Unraveling the Performance Puzzle of Digitalization: Evidence from Manufacturing Firms

The COVID-19 pandemic has boosted firms’ investments in digital technologies, and digitalization is booming. However, it remains unclear how and when digitalization leads to superior performance. To demystify this phenomenon, we develop a moderated moderation model to investigate the combined effects of digitalization, knowledge inertia, and organizational integration mechanisms on firm performance. Based on survey data from 192 Chinese manufacturing firms with different degrees of digitalization, we find that although digitalization has a positive relationship with firm performance, that relationship is negatively moderated by knowledge inertia. More interestingly, a formal organizational integration mechanism, but not an informal organizational integration mechanism, mitigates the negative moderation effect of knowledge inertia. We contribute to the literature by articulating how knowledge inertia and organizational integration mechanisms jointly determine the effect of digitalization on firm performance. Our study also provides implications for firms to modify their practices to prosper in the digital revolution.