The fact that Artificial Intelligence (AI) technologies develop at an extremely large rate has transformed the dynamics of the business environment across the world, and, at the same time, the adoption of this technology among the Small and Medium Enterprises (SMEs) in Indonesia is low due to its contextual influence. This is a theoretical paper of inquiry on the development impacts of AI adoption on the productivity of SMEs, where the cost of high implementation, ignorance, and lack of adequate infrastructure are the middle term factors that inhibit the digital transformation. The overall objective is to investigate the impact of the following mediators in the correlation between the adoption of AI and the increase in productivity in the industry of Indonesian SMEs. The present paper is conducted in the form of conceptual and thematic review, resource-based View (RBV), Technology- Organization- Environment (TOE), and Diffusion of Innovation (DOI) are the only sources of secondary data that include peer-reviewed journals, policy reports, books, and credible online databases. Based on the literature evidence, despite the fact that the process of AI integration is making innovations in operations and efficiency, most Indonesian SMEs are facing structural and capacity-related barriers to effective adoption. The policy should support the creation of affordable AI solutions, digital literacy, as well as the development of infrastructures, which this research suggests should help achieve productive growth in all spheres of the board. The paper concludes that a strategic combination of technology readiness, policy intervention and enhancing human capital is very much desired to ensure maximum out of the transformative potential of AI in the SME sector in Indonesia.