This study looks at how digital ecosystems and business innovation can speed up the sustainable transition of island smart cities. The authors suggest a move away from the technocentric idea towards an organizational and ecosystem model of urban transformation. Island cities, although constrained by space, are dynamic systems that often face resource shortages, energy challenges, climate risks, and seasonal pressures from tourism but also offer opportunities for rapid adaptation. It is argued that digital ecosystems provide infrastructures of interoperability, data and collaboration, which make it possible to connect people, exploit data in real-time and governance. Moreover, entrepreneurial innovation is the transformation of technological capabilities into new business models, organizational practices and ways of creating value, particularly in four major areas: energy, mobility, tourism and the circular economy. The article gives particular attention to open innovation, living labs and ecosystem governance being collective learning and co-creation mechanisms. It illustrates that a combination of digital ecosystems and entrepreneurial innovation management is essentially a synergy that leads to organizationally “smart” and resilient island cities.