represents a significant challenge, as many small businesses are not taking advantage of the potential benefits that technology can offer. The failure to leverage these tools creates a gap that may affect the adaptability of these companies in the contemporary market, where the use of technology is fundamental.

Adapting to digital transformation enables organizations to enhance their innovation capabilities. As noted by Peter et al. (2020), an external analysis focused on value generation allows organizations to manage various dimensions of digital transformation and, consequently, increase their capacity for innovation. With the substantial increase in digital users, adapting to digital transformation has become essential for businesses. The annual growth in internet users has led to a significant expansion, rising from 2.2 billion in 2012 to 4.4 billion in 2019, resulting in increased data interaction (Subramaniam, 2022a). The findings of this study suggest that by embracing digital transformation, MSMEs are on a promising path toward continuous innovation and aligning with the expectations of the digital landscape.

Contrary to expectations, the second research hypothesis (H2) was rejected, as the results did not provide sufficient evidence to suggest that barriers to digitalization development negatively influence the relationship between digital transformation and innovation in Brazilian MSMEs. It was anticipated that these barriers would impede the innovation process. However, Wade (2021) notes that the COVID-19 pandemic actually accelerated digital transformation, with the percentage of managers prioritizing digital transformation increasing from 68% to 90% in the post-pandemic period.

However, when hypothesis H2 is analyzed by firm size, it becomes evident that barriers to digitalization development negatively influence the relationship between digital transformation and innovation in medium-sized enterprises. Our findings indicate that these barriers particularly hinder innovation in larger companies. Experienced companies in digitalization have noted that attempts to replace multiple, carefully designed complex systems all at once often lead to failure (Furr & Shipilov, 2019).

Furthermore, a lack of financial resources (OECD, 2020) may be a significant challenge for medium-sized companies. While micro and small businesses often operate with leaner structures and may be more agile in adopting accessible technologies, medium-sized companies may face considerable difficulties in implementing innovative technologies. In this context, the lack of financial resources can become a substantial barrier to digitalization (Peillon & Dubruc, 2019).

In micro and small businesses, barriers may not significantly affect innovation due to the early stage of development of these companies, which provides more opportunities for digitalization and innovation. Their agility allows them to adapt more easily to changing environments, often without the bureaucratic processes that can hinder larger companies. According to J. A. Pereira and Bernardo (2016), 87% of Brazilian micro and small businesses did not use digital platforms for management. This suggests that these companies may be more adept at finding solutions when faced with difficulties.

Although micro and small businesses encounter their own set of challenges, their more agile structures and flexible cultures often enable them to overcome barriers and adopt digitalization for innovation more efficiently than medium-sized enterprises. However, it is important to note that digital transformation, in itself, is not a familiar environment for most companies, which frequently struggle to navigate the challenges it presents (Peillon & Dubruc, 2019).

This study aimed to analyze the influence of digital transformation on innovation, with a focus on the moderating role of barriers to digitalization development in micro, small, and medium enterprises (MSMEs) in Brazil. The research was conducted using data from a sample of 731 companies, collected by FAEDPYME researchers.

The results indicate that digital transformation, through the use of technologies and digitalization strategies, has a positive and significant impact on innovation (hypothesis H1) in Brazilian micro, small, and medium-sized enterprises. The findings also suggest that, despite the presence of barriers to digitalization development, these barriers do not directly affect this relationship (hypothesis H2), except in the case of medium-sized companies. Additionally, the theory of Dynamic Capabilities (DCs) emerges as a compelling framework for understanding digital transformation, as it highlights the importance of creating value to maintain competitiveness.

In innovation-driven environments, MSMEs prioritize the use of technologies and strategies to enhance digitalization and facilitate digital transformation. Similarly, acknowledging that companies are composed of teams of individuals, the study highlighted the importance of preparing both managers and employees for digital transformation, which is crucial for fostering successful innovation. Leaders must clearly communicate a vision centered around a common objective to the entire organization (Fountaine et al., 2019). Additionally, the availability of appropriate software and technological solutions is essential for supporting this process.

This study has several practical implications. It provides evidence to MSME managers that developing customized digitalization strategies can enhance the positive impact on innovation. Additionally, the adoption of specific technologies—such as e-commerce, social media, big data, cybersecurity, and process automation—should be considered to foster innovation and improve operational efficiency. The use of digital platforms can broaden a company’s reach and interaction with customers, while marketplaces, social networks, and other platforms enhance visibility and competitiveness.

Furthermore, our study reveals that many micro and small enterprises (MSMEs) in Brazil do not adopt technologies in their operations. This lack of adoption represents a significant barrier, as numerous small businesses are not leveraging the benefits that technology offers. The absence of these technological tools can create a gap that impedes these companies’ ability to adapt in a modern market that places a high value on technology. This article addresses these gaps and contributes to advancing the understanding of digital transformation in MSMEs, which have unique structures and implications for calibrating performance and fostering innovation (Verhoef et al., 2021).

Considering the findings, several aspects warrant attention: (i) The use of e-commerce, either through a company’s own portal or a marketplace, is advantageous, as many small companies utilize marketplaces to achieve broader market reach (OECD, 2020); (ii) Technologies such as social media, the Internet of Things, robotics, big data, and other software have a substantial impact on innovation. Competitive advantage can be driven by emerging technologies like sensors, the Internet of Things, and artificial intelligence (Subramaniam, 2022a); (iii) An updated business model and a team well-prepared for digitalization positively influence innovation practices. Each business segment can adapt to its specific digital needs (Furr & Shipilov, 2019); (iv) High levels of business process automation are beneficial for organizations. Digital transformation offers methods to enhance innovation, efficiency, and the effectiveness of products and services, including automated activities, as exemplified by Magazine Luiza (Castellar et al., 2021).

In conclusion, digital transformation, facilitated by the use of technologies and digitalization strategies, is crucial for Brazilian MSMEs. While medium-sized companies may encounter specific challenges that can slow down the process of digital transformation and innovation, the need for adaptive and flexible approaches to overcome these barriers is evident. To address these challenges, Töytäry et al. (2017) suggest that companies should focus on enhancing internal efficiency to achieve lasting impact, thereby acquiring new capabilities and resources.

As for the limitations of this research, one key issue is that it relies on a preformulated data collection. Consequently, the constructs for technology use and innovation, which included a “does not use” response option, may have yielded different results compared to using a more restricted response scale, such as a 1 to 5 Likert scale.

As suggestions for future studies, it is recommended to investigate the reasons why barriers to digitalization development do not significantly influence the relationship between digital transformation and innovation. Given that this study adopts a cross-sectional approach to digital transformation, a longitudinal study with the same constructs may yield different results. It is also suggested to incorporate temporal comparisons, focus on family businesses, conduct analyses in large companies, and pursue more comprehensive research.

We express our gratitude to the State Fund for Support to the Maintenance and Development of Higher Education (FUMDES) for supporting this research. Special thanks are extended to the Ibero-American Observatory, particularly to the Brazilian universities under the leadership of Prof. Dr. Peter Hansen. We also thank the Colegio de Registradores de España and the Spanish Association of Accounting and Business Administration (AECA) for honouring us with the III International SME Juan Antonio Maroto Acín Award, and the Small Business International Review journal for featuring our article as a highlighted publication.