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Digitization strategy and innovation performance of microfinance

institutions: mediating role of innovation capability Digitization strategy and
innovation

Article in Journal of Accounting & Organizational Change · June 2024

DOI: 10.1108/JAOC-12-2023-0241

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Digitization
Digitization strategy and strategy and
innovation performance of innovation

microfinance institutions:
mediating role of innovation
capability Received 28 December 2023
Revised 13 March 2024
17 April 2024
Mekuanint Abera, Chetana Marvadi and Dilipkumar Suthar Accepted 18 April 2024
School of Commerce, Gujarat University, Ahmedabad, India

Abstract
Purpose – This study aims to examine the mediating role of innovation capability in the relationship
between digital transformation strategy and innovation performance of microfinance institutions in
Ethiopia.
Design/methodology/approach – Survey data were collected from 12 microfinance institutions in
Ethiopia through self-administered questionnaires. Statistical analysis was conducted using structural
equation modeling with AMOS and SPSS. Covariance-based structural equation modeling was used to test
the study hypotheses.
Findings – Digital transformation strategy indicators such as (digitization vision, information technology
integration, information technology agility and flexibility of information technology) directly affect
innovation performance. The innovation capability mediates the relationship between digital transformation
strategy indicator (information technology agility) and innovation performance. However, innovation
capability does not have mediation effect in the relationship between digital transformation strategy
remaining indicators (digitization vision, information technology flexibility and information technology
integration) and innovation performance.
Originality/value – The study affirmed the importance of dynamic capability theory and presents
noteworthy conclusions applicable to managers, stakeholders, and policymakers. It illuminates how
innovation capability serves as a crucial link between digital transformation strategies and innovation
performance within microfinance institutions in Ethiopia. This research enhances the current
understanding of innovation capability, digital transformation strategy and innovation performance in
the literature.
Keywords Digital transformation, Information technology, Innovation performance,
Innovation capability
Paper type Research paper

JEL classification – M15, M21, N27

Not applicable.
Contributions: All authors read and approved the final manuscript.
Ethics declarations.
Competing interests: The authors declare that they have no competing interests.
Journal of Accounting &
Availability of data and materials: The authors confirm that data will be made available on Organizational Change
reasonable request. © Emerald Publishing Limited
1832-5912
Funding: Not applicable. DOI 10.1108/JAOC-12-2023-0241
JAOC 1. Introduction
The world is undergoing rapid digital transformation. Scholars have recently begun to
refer to this as the Fourth Industrial Revolution. The digital era is characterized by rapid
changes, growth, innovation and disruption. Moreover, the current economic conditions
pose serious challenges to the competitiveness of the financial institutions. Besides to
that, addressing the timely demands are a constant source of pressure for financial
institutions (Holotiuk and Beimborn, 2017). As a result, financial institutions have
undergone significant changes due to rapid development of financial technology over the
past 25 years. The process of digital transformation involves more than just adopting
new technology, buying tools, improving existing systems and restructure the
organizational setup (Albukhitan, 2020). This underscores the importance of digital
strategies for maintaining business viability, competitiveness and optimal financial
performance in the wake of global financial crisis (Shurie and Olando, 2020). Digital
transformation process aims to maximize wealth through increased productivity, cutting
additional costs and increase organizational innovation performance. It is essential to
establish a plan for the implementation and use of digital technology to make the
organization successful in the future (Hess et al., 2016).
Innovation has been identified as the key source of competitive advantage, the
prerequisite for the success and survival of any organization. In another way, an
organization’s strategy and use of resources have a significant effect on its potential to
innovate (Bohlmann et al., 2013). Shareholders, employees and customers view toward
financial innovation as a new tool for wealth creation (Lumpkin et al., 2011). An
organization’s ability to create, establish and apply knowledge to promote innovation is
referred to as their innovation capability (Damanpour and Aravind, 2012). It includes a
variety of elements, including knowledge management, learning, organizational culture
and teamwork. It enables organization to use digital technology and adapt to shift market
conditions (Kamble et al., 2021). Innovation performance is a reflection of the types of
innovations that have been deployed, as well as the ability of businesses to respond to
market change (Oanh, 2019). In addition to that, innovation performance is linked to the
improvement of quality in existing services and acceptance of new technology for
creation of products or services that meet the demands of clients. It also involves the
speed at which new products or services are introduced, as well as the additional of new
features to existing products or services. Financial institutions need to develop and
implement novel concepts, goods or methods that give them a competitive edge. It
includes innovative aspects like market innovation, process innovation and product
innovation (Damanpour and Aravind, 2012). Achieving high levels of innovation
performance is essential for organizations to sustain growth and remain competitive in
today’s fast-paced business world.
In developing countries, digital transformation and innovation have just recently
been a research topic. However, the rapid advancement of technology, changing
environment and unpredictability of markets are factors that are forcing businesses
particularly financial institutions to assess their capacity for innovation and
technology adoption. Due to that, innovation has become one of the most important
developmental tool for financial institutions as a result of intense international
competition, fragmented, demanding markets and fast-changing technology
(Kafetzopoulos and Psomas, 2015). Meanwhile, an organization can develop capacity,
stay competitive and become market leaders by implementing a well-developed
digitized strategy (Aksoy, 2017).
 One of the most crucial factors of organizational performance is the ability to Digitization
innovate. However, innovation encompasses not only the creation and capture of new strategy and
value but also the implementation of new methods in business practices, workplace
organizations and external relations, as well as the improvement and transformation of
innovation
managerial mindsets and business models to adapt to change (Ünlü Ince et al., 2014).
Ethiopia has increased implementation of change management initiatives such as
business process re-engineering, balanced scorecard, digital transformation strategy, ISO
standards, IFRS and latest financial technology used in its development. However,
majority of these reforms for change are ineffective. Implementation of business process
re-engineering in public organizations was unsuccessful for various reasons (Debela,
2009; Gebremichael and Singh, 2012; Megeressa, 2010; Shafi, 2017). Some of these factors
include organizational resistance, insufficient readiness for change and problems with
fostering a change-friendly culture, a lack of trust between management and employees,
an underestimation of influence of politics on change, low organizational support,
inadequate planning for change and shortening of transition period (Gebremichael and
Singh, 2012; Megeressa, 2010; Shafi, 2017).
In this age of globalization, new technologies are fundamentally changing the way
financial services are delivered and offer potential opportunities for microfinance
institutions (Dary and Haruna, 2013). Today, digital transformation is becoming a
strategic tool for overcoming barriers and greatly assisting microfinance institutions in
reaching clients digitally will ensure their financial sustainability. Ethiopia is not the
only country with low rates of technology adoption and digitization of MFI products and
services (Abate et al., 2015). The promotion of microfinance institutions is one of the
strategic orientations of Ethiopian government’s poverty reduction program and
literature indicates that MFIs play an important role in this by providing financial
services to the rural poor (Abera Timbula, and Marvadi, 2023a, 2023b). To increase their
outreach, the institutions’ operations need to be supported by appropriate technology and
digitization strategy. Digital transformation as a strategic tool for MFIs can enable more
efficient and effective collection, processing, use of data, open door to offering new
products and better customer services and enable greater outreach. Most MFIs in
Ethiopia use technology to support their operations, not to reach clients (Timbula and
Marvadi, 2023). Many researchers have examined the relationship between innovation
capability and innovation performance in manufacturing companies (Calantone et al.,
2002; Gurcaylilar-Yenidogan and Aksoy, 2016; Kafetzopoulos and Psomas, 2015;
Mostafiz et al., 2021; Rajapathirana and Hui, 2018; Taleb et al., 2023; Yusr, 2016).
Moreover, to the best of the researchers’ knowledge, no study has been conducted on
digital transformation strategy, innovation capability and innovation performance using
those research variables and models in Ethiopian microfinance institutions. This study
highlights the importance of complementing digital transformation strategy with
building organizational innovation capacity and its effect on innovation performance.
The relationships between digital strategies, innovation capabilities and innovation
performance may differ across industries and organizational contexts. In a nutshell, this
study seeks to fill the research gap by examining digital transformation strategy,
innovation capability and innovation performance of microfinance institutions in
Ethiopia.

2. Digital transformation and financial technology in microfinance institutions

Globally, digital technology is increasingly quick and significantly affects people’s live. For
both individuals and enterprises, digital innovation opens up new avenues for interaction,
JAOC widens the range of possibilities and boosts productivity (Moro-Visconti and Quirici, 2014).
Microfinance has been increasingly important to society in recent years as a potential tool
for sustainable development. Traditional microfinance has been helpful for many years, and
a shift toward digital technology has further intensified outreaches and financial
sustainability (Dary, 2013). One of the biggest problems MFIs confront globally is
frequently cited as being related to technology. While, effective use of technology can save
costs, boost effectiveness and expand outreach. Many MFIs continue to make subpar
technology investments and restrict their financial capacity to develop or adopt new
technology (UN, 2021, p. 4). The goal of microfinance today is to close the demand gap
between unbanked population and financial service providers (Siwale and Godfroid, 2022).
By contrast, banking industry is quickly catching up to technological advancements in
finance sectors due to smart connectivity, technological innovation, digital inclusion offer
several advantages related to growth, new opportunities, improved service delivery and
financial inclusion through digitization (Mia, 2020).

3. Digitization of microfinance operations and offerings in Africa

Digitizing current products, services and business processes are typically the initial step for
microfinance institutions embracing digital finance. Other methods include leveraging
mobile devices to digitize procedures, collaborating with a provider of digital financial
services or creating a dedicated agency network to market already-available goods or
services. The majority of microfinance institutions no longer support digitizing products
and services in Africa (UNCDF, 2016). It is now a required path to remain competitive and
reach the final mile. MFIs must embrace new technology and reconsider their business
models to foster long-term financial inclusion (Berisha, 2016). Digital solutions assist
financial institutions through increasing customer engagement, product usage leads to
promote and expand financial inclusion. Microfinance institutions and their clients can
benefit from several advantages of digitized operation than traditional branches, paper-
based banking and alternative outreach methods.

3.1 Theory validation

3.1.1 What is digital transformation? Digital transformation is commonly characterized as
a transition performed by organizations that use data-driven innovation to create additional
value for the organization and its stakeholders by transforming internal operations, goods,
services and relationships (Morakanyane et al., 2017; Osmundsen et al., 2018; Verhoef et al.,
2021). The acquisition of data, its analysis and creation of value are all included in the broad
concept of digital transformation (Verhoef et al., 2021). Businesses successfully implemented
digital transformation has seen considerable benefits, including increased agility,
profitability and improved offerings. They have also been able to capitalize on digital
innovation for long-term, sustainable of organizational growth (Dash et al., 2019; Sultana
et al., 2021).
3.1.2 Dimensions of digital transformation strategy. Digital transformation strategy has
the following components, regardless of the industry or organization. These components can
be categorized into four; technological use, changes in value of production, structural
changes and financial considerations (Matt et al., 2015). In fact, technology usage examines
organization attitudes toward emerging technology as well as its capacity. Therefore, it
includes the strategic importance of IT for a business as well as its long-term technological
goals. Accordingly, an organization must choose whether it wants to be a market leader in
the use of technology and have the power to develop its own technological standards, or
whether it will adhere to current standards and regard technology as tools to carry out Digitization
business operations (Matt et al., 2015). strategy and
From a business standpoint, the use of new technology frequently implies a change in
value creation. This focuses on how digital transformation initiatives affect organizational
innovation
value chains or how much the new digital activities diverge from the traditional frequently
analog core business. Despite the fact that further divergences present opportunities to
broaden, enhance the current product and service portfolio, they are frequently accompanied
by a greater requirement for diverse technological and product-related competencies as well
as higher risks because of lack of experience required in the new field. Because other
markets or new consumer segments are now being catered to, the digitization of goods or
services may need or facilitate the use of different types of monetization, or even alterations
to the business scope of enterprises (Cook and Hunsaker, 2001).
Structure adjustments are frequently required to give the new operations a suitable
foundation because various technologies are in use and different ways of creating value. The
new digital activities are located within the organizational structures are considered
structural changes in organizational setup. It is also important to consider whether these
changes are primarily affecting its products, processes and capability. The former three
dimensions cannot be modified until financial factors are taken into account. Due to a
declining core business, these factors both represent organization need to act and its
financial capacity to support a digital transformation effort. Financial considerations are
both a driving force and a constraining factor for the transition. While less financial
pressure on the main business may lessen the sense of urgency to respond, businesses
already under financial strain may not have access to external financing for a change.
Therefore, businesses should investigate their choices and openly confront the necessity to
carry out digital transformation (Matt et al., 2015).
Create new capability by creating new structural changes with innovative new
businesses and activities within existing organizational boundaries. These could be teams
working on product development, start-ups for new businesses or even an incubator offering
venture capability and essential services to generate dozens of new organizations (Lawson
and Samson, 2001). The newly formed organizations and groups mentioned previously have
this organizational strategy. Create capability by spinning off new businesses that do not
suit the business model of the organization and maintaining an equity investment position
for technology and earning infusion back to the organization. Similarly, create capability by
acquiring businesses that have the capability the business wants but to prevent the value
and processes of the parent organization from being greater than to dampen entrepreneurial
enthusiasm for risk taking and business focus. It is better to let the fledgling organization
stand on its own from management trends to integrate it into the dominant processes and
values (Cook and Hunsaker, 2001).
3.1.3 Resource-based and competitive advantage theory. According to the resource-based
theory, having valuable, rare, unique, non-sustainable resources and competencies can give
an organization a long-term competitive edge. Strategic assets that are challenging for rivals
to imitate are resources. According to the competitive advantage theory, an organization
gains a competitive advantage when it develops an attribute or set of attributes that enables
it to outperform its rivals. The basis of competitive theory is observation that organizations
with a competitive edge in the same industry frequently lose it because it is simple for rivals
to copy them or market in the first place (Porter, 1985). These qualities may include having
easy access to natural resources, having highly qualified staff, having cutting-edge
technology, having effective procedures or having distinctive products. The competitive
advantage theory states that the ease with which rivals can imitate an advantage’s sources
JAOC determines how long it can last. A durable competitive advantage is more likely to result
from resources and capabilities. The competitive advantage theory studies how firms can
use different attributes to outperform competitors and maintain their superior position by
making the sources of advantage hard to replicate, while the resource-based theory
describes how strategic assets can result in competitive advantages. The competition theory
concentrates on analyzing influence of the environment on business’s performance,
emphasizing environmental effect rather than unique organizational characteristics on
business’s competitive position (Thuy Anh and Nguyen Ngoc, 2017). A competitive
analysis based on internal factors and available resources are the main focus of the
resource-based business theory. Acceptance for the resource-based theory is growing, and it
helps businesses perform well and gain a competitive advantage (Wernerfelt, 1984). The
ability to innovate is an internal factor that enables businesses to gain a competitive
advantage (Atalay et al., 2013; Gurcaylilar-Yenidogan and Aksoy, 2016).
3.1.4 Dynamic capabilities theory. Dynamic capabilities theory, proposed by Teece and
Pisano in 1994, emerged as both an extension and a response to inability of the resource-
based view (RBV) to interpret the development and re-development of resources and
capability to cope with rapidly changing environment (Galvin et al., 2014). The path-
dependent processes suggested by the theory of dynamic capability allow firms to construct,
integrate and reconfigure their portfolios of resources and capability to respond to a rapidly
changing environment (Teece et al., 1997). The RBV theory was the main point of debate
during this period. The theory indicated that the firm as a portfolio of human, physical and
intangible resources and capability. The firm’s capability was defined as capacity for
creative and effective combination of resources (Barney, 2000;Helfat and Peteraf, 2009).
When it comes to understanding sustainable competitive advantage and superior
performance in a dynamic context, the RBV theory had a number of limitations that have
been addressed by the DC theory. DCs are organizational and strategic practices used by
organization to create new configurations of resources as markets grow, diverge and
ultimately die out (Eisenhardt and Martin, 2000). Teece made a major contribution to DC
theory by writing about the micro-foundations for each of the following three dimensions;
sensing (identifying and assessing an opportunity), seizing (mobilizing resources to address
an opportunity and capture value) and transforming (continuous renewal, redesigning the
intangible and tangible assets of the organization) in 2007. In this study, the researchers
empirically examine connection between innovation capability, digital transformation
strategy and innovation performance. Dynamic capabilities are structured activities that
must be introduced and integrated into organizational digital transformation processes.
These capabilities require time to implement effectively, as evidenced by studies validating
the dynamic capabilities theory.
3.1.5 Technology acceptance model (TAM). According to the technology acceptance
model (TAM), potential adopter’s attitude and expectations of the innovation really
influence the likelihood that it will be adopted (Davis, 1985). Moreover, TAM places
emphasis on two key ideas: how the innovation is perceived by a potential adopter in terms
of its usability or how simple it will be to learn and put into practice and its potential
usefulness or how much it will boost the user’s performance on the job or in other areas of
their personal lives (Straub, 2017). This model developer argued that two factors, simplicity
of use has a direct effect on perceived usefulness because the more likely an adopter is to
employ an innovation, experience increased productivity and demonstrating its usage
(Davis, 1985). Thus, Davis concluded that there was a stronger relationship between
perceived usefulness and technology adoption. The model addressed that, regardless of how
simple a technology is to learn, if people do not accept, then it will not increase their Digitization
productivity (Davis, 1985). strategy and
innovation
3.2 Empirical review
3.2.1 Digitization vision and innovation performance. A digital vision depicts the transition
in a compelling way and promotes understanding at all organizational levels. Emerging
technologies resulted in new possibilities for how organization communicate with and serve
clients (Timbula and Marvadi, 2023). To stay relevant and valuable to them in this digital
age, the organization must work to have good innovation capability and digital
transformation strategy. True digital transformation is frequently sparked by these
contemporary tactics, as well as significant internal adjustments improve innovation
performance. Moreover, it is a future state depiction of the issues that an organization will
resolve for their clients, how they will use organization resources and how employees, their
abilities and the entire business will seem. Leaders are required to put out effort in
developing a digital vision to transition to a new and digitalize the work setup (Timbula and
Marvadi, 2023). The significance of a strategic digitization strategy is in augmenting
process innovation capabilities and, consequently, improving innovation performance (Sun
et al., 2022; Tajudeen et al., 2021). Wang et al. (2023) highlighted the significance of digital
capabilities, encompassing fundamental, functional and integrated capabilities, in
propelling corporate success via innovative business models. To further bolster the
beneficial effects of a digitization vision on innovation performance, Yasa et al. (2019)
emphasize the mediating function that digital innovation plays in improving corporate
success. Digital competencies, such as a strategic digitization strategy, IT strategies and
digital innovation, are critical to improving innovation performance (Tajudeen et al., 2021;
Yasa et al., 2019). The beneficial effects of digital orientation and competence on digital
innovation, which in turn mediates the relationship between these elements and
organizational success, were also highlighted by Khin and Ho (2018). Wang et al. (2023)
elaborated on this by emphasizing how business model innovation acts as a bridge between
digital capabilities and the success of businesses. The aggregate findings of these studies
point to innovation capability, which is fueled by a distinct digitization vision as a major
mediating factor in the relationship between innovation performance and digitization vision.
Tajudeen (2021) discovered that enhancing process innovation capabilities, which boosts
innovation performance, requires a strategic digitization vision. Yasa (2019) emphasized the
function of digital innovation in moderating the impact of digital capabilities on corporate
success. To elaborate, Wang et al. (2023) listed the aspects of digital capabilities and
demonstrated how they improve corporate performance, with business model innovation
serving as a major motivator. Wang et al. (2023) also looked into how enterprise digitization
might promote green innovation, highlighting the significance of resource reallocation as
well as the effects of environmental regulation and economic development. Together, these
studies highlighted how crucial a digital vision is to advancing innovation performance and
capabilities:

Ha1. Digitization vision has positive and significant effect on innovation performance.
Hb1. Innovation capability mediates the relationship between digitization vision and
innovation performance.
3.2.2 Information technology flexibility and innovation performance. IT infrastructure is
valued as a key component of organization’s resources and capabilities, as well as in
assisting with operational and strategic initiatives. It is more important to understand the
JAOC organizational skills that IT should be targeted in enabling or developing, according to
recent commentaries, rather than attempting to determine what combinations of IT
resources and IT competencies organizations. Information technology (IT)-enabled dynamic
capabilities are described as organization capacity to use its IT resources and IT
competences in conjunction with other organizational resources and capabilities to handle
constantly changing business situations. IT architectural flexibility promotes the
development of IT-enabled dynamic capabilities and whether such development yields any
appreciable competitive innovation performance improvements. The flexible IT
infrastructure can only be useful if it is properly used to support or enable crucial
organizational competencies that contribute to digital strategy alignment and innovation
performance (Chung et al., 2003). Lee and Treacy (1988) and Naidoo and Hoque (2018) found
that IT can significantly enhance innovation capability, with Lee and Treacy emphasized
the role of IT in augmenting individual and group capabilities, and Naidoo and Hoque
highlighting the strong positive relationship between IT capability and innovation
capability. Fink and Neumann (2009) further supported this by demonstrating the
competitive impacts of IT-enabled flexibility, particularly in large organizations. Cui et al.
(2015) extended this by showing that the alignment between IT flexibility and open
innovation strategies can enhance innovation performance, leading to improved
organizational performance. Akhtar et al. (2021) found that IT adoption and capability
positively influence innovation performance, with the latter study specifically highlighting
the role of innovation capability as a mediator. Yusr (2016) further supported this, showing
that innovation capability mediates the relationship between total quality management
(TQM) practices and innovation performance. These findings underscore the importance of
innovation capability in leveraging the potential of IT flexibility for improved innovation
performance:

Ha2. Information technology flexibility has a positive and significant effect on

innovation performance.
Hb2. Innovation capability mediates the relationship between information technology
flexibility and innovation performance.
3.2.3 Information technology integration and innovation performance. The process of
integrating technology into daily tasks, such as using computers, mobile phones, digital
cameras, social media, software and the internet, is known as IT integration (Mostafiz et al.,
2021). It is achieved when technology is used effectively. The country’s digital
transformation strategy for using IT in the financial services sector includes the integration
of financial IT. This includes electronic techniques for securing online transactions and
accounts and for managing data on customers’ past purchases. The use of financial
technology can raise the standard of online transactions and increase the innovation
performance of financial institutions. Technology integration in a microfinance institution
refers to the use of technology to strengthen and support the outreach, sustainability and
financial stability of the institution (Kamasak, 2015). IT integration has the potential to
improve manufacturing SMEs’ capacity for innovation, especially with regard to expansion
(Raymond et al., 2013). Further evidence came from Lee and Treacy (1988), who showed how
IT might spur innovation by enhancing individual and group capacities. By extending this
to the retail industry, Oh et al. (2022) demonstrated how IT integration may boost
productivity and creativity, improving business performance. In the high-technology sector,
Yang (2005) likewise examined the benefits of innovation and knowledge integration on the
performance of new products. The combined findings of this research highlight how
important IT integration is for promoting innovative performance. According to research by Digitization
Akhtar et al. (2021) and Sudrajat et al. (2016), IT integration directly improves business strategy and
performance through inventive capability. More evidence for this comes from Lee (1988)
who contended that IT can foster creativity by enhancing individual and group capacities.
innovation
Raymond et al. (2013), on the other hand, offer a more nuanced perspective, pointing out that
although IT integration might foster innovative capacity toward expansion, it might have a
crippling impact on output. IT adoption has been shown to positively impact innovation
performance by both Akhtar (2021) and Naidoo (2018) who examined the importance of IT
capability as a strategic resource. Raymond et al. (2013) identified a paradoxical effect;
however, they suggest that the relationship between IT integration and innovation
capability in manufacturing SMEs may be more complex and context-dependent. The
aforementioned results emphasized the significance of innovation capability in acting as a
mediator in the relationship between innovation performance and IT integration:

Ha3. Information technology integration has a positive and significant effect on

innovation performance.
Hb3. Innovation capability mediates the relationship between information technology
integration and innovation performance.
3.2.4 Information technology agility and innovation performance. The ability of
organizations to achieve their strategic goals is increasingly dependent on their ability to
operate with resilience and agility in their technology operations. These capabilities not only
support day-to-day operations but also set the standard for cutting-edge innovation in
customer experience and new product development (Franco and Landini, 2022). IT
capabilities need to adapt to changing organizational capabilities, and in some cases, it is
necessary to completely overhaul or restructure organizational processes, systems or
structures to meet changing market structure. However, there is also a continuing desire for
stability and control, so there may still be some reluctance to accept any change in IT
systems (Lai et al., 2021). Besides, the literature on how digital transformation affects
innovation performance leads to several significant conclusions. It is determined that
organizational structure, leadership and innovation are essential for implementing digital
strategies successfully (Ribeiro, 2022). Success factors include the company’s strategic
stance and the trans-functional role of IT. New business models have been adopted as a
result of the tremendous impact that digital transformation has had on value generation,
delivery and capture across a range of industries (Vaska et al., 2021). These findings
emphasize the significance of a well-defined digital transformation strategy in fostering
innovation success. Research consistently shows that IT agility has a positive and
significant effect on innovation performance. Ravichandran (2018) and Sambamurthy et al.
(2003) highlighted the role of IT in enhancing organizational agility, which in turn drives
innovation and improves firm performance. Naidoo and Hoque (2018) further supported
this, demonstrating a strong positive relationship between IT capability and innovation
capability, and their combined impact on firm performance. Cai et al. (2016) extended this by
showing that IT capability can be leveraged to build organizational agility in the context of
product innovation, with knowledge management capability and innovative climate playing
important roles. Research consistently shows that IT capability significantly enhances
innovation capability and organizational agility (Cai et al., 2016; Lee and Treacy, 1988;
Ravichandran, 2018). IT capability can improve organizational agility by augmenting
individual and group capabilities, providing motivation and resource support and
facilitating information sharing (Lee and Treacy, 1988). This is particularly important in the
JAOC context of product innovation, where IT capability can enhance knowledge management
and create an innovative climate (Cai et al., 2016). Furthermore, the acquisition and
exploitation capabilities of open innovation can mediate the relationship between IT
capability and organizational agility (Cepeda and Arias-Perez, 2018). Therefore, IT
capability plays a crucial role in fostering innovation capability and organizational agility.
Many studies have explored the relationship between IT agility, innovation capability and
innovation performance. AlTaweel and Al-Hawary (2021) and Cai et al. (2016) found that
innovation capability mediates the relationship between IT agility and innovation
performance. Cai et al. (2016) specifically highlighted the role of knowledge management
capability and innovative climate in this mediation, while AlTaweel and Al-Hawary (2021)
focused on the mediating role of innovation capability in the relationship between strategic
agility and organizational performance. Akhtar et al. (2021) further supported these
findings, demonstrating the mediating role of IT in the relationship between organizational
learning capability and innovation performance. Jiang et al. (2021) also emphasized the
mediating role of firm agility in the relationship between IT application and competitive
performance. These studies collectively suggest that innovation capability and firm agility
play crucial mediating roles in the relationship between IT agility and innovation
performance:

Ha4. Information technology agility has a positive and significant effect on innovation
performance.
Hb4. Innovation capability mediates the relationship between information technology
agility and innovation performance.
3.2.5 Innovation capability and innovation performance. Organizations that deploy
resources with a new capacity to create value have been demonstrated to need to have the
ability to innovate (Yang et al., 2009). Furthermore, the ability to effectively assimilate,
understand and enhance existing and emerging technologies have been called innovation
capability (Lall, 1992). According to Cavusgil et al. (2003), obtaining excellent innovation
performance, which has the potential to be successful, requires a strong foundation in
innovation capabilities. Remembering the RBV theory (Wernerfelt, 1984), the organization is
described as a collection of resources and capabilities. Using distinctive organizational
resources and capabilities, the organization can perform better than its competitors and gain
a competitive advantage. Similarly, higher the caliber of the resources and capability are
more valuable, it is to achieve and maintain superior performance (Barney, 2000; Wernerfelt,
1984). Yesil et al. (2013) examined the relationship between organizational capability for
innovation and how well it performs in the given organization. To increase its overall
capacity for innovation, organization must perform well when implementing various types
of innovation. Lee and Liu (2008) stated that the performance of organizational innovation
positively affected by organizational innovation capability. Incorporating several facets of
an organization’s innovative strength, the innovation performance domain encompasses a
composite of organizational-wide outcomes from renewal and improvement initiatives.
Innovation can be considered as a crucial step and a development that always has effect on
marketing performance. Product innovation can boost organization sales, profits and
competitiveness. In addition to product innovation, service innovation can add value to
organization because service-based competition is the best way to win business competition
(Kadarningsih, 2013; Tuan et al., 2016). In the meantime, successful innovation leads to good
innovation performance. Research and development, patenting and introducing new
products are all included in the process of innovation performance. Stated differently, the
scope of innovation performance in the broad sense highlights the technological aspects of Digitization
innovation and the introduction of new products into the market, but it ignores the strategy and
possibility that inventions will be successful (Ernst, 2001; Stuart, 2007). Innovation has come
through growth of people seeking new and better living conditions. Unless people take
innovation
different ideas and actions, imagine the achievements of modern world that will completely
change the way people do things and tackle fundamental innovations (Fagerberg, 2004).
Further, innovation performance is a composite of organizational-wide outcomes as a result
of renewal, improvement efforts, taking into account various aspects of organizational
innovative strength. Alam et al. (2013) and Lestari and Ardianti (2019) discovered a direct
and indirect relationship between innovation capabilities and financial, marketing and
company performance. Shouyu (2017) added more weight to this by highlighting the critical
role that innovation plays in boosting business performance. Ince et al. (2016) highlighted
the importance of technological innovation capabilities and absorptive ability in boosting
company innovativeness, which impacts performance. All of these studies together have
shown the importance of innovative capabilities in enhancing organization success:

H5. Innovation capability has positive and significant effect on innovation performance.
3.2.6 Digital transformation strategy, innovation capability and innovation performance.
Numerous studies showed that technology adoption was the main factor through which
digital transformation strategy affect organizational innovation performance. The
widespread application of technology can swiftly improve innovation capability, reducing
operational costs over time and helpful for fostering innovation performance (Fang et al.,
2022; Goldfarb and Tucker, 2021). Technology adoption, system upgrading and
introduction of new products and services have positive effect both on innovation capability
and innovation performance (Gaglio et al., 2022). Stronger and more effective organization
can frequently benefit from greater innovative practices (Müller et al., 2021). An earlier
study revealed that implementing digital transformation has significant contribution to
economic growth and boost innovation performance of the organization (Zhang et al., 2022).
The comprehensive transformation of enterprise strategy, marketing, products, business
models, management and corporate culture is included in the digital transformation strategy
of organizations. Therefore, digital transformation can lower organizational costs, increase
the connectivity of innovation networks, quicken the speed of digital integration, broaden
the integration’s application, raise the knowledge base, integration needs of innovation
networks and change the way knowledge is acquired and shared in innovation networks.
Technological capabilities are only enabled through innovation capability and have a
positive effect on innovation performance. Furthermore, the benefits of digital
transformation are greatest for businesses in the mature stage of their product development
(Zhang et al., 2022). Another study by Helfat (2022) examined the relationship between
adopting a digital business strategy and innovation in the organization. It found that
innovation performance was higher in organizations that had a well-framed digital business
strategy. The study also highlighted the importance of organizational capability, including
the ability to innovate and facilitating the condition of digital strategies into improved
innovative performance. Yasa et al. (2019) found that digital innovation mediates the
relationship between digital capabilities and firm performance, suggesting that improving
digital capabilities can lead to the development of new digital innovations, which can then
improve business success. According to Liang and Li (2022), R&D capability and digital
transformation capability, respectively, act as mediators in the relationship between
innovation performance and digital transformation. Tajudeen et al. (2021) highlighted how
important digitization strategies and IT strategies are to building process innovation skills,
JAOC which raises innovation performance. All of these studies suggest that digital
transformation strategy may enhance innovation performance, with innovation capabilities
serving as a mediating factor. In summary, as illustrated above, many studies have found a
positive relationship between innovation capability and performance. Organizations with
higher capability tend to have higher performance in areas like new product development,
patents and financial growth. They also substantiate the link between innovation capability
and innovation performance, but the relationship is complex and depends on how
capabilities are managed and aligned. Strong capabilities do not automatically produce
results without strategic direction.

4. Materials and methods

After a review of the literature, the measurement items were created and subsequently
revised to be appropriate for the study. The quantitative nature of the study and its
foundation in the positivist research paradigm led to the adaptation of the deductive
approach. Furthermore, it is perfect for this study because its goal is to evaluate theories in
light of preexisting ones. Convenience sampling was used in the selection of microfinance
institutions. There was COVID-19 pandemic and conflicts in same part of Ethiopia, which
led to the selection of 12 microfinance institutions. The study sample consisted of 536
employees from various branches, head offices and district offices of 12 microfinance
institutions. This sample size was determined using the Goodden formula for sample
size calculation. A self-administered questionnaire was used to collect survey data from
the sample. Simple random sampling was used to select respondents from the employee
population of the microfinance institutions. The sample size determination involved two
steps. First, the infinite population formula was used to arrive at the initial sample size
estimate:

ðzÞ2  ðpÞ  ð1  PÞ
SS ¼
ðCÞ2

where:
p ¼ sample proportion, q ¼ 1 – p;
SS ¼ Sample size;
Z ¼ Z-value (e.g. 1.96 for a 95% confidence level);
p ¼ Percentage of population picking a choice, expressed as decimal;
C ¼ Confidence interval, expressed as decimal;
SS ¼ New sample size;
Pop ¼ Total population;
z ¼ the value of the standard normal variant at a given confidence level; and
Z-values (cumulative normal probability table).
When the probability of success (p) and failure (q) are both set to 0.5 (q ¼ 1 – p), it represents
the scenario where the sample size will be maximized while still ensuring the desired
precision. By permitting a margin of error of 5% with a 95% confidence level, the computed
sample size for an infinite population was determined to be 600:
SS
New SS ¼ ð1þðSS1Þ
Pop

OR:
 600 Digitization
New SS ¼ ð1þð6001Þ
5050 strategy and
innovation
New SS ¼ 536. The researcher consolidated the employees from various branches, head
offices and district offices to constitute the total population, which amounted to 5050
individuals. The sample size for the study was calculated to be 536 participants using a
statistical formula. Two software programs were used to analyze the data – AMOS version
26 and SPSS version 24. AMOS was used to assess the structural and measurement models.
SPSS was used to calculate the internal consistency reliability of the measurement items,
Kaiser–Meyer–Olkin (KMO) measure of sampling adequacy and Bartlett’s test of sphericity.
While AMOS evaluated the modeled relationships, SPSS provided additional statistical tests
on the properties of the measurement scales. Together, the software enabled comprehensive
data analysis for the study (Hinton et al., 2004). In this study, a cross-sectional survey design
was adopted. Covariance-based structural equation modeling (CB-SEM) has been a popular
tool in the social sciences over the past few decades. It remains the preferred technique for
data analysis when testing theories and verifying or disproving hypotheses, particularly in
cases where the sample size is large, the data are regularly distributed and most
importantly, the model is accurately stated. Stated differently, when a theory is converted
into a structural equation model, the appropriate variables are chosen and connected (Hair
et al., 2020). One of the most commonly used statistical packages for CB-SEM is AMOS
(Wan,2002).

4.1 Development of measurement

The purpose of this study was to examine mediating role of innovation capability in the
relationship between digital transformation strategy and innovation performance. A seven-
point Likert scale used to assess the degree of agreement with regard to given statements.
For the purpose of measuring digitization vision, five items were adapted from Niemand
et al. (2017). While, three items were adapted to measure the IT flexibility from Fichman
(2004), Saraf et al. (2007). The four items related to IT Integration were adapted from the
study of Rai and Tang (2010). IT Agility, consisting of five items, was adapted from
Fichman (2004), Lu and Ramamurthy (2011). While, six items for each variable with regard
to innovation performance were taken from the work of Gomezel and Rangus (2019),
Jimenez-Jimenez and Sanz-Valle (2011), and innovation capability was measured using six
items developed by the researchers.

5. Analysis and result

5.1 Common method bias
According to Podsakoff et al. (2012), common method bias is the systematic variance that is
shared when the variables are used and based on the idea that a single item accounts for
most of the variance. It can become a problem if left unaddressed, as it is thought to be the
main sources of measurement error. Any measure that frequently contains technique bias
will produce results that are hypothetically ambiguous because correlations will be inflated
(Carlson and Stevens, 1988). To reduce the effect of common method bias, a number of
procedural safeguards were used in this study. First, respondents were given full freedom of
choice and expression to reduce evaluative anxiety, with the guarantee that their responses
would be kept strictly private and used only for research purposes. It was made clear to
participants that there were no right or wrong answers to the questionnaire. In addition, to
reduce the usual technique variance in this study, the scale items were improved to reduce
JAOC ambiguity. Using straightforward language and avoiding ambiguous words helped achieve
this. All survey questions were prepared in a clear, concise and straightforward manner to
further improve the items.

5.2 Factor extraction

The principal component method used in this study to extract factors from results of un-
variety analysis and Equamax rotation used to interpret the result. To check if the samples
were big enough and right, SPSS was used to run the KMO test (which checks if partial
correlations between variables are small) and Bartlett’s test of sphericity. Based on Table 1,
the study had a KMO value of 0.921 and acceptable, ensuring that factor analysis performed
with the data. In addition to this, values of Bartlett’s test of sphericity (< 0.05) suggest that
factor analysis could be suitable with the data.

5.3 Measurement model

The measurement model generates the most reasonable, accurate and legitimate model. It is
primarily used to confirm construct validity based on convergent and discriminant validity
(Oh et al., 2022). It can be seen in Table 2, all of the AVEs, CRs and Cronbach alpha values
for the six constructs were over the permissible thresholds of > 0.5, 0.7 and 0.7, respectively.
The model met the requirements of convergent validity, discriminant validity and reliability
test (Fornell and Larcker, 1981).
The heterotrait-monotrait (HTMT) test is an additional suggested technique for
evaluating discriminant validity with IBM AMOS (Hair et al., 2020). The ratio of within-trait
correlations to between-trait correlations is known as the HTMT (HTMT ratio of the
correlations). HTMT discriminant validity test results are shown in Table 3. The threshold
value for the HTMT was 0.85 as a general rule when the path model constructs are
conceptually similar and 0.85 as a lower threshold when they are conceptually different
(Hair et al., 2020). When the HTMT ratio is less than 0.85, there is strong evidence of
discriminant validity, and HTMT values above 0.85 indicate the opposite. All ratios were
below 0.85 level, as seen in the table below, demonstrating discriminant validity for each
construct in the path model.

5.4 Final measurement and structure model

The researcher used AMOS version 26 to perform a confirmatory factor analysis (CFA) of
the proposed model before performing the structural equation analysis. The proposed
model’s maximum likelihood (ML) estimation showed that it was well fitted for model
goodness and has high loading of standardized regression. It can be seen in Table 4, all of
the model indices and chi-square statistics were within the cut-off. CFI value strongly met
the conventional cut point, and RMSEA value was below 0.08 and acceptable (Hu and
Bentler, 1999).
The final structural equation model encompasses both the measurement and structural
aspects of the analysis. It merges the connections between observed variables and latent

KMO measure of sampling adequacy 0.921

Bartlett’s test of sphericity Approximate chi-square 13,779.469
Df 435
Table 1. Sig 0.000
KMO and Bartlett’s
test Source: IBM SPSS 24 Output (2022)
Construct Label Factor loading AVE CR CA Items

Digitization vision Your organization has a clear plan to maintain its competitive edge in digital strategy 0.862 0.750 0.884 0.883 5
over the next five to ten years (DV1)
Your organization has a well-defined digital strategy (DV2) 0.915
Your institution has a digital strategy that is implemented across all business units 0.891
(DV3)
Your organization has continuously evaluated and adapted its digital strategy (DV4) 0.882
Your organization has established new business models based on new technology 0.783
(DV5)
IT flexibility The IT tools are organized and integrated in such a way that they can be changed at 0.901 0.705 0.919 0.916 4
short notice in your organization (ITF1)
IT tools are highly scalable in your organization (ITF2) 0.882
IT tools are specifically designed to facilitate the formation of new collaborative 0.853
innovation relationships in your organization (ITF3)
IT tools are easy to modify to add new applications or features and do not require 0.724
significant effort to do so in your organization (ITF4)
IT integration Your organization provides easy access to the data that is stored on the systems of 0.904 0.826 0.903 0.912 4
other financial institutions (ITI1)
Your organization can connect to the systems used by those working to innovate in a 0.935
way that does not cause problems (ITI2)
Your organization can help the people who are working together on an innovation to 0.904
share information in real time (ITI3)
Your organization can easily aggregate innovation-related information from partners’ 0.893
databases (ITI4)
IT agility IT is capable of responding quickly to new opportunities in customer needs, markets 0.883 0.738 0.909 0.918 5
and business environment (ITA1)
Organization uses IT for new ways to improve the efficiency (ITA2) 0.915
Make predictions about possible changes and new developments in IT that could affect 0.884
operation of our organization (ITA3)
Possibility of quickly scale up or down the IT infrastructure in your organization 0.862
(ITA4)
Your organization can continue to actively and proactively explore new IT tools (ITA5) 0.754
(continued)

Table 2.
innovation
Digitization

discriminant validity
factor loading and
Convergent validity,
strategy and
 JAOC

Table 2.
Construct Label Factor loading AVE CR CA Items

Innovation capability The organization has ability to be proficient in the use and assimilation of basic and 0.872 0.809 0.958 0.958 6
essential technology (IC1)
The organization has ability to do creation and management of new technologies that 0.934
are interrelated (INC2)
Your organization allocates resources to create an effectively product and service to 0.932
market (INC3)
Your organization possesses knowledge that is extremely useful for the creative 0.924
process and technological adoption (INC4)
Your organization provides a direction on the best ways to organize the work, best 0.853
procedures and framework for doing so (INC5)
Your organization provides an effective tool to help the process of developing new 0.883
product or service (INC6)
Innovation performance The number of new products or services that have been recorded in your organization 0.874 0.745 0.933 0.932 6
is adequate (INP1)
Your organization has launched new product or service to its clients (INP2) 0.892
The total hours of work, including total number of hours worked by individuals, 0.853
groups and training, put into development of new products or services are adequate in
your organization (INP3)
The total number of new changes in product and services that have been introduced 0.874
into the appropriate process are adequate in your organization (INP4)
The introduction of new and innovative processes in the development of new products 0.883
or services is adequate (INP5)
The renewal of the management system and operational performance in line with the 0.804
strategy of organization (INP6)

Notes: IT ¼ information technology; AVE ¼ average variance extracted; CR ¼ composite reliability; CA ¼ cronbach’s alpha
Source: IBM AMOS and SPSS Output
constructs, which constitute the measurement model, along with the relationships among Digitization
latent constructs, forming the structural model. Constructing the final SEM involves strategy and
synthesizing the outcomes of the CFA and enables researchers to explore the intricate innovation
interactions among variables and constructs within a conceptual framework. This model
offers insights into the interrelationships among variables and their combined effect on
elucidating the phenomenon under investigation. Testing the hypothesis was preceded by
an evaluation of the goodness of fit. The complete structural model is displayed in Figure 1.

6. Discussion
To investigate the impact of a digital transformation strategy on innovation performance, it
is essential to consider innovation capability as a mediating variable. This requires testing
both the direct and indirect effects. As shown in Table 5, digitization vision (b1 ¼ 0.223,
CR ¼ 4.207, p < 0.01), this result was in line with earlier research, which states digital
competencies, such as a strategic digitization strategy, IT strategies and digital innovation,
are critical to improving innovation performance (Tajudeen et al., 2021; Yasa et al., 2019). IT
flexibility has (b2 ¼ 0.195, CR ¼ 5.571, p < 0.01); according to Cui et al. (2015), alignment
between IT flexibility and open innovation strategies can enhance innovation performance,
leading to improved organizational performance. IT integration has b3 ¼ 0.134, CR ¼ 2.436,
p < 0.01; this result was in line with earlier research, Oh et al. (2022) demonstrated how IT
integration may boost productivity and creativity, improving business performance. In the
high-technology sector, Yang (2005) likewise emphasized the benefits of innovation and
knowledge integration on the performance of new products. IT agility (b4 ¼ 0.212,

Variables DIV ITA ITF ITI INC INP

DIV
ITA 0.522
ITF 0.207 0.403
ITI 0.078 0.139 0.146
INC 0.485 0.786 0.437 0.119
INP 0.281 0.542 0.333 0.184 0.503

Notes: DIV ¼ digitalization vision; ITA ¼ information technology agility; ITF ¼ information technology
flexibility; ITI ¼ information technology integration; INC ¼ innovation capability; INP ¼ innovation Table 3.
performance HTMT discriminant
Source: IBM AMOS 26 Output validity results

Goodness of fit Proposed model Cut-off Evaluation model

Tucker–Lewis index (TLI) 0.917 > 0.9 (Hooper et al., 2008) Good fit
Comparative fit index (CFI) 0.923 > 0.9 (Schreiber et al., 2006) Good fit
Root mean square error 0.057 < 0.08 Good fit
of approximation
(RMSEA)
Chi-square/degree of 3.71 < 5 (Zainudin, 2012; Good fit
freedom Hooper et al., 2008)
Table 4.
Source: IBM AMOS 26 Output Model fitness result
JAOC

Figure 1.
Structural equation
model

CR ¼ 2.717, p < 0.01) and innovation capability (b3 ¼ 0.138, CR ¼ 2.653, p < 0.01).
Ravichandran (2018) and Sambamurthy et al. (2003) highlighted the role of IT in enhancing
organizational agility, which in turn drives innovation and improves firm performance.
Naidoo and Hoque (2018) further supported this, demonstrating a strong positive
relationship between IT capability and innovation capability and their combined effect on
firm performance. This result was in line with earlier research that indicates a positive
relationship between digital transformation strategy indicators and innovation
performance. The innovation capability mediated the relationship between digital
transformation strategy indicator (IT agility) and innovation performance. IT capability
significantly enhances innovation capability and organizational agility (Cai et al., 2016; Lee
and Treacy, 1988; Ravichandran, 2018). IT capability can improve organizational agility by
Hypothesis Relationship b SE CR p-values Findings
Digitization
strategy and
Ha1 DIV ! IP 0.223 0.053 4.207 *** Supported innovation
Ha2 ITF ! IP 0.195 0.035 5.571 *** Supported
Ha3 ITI ! IP 0.134 0.055 2.436 * Supported
Ha4 ITA ! IP 0.212 0.078 2.717 ** Supported
H5 NC ! IP 0.138 0.052 2.653 ** Supported
Bootstrapping the indirect effect
Hb1 DIV ! IC! IP 0.023 0.020 1.150 0.250 Unsupported
Hb2 ITF ! IC ! IP 0.020 0.014 1.428 0.153 Unsupported
Hb3 ITI ! IC ! IP 0.038 0.022 1.727 0.084 Unsupported
Hb4 ITA ! IC ! IP 0.071 0.026 2.692 ** Supported

Notes: DIV ¼ digitization vision; ITA ¼ information technology agility; ITF ¼ information technology
flexibility; ITI ¼ information technology integration; INC ¼ innovation capability; INP ¼ innovation
performance Table 5.
Source: IBM AMOS 26 Output Hypotheses testing

augmenting individual and group capabilities, providing motivation and resource support,
and facilitating information sharing (Lee and Treacy, 1988). This is particularly important
in the context of product innovation, where IT capability can enhance knowledge
management and create an innovative climate (Cai et al., 2016). The innovation capability
does not have mediation effect in the relationship between digital transformation strategy
remaining indicators (digitization vision, IT flexibility and IT integration) and innovation
performance. Digitization vision (b ¼ 0.023, p ¼ 0.250), IT flexibility (b ¼ 0.020, p ¼ 0.153),
IT integration (b ¼ 0.038, p ¼ 0.084) and IT agility (b ¼ 0.071, p < 0.01). The significance of
a strategic digitization strategy lies in enhancing process innovation capabilities, which in
turn improves innovation performance (Sun et al., 2022; Tajudeen et al., 2021). Wang et al.
(2023) examined the importance of digital capability–encompassing fundamental,
functional, and integrated capabilities–in driving corporate success through innovative
business models.

7. Conclusions
Digital transformation strategy indicators (digitization vision, IT flexibility, IT integration
and IT agility) have a positive direct effect on innovation performance. Innovation capability
mediates the relationship between IT agility and innovation performance. Innovation
capability does not have mediation effect in the relationship between digital transformation
strategy indicators (digitization vision, IT flexibility and IT integration) and innovation
performance. The study revealed that indicators of digital transformation strategy
(digitization vision, IT flexibility, IT integration and IT agility) have indirect positive effects
on innovation performance. This suggests that organizations with a well-defined vision for
digitization are more likely to achieve better innovation outcomes. This underscores the
critical role of strategic planning and vision-setting in driving innovation within
organizations, particularly in the context of digital transformation. Institutional flexibility to
outsource, amend, supervise and use of latest technologies are vital for innovation
performance. Improving the innovation performance of financial institutions directly
contributes to enhancing other aspects of organizational performance. Improving innovation
performance should be considered as a strategy for enhancing operational performance,
marketing performance and financial performance of microfinance institutions.
JAOC 8. Recommendations
Most microfinance institutions have not digitized their operations yet in Ethiopia. They
have rendered services manually, resulting in a lengthy process that increases their
operational expenses and reduces their profitability. Therefore, maximum effort should be
exerted to bring innovative financial processes to microfinance institutions in Ethiopia.
Microfinance institutions should develop a clear and comprehensive vision for digitization
that aligns with their overall strategic objectives. This vision should outline the
organization’s goals, priorities and desired outcomes related to digital transformation,
providing a roadmap for future initiatives and investments. Microfinance institutions
should invest more in strategies that improve innovation performance, as innovation
performance is considered the foundation for other organizational performance indicators,
such as financial performance, service performance and other operational performance.
Encourage collaboration and integration between IT and business functions to leverage IT
flexibility for innovation. Ensure that IT strategies align with business objectives, and that
IT investments are closely tied to innovation initiatives. Prioritize investments in IT
infrastructure and systems that support integration across different business functions and
processes. This may involve implementing enterprise resource planning (ERP) systems,
customer relationship management (CRM) platforms and other integrated IT solutions that
enable seamless data sharing and workflow automation. Moreover, before implementing
digital transformation strategy, it is imperative to prepare ahead and make the required
resources available. Furthermore, it is recommendable to make the existing IT system agile,
flexible and easily configure with the latest financial technology. Microfinance institutions
need to innovate to improve the quality, scale and efficiency of financial services provided to
the poor and low-income population. For microfinance institutions to successfully digitize,
they must develop new skills, particularly in adopting the latest financial technology. When
undergoing digital transformation, MFIs must provide training for their existing employees.
It is necessary to identify areas of capacity deficiency and develop a detailed plan to address
those issues. The government, funder and other interested parties should support and
encourage microfinance institutions to adopt and use technology. This can be achieved by
contributors and stakeholders providing support specifically for the implementation of
national digital payment strategy. To achieve this, National Bank of Ethiopia can provide
grants and support to domestic system and software developing firms. This will enable the
creation of payment software with robust security measures for the financial services
industry and enhance e-commerce practices in Ethiopia.

9. Implications for policy, managerial and theory

The study contributes to empirical studies on microfinance institutions’ innovation
performance in developing countries. The DC theory has addressed several RBV theory
limitations when comprehending sustainable competitive advantage and superior
performance in a dynamic context. Organizations use DCs, which are organizational and
strategic practices, to develop new resource configurations as markets expand, diverge and
eventually die out (Eisenhardt and Martin, 2000). This study validated the dynamic
capability theory. There have been a few empirical studies on dynamic capability to date
(Awan et al., 2021; Mostafiz et al., 2021). In this study, the researcher empirically examines
the relationship between innovation capability, digital transformation strategy and
innovation performance. As dynamic capabilities are patterned activities that are
introduced, they need to be incorporated into organizational digital transformation
processes and take time to implement. The indicators of digital transformation strategy
include digitization vision, integration of IT, IT flexibility and agility of IT. Microfinance
institutions should focus on the important role of organizational innovation capability and Digitization
technology change in the process of digital transformation. Organizational innovation strategy and
capability and technology acceptance are important bridges for digital transformation innovation
strategies to improve innovation performance. In a dynamic market environment,
organizations must enhance innovation capability, improve flexibility and integration with
the latest IT, identify and seize opportunities and promote innovation. Further, acceptance
of digital technology and following traditional business models have an adaptation problem,
and organizations should pay attention to digital transformation strategies and increase
investment in digital technology. The organization should support members through
various channels and enhance employees’ commitment to digital transformation. The
National Bank of Ethiopia needs policies and regulations that promote digitization and
innovation capabilities among microfinance institutions. Policies are needed to incentivize
investments in building innovation-enabling skills, resources and processes in microfinance
institutions.

10. Limitations
This study does not provide evidence for any real causal effects of antecedents on
innovation performance, because the data collected was self-reported and represents
respondents’ normative opinions about their personal experiences in the organizations for
which they have been working. The study is not generalizable because it only looked at
microfinance institutions in Ethiopia. As the demand for cross-country research grows,
future studies should aim to include more developing nations and compare their results with
studies from developed countries.

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Corresponding author
Mekuanint Abera can be contacted at: mekuanintabera@yahoo.com

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