Internal and external factors enhancing knowledge acquisition and digital literacy for digital business transformation: Evidence from small businesses in Indonesia

Small business digital transformation remains insufficiently examined, particularly in emerging markets. Prior research has largely concentrated on large enterprises or specific technological implementations and has predominantly adopted a factor-based approach, offering limited insight into how internal and external drivers are translated into digital transformation outcomes. Addressing this gap, this study develops a mechanism-based framework in which knowledge acquisition and digital literacy serve as sequential mediating processes that link internal factors (locus of control and need for achievement) and external factors (social capital) to digital business transformation. Grounded in social cognitive and dynamic capability theories, this study conceptualizes digital transformation as the outcome of learning and capability development processes, in which knowledge acquisition reflects cognitive learning mechanisms and digital literacy constitutes an enabling organizational capability. Using survey data from 293 small business owners in East Java, Indonesia, and analyzing the data with PLS-SEM, the results show that both internal traits and social capital enhance knowledge acquisition, which, in turn, promotes digital literacy and ultimately facilitates digital business transformation. Notably, social capital emerged as the strongest predictor of knowledge acquisition. By clarifying the sequential mechanism through which psychological traits and relational resources are translated into digital capabilities, this study advances a process-oriented understanding of digital transformation in resource-constrained small businesses. The findings also offer practical implications for strengthening organizational learning and digital capability development in emerging economies.