Abstract: Servitization has emerged as a key strategic opportunity for manufacturers to enhance differentiation and create competitive advantage. Almost 60% of manufacturers in Western economies have offered full customer-focused packages of products and services. However, servitization has also been questioned with its over-emphasis on business model innovation and loss of focus on core technology. Empirical studies on the relationship between servitization and product innovation are scarce, and have generated inconsistent findings. Although there are arguments of servitization′s benefits in generating rich insights into customer needs and knowledge, there are also evidences that servitization can be detrimental by bringing in resource conflicts and familiarity trap. Therefore, it still merits further exploration that whether servitization can enhance product innovation and generate sustainable competitive advantage.To obtain in-depth explanations of the effects of servitization, this paper uses knowledge based view (KBV) as the explanatory framework to analyze the positive and negative influences across different levels of servitization, and empirically investigates the relationship between servitization and product innovation. Moreover, concerning that the technology and market factors will bring in different opportunities and threats, this study differentiates technology dynamism and market uncertainty to examine the moderating effects of environmental uncertainty. Hypotheses are tested by survey data from 239 Chinese manufacturing firms, covering four geographically different areas: the Pan-Pearl River Delta economic zone, the Yangtse River Delta economic zone, the Bohai Rim economic zone and other inland areas, which also represents different economic developments. Then, a hierarchical moderated regression is employed to examine the explanatory power of each set of variables.First, the results show a U-shaped relationship between servitization and product innovation. At low levels of servitization, manufacturers still emphasize on physical products and provide a narrow range of basic services, implying a small number of customer interaction activities. These services and interactions are unlikely to lead to new ideas that depart from existing products. Relying on such knowledge will lead manufacturers to keep on improving existing products and get positive feedback from existing customers, and then lose the motivation to conduct breakthrough innovation. Meanwhile, firms are constrained by existing routines and resources. Given that the dynamics, rules, and culture of the service sector are greatly different from those of the manufacturing sector, manufacturers may need to acquire new resources, even transfer resources from product businesses, and adjust the current processes and organizational structure to implement servitization. Consequently, improving servitization levels would cause the dilution and shortage of resources in product innovation. Taken together, at low levels of servitization, resource conflicts would be prevalent and outweigh the complementary effects of customer knowledge, hence leading to a negative effect of servitization on product innovation.At high levels of servitization, manufacturers emphasize more on services and widen the service range. The increased number, the widened variety and the interactive nature with customers of services greatly improve customer trust and loyalty. Manufacturers get access to more information on customer preferences, more accurate interpretation of customer demands, and more user-specific data. These data and information contain abundant tacit knowledge, especially the underlying customer needs, which are not bound to existing products, abstract, vague and difficult-to-acquire. Underlying customer needs reflect customers′ deeper and broader needs, and are conducive to stimulate new ideas and inspire breakthrough innovations. Meanwhile, along with the learning effect, the marginal resource input in service is diminishing, and then the resource conflict between product innovation and service is gradually weakened. Therefore, at high servitization levels, the complementary effects of customer knowledge increase substantially and outweigh the rise in resource conflicts, resulting in a positive effect of servitization on product innovation.Second,the results show that technology dynamism negatively moderates the relationship between servitization and product innovation. Under high technology dynamism, technological advances constantly emerge and prior knowledge becomes obsolete rapidly. In these cases, highly innovative product concepts and designs are usually derived from technological advances in other industries. Therefore, manufacturers need to obtain diversified information from multiple channels to promote product technology innovation, such as suppliers and third-party scientific research institutions, which consequently weakens the importance of information channels through servitization. Moreover, for manufacturers in technologically turbulent markets, allocating slack resources into servitization may be counterproductive as these resources could be better invested in technological innovation. In short, high technology dynamism requires manufacturers to increase investment in product innovation, which strengthens resource conflicts between services and product innovations, and weakens the role of servitization as information channels. Third, the results show that market uncertainty negatively moderates the relationship between servitization and product innovation. Under high market uncertainty, customers and competitors are diversified and change rapidly, and new market segments constantly emerge. Manufacturers need to broaden their business horizons to embrace more customer groups and emerging segments, as they are likely to become the focus of competition in the future. However, servitization′s focus on the current market is likely to lead manufacturers to ignore potential customer groups, limit innovation to current business areas, and miss product innovation opportunities in emerging markets. On the contrary, under low market uncertainty, customer demands and competitors′ behaviors are simple and stable, which strengthens the positive effects of information acquired through servitization on product innovation. In a word, high market uncertainty increases the possibility of emerging markets, and therefore weakens the positive impact of servitization on product innovation as it is difficult to obtain information on emerging markets through servitization.In general, this study complements the existing literature in three major ways. First, previous evidences on the role of servitization in product innovation are largely anecdotal and drawn from the conclusions of selected case studies in a Western context. In this study, the empirical investigation covers large samples from China as an emerging economy, improving the generalizability and providing managerial insights for practitioners in China to implement servitization. Second, this study extends the servitization research by providing a nuanced understanding of the curvilinear effects of servitization on product innovation in response to recent calls for detailed insights from quantitative studies. The results help managers recognize both the bright and dark sides of servitization in product innovation. Third, this study extends the understanding of the moderating roles of technology dynamism and market uncertainty, which provides guidance to implement servitization efficiently according to different environments.

Key words: servitization, product innovation, technology dynamism, market uncertainty