Digitalization and firm performance: the need for strategic decision-making

Purpose Despite substantial investments in digital transformation, firms in emerging economies often experience widely divergent performance outcomes. This study examines how digitalization relates to firm performance through strategic decision-making and governance mechanisms, and how these relationships vary with firm size. Design/methodology/approach Grounded in transaction cost theory (TCT) and a strategic decision-making perspective, we develop and test a moderated mediation framework using structural equation modeling with survey data from 212 Chinese manufacturing firms. We examine whether digitalization relates to firm performance through two characteristics of strategic decision-making processes: procedural rationality and organizational politics, and whether these indirect effects vary with firm size. Findings Digitalization is positively associated with firm performance both directly and indirectly through decision-governance mechanisms. Specifically, digitalization is linked to greater procedural rationality and lower organizational politics, which together help explain why seemingly similar digital investments yield divergent outcomes. Moreover, these governance pathways are systematically contingent on firm size, such that the governance returns to digitalization are more pronounced in larger, more complex organizations. Originality/value This study makes three theoretical contributions. First, it extends TCT in the digital age by specifying decision governance as the key internal channel through which digitalization translates into firm performance, thereby opening the black box behind heterogeneous outcomes. Second, it advances digitalization research by developing a process-based, dual-mechanism account of value capture in which digitalization operates through complementary changes in strategic decision making: enhancing procedural rationality while constraining organizational politics, rather than technological sophistication per se. Third, it identifies firm size as a structural contingency that conditions these governance pathways, providing a theoretical basis for explaining when and why digital investments yield stronger performance implications across organizations of different scale and complexity. These insights also offer actionable guidance for managers in emerging economies by framing digital transformation as a decision-governance redesign problem.