How digital transformation enhances firm performance through capability building: An empirical analysis of Chinese manufacturing firms

This study examines how digital transformation (DT) impacts Chinese manufacturing firms' corporate performance through capability building. While prior research has shown that DT has a positive effect, it has typically examined servitization or innovation capability separately, seldom considering their combined influence or institutional boundaries. Our analysis of panel data from Chinese A-listed manufacturing firms for the period 2012–2022 shows that (1) DT significantly improves firm performance; (2) this effect operates through both firms' servitization level and product innovation capability, with each partially transmitting the effect independently, while jointly accounting for it when included in parallel, with no significant difference in their magnitudes; and (3) intellectual property protection strengthens the performance payoff from DT but does not materially change how DT relates to servitization or innovation capability. We propose a dual-capability mechanism—servitization upgrading + product innovation—through which DT generates returns, whereas intellectual property protection matters mainly at the value-appropriation stage, rather than during capability building. Thus, we argue that firms should develop coordinated servitization and innovation capabilities, while governments should enhance intellectual property protection to secure digital investments' value realization. Robustness checks confirmed these patterns across specifications. This study clarifies DT's value-creation pathways and offers guidance for digitalizing manufacturing firms in emerging economies.