How does a firm’s digital business strategy affect its innovation performance? An investigation based on knowledge-based dynamic capability

Purpose While previous research has demonstrated the positive effects of digital business strategies on operational efficiency, financial performance and value creation, little is known about how such strategies influence innovation performance. To address the gap, this paper aims to investigate the impact of a firm’s digital business strategy on its innovation performance. Design/methodology/approach Drawing on the dynamic capability view, this study examines the mechanism through which a digital business strategy affects innovation performance. Data were collected from 215 firms in China and analyzed using multiple regression and structural equation modeling. Findings The empirical analysis reveals that a firm’s digital business strategy has positive impacts on both product and process innovation performance. These impacts are partially mediated by knowledge-based dynamic capability. Additionally, a firm’s digital business strategy interacts positively with its entrepreneurial orientation in facilitating knowledge-based dynamic capability. Moreover, market turbulence enhances the strength of this interaction effect. Therefore, entrepreneurial-oriented firms operating in turbulent markets can benefit more from digital business strategies to enhance their knowledge-based dynamic capabilities and consequently improve their innovation performance. Originality/value This study contributes to the understanding of how a firm’s digital business strategy interacts with entrepreneurial orientation in turbulent markets to shape knowledge-based dynamic capability, which in turn enhances the firm’s innovation performance.