Abstract

Purpose: This study developed a theoretical model to test the relationship between digital capability and Industry 4.0 (I4.0) and its effect on innovation performance in small and medium-sized enterprises (SMEs). Design/methodology/approach: The proposed theoretical model was evaluated using partial least-squares structural equation modeling and fuzzy-set qualitative comparative analysis. The data were obtained from a sample of 536 SMEs in Chile. Findings: The proposed model presented two dimensions of digital capability: management and information and communication technologies (ICTs). Management models composed of enterprise resource planning and customer relationship management systems are essential for optimizing organizational management. Meanwhile, ICTs facilitate the smooth flow of information within an organization, leading to improved efficiency in production processes. I4.0 is encouraged by exposing SMEs to base technologies such as data analytics. These results confirm that I4.0 influences innovation performance. Practical implications: SME managers should encourage the development of digital capabilities to transition toward I4.0, as this can make SMEs more competitive and innovative in changing and dynamic scenarios. Social implications: I4.0 adoption and the development of digital capabilities can directly affect employment and national economic growth. Originality/value: Most studies focus on the organizational factors affecting SMEs’ I4.0 adoption. They do not, however, address the role played by current digital capability in I4.0 technology adoption and its effect on firms’ innovation performance. © 2025, Emerald Publishing Limited.