Linking Digital Capacity to Innovation Performance: the Mediating Role of Absorptive Capacity

Abstract

Abstract Digital technologies are considered as factors that accelerate the pace of innovation and increase the firm’s innovation performance. However, few studies have investigated whether this claim is conditioned by other elements that contribute to innovation. Furthermore, firms increasingly rely on external knowledge sources to expand their internal knowledge base for the development of innovations. In this context, absorptive capacity can be considered as an essential organizational capability to embrace adoption of digital technologies and enhance their positive effect on innovation performance. This paper builds on this discussion and studies the contribution of digital capacity on innovation performance, proposing the mediating role of absorptive capacity in the context of the digital transformation. It uses evidence from an extensive Greek survey in 1014 manufacturing firms and analyzes the complex relationships underlying the role of digital transformation to innovation. The contribution of the paper is two-fold: (i) it provides a deeper insight into the underlying mechanisms through which firms can leverage their digital capacity to accelerate innovation, and (ii) it highlights the important mediating role of absorptive capacity in enhancing the positive effects of digitalization indicating that digital capacity is not an unquestionable asset for innovation performance. Accordingly, our results show a positive direct contribution of digital capacity to innovation performance, which is enhanced in the presence of absorptive capacity as a mediator. In fact, the indirect effect of digital capacity to innovation performance through absorptive capacity is stronger. These findings present important policy implications, as there is need for improvement in other innovation-related aspects of the business ecosystem to efficiently address the challenge of digital transformation, such as R&D efforts, training, interaction among actors, and building of communities of practice.