<![CDATA[Artificial intelligence (AI) is reshaping how micro, small, and medium enterprises (MSMEs) create, deliver, and capture value, yet evidence from secondary cities in eastern Indonesia remains scarce. This study examines the effect of dynamic capabilities on AI-based business model transformation and business sustainability and tests the mediating role of AI-based business model transformation among MSMEs in Kendari City, Southeast Sulawesi. A quantitative explanatory design was employed through a survey of 203 MSME owners or managers selected purposively from a population of 42,210 MSMEs. Data was analysed using partial least squares structural equation modelling (PLS-SEM) with 5,000 bootstrap subsamples. The results show that dynamic capabilities have a positive and significant effect on AI-based business model transformation (β = 0.613; p < 0.001) and business sustainability (β = 0.216; p = 0.003), while AI-based business model transformation significantly enhances business sustainability (β = 0.513; p < 0.001) and partially mediates the relationship between dynamic capabilities and sustainability (indirect β = 0.315; p < 0.001). The model explains 44.5% of the variance in business sustainability. These findings extend the dynamic capabilities view to AI-driven business model change in resource-constrained MSMEs and suggest that local governments should prioritise capability-building programmes, rather than mere technology provision, to secure the long-term sustainability of MSMEs.]]>
