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Digital transformation and firm business diversification: An inverse U-shaped relationship

Author

Listed:
  • Wu, Xinmei
  • Wu, Xinhong
  • Shang, Duo
  • Fan, Libo

Abstract

As digital age approaches, firms are increasingly concerned about how to conduct and benefit from digital transformation. Building on dynamic capability theory, our findings confirm an inverse U-shaped relationship between digital transformation and firm business diversification, which is driven by market response and resource allocation mechanisms. Moderating effect tests suggest that the shape of this nonlinear curve varies with firm fundamentals, and that an increase in firm size, profitability, and market power would flatten this inverse U-shaped relationship. We further identify skilled talent, financing slack, cooperative culture, and technology intensity as key boundary conditions that determine whether this nonlinear relationship holds in the cross-sectional analyses. Overall, this paper advances the digital transformation literature from the perspective of business diversification and provides practical guidance for firm digital transformation.

Suggested Citation

  • Wu, Xinmei & Wu, Xinhong & Shang, Duo & Fan, Libo, 2025. "Digital transformation and firm business diversification: An inverse U-shaped relationship," Economic Analysis and Policy, Elsevier, vol. 87(C), pages 874-892.
    • Handle: RePEc:eee:ecanpo:v:87:y:2025:i:c:p:874-892
    DOI: 10.1016/j.eap.2025.06.042
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

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