When Does Digital Capability Enable Innovation Capability for Competitive Performance in an Emerging Economy? An Examination of Two Institutional Forces

ABSTRACT Academic Summary Despite growing interest in digital transformation in emerging economies, the relationships among digital capability, product innovation capability (product IC), process innovation capability (process IC), and firm performance remain insufficiently understood, especially under varying institutional conditions. The authors draw on the IT‐enabled organizational capabilities perspective, grounded in the lens of dynamic capabilities, to first develop a chain model, showing how digital capability enables product IC and process IC, two higher‐level organizational capabilities for a firm's competitive performance. The authors then integrate institutional theory to examine the roles that dysfunctional competition and government support, two institutional forces prominent in emerging economies, play in the chain model. Based on data from 241 firms in China, the findings reveal that digital capability enables product IC and process IC for stronger competitive performance. However, this chain effect is contingent on institutional context: dysfunctional competition and government support showcase distinct moderating effects on different links in the chain model. The authors discuss the results and their implications for theory and practice toward the end. Managerial Summary Firms should view digital transformation as more than a technology investment. Managers need to develop digital capability that can support innovation capability. However, the benefits of establishing and leveraging both digital and innovation capabilities are not universal. Two institutional forces, that is, dysfunctional competition and government support, common in emerging economies affect how digital capability translates into innovation capability and performance. Their effects differ across product and process innovation capabilities, suggesting that managers should consider the broader institutional context when building and leveraging different types of organizational capabilities.