Research on the effects of digital transformation in micro and small enterprises (MSEs) is growing, yet remains underdeveloped, particularly in the context of emerging economies. While previous studies highlight the performance benefits of digital readiness, they often overlook how sector-specific challenges influence these outcomes. This study investigates the relationship between digital readiness and firm performance among MSEs in Bhutan, with a focus on the moderating roles of internal (operational) and external (supply chain) issues. Drawing on data from 217 survey responses collected from firm owners and operators, this study compares tourism and non-tourism sectors to reveal sectoral asymmetries in digital transformation outcomes. The results show that digital readiness is positively associated with firm performance across both sectors. However, the strength of this relationship is differentially moderated by contextual challenges: external issues negatively moderate the digital readiness–performance link in the tourism sector, while internal issues play a similar moderating role in the non-tourism sector. Additionally, firms in the tourism sector report higher levels of both digital performance and satisfaction with digitalization than their non-tourism counterparts. These findings contribute to the Diffusion of Innovation Theory by emphasizing the contingent and asymmetric nature of digital adoption effects across industry sectors. This study offers practical implications for managers and policymakers by underscoring the need for sector-sensitive digital strategies and support mechanisms.
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