Legacy Technologies or Digital Technologies? Technological Choices of Traditional Firms Facing Performance Shortfall Under the Transformation Threat

Abstract

Technological change can create performance shortfalls in incumbent firms, which in turn affect their subsequent technological choices. This paper extends the behavioral theory of the firm to the context of digital technological transformation, emphasizing the survival threats faced by incumbent firms during periods of change, while considering both legacy technologies and digital technologies in the decision-making process. We propose that, first, performance shortfalls in incumbent firms drive problemistic search (including local search and distant search), which results in the accumulation of stocks of both legacy and digital technologies. Second, the decision on how to choose between legacy and digital technologies is influenced by the survival threats faced by incumbent firms. Specifically, on the one hand, as the performance shortfall increases, the degree to which incumbent firms choose legacy technologies decreases under the influence of local search and threat of omission. On the other hand, under the influence of distant search and threat of commission, an inverted U-shaped relationship exists between performance shortfalls and digital technologies. Furthermore, this paper also discusses how the ease of asset digitization moderates the impact of survival threats on the technological choices of incumbent firms. Using unbalanced panel data from 739 publicly listed firms in China's traditional manufacturing industry, covering 4031 valid observations from 2007 to 2022, the empirical analysis supports these hypotheses.

Keywords: traditional firm, digital transformation, legacy technology, the Behavioral Theory of the Firm, performance shortfall