Effects of market dynamics and policy uncertainty on the effectiveness of digital transformation: a perspective on the digitalization paradox

Purpose The paper aims to examine how external environmental factors – specifically market dynamics and policy uncertainty – moderate the relationship between digital transformation and firm performance. The study addresses the digitalization paradox, where digital investments do not consistently yield expected performance gains. Design/methodology/approach Grounded in the resource-based view and contingency theory and extended by the dynamic capabilities perspective, the study uses data from 3,082 listed firms in China (2011–2021) to empirically test hypotheses regarding digital transformation and firm performance under different environmental factors. Findings Results indicate that digital transformation generally has a positive impact on firm performance. However, this effect weakens significantly under conditions of high market dynamics and policy uncertainty, suggesting that environmental factors play a crucial moderating role. Research limitations/implications The study is limited to Chinese-listed firms, which may limit generalizability. Future research could consider similar analyses across different contexts and industries to validate findings. Practical implications The findings emphasize the importance of evaluating environmental factors when implementing digital transformation strategies. Companies and policymakers are encouraged to adapt digital strategies to varying levels of uncertainty to maximize benefits and minimize risks. Originality/value This study enriches the theoretical framework of the digitalization paradox by incorporating the effects of external environmental factors, providing a nuanced understanding of how these factors influence firm performance. It offers valuable insights for practitioners and policymakers seeking to optimize digital investments.