Imam Mukhlis, Hary Suswanto, Anton Agus Setyawan, Diah Wahyuningsih, Agung Nugroho
Micro, Small, and Medium Enterprises (MSMEs) play a vital role in Indonesia's economy, contributing 61% to GDP and employing 97% of the workforce. However, Indonesian MSMEs continue to face significant challenges in enhancing competitiveness, particularly regarding financial literacy, digital adoption, and cognitive capacity. Although previous studies have examined these factors separately, few have investigated how they interact or how external locus of control mediates their effects on MSME competitiveness. This study examines how financial literacy, cognitive ability, and management digitalization affect MSME competitiveness in East Java Province, Indonesia. External locus of control serves as a mediating variable. Using Structural Equation Modeling–Partial Least Squares (SEM-PLS), we collected data from 400 MSME actors across six regencies and cities in East Java: Trenggalek, Tulungagung, Malang, Kediri, and Blitar. The analysis reveals that External Locus of Control exerts the strongest influence on MSME competitiveness (β = 0.372; p < 0.001), followed by Cognitive Ability (β = 0.350; p < 0.001) and Digitalization of Management (β = 0.243; p < 0.001). Interestingly, Financial Literacy demonstrates a negative direct effect on competitiveness (β =-0.147; p = 0.011) but shows positive indirect effects through Cognitive Ability (β = 0.713; p < 0.001) and External Locus of Control (β = 0.291; p < 0.001). All relationships are statistically significant (p < 0.05). These findings extend the Resource-Based View by demonstrating that external awareness serves as a critical dynamic capability linking internal resources with competitive outcomes. The study concludes that MSME competitiveness depends on cognitive strength, digital readiness, and perceived external control. Financial literacy enhances competitiveness indirectly through mediation mechanisms. Policymakers should design integrated interventions combining financial literacy programs with cognitive capacity building and digitalization support to strengthen MSME competitiveness in the digital economy. © 2026, Malque Publishing. All rights reserved.
Faculty of Economics and Business, Universitas Negeri Malang, Malang, Indonesia; Faculty of Engineering, Universitas Negeri Malang, Malang, Indonesia; Faculty of Economics and Business, Universitas Muhammadiyah Surakarta, Surakarta, Indonesia; Faculty of Economics and Business, Universitas Trunojoyo Madura, Bangkalan, Indonesia
