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Innovation and small and medium enterprises (SMEs) are associated with economic development and industrial revitalization. Innovation and digitalization have long been established as the primary contributors to improved business performance in SMEs, and digitalization is becoming increasingly regarded as enabling the transformation of business model and operational capabilities. However, South African SMEs face many challenges in adopting digitization and fostering innovation. This paper critically examines how South African SMEs can systematically leverage business innovation and digitalization to acquire sustainable competitive advantage. The study used a systematic literature review approach, focusing on literature published from 2019 through 2024. Through database analysis of academic literature and industry trends, the study aimed to discover the best practices, barriers, and the role of external partnerships in fostering innovation and digital transformation. The findings indicate that SMEs that emphasize innovation and digital technology improve their productivity and competitiveness. However, obstacles including a lack of funding, expertise, and restricted access to technology prevent many SMEs from reaching their full potential. To overcome these obstacles and promote a culture of ongoing innovation, cooperation with outside partners and emphasis on consumer interactions is crucial. This article contributes to innovation in the digital transformation landscape of SMEs by offering approaches and frameworks for South African SMEs to facilitate the adoption of innovation and digitization for sustainable competitive advantage. This addresses a core gap by guiding how to overcome barriers such as constraints of resources and focus on collaborative networks to drive digital and innovative growth.

Innovation and small and medium enterprises (SMEs) are associated with economic development and industrial revitalization. Innovation and digitalization have long been established as the primary contributors to improved business performance in SMEs, and digitalization is becoming increasingly regarded as enabling the transformation of business model and operational capabilities. However, South African SMEs face many challenges in adopting digitization and fostering innovation. This paper critically examines how South African SMEs can systematically leverage business innovation and digitalization to acquire sustainable competitive advantage. The study used a systematic literature review approach, focusing on literature published from 2019 through 2024. Through database analysis of academic literature and industry trends, the study aimed to discover the best practices, barriers, and the role of external partnerships in fostering innovation and digital transformation. The findings indicate that SMEs that emphasize innovation and digital technology improve their productivity and competitiveness. However, obstacles including a lack of funding, expertise, and restricted access to technology prevent many SMEs from reaching their full potential. To overcome these obstacles and promote a culture of ongoing innovation, cooperation with outside partners and emphasis on consumer interactions is crucial. This article contributes to innovation in the digital transformation landscape of SMEs by offering approaches and frameworks for South African SMEs to facilitate the adoption of innovation and digitization for sustainable competitive advantage. This addresses a core gap by guiding how to overcome barriers such as constraints of resources and focus on collaborative networks to drive digital and innovative growth.