Digital transformation and firm business diversification: An inverse U-shaped relationship

Xinmei Wu, Xinhong Wu, Duo Shang and Libo Fan

Economic Analysis and Policy, 2025, vol. 87, issue C, 874-892

Abstract: As digital age approaches, firms are increasingly concerned about how to conduct and benefit from digital transformation. Building on dynamic capability theory, our findings confirm an inverse U-shaped relationship between digital transformation and firm business diversification, which is driven by market response and resource allocation mechanisms. Moderating effect tests suggest that the shape of this nonlinear curve varies with firm fundamentals, and that an increase in firm size, profitability, and market power would flatten this inverse U-shaped relationship. We further identify skilled talent, financing slack, cooperative culture, and technology intensity as key boundary conditions that determine whether this nonlinear relationship holds in the cross-sectional analyses. Overall, this paper advances the digital transformation literature from the perspective of business diversification and provides practical guidance for firm digital transformation.

Keywords: Digital transformation; Firm business diversification; Inverse U-shaped relationship; Market response; Resource allocation (search for similar items in EconPapers)
JEL-codes: G30 L22 M20 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:87:y:2025:i:c:p:874-892

DOI: 10.1016/j.eap.2025.06.042

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