The effect of digitalization on total factor productivity: a dynamic capabilities perspective

Manufacturing and digital technologies are increasingly integrated to enhance productivity. While prior studies have investigated the effect of digitalization on productivity, limited attention has been paid to the moderating role of dynamic capabilities in this effect. This study bridges this gap by employing a panel fixed-effects model to test how dynamic capabilities moderate the effect of digitalization on total factor productivity (TFP) in Chinese listed manufacturing firms from 2007 to 2020. The results show that digitalization significantly improves firms’ TFP. Moreover, digitalization’s effects on TFP are moderated positively by absorptive, innovative, and adaptive capabilities. Among these, adaptive capability has the strongest moderating effect, followed by innovative capability, while absorptive capability has the weakest. The strength of these moderating effects is closely related to the industry competition and the degree of government intervention in the market where the companies operate. This study introduces a dynamic capabilities perspective to offer a novel interpretation for uncovering the pathways through which digitalization enhances TFP. It also provides insights for managers on how to better leverage digital technologies and for policymakers on how to design supportive policies.