With the rapid advancements in technological and industrial revolutions and the evolving global supply chain landscape, innovation has become increasingly critical for manufacturing enterprises seeking to maintain competitiveness and adapt to changing market demands. Within this context, disruptive and incremental innovation represent two distinct yet essential strategic pathways. Incremental innovation focuses on refining existing products, services, and processes, allowing firms to sustain market share and secure stable, short-term returns. In contrast, disruptive innovation aims to induce transformative change, redefining industry landscapes, creating new markets, and providing firms with potential long-term competitive advantages. This study examines how the level of digitalization in a region influences firms' strategic choices between these two innovation approaches. The theoretical framework of digital affordance highlights how digital environments provide firms with specific opportunities and resources for action, and on this basis, the paper argues that regional digital environments—comprising advanced digital infrastructures, enhanced knowledge flows, and supportive ecosystems—create unique opportunities that shape firms' innovation strategies. Distinct from previous research which primarily focuses on digital transformation efforts at the individual firm level, this study shifts the focus to regional digital environments as critical external factors influencing firms' strategic innovation decisions.
Employing a multilevel mixed-effects model and analyzing data from Chinese A-share manufacturing companies from 2013 to 2022, this study provides a comprehensive assessment of the impact of regional digitization on firms' innovation preferences, particularly their tendency toward disruptive over incremental innovation. We find that regional digitalization exerts a notable “catalytic effect” on disruptive innovation, establishing a favorable environment for firms to pursue bold, market-shaping strategies. Regional digitalization promotes an enabling environment for technological adaptation, fosters inter-firm collaboration, and supports the flow of real-time customer feedback, all of which encourage firms to allocate more resources toward disruptive projects. This environment, rich in resources and connections, creates a “cannibalization effect” on incremental innovation, as firms increasingly focus on high-impact, transformative innovations. Specifically, the higher the level of regional digitalization, the more firms are inclined toward disruptive innovation due to the environment's support for rapid technology adoption, collaborative networks, and enhanced market responsiveness. These factors compel firms to prioritize disruptive innovations, reallocating resources that might otherwise go toward incremental improvements.
Additionally, this study investigates the moderating roles of two important contextual factors: firms' digital innovation capabilities and the level of regional marketization. It hypothesizes that firms with advanced digital innovation capabilities—characterized by substantial internal resources, robust technological infrastructure, and high digital maturity—may exhibit less dependence on the external digital environment, which could in turn weaken the catalytic effect of regional digitalization on disruptive innovation. This reduced dependency on the external environment indicates that while regional digitalization catalyzes disruptive innovation, firms with strong internal digital capabilities may mitigate this effect, thereby preserving resources for incremental innovations that provide stable returns and reinforce existing market positions. Similarly, higher levels of regional marketization influence how firms respond to digitalization by shaping competitive dynamics, risk tolerance, and resource allocation priorities, impacting firms' strategic inclinations toward disruptive or incremental innovation. Firms operating in highly marketized areas are more likely to prioritize short-term financial returns and stable growth over potentially high-risk, high-reward strategies, thereby diminish the digital environment's capacity to foster disruptive innovation.
This study offers significant contributions to the digital transformation and firm innovation literature. First, it extends digital affordance theory to encompass regional digital environments, demonstrating how external digital infrastructures shape firms' innovation strategies. Second, it illuminates the intricate interplay between firms' internal and external digital capabilities and competitive contexts, offering a nuanced perspective on how digitalization influences innovation pathways. While conventional perspectives highlight a synergistic relationship between a firm's digital transformation and innovation capabilities, this study reveals that high digital innovation capabilities can reduce a firm's dependency on the regional digital environment, impacting its strategic choices between disruptive and incremental innovation. Finally, by integrating marketization as a contextual factor, the study clarifies how market conditions intertwine with regional digitalization to shape innovation strategies, providing practical insights for policymakers aiming to stimulate innovation within diverse market environments.
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