Uncovering the digitalization paradox: how investment in digitalization affects revenue enhancement and firm performance

Purpose This study aims to explore the effect of digitalization on firm performance, which has been widely discussed and pursued in digitalization studies. It identifies whether investment in digitalization enhances firm performance, with a particular focus on the potential curvilinear relationships involved. Design/methodology/approach A quantitative research design was employed, through which data were collected from 506 manufacturing firms. Confirmatory factor analysis and ordinary least squares (OLS) regression were considered in the analytical framework. Consequently, the scores of latent variables derived from the study were used to test the hypotheses using polynomial regression models. Findings The results reveal that the total effect of investment in digitalization on firm performance, as mediated by revenue enhancement through digitalization, is positive (β = 0.469). The effect of investment in digitalization on revenue enhancement is strong and follows an inverted S-shape relationship. A similar but weaker inverted S-shape effect is observed between revenue enhancement and firm performance. Research limitations/implications This study employs a cross-sectional design, capturing digitalization investments at a single point in time. As the impact of digitalization evolves, future research could employ longitudinal approaches to track the performance effects over time. Additionally, moderating factors such as industry type, firm size or manufacturing processes may influence the curvilinear relationship, warranting further investigation. Practical implications The findings highlight the importance of aligning digitalization investments with long-term strategic goals. While such investments enhance revenue, this may not immediately improve firm performance, as gains are often reinvested during mid-stages of digital maturity. Firms should manage expectations and focus on capability development to realize long-term benefits. Originality/value This study advances digitalization-firm performance research with empirical evidence of the complex, nonlinear relationship between digitalization investment and firm performance. It advances the discourse on the role of digitalization investment and revenue enhancement through digitalization in business strategy and optimization of firm performance. It provides an in-depth understanding of when and how digitalization investments pay off.