Digital Entrepreneurship and SME Performance: The Mediating Role of Business Model Innovation and the Moderating Role of Digital Readiness

Abstract

Digital technologies are transforming the ways in which small and medium-sized enterprises (SMEs) discover opportunities, develop value propositions, and compete, but the link between digital entrepreneurship (DE) and measurable outcomes of the firms' performance is not fully understood. This study investigated the link between digital entrepreneurship and the performance of SMEs (SMEP) with business model innovation (BMI) as a mediator, and digital readiness (DR) as a boundary condition to moderate the relationship between DE and SMEP. Data was gathered from 250 owners, managers and senior employees of SMEs across various digitally enabled industries of retail trade, services, manufacturing, information technology, e-commerce and other service industries in Pakistan using purposive sampling as a quantitative research method with cross-sectional design. The analysis of data was done in two stages, namely the analysis of partial least squares structural equation modeling (PLS-SEM). The measurement model showed good indicator reliability (all loadings > 0.80), internal consistency (Cronbach's alpha > 0.89, and composite reliability > 0.89), and convergent and discriminant validity (average variance extracted > 0.70; Fornell-Larcker and Heterotrait-Monotrait criteria met). The digital entrepreneurship-SME performance relationship was partially mediated by the business model innovation variable (indirect effect = .181, 95% bootstrap CI [0.117, 0.253]), which was directly predicted by digital entrepreneurship. A mediating role between digital entrepreneurship and the SME performance variable was found for the business model innovation variable, which significantly and positively predicted SME performance, and which was itself significantly predicted by digital entrepreneurship (indirect effect = 0.181, 95% bootstrap CI [0.117, 0.253]). The direct link between digital entrepreneurship and SME performance was moderated by digital readiness in the sense that the relationship grew stronger with an increase in the level of digital readiness. The model accounted for 36.6% of the variance in SME performance and exhibited good predictive relevance (Q2 = 0.354). The results provide an extension of the resource-based view and dynamic capabilities theory to the digital SME context and suggest managers of SMEs and policymakers towards turning digital entrepreneurial activity into positive performance-based outcomes.