The adoption of Industry 4.0 (I4.0) technologies is increasingly viewed as a pathway to enhance productivity and competitiveness in manufacturing systems. However, the diffusion of such technologies among micro, small, and medium enterprises (MSMEs) remains uneven, particularly in emerging economies. This study examines the relationship between Industry 4.0 adoption, firm-level economic performance, and underlying capability gaps within MSMEs.

Drawing on a mixed-method approach, the study integrates (i) firm-level financial and operational data, (ii) structured indicators of I4.0 adoption, and (iii) qualitative insights on organizational capabilities. The empirical analysis identifies a positive but heterogeneous relationship between I4.0 adoption and performance outcomes, contingent on firms’ absorptive capacity, workforce readiness, and financial resilience. The findings further reveal that while early adopters experience measurable gains in operational efficiency and revenue growth, a substantial proportion of MSMEs remain constrained by capability deficits in digital skills, infrastructure, and strategic alignment.

The study contributes to the literature by advancing a capability-based explanation for uneven I4.0 outcomes in MSMEs and by integrating economic performance with organizational readiness. It also provides actionable policy insights, emphasizing the need for targeted interventions in skill development, financing mechanisms, and ecosystem-level support. The results suggest that without addressing structural capability gaps, Industry 4.0 risks reinforcing existing productivity inequalities within the MSME sector..