Configurational Pathways to Breakthrough Innovation in the Digital Age: Evidence from Niche Leaders

Abstract

Fostering niche leaders to achieve technological breakthroughs has become a national strategic priority in emerging markets in order to overcome technology blockades and drive technological progress. Previous research indicates that achieving breakthrough innovation, particularly for firms with resource constraints, is a multifaceted phenomenon occurring across various levels. Based on the technology–organization–environment (TOE) framework, this paper aims to examine the influence of technological, organizational, and environmental factors on the breakthrough innovation of niche leaders in emerging markets from a configurational perspective. Using dynamic qualitative comparative analysis (QCA), we analyzed panel data from 87 Chinese niche leaders (2018–2023) through inter-group, intra-group, and pooled comparisons to uncover distinct configurational pathways to breakthrough innovation. Our findings reveal three effective pathways: an R&D-driven innovation pathway, a digital transformation-driven innovation pathway, and a comprehensive support innovation pathway. Additionally, we identified two configurational pathways leading to the absence of high-breakthrough innovation: the conservative management configuration, and the digital island configuration. Our results underscore the essential role of government subsidies, the complementary impact of digital transformation and R&D, and the restrictive effect of rigid governance structures. Furthermore, these pathways demonstrate significant regional variations and temporal evolution, highlighting the context-dependent nature of breakthrough innovation in emerging economies.

1. Introduction

Seeking to catch up in terms of technology, emerging economies face the challenge of a weak technological base while being subjected to technological blockades by developed countries. This situation makes it difficult for them to rely on formal channels, such as patent licensing and technological cooperation, to acquire product technologies [1]. Therefore, achieving technological breakthroughs is becoming a strategic imperative for emerging economies. Breakthroughs or radical innovations are typically seen as ruptures along specific technological trajectories, potentially leading to shifts or transformations in the dominant technological paradigm [2,3,4]. This is a powerful pathway for expanding markets, delivering new functionalities, and serving as a viable innovation strategy for emerging market firms. Governments in emerging markets are increasingly recognizing the strategic importance of fostering a particular subset of SMEs, often termed “niche leaders” or “small giants”, to achieve technological breakthroughs when confronted with technological blockades from developed markets. These firms concentrate on specialized market segments, leveraging their technical expertise and market influence to secure pivotal positions within global supply chains [5]. In China, the Ministry of Industry and Information Technology (MIIT) launched the initiative to cultivate “Specialized, Refined, Distinctive, and Innovative (SRDI) Little Giants” in 2018. Over 12,000 SRDI enterprises had been established by the end of 2023. These SRDI “Little Giants” have been pivotal in addressing technological shortcomings and catalyzing progress in key industries such as advanced manufacturing, new materials, and cutting-edge information technology; they have taken a leading role in upgrading industries and enhancing cost-efficiency across the entire industrial supply chain.

However, participating in breakthrough innovation requires SMEs to invest extensive resources [6] and confront substantial uncertainty [7]. These challenges are particularly pronounced for niche leaders in emerging economies. Technological constraints limit knowledge spillovers and collaborative opportunities, and the immaturity of the financial market hinders the process of technological development and commercialization [8]. The advent of the digital era, marked by the convergence of artificial intelligence, big data, cloud computing, and the Internet of Things (IoT), has fundamentally transformed the innovation landscape. In this new paradigm, digital technologies reshape traditional industry boundaries and accelerate the pace of technological breakthrough [9,10,11]. Meanwhile, the digital epoch also ushers in heightened market volatility and technological unpredictability [12,13]. The accelerated cycles of innovation require SMEs to input more resources to cope with rapid technological changes. This mismatch between high resource input and resource constraints exacerbates the difficulty of achieving technological breakthroughs [6]. In this context, government support, particularly through targeted subsidy programs, emerges as a crucial mechanism for addressing these market inefficiencies [14,15]. Specifically, government subsidies can help firms to overcome resource barriers, accelerate R&D investments, and enhance innovation capabilities [15,16,17]. Moreover, government support can signal firms’ innovation potential to external stakeholders, attracting additional resources from the market [18]. Given these complex circumstances, the ways in which niche leaders formulate innovation strategies and allocate limited resources to enhance breakthrough innovation performance have become crucial factors that demand immediate attention.

According to the theory of ambidextrous innovation, innovation activities can be broadly categorized into incremental and breakthrough innovation based on their degree of innovativeness [19,20]. Incremental innovation is an improvement-type innovation; it focuses on enhancing existing technological attributes and product features to better align with consumer needs. In contrast, breakthrough innovation is an innovation process that works from scratch; it is a new creative process that begins after the enterprise collects external knowledge [21,22,23,24]. However, existing research has not fully addressed critical aspects of breakthrough innovation, particularly in the context of digitalization and government subsidies to emerging economies. First, existing studies fail to identify the impacts of the configuration of multiple factors on breakthrough innovation. Researchers have proposed strategies such as organizational network building, knowledge recombination, and distant search to enhance the breakthrough innovation performance based on resource-based and knowledge-based theory [19,25,26]. Previous studies have focused on the effects of isolated technical or environmental factors [27,28], preventing a deep understanding of the synergistic matching effect between multiple factors in breakthrough innovation performance, such as technology, organization, and environment. Second, existing research has primarily concentrated on breakthrough innovation in large corporations [29,30,31], underestimating the strategic importance and value of niche leaders in driving breakthrough innovation. In the past two decades, numerous SMEs have successfully ascended global value chains and developed distinctive competitive advantages [32]. The unique pathways through which these firms achieve breakthrough innovation, especially in the resource-constrained context of emerging economies, remain inadequately explored. Third, while government subsidies are widely recognized as catalysts for innovation, their specific role in enabling breakthrough innovation among niche leaders remains theoretically underdeveloped and empirically underexplored, with unanswered questions regarding their optimal configurations and underlying mechanisms. It can be seen that the impact of different factors on the breakthrough innovation performance of enterprises is not isolated; they produce different combinations through linkage matching, affecting breakthrough innovation performance.

Guided by the technology–organization–environment (TOE) framework, this research employs dynamic qualitative comparative analysis (QCA) in an effort to identify the configurational factors that promote breakthrough innovation among niche leaders in emerging economies during the digital era. We explore how government subsidies interact with organizational capabilities and market dynamics to shape innovation pathways. Furthermore, this study analyzes how these configurations evolve over time and uncovers regional differences that reflect unique innovation characteristics in emerging markets. Based on secondary data from 87 Chinese niche leaders spanning 2018–2023, our findings reveal three effective configurational pathways to high-breakthrough innovation and two pathways leading to its absence. These results illuminate the essential role of government subsidies, the synergistic effects between digital transformation and R&D capabilities, and the constraining influence of rigid governance structures. Furthermore, significant regional variations and temporal evolution in these pathways underscore the context-specific nature of breakthrough innovation in emerging economies.

This study makes important contributions to the existing literature on the breakthrough innovation of niche leaders in emerging economies. Firstly, our analysis identifies the unique configurational factors that drive breakthrough innovation among niche leaders during digital transformation from a complexity perspective. By examining how different elements of the innovation ecosystem—including government support, market forces, and enterprise capabilities—interact and combine, we reveal the complex pathways through which niche leaders achieve breakthrough innovation while managing resource constraints. This configurational approach challenges traditional linear models of innovation, offering new theoretical insights into how various factors work together in resource-constrained environments. From a dynamic perspective, we capture how innovation pathways evolve in response to rapid technological advancements and digital disruptions. Through dynamic QCA within the TOE framework, we demonstrate how niche leaders continuously adapt their strategies, leveraging digital tools and supportive policies while navigating changing market conditions. In terms of management implications, this study offers valuable insights for enterprise managers, policymakers, and other emerging economies, emphasizing the multifaceted pathways taken to achieve breakthrough innovation based on unique organizational characteristics and contextual factors.

2. Theoretical Background and Model Construction

2.1. Breakthrough Innovation in Niche Leaders

Technological innovation refers to activities that introduce new or significantly improved products, processes, services, or business models in the field of technology [33,34]. Among these, breakthrough innovation represents a strategic approach that fundamentally transforms existing markets and creates new value propositions in the digital era [7]; it embodies an exploratory mindset that emphasizes experimentation with emerging technologies and the pursuit of novel knowledge domains [10,35]. This exploratory orientation, though coming with higher uncertainty, enables firms to develop revolutionary solutions that address emerging market demands and maintain long-term competitiveness amid intensifying global competition.

The factors influencing breakthrough innovation performance have attracted considerable scholarly attention in innovation research. Prior studies have predominantly investigated these factors through isolated views. From the technological perspective, studies reveal the impacts of R&D intensity [27], absorptive capacity [36], technological search strategy [24], and knowledge search breadth on radical innovation [36]. Recent studies have also examined digital transformation capabilities and technological infrastructure as emerging drivers of breakthrough innovation [28,37]. These studies collectively emphasize how firms develop and leverage their technical resources to achieve innovative breakthroughs. At the organizational level, factors such as strategic leadership [3], human capital development [38], and organizational culture [39] have been identified as crucial factors. Additionally, governance mechanisms that strike a balance between control and flexibility are seen as crucial to enhancing organizational agility during the innovation process [40]. The organizational dimension highlights how internal structures, processes, and capabilities shape a firm’s ability to pursue breakthrough innovation. From the environmental perspective, research has focused on the role of external factors—including government policies [41], the digital economy environment [10], and regional institutional differences [42]—in shaping breakthrough innovation trajectories. However, these one-dimensional perspectives offer fragmented insights into the phenomenon of breakthrough innovation. Given its complexity, breakthrough innovation’s success does not depend on isolated factors [29,43] but on the systematic alignment of technological, organizational, and environmental conditions.

Research on breakthrough innovation has historically centered on large enterprises; as such, innovation requires substantial resource commitments [44]. Scholars have argued that large firms are better positioned for breakthrough innovation due to their abundant financial and technical resources [29,30,31]. However, this view significantly underestimates the potential and strategic importance of breakthrough innovation among SMEs, particularly niche leaders. Niche leaders, characterized by their specialized market focus and deep technical expertise [45], demonstrate distinctive approaches to breakthrough innovation that differ from those of large enterprises. Unlike large firms, relying on extensive R&D budgets, niche leaders achieve breakthrough innovation through focused technological specialization and agile organizational structures [5]. These firms exhibit higher R&D efficiency through concentrated investments in specific domains [46], and they benefit from flexible decision-making processes and integrated innovation teams [45], often surpassing larger competitors in their chosen niches.

Research on niche leaders has largely focused on developed economies, examining their innovation patterns within mature institutional environments [46], including areas such as financial performance [47], human resource management [48], and internationalization strategies [49]. This research landscape spans multiple developed economies, including German “hidden champions”, Japanese “Niche Top Companies”, American “Niche Companies” and Korean “Strong Medium-Sized Enterprises” (SMSEs). Among developed economies, Europe and the United States have perfect market mechanisms and mature innovation ecosystems [50], while Japan has a well-developed collaborative innovation system for the industrial chain [51] and interdependence between large, medium, and small enterprises. A mature technology ecosystem and abundant financing resources provide excellent adaptability and competitiveness in breakthrough innovation. In contrast, emerging markets are increasingly recognizing the strategic importance of niche leaders, as exemplified by China’s “Specialized, Advanced, Differentiated, and Innovative” (SADI) program and India’s “Champions” scheme for micro-, small, and medium enterprises (MSMEs). In emerging economies such as China, the operating environment for niche leaders is characterized by strong government guidance, market mechanisms that need to be improved, and diverse but costly financing channels. These programs reveal distinct characteristics across different economic contexts, particularly in terms of development trajectories, public visibility, market approaches, and business expansion strategies [29,45,52]. The variations in institutional environments, market conditions, and business cultures significantly influence how niche leaders emerge and develop, demonstrating the importance of considering regional specificities in studying and supporting them.

Previous studies have not adequately explored the inherent complexity of breakthrough innovation, the need for multifactor coordination, and the unique challenges faced by niche leaders in emerging economies. For these niche leaders, success in breakthrough innovation requires a synergistic ecosystem comprising three key elements: dynamic market forces, robust firm capabilities, and strategic government support. The digital economy environment, characterized by accelerating technological advancement and evolving market dynamics, provides the essential context for innovation [23]. Within this context, firms’ internal capabilities—including digital transformation competencies and R&D innovation potential—interact with organizational structures and growth potential to determine their capacity to implement breakthrough innovations. Government subsidies function as a crucial institutional support mechanism, bridging resource gaps and aligning innovation efforts with broader development objectives. This tripartite interaction creates a dynamic innovation ecosystem where resource-constrained niche leaders can achieve breakthrough innovation through the systematic alignment of internal capabilities, market forces, and government support. Digital transformation acts as a catalyst in this process, enabling firms to overcome traditional resource limitations [53,54,55]. However, the success of these transformation efforts hinges on firms’ ability to effectively coordinate these three elements within the unique institutional context of emerging economies. By adopting this integrative perspective, this study examines how these factors interact and evolve to enable breakthrough innovation among niche leaders operating under resource constraints and institutional complexities specific to emerging economies.

2.2. TOE Theoretical Framework

The TOE framework is a widely used analytical tool that examines three interrelated dimensions: technology, the organization, and the environment [56]. The technological dimension focuses on the characteristics, performance, and maturity of the technology, highlighting how they shape innovation potential. The organizational dimension addresses an enterprise’s management structure and developmental capabilities, factors which influence a firm’s ability to execute innovation. The environmental dimension considers external factors that present both opportunities and constraints for innovation [57].

Breakthrough, as a complex and nonlinear process, requires firms to balance internal resources with external dependencies. The TOE framework provides a systematic lens to explore this complexity by analyzing how controllable technological and organizational factors interact with external environmental influences to drive innovation outcomes; its multidimensional perspective aligns with the dynamic and interdependent nature of breakthrough innovation, offering insights into the mechanisms through which firms integrate internal strengths with external opportunities. Furthermore, QCA, with its emphasis on causal complexity and configurational analysis, aligns seamlessly with the TOE framework’s multidimensional perspective. This allows researchers to systematically explore how various combinations of factors contribute to innovation success, uncovering pathways that might otherwise remain hidden in traditional linear analyses.

In the context of digital transformation, where rapid technological advancements and evolving market demands reshape business landscapes [58], the TOE framework is particularly relevant; it helps to analyze how firms, especially niche leaders, strategically adapt to external pressures while maximizing their internal capabilities. By encompassing these interrelated dimensions, the TOE framework serves as a robust theoretical foundation with which to explore how enterprises overcome constraints, capitalize on opportunities, and achieve breakthrough innovation.

2.3. Model Construction

Building on existing research and the transformative practices of niche leaders, this study applies the TOE framework to examine the antecedent conditions that enhance breakthrough innovation capabilities and explores their configurational pathways, as shown in Figure 1.

2.3.1. Technological Factors

At the technological level, two key antecedent conditions were identified: digital capabilities and R&D intensity. Digital capabilities represent an enterprise’s ability to harness emerging technologies to improve their business processes and explore new business models [59,60]. In emerging economies, although digital infrastructure may be underdeveloped, digital technologies often hold leapfrogging potential, enabling firms to overcome traditional technological constraints and achieve low-cost innovation. By strengthening digital capabilities, niche leaders can enhance their operational efficiency, respond swiftly to market changes, and even gain first-mover advantages in competitive markets [55].

R&D intensity, which reflects the proportion of resources allocated to research and development activities, serves as a key indicator of a firm’s commitment to innovation [61]. In emerging economies, limited resources and higher financing costs often mean that R&D investments rely on diverse funding sources. This includes leveraging government subsidies, fostering external collaborations, and utilizing international technology transfers. Despite these challenges, firms with high R&D intensity demonstrate resilience by sustaining investments in innovation and overcoming systemic limitations. This commitment not only drives the creation of breakthrough products and technologies but also highlights a firm’s ability to adapt to resource-scarce environments and unlock its long-term innovation potential [62].

2.3.2. Organizational Factors

At the organizational level, corporate governance and enterprise growth potential were identified as key antecedent conditions for the success of niche leaders. Corporate governance assumes particular significance for niche leaders operating within emerging economies’ volatile institutional environments. Given their specialized market positioning, these firms require governance structures that are aligned with their strategic imperatives and market focuses. Effective governance mechanisms facilitate strategic coherence, resource optimization, and comprehensive risk management protocols [63]. For niche leaders, these governance frameworks critically influence strategic decision-making, resource allocation efficiency, and stakeholder relationship management [64,65]. The specialized nature of niche leadership presents unique governance challenges, necessitating a delicate balance between maintaining deep domain expertise and preserving strategic adaptability while optimizing resource deployment within targeted market segments.

Enterprise growth potential reflects a firm’s ability to expand its market share, diversify its offerings, and sustain its competitive advantage [66]. For niche leaders, expanding core business areas is both a survival strategy and a growth driver. Through focused resource deployment in areas of competitive advantage, these firms can achieve operational economies of scale while strengthening their market positioning. During digital transformation initiatives, firms exhibiting robust growth potential demonstrate enhanced capabilities to invest in and integrate advanced technologies, thereby fostering innovation and modernizing core processes [29].

2.3.3. Environmental Factors

At the environmental level, two key external factors were identified—government subsidies and the digital economy environment—with a particular focus on the catalytic role of government subsidies in enhancing niche leaders’ breakthrough innovation capabilities. In emerging economies, government subsidies perform a more fundamental and multifaceted function than mere financial support: they serve as institutional endorsements that enhance resource access and legitimacy [17]. In contexts where private financing mechanisms, such as venture capital, are underdeveloped, government subsidies become a vital catalyst, boosting firms’ R&D investments and optimizing the allocation of innovation resources. This is especially important in high-risk, long-payback-cycle sectors such as digital technologies, where firms often face significant financial constraints [67]. This catalytic effect drives digital innovation development while providing robust external incentives for technological and market exploration [15].

The digital economy environment, characterized by accelerating technological advancement and increasing connectivity, presents distinctive opportunities and challenges within emerging economies. While digitalization facilitates access to global knowledge networks and technological resources, infrastructural limitations, digital inequalities, and inconsistent regulatory frameworks often constrain firms’ abilities to fully capitalize on these advantages [68,69]. Nevertheless, emerging economies are experiencing rapid digital technology adoption, propelled by government-led transformation initiatives and the proliferation of affordable connectivity solutions [70,71]. For niche leaders, navigating this dynamic environment requires balanced adaptation to local market conditions while exploring digital platform-enabled business models. The synergistic interaction between government support mechanisms and the evolving digital economy creates a fertile innovation ecosystem in emerging economies. By addressing structural constraints while leveraging digital transformation opportunities, niche leaders can transcend traditional resource limitations to achieve breakthrough innovation and sustainable competitive advantages. This interaction particularly benefits firms pursuing specialized market positions, enabling them to leverage institutional support while capitalizing on digital transformation opportunities.

3. Research Design

3.1. Research Method

Traditional QCA methods are limited by their focus on cross-sectional data, an emphasis which restricts their ability to capture longitudinal changes over time [72]. However, breakthrough innovation in enterprises is inherently dynamic and continuously evolving. Therefore, a single cross-sectional analysis cannot fully capture the complex, time-dependent causal relationships involved. To overcome these limitations, this study employs a dynamic QCA approach using the R programming language, which allows for the analysis of panel data and enables a deeper exploration of configurational relationships over time [73].

Our methodological framework included analyses performed across three dimensions: inter-group, intra-group, and pooled. This comprehensive approach enables the detailed examination of niche leaders’ evolving innovation capabilities.

3.2. Data Sources

In 2018, China’s Ministry of Industry and Information Technology (MIIT) launched the “Specialized, Advanced, Differentiated, and Innovative (SADI) Small Giant Enterprise Cultivation Plan”. This initiative aims to support enterprises operating in niche markets that demonstrate strong innovation capabilities, control a high market share, and possess superior quality and efficiency. These SADI enterprises, recognized as “small giants”, serve as crucial links in their respective industrial chains and represent the vanguard of China’s industrial innovation, providing an ideal setting for examining breakthrough innovation patterns.

Drawing from the OECD Oslo Manual, which established a framework of innovation types, this study primarily focuses on technological innovation, with a specific emphasis on product and process innovations in the digital transformation context. While the four canonical types of innovation include product, process, marketing, and organizational innovations, our research concentrates on the technological dimensions that are most critical to breakthrough innovation in the digital age. Product innovation is captured through patent novelty and technological breakthroughs, while process innovation is reflected in digital transformation capabilities and technological upgrade pathways. The patent-based measurement approach allows us to systematically track technological innovations that represent fundamental changes in how these niche market leaders develop and deliver technological solutions.

To construct our research sample, we employed a systematic three-stage selection process. First, we identified all national-level SADI enterprises recognized across five successive batches by MIIT through 2023, and we screened for those listed on either the Shanghai or Shenzhen Stock Exchange, ensuring data reliability using standardized disclosure requirements. Second, we established an observation period from 2018 to 2023, spanning from the SADI program’s initiation to the release of the latest available patent data, thereby capturing the entire policy implementation cycle. Third, we verified data completeness by only retaining companies with complete patent records throughout the observation period. These companies, which have made significant strides in digital transformation, offer valuable insights into China’s broader digital evolution. Our data collection utilized two authoritative sources: financial data were sourced from the Choice Financial Terminal Database, while patent information was sourced from the Chinese Research Data Services Platform (CNRDS).

Our final sample comprised 87 national-level SADI “small giants”, featuring diverse industrial sectors and geographical regions. These firms provide a comprehensive lens through which to examine how Chinese niche market leaders achieve breakthrough innovation in the digital age.

3.3. Variable Measurement

(1)

R&D intensity: this is measured as the ratio of R&D expenditures to operating revenue [74].

(2)

Digital capability: This is assessed by analyzing annual reports of the sampled enterprises. We used the PyPDF2 tool to extract text and calculate the frequency of keywords related to digital transformation [11].

(3)

Corporate governance level: Based on existing research, we constructed a composite index using seven indicators, namely, executive compensation, shareholding ratios, independent director ratios, board size, institutional shareholding, equity balance, and the CEO–chairman duality. Principal component analysis was applied to derive a comprehensive governance quality indicator [64].

(4)

Enterprise growth: this is measured by the growth rate in terms of core business revenue [29].

(5)

Digital economy environment: this was evaluated by using the “China Urban Digital Economy Index”, developed by the New H3C Group and institutions such as the China Academy of Information and Communications Technology, to capture the digital economic environment in the enterprise’s location.

(6)

Government subsidies: this is measured as the ratio of government subsidies to total assets—a key focus of this study [17].

(7)

Enterprise breakthrough innovation: This study measures breakthrough innovation through the International Patent Classification (IPC) system, utilizing the first four digits of IPC codes to capture fundamental technological characteristics [75,76]. Following established methodologies, we employ a five-year rolling window approach: a patent is classified as a breakthrough patent if its IPC code differs from all IPC codes present in the firm’s patent portfolio during the previous five years. The annual sum of such patents represents the firm’s breakthrough innovation output [77,78]. This approach effectively captures technological discontinuities, as patents with novel IPC codes indicate that firms are exploring unfamiliar technical domains and creating new knowledge spaces. Such departures from established technological trajectories reflect the breakthrough nature of innovation.

3.4. Data Calibration

We used the direct calibration method for this study, setting the 95th percentile as the threshold for full membership, the 50th percentile as the crossover point, and the 5th percentile to indicate full non-membership for each attribute [79,80]. To prevent invalid data, a constant of 0.001 was added to any score standing at exactly 0.5 [81]. Detailed calibration results are presented in

Table 1. Calibration of variables.

Variable Name			Calibration
			Fully In	Crossover	Fully Out
Result variables	Breakthrough innovation (Y)		22.000	4.000	0.000
Conditional variables	T	R&D intensity (A)	17.722	5.875	2.084
		Digital capabilities (B)	266.300	32.000	6.000
	O	Governance level (C)	47.553	18.846	8.949
		Growth potential (D)	62.443	8.247	−29.208
	E	Digital economy environment (E)	93.700	82.300	60.500
		Government subsidies (F)	1.426	0.419	0.108

.

4. Data Analysis and Empirical Results

4.1. Necessity Analysis of Individual Conditions

Before conducting panel analysis, it is important to determine whether an individual’s condition is necessary for the outcome variable. Typically, a consistency coefficient above 0.9 and a coverage greater than 0.5 are used as general criteria to identify the necessary conditions [72]. In panel data QCA, further examination using consistency-adjusted distance is required. If the consistency-adjusted distance exceeds 0.2, there may be a time effect on the necessity of the antecedent condition, warranting further exploration [73]. As shown in

Table 2. Test of necessity for single conditions.

Variant	High-Breakthrough Innovation				Non-High-Breakthrough Innovation
	Consistency	Coverage	Inter-Group Consistency	Intra-Group Consistency	Consistency	Coverage	Inter-Group Consistency	Intra-Group Consistency
A	0.645	0.631	0.073	0.436	0.595	0.708	0.049	0.512
~A	0.701	0.587	0.098	0.370	0.690	0.703	0.089	0.408
B	0.612	0.643	0.113	0.493	0.550	0.703	0.092	0.531
~B	0.718	0.568	0.107	0.380	0.721	0.693	0.095	0.389
C	0.616	0.558	0.073	0.493	0.642	0.707	0.079	0.493
~C	0.676	0.608	0.141	0.446	0.598	0.654	0.046	0.512
D	0.718	0.649	0.134	0.218	0.627	0.689	0.165	0.285
~D	0.650	0.591	0.183	0.275	0.681	0.746	0.144	0.228
E	0.672	0.568	0.070	0.455	0.654	0.671	0.037	0.493
~E	0.610	0.592	0.107	0.588	0.579	0.682	0.055	0.636
F	0.662	0.658	0.110	0.380	0.554	0.670	0.183	0.427
~F	0.668	0.552	0.159	0.372	0.717	0.721	0.070	0.332

, none of the six antecedent conditions—R&D intensity (A), digital capabilities (B), governance level (C), growth potential (D), digital economy environment (E), and government subsidies (F)—had pooled consistency coefficients above the 0.9 threshold. Furthermore, the inter-group consistency distances for these factors were all below the critical value of 0.2. These results suggest that none of the six factors consistently qualify as necessary conditions for achieving high levels of breakthrough innovation across the observed firms and time periods.

This finding highlights the multifaceted nature of breakthrough innovation in the digital age. Rather than relying on a single dominant factor, breakthrough innovation likely emerges from complex interactions among multiple conditions, varying across organizational contexts and temporal dimensions. This underscores the importance of performing subsequent configurational analyses to uncover combinatory patterns that lead to high-innovation outcomes.

4.2. Sufficiency Analysis of Conditional Configurations

Configurational analysis, which is central to the QCA method, aims to explain how different combinations of antecedent conditions influence outcomes. The main criterion for sufficiency is a consistency level of at least 0.75. Based on previous studies, researchers can set different consistency thresholds for the presence or absence of high outcomes, depending on the research objectives and data characteristics [82,83].

In this study, we used a frequency threshold of 6, retaining 411 cases that exceeded the 75% sample retention benchmark. For high outcomes, we set a consistency threshold of 0.85 with a PRI threshold of 0.5. For the presence of high outcomes, we used a consistency threshold of 0.89 and a PRI threshold of 0.67.

After constructing a truth table based on the purpose of this study in the stage of counterfactual analysis, we assigned the condition variable “F” a value of “1” in the configurational sufficiency analysis to indicate its presence, while the other variables were marked as “uncertain” (“—”). This approach helps to identify core and peripheral conditions in configurational paths that meet the established criteria, producing simple, intermediate, and complex solutions.

Our analysis focuses on the intermediate solution, which is supported by the parsimonious solution, to identify the core and peripheral conditions in each configurational path necessary for both the presence and absence of high-breakthrough innovation. The detailed results are presented in

Table 3. Configurational result analysis.

Variant	High-Breakthrough Innovation				Non-High-Breakthrough Innovation
	a1	a2	a3	a4	b1	b2
R&D intensity (A)	⬤	⬤	${\displaystyle ⨂}$	●	${\displaystyle ⨂}$
Digital capabilities (B)	${\displaystyle ⨂}$		⬤	⬤	${\displaystyle ⨂}$	⬤
Governance level (C)	${\displaystyle ⨂}$	${\displaystyle ⨂}$	⨂	⨂	⬤	⬤
Growth potential (D)		${\displaystyle ⨂}$	●	⬤		⨂
Digital economy environment (E)	⨂	⨂	⨂	●	⨂	●
Government subsidies (F)	⬤	⬤		⬤	⬤	⨂
Consistency	0.875	0.855	0.872	0.891	0.896	0.907
PRI	0.640	0.573	0.598	0.523	0.713	0.736
Original coverage	0.273	0.276	0.285	0.240	0.240	0.284
Unique coverage	0.021	0.012	0.073	0.046	0.104	0.147
Inter-group consistency-adjusted distance	0.092	0.113	0.076	0.089	0.064	0.073
Intra-group consistency-adjusted distance	0.152	0.171	0.161	0.133	0.142	0.123
Overall consistency	0.833				0.888
Overall PRI	0.576				0.732
Overall coverage	0.433				0.388

Note: ⬤ = presence of core conditions; ⨂ = absence of core conditions; ● = presence of contributing conditions; ${\displaystyle ⨂}$ = absence of contributing conditions; blank = not relevant.

.

4.2.1. Pooled Results

Table 3 identifies four configurations leading to high-breakthrough innovation and two configurations associated with its absence. All configurations display consistency values above the sufficiency threshold of 0.75, confirming their explanatory adequacy. The overall solution consistency for high-breakthrough innovation is 0.833, while the value for its absence is 0.888. Both are well above the standard threshold, demonstrating the strong explanatory power of the identified pathways.

• Configurational analysis of high-innovation configurations.

For high-breakthrough innovation, the consistency values of configurations a1, a2, a3, and a4 are 0.875, 0.855, 0.872, and 0.891, respectively. Additionally, the adjusted distances of the intra-group and inter-group analyses are below the critical value of 0.2 for each configuration. This low level of variation within and between groups indicates that the configurations are both temporally stable and internally coherent, providing reliable explanations of the observed patterns of breakthrough innovation. Our analysis reveals three primary modes of high-breakthrough innovation, offering insights into the innovation mechanisms of niche leaders operating in complex environments.

We analyzed R&D-driven innovation pathways (configurations a1 and a2). These configurations are characterized by high R&D intensity, government subsidies, and the absence of a developed digital economy. A lack of strong corporate governance appears to be a peripheral condition. This pathway highlights the essential role of government subsidies in promoting innovation, especially in areas with an underdeveloped digital infrastructure; it establishes a synergistic model of “policy support + technological input”, illustrating how subsidies act as catalysts within the innovation ecosystem by alleviating financial and risk constraints [16,18]. This model stimulates internal innovation efforts to compensate for weak informal institutional support. Niche leaders in this pathway tend to adopt a “reverse innovation” strategy, focusing on fundamental R&D to overcome technological barriers and strengthen their market position. This approach aligns with the strategic adaptability and resilience that niche leaders demonstrate in challenging environments, laying the groundwork for future digital transformations.

We analyzed digital transformation-driven innovation pathways (configuration a3). This configuration features strong digital transformation efforts, despite the absence of both high governance levels and a developed digital economy. Enterprise growth potential is a peripheral condition. This illustrates how niche leaders achieve breakthrough innovation through digital transformation, even in less favorable digital environments. Digital transformation significantly enhances technological innovation and market adaptability [84] while improving the ability to reconfigure resources in uncertain environments [53]. This pathway emphasizes the importance of resource and capability reconfiguration in fast-changing landscapes. Notably, government subsidies are not a core condition here, highlighting that this is an “independent innovation” model in which internal resources and capabilities drive innovation. Digital transformation not only boosts innovation but also supports market expansion and business growth [10], demonstrating a broad impact on enterprise value creation.

We analyzed comprehensive support innovation pathways (configuration a4): This configuration outlines the multifaceted model of innovation support. The core conditions include digital transformation, enterprise growth potential, government subsidies, and the absence of strong corporate governance. Peripheral conditions include R&D intensity and a favorable digital economy environment. This configuration highlights the complex interactions between government subsidies, internal enterprise capabilities, and the external environment, emphasizing the systemic nature of innovation [85,86]. Government subsidies play a critical role in this framework; they directly support digital transformation efforts and significantly improve innovation efficiency [87], particularly for niche leaders at the forefront of technology. Subsidies also indirectly stimulate innovation by encouraging sustained R&D investment, which is a key driver of digital innovation [88]; in addition, they provide financial resources to fuel enterprise growth, enabling market expansion and scaling [67]. This model illustrates the synergistic interactions that drive innovation with government support, working in tandem with internal capabilities and external factors. A supportive digital economy environment provides essential infrastructure and ecosystem support [89], thereby enhancing the impact of subsidies and enterprise capabilities. This aligns with the “Triple Helix” model of innovation [90], fostering an ecosystem where proactive governance, enterprising firms, and efficient markets collaborate to promote innovation.

A systematic analysis of the three high-breakthrough innovation models revealed that there was an intricate relationship between government subsidies, digital transformation, R&D intensity, and governance structures in terms of driving innovation among niche leaders. Key insights include the following observations:

First, government subsidies play a central role in three of the four high-breakthrough-innovation configurations (a1, a2, and a4), highlighting their importance in fostering innovation. In less developed digital economies (as seen in configurations a1 and a2), subsidies are vital for compensating for external resource shortages and supporting both technological and organizational innovation. This finding suggests that government intervention can effectively address market failures, particularly in emerging innovation ecosystems.

Second, digital transformation and R&D intensity have varying levels of influence across configurations, often complementing government subsidies in driving breakthrough innovation. For example, configuration a3 places digital transformation at the forefront, whereas configurations a1 and a2 prioritize R&D intensity. This highlights the evolving role of government subsidies in the digital age, where they not only provide financial support but also guide enterprises toward technological innovation and digital transformation. This underscores the importance of internal capabilities in maximizing external resources for innovation.

Third, the absence of strong governance structures in all of the high-breakthrough-innovation configurations is noteworthy. This finding suggests that traditional rigid governance models are less effective in a fast-changing innovation environment. Instead, flexible, decentralized decision-making may enable businesses to respond quickly to market shifts and technological opportunities [91], emphasizing the need for organizational agility in uncertain conditions [63].

Finally, the digital economy has varying impacts across configurations. In some cases (such as a1 and a2), the lack of a developed digital economy forces enterprises to rely more on government subsidies and internal R&D. In other configurations (such as a4), a robust digital economy works synergistically with other factors. This differentiated influence underscores the importance of external environmental factors in shaping innovation, emphasizing that innovation is a systemic process involving multiple stakeholders and variables.

2.

Configurational analysis of the absence of high-breakthrough innovation

Due to the absence of high-breakthrough innovation, configurations b1 and b2 exhibited consistency values of 0.896 and 0.907, respectively. The overall solution consistency of this set was 0.888 and, as with the configurations for high-breakthrough innovation, both the intra-group and inter-group adjusted distances were below 0.2. These results enhance the credibility of our findings, indicating that the identified pathways are consistent across different firm contexts. An analysis of the two configurations that result in the absence of high-breakthrough innovation reveals distinct patterns, each showing the unique challenges and constraints faced by niche leaders in their innovation processes.

We analyzed a conservative management configuration (configuration b1): This configuration is defined by high governance levels and the presence of government subsidies combined with an underdeveloped digital economy. The absence of R&D intensity and digital transformation is identified as a peripheral condition. This pattern reflects a conservative management approach, suggesting that niche leaders experience innovation stagnation despite their strong innovation potential. This may be due to the “substitution effect” of government subsidies. As Chen et al. (2018) noted, overreliance on government funding can replace internal R&D efforts, thereby weakening a company’s drive for self-initiated innovation [92]. This illustrates the potential downsides of government intervention in enterprise innovation [14,93]. Furthermore, traditional governance structures may prioritize maintaining the status quo and avoid risks rather than fostering breakthrough innovation [94], which partially explains why high governance levels have not translated into high innovation outputs. In regions with underdeveloped digital economies, companies may lack external market pressure or competitive influence, weakening their motivation to pursue continuous innovation [68]. Recent studies, such as the work of Browder et al., emphasize the importance of digital capabilities in driving enterprise innovation [84], further underscoring the negative impact of the absence of digital transformation identified in this configuration.

We analyzed a digital island configuration (configuration b2): This configuration is marked by the presence of digital transformation and high governance levels but lacks enterprise growth and government subsidies. The presence of a digital economy environment, as a peripheral condition, further emphasizes the unique challenges that niche leaders face in their digitalization efforts. Despite implementing digital transformation and establishing strong governance structures, these efforts have not led to significant business growth, highlighting the disconnect between digital transformation and expansion [95,96]. In contrast to the research by Koh et al., which underscores the importance of government support for innovation [15], this configuration shows that niche leaders independently advance the digital transformation with minimal government subsidies. This reflects their strong innovation capability. However, while this approach aligns with their specialized and innovative positioning, it also reveals the critical role that government support plays in balancing technological development and market growth [63]. Chen et al. emphasized that regional innovation environments have a significant impact on enterprise development [89]. However, in this case, a favorable digital economy environment is not sufficient to drive business growth. This “digital island” phenomenon highlights the complex relationship between digital transformation and other organizational elements. While digital transformation is often viewed as a catalyst for innovation, especially for technology-oriented firms [53], this study reveals that its effectiveness may be significantly diminished in the absence of complementary resource support and growth drivers.

A comparative analysis of these two configurations highlights the dual role of government subsidies in fostering innovation among niche leaders. In configuration b1, government subsidies fail to effectively stimulate innovation, reflecting a “crowding-out” effect in which public funding may replace rather than complement private R&D investment. Conversely, in configuration b2, the absence of government subsidies impedes the conversion of digital efforts into tangible innovation outcomes. Additionally, the presence of high governance levels and low innovation rates in both configurations challenges the conventional assumption that strong governance naturally promotes innovation. This finding reinforces the conclusions of high outcome configurations, suggesting that niche leaders in the digital age may require more flexible and adaptive governance models to drive breakthrough innovation.

4.2.2. Inter-Group Results

To overcome the limitations of traditional QCA configurations with respect to time, this study used inter-group consistency to examine the temporal effects of configurations. Inter-group consistency evaluates whether each condition configuration consistently predicts outcomes across each year in the sample period, providing an annual cross-sectional consistency measure.

• Inter-group analysis of high-breakthrough innovation

Figure 2 shows the annual trend in configuration consistency levels for high outcome variables, reflecting how enterprises adapt their innovation strategies to changing external environments along with the relative effectiveness of different innovation pathways. All four configurations have inter-group consistency distances below 0.2, indicating that there was no significant temporal effect on the pooled results. The consistency levels for the configurations remain above 0.75 for most years during the period of 2018–2023, reflecting a high level of inter-group consistency.

In 2018, configuration a3 (digital transformation-driven) had the highest consistency of 0.937, indicating that digital transformation was the strongest driver of breakthrough innovation. This aligns with China’s entry into the Reform and Opening-up 2.0 phase, during which enterprises are to rapidly advance their digital transformation, yielding significant innovations. By 2019, configuration a2 (R&D-driven) had a slightly higher consistency of 0.893, with minimal differences among configurations, suggesting a balanced state in which various innovation strategies coexist. Configuration a4 (comprehensive support) exhibited the highest consistency from 2020 to 2022, almost always remaining above 0.9, highlighting the importance of a comprehensive innovation support system during this period. This aligns with the increased support provided by the Chinese government in response to the COVID-19 pandemic, underscoring the significance of integrated innovation strategies in the post-pandemic era. Two key trends emerged in the year 2023: First, all configurations exhibited a notable decline in consistency. This decline, which was concentrated in 2023, was not randomly distributed and, as Castro et al. pointed out, was not a benign bias [73]. Rather, this reflected the overall challenges faced by the Chinese economy. Second, despite this overall decline, configuration a3 (digital transformation-driven) maintained a relative advantage, with its consistency remaining at the highest level of 0.768, suggesting that digital transformation remained a key strategy for sustaining innovation in the face of economic pressure.

This dynamic trend illustrates the adaptive evolution of niche leaders’ innovation strategies. Different innovation paths exhibit different levels of resilience, with the digital transformation-driven innovation path (a3) showing relatively strong resilience. This suggests that policymakers and business managers may need to pay more attention to digital transformation in the future while optimizing their R&D investment strategies and government support approaches in order to adapt to the changing economic environment.

2.

Inter-group analysis of the absence of high-breakthrough innovation

Figure 3 presents the annual trends in configuration consistency levels regarding the absence of high-breakthrough-innovation outcomes from 2018 to 2023. By analyzing changes in the consistency levels of configurations b1 (conservative management) and b2 (digital island) over time, we can determine which conditions contributed to niche leaders’ failure to achieve high-level breakthrough innovation in different periods.

From 2018 to 2019, the digital island configuration (b2) was predominant, and its consistency level was maintained at 0.86 and above, although its advantages were narrowed by 2019. This likely reflects the challenges faced by early niche leaders during the initial stages of digital transformation, when digital initiatives are launched but are not yet effectively integrated into core business operations, creating the “digital island” effect. In 2020, the conservative management configuration (b1) clearly took the lead, showing the highest concordance level at 0.887, possibly because of the onset of the COVID-19 pandemic. In response to the crisis, some enterprises may have adopted more cautious management strategies, reduced their innovation investments, or focused on risk management and survival. Since 2021, the digital island configuration (b2) has regained prominence, with its explanatory power growing steadily each year and its consistency level growing from 0.923 all the way up to 0.991. Both configurations show rising consistency levels, with significant growth after 2021 to a level consistently above 0.92. This suggests that these condition combinations increasingly explain why niche leaders struggle to achieve high-level breakthrough innovation.

This trend may reflect several factors: the persistence of non-high-breakthrough innovation patterns; external pressures (such as economic challenges and policy changes) that drive enterprises to adopt more uniform coping strategies; and innovation bottlenecks or resource constraints that make it difficult for firms to achieve high-level innovation. As a result, niche leaders may resort to more conservative or localized innovation strategies.

4.2.3. Intra-Group Results

China’s vast geographical scope and uneven economic development lead to pronounced regional differences in industrial characteristics and policy priorities. To analyze these differences, we categorized the 87 firms into three major regions—Eastern, Central, and Western—based on China’s regional economic zoning standards and the provinces where the firms are located. From the perspective of regional distribution, the “small giant” enterprises show a clear “east is strong and west is weak” gradient, reflecting underlying regional economic disparities and varying innovation capacities. The Eastern region, with a more developed economy and a better manufacturing base, has a better environment for innovation and the development of SMEs, breeding more than half of the “small giants”, accounting for 67.82% of the total. The Central region, which undertakes the layout of emerging industries, accounts for 18.39% of the sample. This medium ratio reflects the growing importance of this region in nurturing niche leaders. In contrast, the Western region, despite being an important energy base in China, hosts only 13.79% of the “small giant” enterprises, indicating substantial untapped potential for SRDI enterprise development through strategic policy interventions and resource allocation.

By calculating the average coverage of the six configuration models in each region, we found that SRDI small giant enterprises, the leading firms in China’s niche sectors, exhibit different innovation paths in different geographic regions, reflecting the impact of regional economic contexts, policy priorities, and resource endowments on the innovation strategies of SADI enterprises.

As shown in

Table 4. Geographical coverage.

Region	High-Breakthrough Innovation				Non-High-Breakthrough Innovation
	R&D-Driven Innovation Pathway		Digital Transformation-Driven Innovation Pathway	Comprehensive Support Innovation Pathway	Conservative Management Configuration	Digital Island Configuration
	Configuration a1	Configuration a2	Configuration a3	Configuration a4	Configuration b1	Configuration b2
Eastern China	0.242	0.227	0.229	0.265	0.230	0.329
Central China	0.356	0.409	0.355	0.198	0.271	0.222
Western China	0.238	0.243	0.329	0.207	0.298	0.245

, in the Eastern region, the digital island configuration (b2) of non-high-breakthrough innovation outcomes became the dominant mode, with a coverage rate of 0.329. This reflects the region’s leadership in digitalization, while also highlighting an innovation dilemma. Hassan et al. noted that digital transformation alone does not guarantee innovation success [55]; enterprises must overcome organizational inertia and capability traps. Although enterprises in the East have mature management systems, their high market saturation makes it difficult for them to sustain rapid growth. This aligns with Tammi et al.’s findings, which suggest the existence of an inverted U-shaped relationship between market competition and innovation [97], in which excessive competition may stifle innovation.

In the Central region, the optimal pathway is R&D-driven innovation (configurations a1 and a2), especially configuration a2, which achieves the highest coverage for high-breakthrough innovation at 0.409. This region’s recent policy focus on developing high-tech industrial zones provides a favorable environment for innovation. This highlights the strategic alignment between regional innovation capabilities and R&D-intensive growth trajectories.

For the Western region, the digital transformation-driven innovation pathway (configuration a3) demonstrates superior performance, achieving a coverage of 0.329 for high-breakthrough innovation. This demonstrates the region’s potential for technological leapfrogging by capitalizing on its late-mover advantage. Digital transformation is a “general-purpose technology” that drives regional innovation. The focus on developing the digital economy in the new phase of the “Western Development” strategy, along with the establishment of big data pilot zones, provides a solid policy foundation and strong demonstration effects for the Western region’s digital transformation.

4.3. Robustness Check

To ensure the reliability and stability of the results, this study drew on the research methods of previous scholars [79,81,98], mainly adopting the following three methods to conduct the robustness test: adjusting the original frequency threshold from 6 to 7, increasing the original consistency threshold to 0.9, and modifying the original PRI thresholds to 0.6 and 0.7, respectively. In all adjusted analyses, the configurations maintained a clear subset relationship with the original configurations. This suggests that the combinations of conditions identified in this study maintained stable explanatory power under both strict and loose criteria.

5. Conclusions and Discussion

5.1. Research Conclusions

This study, based on the TOE theoretical framework and employing dynamic QCA, examined the breakthrough innovation pathways of China’s niche leaders in the context of digitalization, with a focus on the catalytic role of government subsidies. The key findings are as follows:

First, the necessity analysis showed that no single condition is sufficient to drive the presence or absence of high-breakthrough innovation. This emphasizes that innovation in enterprises results from the complex interaction of multiple factors, with no individual condition acting as the sole driver or inhibitor.

Second, this study identified four configurations leading to high-breakthrough innovation, and two leading to its absence. High-innovation pathways include R&D-driven innovation (a1 and a2), where government subsidies and strong R&D intensity enable firms to overcome digital infrastructure gaps, and the digital transformation-driven pathway (a3), which highlights how internal digital capabilities drive adaptability and innovation. The comprehensive support pathway (a4) integrates government support, digital transformation, and enterprise growth potential to create a multifaceted innovation ecosystem. In contrast, the conservative management pathway (b1) and the digital island pathway (b2) are associated with the absence of high-innovation outcomes. The former reflects a reliance on subsidies and conservative governance that discourages proactive innovation, while the latter demonstrates how a lack of complementary resources undermines the potential benefits of digital transformation. These findings emphasize the diverse strategies that niche leaders employ to achieve breakthrough innovation, shaped by internal capabilities and external support. The effectiveness of these configurations evolves over time, reflecting the dynamic and path-dependent nature of innovation. Notably, the digital transformation-driven innovation pathway demonstrates resilience, especially in challenging economic environments, underscoring the importance of digital technology as a key enabler of innovation.

Third, this study reveals the complex role of government subsidies in fostering innovation. Government subsidies are a core element of the three high-breakthrough-innovation configurations, illustrating their critical role in driving innovation among niche leaders. Moreover, a high internal R&D intensity effectively complements external government subsidies. Firms with high R&D intensity can achieve technological breakthroughs through government support, especially in an imperfect digital economy, thereby realizing a synergistic relationship between government assistance, market mechanisms, and firms’ capabilities. However, subsidies can also lead to a “substitution effect”, as seen in the conservative management configuration (b1), where overreliance on government support compared to internal R&D dampens innovation momentum. This effect is more likely in environments with abundant external funding and stable long-term subsidies, which can reduce incentives for independent innovation.

Fourth, this study finds a paradox in the governance structure. Despite all high-breakthrough-innovation configurations featuring low governance levels, the result challenges conventional management theories. This suggests that, in fast-changing innovation environments, flexible and decentralized governance structures may be more effective in terms of driving breakthrough innovation than rigid hierarchical models. Adaptable organizational frameworks allow enterprises to respond more quickly to market changes and technological advancements, thereby enhancing their innovation capabilities.

Finally, this study reveals the regional differences in innovation patterns among niche leaders in China. The Eastern region focuses on digital transformation, the Central region drives technological progress through increased R&D investment, and the Western region leverages late-mover advantages and digital economic policies to achieve technological leapfrogging. These regional differences highlight the significant impact of tailored economic development policies on the innovation trajectories of enterprises in China.

5.2. Theoretical Contributions

First, this study extends the theoretical scope of breakthrough innovation by uncovering multiple pathways through which niche leaders achieve innovation in resource-constrained and digitally transforming environments. Unlike traditional linear models that emphasize single innovation trajectories [14,23,76], this study adopts a configurational and dynamic perspective. By leveraging the TOE framework and a complexity lens, the findings reveal how technological, organizational, and environmental factors interact to shape innovation outcomes. These mechanisms illustrate how niche leaders strategically coordinate government support, market forces, and internal capabilities to overcome challenges such as resource scarcity and underdeveloped ecosystems, highlighting the multifaceted mechanisms that underpin breakthrough innovation. Furthermore, this study remedies the inadequacy of the current literature by focusing on the unique roles of niche leaders in emerging markets, enriching theoretical discourse by situating breakthrough innovation within the unique opportunities and constraints of emerging markets, and thereby offering insights into their strategic behaviors in contexts characterized by both opportunities and constraints.

Second, this study highlights the dual role of government subsidies in fostering innovation. While subsidies can address market failures/structural barriers and stimulate innovation [16,17,18], the findings reveal that they can also create substitution effects that hinder proactive innovation efforts under certain conditions [99,100]. By analyzing how subsidies interact with firm-level capabilities and market dynamics in the configurations identified, this study bridges resource dependence theory and the crowding-out effect framework. This integration contributes to a more comprehensive understanding of government intervention in emerging markets, particularly in the context of digital transformation, where firms often face heightened uncertainty and resource limitations. These insights provide theoretical clarity on how policy mechanisms influence innovation outcomes at the firm level.

Finally, this study challenges conventional corporate governance theory by showing that rigid governance structures may hinder, rather than promote, innovation in high-breakthrough-innovation configurations. This contradicts the common belief that strong governance facilitates innovation [64,101]. Instead, the findings highlight the importance of flexibility and adaptability in governance practices. This theoretical contribution is particularly relevant in the digital age, where niche leaders operate in highly volatile environments. This study underscores the need for adaptive governance frameworks that align with the fast-paced and unpredictable nature of digital transformation, providing new directions for understanding innovation governance in emerging markets.

5.3. Practical Implications

This study offers valuable insights for enterprise managers, policymakers, and other emerging economies, emphasizing the multifaceted pathways that can be followed to achieve breakthrough innovation based on unique organizational characteristics and contextual factors.

For enterprise managers, the findings underline the importance of aligning innovation strategies with regional economic and technological conditions. In regions with advanced digital economies, businesses should prioritize digital transformation-driven innovation through strategic investments in emerging technologies such as artificial intelligence, cloud computing, and big data analytics. Conversely, in regions where traditional industries predominate, focusing on R&D-driven innovation may yield better outcomes. Striking a balance between digital transformation efforts and traditional R&D investments is critical, with resource allocation tailored to market dynamics and technological trends. Notably, digital transformation has demonstrated significant resilience during economic downturns, underscoring its importance as a core component of business strategies to maintain competitiveness in volatile markets. In addition, enterprises should revisit their governance structures to adapt to rapidly changing innovation landscapes. Flexible and decentralized decision-making processes, such as establishing specialized innovation committees or granting greater autonomy to innovation teams, can enhance organizational responsiveness. Government subsidies, while instrumental in catalyzing innovation, should complement rather than replace intrinsic R&D capabilities. To sustain innovation momentum, enterprises must strengthen their internal innovation capacities, actively engage in regional innovation ecosystems, collaborate with academic institutions, contribute to industry standards, and form alliances with supply chain partners.

For policymakers, this study highlights the critical need for regionally tailored innovation policies that account for local developmental stages, resource endowments, and institutional environments. Our research identified distinct regional patterns among Chinese niche leaders, providing a valuable reference framework for other emerging economies. In the Eastern region, characterized by a mature digital infrastructure, policies should focus on deepening the integration of digital technologies with traditional industries. Key initiatives could include establishing industrial Internet platforms, promoting digital innovation demonstration zones, and providing financial incentives to support cross-sector digital convergence. Addressing challenges such as “digital silos” will require specific measures, including subsidies for traditional enterprises undertaking digital transformation, and the formulation of standardized digital practices. For the Central region, where R&D-driven innovation pathways demonstrate superior performance, policymakers should prioritize the strengthening of research capabilities and foster industry–university–research collaborations. Measures such as expanding R&D tax incentives, creating regional innovation hubs, and supporting technology transfer programs are essential. Furthermore, promoting industry clustering can facilitate knowledge spillovers and enhance synergies within regional innovation ecosystems. In the Western region, where digital transformation-driven innovation holds significant potential despite infrastructure limitations, policy priorities should include building fundamental digital infrastructure, developing talent pools, and fostering innovation ecosystems. Specific initiatives might encompass subsidies for digital infrastructure projects, talent attraction and retention programs, and the establishment of regional innovation service platforms, such as technology transfer centers and innovation incubators.

For other emerging economies, these findings offer actionable guidance for shaping innovation policies and fostering breakthrough innovation among niche leaders. First, policymakers should adopt a staged approach to policy development, tailoring strategies to their specific developmental contexts and regional disparities. Drawing on China’s experience, advanced regions could focus on digital–traditional industry integration, with some regions developed based on building R&D capabilities, and with less developed regions focused on infrastructure construction and talent development. Second, given the common challenges of limited innovation resources in emerging economies, governments should prioritize building innovation ecosystems that facilitate knowledge sharing and resource optimization. This could include establishing technology transfer mechanisms, promoting industry–university collaboration, and creating platforms for cross-regional cooperation. Third, emerging economies can benefit from China’s balanced approach to government subsidies, using it as a model for innovation while carefully managing potential drawbacks, such as the crowding-out effect of excessive intervention. Such a nuanced approach can ensure that public resources effectively stimulate private sector innovation without undermining market dynamics.

5.4. Research Limitations and Future Prospects

Although this study offers insights into niche leaders’ breakthrough innovation pathways, it has several limitations, which suggest opportunities for future research.

First, while our variable selection based on the TOE framework provides broad applicability, it may not fully capture the complex contextual dynamics of emerging markets. Although we considered government subsidies and digital economy development, our model could be enriched by incorporating additional contextual influences that characterize emerging market environments. For instance, regulatory challenges (e.g., policy uncertainty, regulatory compliance costs, intellectual property protection issues), market volatility factors (e.g., demand fluctuations, competitive intensity, market entry barriers), and institutional voids (e.g., underdeveloped intermediary institutions, information asymmetry, informal institutional constraints) could significantly impact innovation pathways. Furthermore, firm-level factors such as entrepreneurial orientation, organizational learning capabilities, and network embeddedness may play crucial roles in shaping innovation outcomes. Future studies could combine multiple theoretical perspectives—such as institutional theory, the resource-based view, and dynamic capabilities theory—to develop more comprehensive multidimensional models that capture the complex dynamics which drive innovation.

Second, although we examined the role of government subsidies, our analysis of specific policy tools was not sufficiently detailed, revealing gaps in our understanding of how different policies impact innovation. Future research could categorize policy tools such as direct subsidies, tax incentives, and government procurement, and use more refined evaluation methods to explore the varied effects of these instruments on niche leaders’ innovation.

Third, although digital transformation was identified as a key driver of innovation, this study does not delve deeply into its mechanisms. Given the complex and rapidly evolving nature of digitalization, future research could employ mixed methods to examine how digitalization reshapes innovation processes by altering organizational structures, improving knowledge management, and fostering open innovation. This could lead to the development of theoretical models for digitally driven innovation that offer practical guidance to enterprises undergoing digital transformation.

Finally, although regional disparities were noted, our analysis of dynamic mechanisms within regional innovation ecosystems was not comprehensive. Future research could employ multilevel analysis methods to investigate the interactions among enterprises, industrial clusters, and regional innovation systems, and can also explore how these interactions influence niche leaders’ innovation. Incorporating geographic information system (GIS) technology could offer more precise insights into spatial effects, enhancing our understanding of regional innovation policies and supporting the coordinated development of regional innovation ecosystems.