The digital transformation is now increasingly viewed as a major driver of innovation and competitiveness for small and medium-sized enterprises (SMEs), particularly in newly emerging economies where national development strategies prioritize digitalization and entrepreneurship. Despite its significance, research on digital marketing capabilities (DMCs) and their role in enhancing SME innovation and performance is fragmented, especially with regard to emerging markets such as Oman. This study aims to systematically synthesize existing research on the relationship between DMCs and SMEs’ innovation and performance. A systematic literature review was undertaken, adhering to the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) method. Thirty-eight peer-reviewed articles published between 2015 and 2025 were included and reviewed, and the Theory, Context, Characteristics, Methodology (TCCM) framework was followed to ensure structure and transparency in the analysis. The research streams identified by the findings include: strategic importance of DMCs in innovation and performance; marketing analytics and customer relationship management systems; social media and customer engagement; organizational readiness and leadership; and contextual challenges in SMEs of emerging economies. Finally, it is noted that there is considerable reliance of theories used in marketing analytics and customer relationship management on theories of Resource-Based View and Dynamic Capabilities. Longitudinal and integrative research is limited. An integrative conceptual model on the linkages between digital marketing capabilities, innovation capacity, and SME performance is developed. The current research has implications for policymakers and SME managers, with emphasis on the need for the development of digital skills, analytics, and leadership support as the driving factors for innovation-based SMEs, which are aligned with the country’s development strategy, Oman Vision 2040.