Digital transformation pays off for manufacturers, but efficiency determines who wins

While the overall results confirm the positive impact of digital transformation efficiency, the study also reveals sharp differences across firm types. Digital gains are not evenly distributed. Large enterprises and mature firms benefit far more from efficient digital transformation than small, medium-sized, or growth-stage companies.

Manufacturing firms that invest in digital technologies do not automatically gain a competitive edge. What matters most is how efficiently those investments are converted into real business outcomes. That is the primary finding of a new large-scale empirical study published in the International Journal of Financial Studies that reshapes how digital transformation is understood in the manufacturing sector, particularly in emerging economies facing rising cost pressures and slowing productivity growth.

In a study titled “Assessing the Impact of Digital Transformation on Manufacturing Enterprises’ Performances: An Efficiency Perspective,” researchers analyze nearly a decade of data from Chinese listed manufacturing firms to determine whether digital transformation truly improves performance, and under what conditions it delivers measurable returns. The findings challenge simplistic narratives around technology adoption and instead place efficiency, financing access, and firm maturity at the center of digital success.

Digital efficiency, not digital spending, drives market and innovation gains

The study examines Chinese A-share listed manufacturing enterprises over the period from 2012 to 2021, a phase marked by large-scale digital upgrades across the country’s industrial base. Rather than measuring digital transformation through surface indicators such as technology adoption rates or digital tool usage, the researchers introduce a more rigorous metric: digital transformation efficiency.

This efficiency-based approach evaluates how well firms convert multiple digital inputs, including technology investment, R&D personnel, infrastructure, and strategic digital initiatives, into tangible outputs such as market value growth, innovation activity, and operational performance. Using data envelopment analysis, a method commonly applied in efficiency studies, the research captures the balance between digital input costs and output gains.

The results are unambiguous. Firms with higher digital transformation efficiency consistently outperform their peers in both market performance and innovation performance. Market performance improves as measured by firm valuation indicators, while innovation performance rises through increased patent activity and more efficient use of R&D spending. These relationships remain statistically robust even after controlling for firm size, age, capital structure, asset composition, industry effects, and macroeconomic conditions.

The findings directly address long-standing debates around the so-called digital paradox, which suggests that digital investments do not always translate into better financial results. According to the study, the paradox emerges not because digital transformation lacks value, but because many firms fail to manage the transformation process efficiently. High spending on digital initiatives without coordinated strategy, organizational alignment, and resource discipline leads to weak returns, masking the true potential of digitalization.

By shifting the analytical focus from digital intensity to digital efficiency, the research demonstrates that performance gains are not automatic. They depend on how effectively firms integrate technology into business processes, innovation systems, and strategic decision-making.

Financing constraints emerge as the critical transmission channel

Apart from establishing a direct link between digital efficiency and performance, the study identifies a key mechanism that explains why efficient digital transformation delivers stronger results. Financing constraints play a central role in translating digital efforts into market and innovation outcomes.

The analysis shows that firms with higher digital transformation efficiency face fewer financing constraints. Improved efficiency enhances information transparency, operational credibility, and data availability, making it easier for financial institutions to assess firm performance and risk. As a result, digitally efficient firms gain better access to external financing and face lower capital costs.

This easing of financing constraints has a cascading effect. With improved access to funds, firms can expand production, invest more consistently in R&D, and pursue innovation projects that would otherwise be considered too risky. The study confirms that financing constraints partially mediate the relationship between digital transformation efficiency and both market performance and innovation performance.

In practical terms, digital transformation strengthens performance not only by improving internal operations but also by reshaping firms’ relationships with capital markets. Efficient digital systems reduce information asymmetry, lower transaction costs, and increase investor confidence. This creates a virtuous cycle in which digital capability attracts capital, and capital further amplifies digital-driven growth.

The findings carry significant implications for policymakers and financial regulators. Digital transformation initiatives that focus solely on technology deployment may fail to deliver broad economic benefits if firms remain financially constrained. Supporting digital transparency, data governance, and financial infrastructure is essential to unlocking the full performance potential of digital manufacturing.

Large and mature firms benefit most, exposing a widening digital divide

While the overall results confirm the positive impact of digital transformation efficiency, the study also reveals sharp differences across firm types. Digital gains are not evenly distributed. Large enterprises and mature firms benefit far more from efficient digital transformation than small, medium-sized, or growth-stage companies.

The heterogeneity analysis shows that digital transformation efficiency significantly boosts both market and innovation performance for large firms, while the effects for smaller firms are positive but statistically weaker. Similarly, mature enterprises experience strong performance improvements, whereas younger firms in the growth stage see limited benefits.

This divergence reflects differences in resource endowments, organizational capabilities, and risk tolerance. Large and mature firms typically possess stronger financial reserves, more stable revenue streams, and deeper talent pools. These advantages allow them to absorb the short-term costs and uncertainties associated with digital transformation while optimizing resource allocation over time.

Smaller and younger firms, by contrast, often face tighter budgets, limited access to skilled digital talent, and higher sensitivity to financial risk. For these firms, inefficient digital investments can quickly erode profitability, making them cautious about pursuing ambitious transformation strategies. As a result, they may struggle to achieve the efficiency thresholds required for digital transformation to translate into performance gains.

The findings suggest that digital transformation may inadvertently widen performance gaps within the manufacturing sector if supportive measures are not put in place. Without targeted financial support, capacity-building programs, and digital financing mechanisms, smaller firms risk falling further behind as larger competitors leverage digital efficiency to consolidate market power.

Digital transformation is not a purely technological process but a strategic and managerial one. Success depends on aligning digital investments with firm capabilities, life-cycle stage, and financial structure. Firms that treat digital transformation as a long-term capability-building exercise, rather than a short-term technology upgrade, are more likely to realize sustainable performance gains.

Rethinking digital transformation strategies for manufacturing competitiveness

The findings reshape how digital transformation should be understood and implemented in manufacturing. The research demonstrates that digitalization delivers real economic value, but only when managed efficiently and supported by adequate financial access. Simply increasing digital spending or adopting advanced technologies does not guarantee improved performance.

For corporate leaders, the study highlights the importance of disciplined digital strategy. Firms must focus on integrating digital tools across production, R&D, finance, and management systems, ensuring that investments generate measurable output rather than symbolic modernization. Improving data integration, cross-department coordination, and digital governance is essential for turning digital inputs into competitive advantage.

For policymakers, the results point to the need for differentiated digital transformation policies. Large firms may require fewer direct interventions, while smaller and growth-stage enterprises need targeted support to overcome financing constraints and capability gaps. Digital finance platforms, preferential lending schemes, and technology-sharing initiatives can help level the playing field and prevent excessive concentration of digital benefits.

The study also carries broader implications for economies seeking to upgrade manufacturing competitiveness in the face of global uncertainty. Digital transformation, when executed efficiently, strengthens not only firm-level performance but also industrial resilience by improving innovation capacity and financial stability. However, without attention to efficiency and inclusivity, digitalization risks reinforcing structural inequalities within the industrial ecosystem.