Digital Technologies and Sustainable Competitiveness: The Role of AI and Internet of Things in Driving Green Innovation and Firm Performance

ABSTRACT Digital technologies are increasingly recognized as important drivers of sustainable business transformation, yet the mechanisms through which they contribute to organizational performance remain insufficiently understood. This study examines how Artificial Intelligence (AI) and the Internet of Things (IoT) influence firm performance through green innovation and enterprise competitive advantage. Drawing on the Natural Resource‐Based View and Dynamic Capabilities Theory, a conceptual framework is developed to explain how digital capabilities can enable environmentally oriented innovation. Data from 425 questionnaires were collected during the third quarter of 2025 through a survey of manufacturing firms operating in Pakistan, and the proposed relationships were tested using Partial Least Squares Structural Equation Modeling (PLS‐SEM). The results indicate that AI and IoT positively influence green innovation activities, which subsequently strengthen enterprise competitive advantage and enhance firm performance. Further, the outcomes validate the mediating effect of GI in the transformation of digital technological capabilities into strategic competitive advantages. These findings highlight the role of digital technologies as enablers of sustainability‐oriented innovation rather than direct drivers of performance. The study contributes to the literature on corporate social responsibility and environmental management by demonstrating how digital transformation can support sustainable competitiveness in manufacturing industries.