ARTIFICIAL INTELLIGENCE AND BUSINESS PERFORMANCE: THE MEDIATING ROLE OF DIGITAL INNOVATION

Abstract

AI is seen as a strategic asset of business value; however, the impact of AI in improving the performance of the organization hinges on how it is translated into innovation. This study explores the relationship between the capability of Artificial Intelligence and Business Performance, while Digital Innovation is suggested as an important mediator. A three waves time-lagged survey of 400 managerial employees from Jazz, Daraz Pakistan and Habib Bank Limited (HBL) was conducted in a quantitative and explanatory approach. Partial Least Squares Structural Equation Modeling with 10,000 bootstrappes was used to analyse the data in SPSS 29 and SmartPLS 4. The results show how Artificial Intelligence capability enhances organizations' capability to develop digitally enabled products, services, processes and customer solutions. The overall model accounted for 46.1% of the variance in organizational performance, with Digital Innovation identified as a key pathway through which AI has an impact on Business Performance. The mediation analysis also revealed a large share of AI's impact is through innovation, not just operational efficiencies. This research contributes to the literature by bringing clarity to the process of converting AI capability to organizational value, in the context of an emerging economy. It highlights that the implementation of AI is most effective when complemented by innovation-driven processes, competent workforce, robust data capabilities, and managerial dedication and commitment. The study thus has significant implications for organizations looking to transform technological investment into sustainable performance and competitive advantage.