Abstract: In recent years, the adoption of digital technology has been playing a vital role for firms to develop against the backdrop of digitalization. Considering the importance of digital technology, the Chinese government has enacted many policies aimed at promoting the rapid growth of the use of digital technology. However, few scholars have examined the influence of the external environment on the adoption of digital technology for SMEs in China. For this purpose, an empirical model was developed using the Technology Organization Environment (TOE) framework. Data collected from 207 digital SMEs was analyzed by utilizing the structural equation modelling. Our results first indicated that two environmental predictors including government policy and competitor pressure have an indirect effect on the adoption. At the same time, we also found that the influence of perceived benefits on the adoption turned out to be insignificant. This study contributes greatly by empirically proposing two significant environmental factors which are critical for digital SMEs in China. Further, this research also extends the TOE framework by introducing two mediating variables, which explain how the path of government policy and competitor pressure to adoption works.