Towards a Holistic Understanding of Digital Innovation: A Multidimensional Approach

Abstract

This study develops and empirically validates an integrative model explaining how firms achieve digital innovation through the interplay among digital strategy, absorptive capacity, digital technology deployment, and environmental dynamism. Drawing on the content-context-process-outcome framework, digital strategy provides the guiding content; absorptive capacity and environmental dynamism act as contextual enablers; and digital technology deployment functions as the central process driving innovation outcomes. Survey data from 250 Chinese firms were analyzed using partial least squares structural equation modeling (PLS-SEM) and contextualized and externally validated through cross-case and cross-industry validation. The findings reveal an inverted U-shaped relationship between digital technology deployment and innovation, challenging the linear assumption of prior research. While deployment is essential, overinvestment without strategic alignment leads to diminishing returns, underscoring the need for strategic coherence and absorptive alignment. Digital strategy and absorptive capacity directly and indirectly enhance innovation through digital technology deployment, while environmental dynamism amplifies the strategic-innovation linkage. Theoretically, the study contributes to the engineering management literature by advancing a holistic, dynamic, and nonlinear understanding of digital innovation as an optimization and orchestration process rather than a purely technological one. It offers a generalizable framework that strengthens integrative and system-oriented perspectives in engineering management research.