Is technological innovation the cure for overcapacity? Exploring mediating and moderating mechanisms

• Find the divergence between the developed and developing countries towards excess capacity. • Prove a roadmap from technological innovation to overcapacity, and their influencing mechanism. • Provide suggestions for overcapacity regulation in such developing countries as China. • Enrich technological innovation research by testing its economic consequences. • Test a variety of enterprise heterogeneities and additionally test the overcapacity subgroup. Enterprises were shown to increase excess capacity more cost-effectively owing to technological improvements in the United States. However, technological backwardness is considered a cause for overcapacity in China. This divergence inspires deep investigation into the holistic roadmap from technological innovation to overcapacity. This study theoretically extends the endogenous growth model, constructs mediating and moderating effect models, and empirically tests publicly listed firms in China. It proves that technological innovation curbs overcapacity through enhancing enterprise competitiveness and reducing overinvestment. A variety of enterprise heterogeneities moderate the casual relationship. Moreover, for firms with a relatively high level of technological innovation, the negative impact of overinvestment on capacity utilization (CU) diminishes. Instead of implementing one-size-fits-all approaches, more attempts by the Chinese government on stimulating enterprises’ innovation initiatives are necessary when modifying de-capacity policies. The market should be developed to better distinguish innovation quality and avoid overinvestment from the onset.