Abstract:  In the context of digital economy, the application of artificial intelligence (AI) technology is deeply affecting the transformation of firm management, the expansion of business boundaries, and the change of management models. Although more and more firms are accelerating business model innovation through AI, we should see that the expansion of enterprise boundaries also brings challenges to firm management. Based on the nature of AI technology, our paper aims to explore and study how AI application capabilities and AI management capabilities act in promoting firm innovation so as to facilitate firms in making changes in accordance with AI technology. Combining the complementary assets view and the organizational learning theory, we propose an analytical framework based on firm′s application and management capabilities on AI technologies, emphasize the necessity of combining AI with human intelligence, and explain the functions and influences of the two capabilities with their complementary effect on the costs and benefits of firm innovation; the complementary effect of the two capabilities can help firms effectively acquire and control the complementary assets required for innovation, reduce the costs of digital innovation, improve operational efficiency and promote corporate innovation performance.In terms of the benefits of AI application, it helps firms automate the business processes, analyze data, coordinate the communication with customers, and facilitate the interaction between employees. With the development of AI application capabilities, firms can increase efficiency in processing structured and unstructured data. The cognitive abilities of AI can greatly reduce the cost of coordination and communication with customers and employees. Meanwhile, AI application have also brought new problems such as increasing costs in maintaining data security and privacy, and therefore it is important to establish AI management capabilities ( the ability to continuously learn in the process of applying AI to control the risks and costs brought by AI).We found that AI application capabilities can reduce cost in labor, communication and coordination, and data search, but will induce new cost in building digital infrastructure, dealing with ethical issues, securing critical data, and managing organizational structure change. More importantly, firms must establish AI management capabilities to effectively deal with the continuous innovation of big data, digital technology, AI technology, and to manage the internal organizational structure change as well as the external environment risks brought about by the technologies; the effective combination of the AI capabilities benefit firms in coordinating digital technology enabled resources, acquiring complementary assets, and controlling the cost and risks of AI. We also propose that with the interaction of AI application capabilities and management capabilities, firms will be able to reduce cost in labor, communication and coordination, and data search; meanwhile, firm will be able to control costs in building digital infrastructure, deal with ethical issues, secure critical data, and manage organizational structure change. Finally, this paper provides new insight for firm′s digital innovation strategies. We suggest firms not only should focus on the application of AI, but also need to establish management capabilities of AI, such that firms can take advantage of AI application while avoiding the risks and costs, form business models and operating models that are hard to imitate and maintain the benefits and competitive advantages brought by technology innovation.

Key words: Artificial intelligence (AI), application capabilities；management capabilities；firm innovation