What Drives the Adaptive Capability of Indonesian SMEs during the Covid-19 Pandemic: The Interplay between Perceived Institutional Environment, Entrepreneurial Orientation, and Digital Capability

The Covid-19 pandemic has caused disruptive business environments that demand firms to develop their adaptive capacity to survive. This paper aims to investigate the antecedents of adaptive capability by integrating the resource-based view, dynamic capability, and institutional theories to explain firms’ adaptive capability during the pandemic in the context of Indonesia. A causal model was developed and tested using Partial Least Squares (PLS) with 262 participants. The findings reveal that institutional environment is the key driver of enhancing SME’s entrepreneurial orientation and developing their digital capabilities to adapt to disruptions triggered by the pandemic. In practice, the government needs to revise its support programs to assist SMEs in advancing their entrepreneurial skills and digital capability to operate their businesses in digital markets. Training on design thinking, digital technology, and Artificial Intelligence should be incorporated into any support programs provided to strengthen SMEs’ competitiveness through digital capability and entrepreneurial orientation. The government also needs to revisit the current IT infrastructure to provide affordable IT technologies to support the digital capability of SMEs.