Digital Commitment, Investment, and Firm Innovation: The Moderating Role of Market Dynamics

Digitalization is both a challenge and an opportunity for a firm's competitive advantage in the post-COVID-19 volatile environment. However, scholarship investigating how a firm's digital strategy influences its innovation performance and profitability are scant. We address this limitation in the literature by proposing that shareholder commitment to digitalization promotes a firm's innovation performance and, subsequently firm profitability. Employing a multiple-sources panel dataset consisting of 1,116 China's publicly listed firms from 2011 to 2019, text-mining techniques and negative binominal empirical models, the main hypotheses testing and subsequent robustness checks support our argument. Specifically, our study shows that 1) a firm’s digital commitment significantly increases its innovation performance, 2) digital investment partially explains digital commitment’s impact on innovation performance, and 3) Market dynamics positively moderate the effect of digital commitment on innovation performance by enhancing the impact of digital investment on innovation performance but has no significant effect on the relationship between digital commitment and digital investment. In addition, analysis shows that the impact of digitalization is long-lasting and promotes the firm's profit from innovation. In addition to developing theory on digitalization as it relates to firm innovation and financial performance, this study also generates practical insights for managers and policymakers with regards to firms' digital transformation in today's post-COVID-19 dynamic world.