Exploring the digitalization paradox: the impact of digital technology convergence on manufacturing firm performance

Purpose This study aims to investigate the “digitalization paradox” in manufacturing digital transformation, where significant investments in digital technology may not necessarily lead to increased returns. Specifically, it explores the intricate relationship between digital technology convergence, financial performance, productivity and technological innovation in listed Chinese manufacturing firms, drawing upon theories of digital innovation and knowledge networks. Design/methodology/approach Using a large panel data from 747 listed firms in China’s manufacturing sector and their 428,927 patents spanning from 2013 to 2022, this research first quantifies manufacturing firm-level digital technology convergence through patent network analysis. Furthermore, this study employs hierarchical regression analysis and the instrumental variable method to investigate the curvilinear relationship between digital technology convergence and financial performance. Furthermore, the moderating role of firms’ productivity and technological innovation is tested. Findings Three types of firm-level digital technology convergence (DTC) are delineated and quantified: local authority in digital convergence (DegreeDTC), convergence with heterogeneous digital knowledge (BetweenessDTC) and shortest-path convergence with digital technologies (ClosenessDTC, where a higher value signifies a more conservative and shorter path in adopting digital technologies). Network visualization shows that manufacturing firms' DTC has consistently increased over time. Contrary to traditional assumptions, our research reveals a U-shaped relationship between DTC (specifically, DegreeDTC and BetweenessDTC) and financial performance. This relationship is characterized by a negative correlation at lower levels and a positive one at higher levels. The joint effect of firms’ productivity and technological innovation significantly strengthens this relationship. These findings are robust across a series of robustness checks. Practical implications Our findings offer practical insights for both managers and policymakers. We recommend a balanced approach to digital innovation management within the technology convergence paradigm. Manufacturing firms can generate economic value by strategically choosing to either shrink or expand their digital technology application areas, thereby reducing uncertainties related to emerging convergent businesses. Additionally, the study underscores the synergistic strategy of combining innovation with productivity. Within the DTC business context, integrating productivity with technological innovation not only enhances cost flexibility but also improves problem-solution matching, ultimately amplifying synergistic benefits. Originality/value To the best of our knowledge, this is the first study to apply a digital technology co-occurrence network to unveil nuanced relationships in “DTC – finance performance” within the manufacturing sector. It challenges conventional thinking regarding the common positive effect of digital innovation and technological convergence. This study provides a comprehensive analysis of DTC, financial performance, productivity and technological innovation dynamics, as well as offers managerial implications for managers and policymakers. Highlights (1) We quantify manufacturing firm-level DTC through patent network analysis and find consistent increases over time. (2) A significant U-shaped relationship between DTC and financial performance, being negative at lower levels and positive at higher levels. (3) The joint effect of firms’ productivity and technological innovation reinforces this relationship by distributing costs and enhancing synergistic benefits. (4) We challenge existing literature by uncovering a complex relationship in “DTC – finance performance”, contrary to popular belief of a monotonic effect of digital innovation or technological convergence.