In today’s digitally connected world, firms must actively pursue radical innovation to stay competitive in the long term. While this means that most firms are transforming their business processes making them digital, it remains unclear what the effect of such a digital transformation on radical innovation is. Hence, this study explores the impact of digitalization on radical innovations. We argue that this relationship takes the shape of an inverted U in which digitalization initially enhances radical innovation, but with decreasing returns that ultimately turn negative. We attribute this inverted U-shape to the fact that digitalization initially provides access to new technologies, data, and tools that enable the development of radical innovations. With growing digitalization, however, the increasing information density, and the complexity of such new information and technologies makes it more difficult to use that information to derive radical innovations. In addition, the increasing digitalization is leading to a standardization of systems that promotes incremental innovation. We further argue that a firm’s absorptive capacity enables them to better integrate and leverage new knowledge, which prolongs the positive effect of digitalization on radical innovation. To test our theorizing, we trained an NLP model to create a measure for digitalization. Our subsequent regression analyses confirm our theorizing of an inverted U-shape moderated by absorptive capacity. Overall, our study highlights the importance of balancing strategic R&D investments and digitalization for radical innovation, challenging the notion of more digitalization is always better.
