The effect of process digitalization initiative on firm performance: A dynamic capability development perspective

Digitalization has been increasingly adopted to transform the manufacturing process and considered as effective to achieve product customization, process efficiency, and firm performance for companies. Nevertheless, misalignment among digital initiative and existing operational routines are found in some companies, making the effectiveness of process digitalization initiative (PDI) uncertain. This research empirically investigates the effect of PDI on firm performance. Taking the perspective of dynamic operational capability, this study considers three key organizational factors, i.e., differentiation strategy, absorptive capability and lean production mechanism, that can facilitate firms to align their existing operational processes with digital technology and examine how they affect the implementation of PDI. We employ the long-horizon event study approach using the panel data collected from 168 firms adopting PDI in China during the period between 2006 and 2018. The findings of this study demonstrate that PDI implementation enhances firm performance. The results also show that differentiation strategy and absorptive capacity can enhance the effect of PDI implementation, but lean production has a substitution role in the effect of PDI. This research contributes to the literature on digital transformation and dynamic capability by investigating the actual effects of PDI implementation and exploring the key elements for its success from a novel perspective (i.e., dynamic capability development). This research also provides practical guidelines to enterprises how to conduct effective process digitalization and valuable insights to governments how to support enterprises for digitalization.