Impact of dynamic capabilities on digital transformation and innovation to improve banking performance: A TOE framework study

Abstract

The focus of this research revolves around applying the dynamic capabilities (DC) considering technological, organizational, and environmental dimensions (TOE framework) to explore the digital transformation (DT) and innovation. The current literature has shown a limited focus on integrating DC with the TOE framework, inspiring this research to address this gap. This research adopts a quantitative approach employing partial least square structural equation modeling (PLS-SEM), leveraging a survey with 325 respondents from 48 banks in Indonesia. The study identifies the necessary organizational capabilities for DT and innovation, encompassing technological capabilities representing technology, strategic and organizational capabilities representing the organizational dimension, as well as ecosystem and governance-risk-compliance (GRC) capabilities representing the environmental dimension. The findings unveil that technology and ecosystem capabilities have a positive and significant impact on DT and innovation. Organizational capabilities positively influence innovation but exhibit a negative impact on DT. Strategic capabilities positively affect DT and negatively impact innovation, while GRC capability enhances its role in DT, contributing to improved company performance. This research adds to the theoretical understanding of DC within the TOE framework and offers managerial insights to assist the banking sector in effectively managing capabilities for successful DT and innovation.