In today’s rapidly evolving digital landscape, the ethical adoption of Artificial Intelligence (AI) has become a critical concern for organizations seeking to innovate responsibly. This study explores the integration of AI within South African Small and Medium Enterprises (SMEs), emphasizing the ethical challenges and strategic considerations associated with adoption in resource-constrained environments. While AI offers transformative potential for enhancing innovation, efficiency, and competitiveness, its deployment raises significant ethical risks, including algorithmic bias, data privacy violations, and a lack of transparency and accountability. Grounded in the Technology-Organization-Environment (TOE) framework and Ethical Decision-Making (EDM) theory, this research adopts a literature review methodology to examine the drivers, barriers, and ethical dimensions of AI adoption in SMEs. The study reveals that ethical awareness, organizational readiness, and external regulatory support are crucial to enabling responsible innovation. It highlights that SMEs with stronger ethical intent and governance practices are better positioned to adopt AI in ways that promote trust, fairness, and long-term sustainability despite resource limitations. This study contributes a context-sensitive conceptual framework that integrates structural and ethical considerations, offering practical guidance for policymakers, business leaders, and technology developers. The findings underscore the importance of aligning digital transformation with ethical imperatives to ensure inclusive and equitable AI adoption in developing economies.