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Abstract

Dynamic Capability Theory (DCT) has emerged as a foundational framework for understanding how firms adapt to environmental turbulence. However, classical DCT formulations have faced criticism for inadequately explaining adaptation failures among small and medium enterprises (SMEs), particularly in resource-constrained developing economies. Recent theoretical advances emphasize adaptive judgment and quality of adaptation as critical mechanisms linking dynamic capabilities to business resilience. This systematic review synthesizes empirical evidence on DCT applications in SME contexts across developing economies from 1994 to 2026. Following PRISMA 2020 guidelines, we conducted a comprehensive search across four databases (SciSpace Deep Search, Scopus Full Text Search, Google Scholar, and Mendeley) using structured queries combining dynamic capabilities, SME adaptation, resilience, and developing economy contexts. From 919 initially identified records, 182 duplicates were removed, leaving 737 records for title/abstract screening. After applying eligibility criteria with a threshold score of ≥4.0, 41 studies underwent full-text assessment (threshold ≥4.5). Ultimately, 38 studies met inclusion criteria and were synthesized qualitatively. Data extraction focused on study design, geographic context, adaptive judgment mechanisms, key findings on dynamic capabilities, theoretical contributions, and risk of bias. Based on our results states the 38 included studies spanned 15 developing economies, with Indonesia (n=13), Pakistan (n=2), and Sri Lanka (n=2) most represented. Tourism (n=8), manufacturing (n=7), and retail/e-commerce (n=6) sectors dominated. Studies employed quantitative (n=26), qualitative (n=8), and mixed methods (n=4) designs. Three key themes emerged: (1) classical DCT limitations are addressed through emphasis on adaptive judgment, sensemaking, and entrepreneurial competencies that enable SMEs to navigate resource constraints; (2) modern DCT approaches integrate digital transformation, organizational agility, and ecosystem embeddedness as critical resilience mechanisms in developing economies; and (3) quality of adaptation—operationalized through business model innovation, strategic flexibility, and absorptive capacity—mediates the relationship between dynamic capabilities and business resilience. Conclusions: This review demonstrates that DCT has evolved substantially to address SME-specific challenges in developing economies. Adaptive judgment emerges as a critical cognitive capability that complements traditional sensing-seizing-transforming dimensions. The quality of adaptation, rather than mere possession of dynamic capabilities, determines resilience outcomes. Future research should employ longitudinal designs to capture capability development trajectories and explore contextual boundary conditions across diverse developing economy settings.

Keywords

Dynamic Capability Theory SME Resilience Adaptive Judgment Developing Economies Business Adaptation

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Putra, A. H. P. K., Rahim, S., Laela, L., Amrul, N. G., & Safhira, Z. N. (2026). Dynamic Capability Theory in Strategic Management: A Systematic Review of SME Adaptation, Resilience, and Adaptive Judgment in Developing Economies (1994-2026). Golden Ratio of Social Science and Education, 6(2), 435–458. https://doi.org/10.52970/grsse.v6i2.2601
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