Can Dual Unlocking Occur? The Impact of Generative AI on Firms' Demand‐ and Supply‐Related Innovation

ABSTRACT Generative AI (GenAI) is reshaping firm innovation through advanced content generation. While prior studies have emphasized GenAI's contributions to both market‐facing and operational innovation, most remain fragmented observations, lacking theoretical integration and large‐scale empirical validation. To address this gap, this study integrates the Dynamic Capability View and Institutional‐Based View to propose and test a conceptual framework that includes demand‐related (product/marketing) and supply‐related (process/organizational) innovations. Analyzing survey data from 335 Chinese manufacturing and Information and Communication Technology firms using PLS‐SEM, we find that GenAI routine use enhances market agility, thereby facilitating product and marketing innovation, and improves operational agility, which in turn boosts process and organizational innovation. Crucially, the moderating effect of environmental dynamism is negative and uniquely observed among state‐owned enterprises. These findings underscore GenAI's dual innovation value and highlight organizational agility as a critical pathway linking technology embeddedness to ambidextrous innovation. They also suggest that realizing the full potential of GenAI requires alignment between a firm's underlying dynamic capabilities and the dynamism of its external environment.