Does Digital Transformation Stimulate Breakthrough Innovation? Evidence From Chinese Firms

Digital transformation (DT) strategies have become crucial for enterprises, playing a pivotal role in redefining their value propositions, evolving business models, and driving innovation. Despite this importance, the impact of DT on breakthrough innovations has not been thoroughly examined. This article addresses this gap by analyzing data from a sample of Chinese listed firms to examine how DT, across both technical and business dimensions, influences breakthrough innovation. Our findings indicate that DT positively impacts breakthrough innovation, predominantly driven by its technical aspect. To understand the mechanisms at play, we identify two key effects. First, the absorptive capacity effect describes how companies strengthen their ability to assimilate and integrate knowledge, thus further stimulating breakthrough innovation. Second, the government subsidies effect shows how firms undergoing DTs gain increased government backing, thereby enhancing breakthrough innovation. The tests of these mechanisms confirm their significant influence. Moreover, taking into account the institutional context, we find that DT fosters a more conducive environment for breakthrough innovation in high-tech industries and regions with low marketization. These findings present important implications for both research and practice in balancing technological adoption with innovation management.