Bridging old and new: how AI literacy and frugal innovation enable family-owned boutique hotels to transform Industry 4.0 into innovation performance

Purpose How can family-owned boutique hotels (F-OBHs) preserve their uniqueness and embrace cutting-edge technology? This study aims to examine a research gap, how Industry 4.0 (I-4.0) capabilities drive sustainable innovation performance (SIP) through frugal innovation. It is also investigated how AI problem-solving and digital literacy influence these conscious enterprises without losing their authentic character. Design/methodology/approach Primary data were collected from 243 descendant entrepreneurs handling their F-OBHs. This data was analysed by using 2nd generation software, Smart-PLS and applied the PLS-SEM technique. Findings This study found that I-4.0 capabilities, AI problem-solving and AI literacy significantly boost SIP in F-OBHs. Frugal innovation strengthens I-4.0 capabilities with SIP. AI problem-solving abilities of F-OBHs maximize their I-4.0 capabilities and achieve excellent frugal innovation. Moreover, high AI literacy of entrepreneurs increases frugal innovation activities and achieves SIP. Originality/value This study unlocks how F-OBHs can compete against giants in their industry by using smart tech and slowly replacing established traditions cost-effectively. The findings show how F-OBHs can turn their everyday challenges into breakthrough opportunities in an increasingly digital marketplace.