DIGITAL INVESTMENT AND FIRM PROFITABILITY: A TIME-LAGGED MEDIATION ANALYSIS IN EMERGING MARKETS

Abstract

Digitalization has brought fundamental changes to the way companies operate. However, in practice, technology investments often do not immediately result in increased profits. This phenomenon is known as the Digital Productivity Paradox. In this study, it aims to examine the effect of digital investment on corporate profitability through operational efficiency as the mediating role, using a time-lagged approach in emerging markets. Adopting the Resource-Based View (RBV) theoretical framework, this study explains that digital assets are strategic resources that require a transition period to be effectively integrated into company operations. A quantitative approach was applied by examining secondary data from the financial statements of 12 issuers on the Indonesia Stock Exchange (IDX) which listed in the LQ 45 index for the period 2018–2024. This resulted in a strongly balanced data panel of 36 observations. Data were analyzed using the Arellano-Bond Generalized Method of Moments (GMM) to control for the dynamic nature of profitability and potential endogeneity issues. The test results demonstrate that digital investment in year (t-2) has a positive and highly significant effect on profitability in year (t+2), both directly and through operational efficiency in year (t). These findings resolve the productivity paradox by confirming that technology investments take time to have an impact before ultimately delivering financial value benefits to a company's profitability.