Purpose

This study examines the effect of servitization distinctiveness on manufacturing firm performance, given the optimal distinctiveness tension wherein it reduces competition but erodes legitimacy. We further explore the moderating roles of financial leverage and environmental, social and governance (ESG).

Design/methodology/approach

Based on 589 Chinese listed manufacturing firms from 2018 to 2021, the study employs fixed-effects panel models to test the hypotheses. We address endogeneity concerns using an instrumental variable approach and conduct multiple tests to ensure robustness of the results.

Findings

Servitization distinctiveness, which denotes the degree to which a firm's servitization deviates from the industry average, exhibits a U-shaped relationship with a manufacturer's performance. Financial leverage intensifies the U-shaped relationship. Although the aggregate ESG does not significantly moderate this U-shaped relationship, the governance dimension of ESG flattens it.

Originality/value

By combining the optimal distinctiveness perspective with servitization, a U-shaped relationship between servitization distinctiveness and manufacturing firm performance is theorized through two key mechanisms: legitimacy loss and competitive pressure reduction. It further demonstrates the contingencies of firms' financial leverage and the governance dimension of ESG, highlighting how internal resource availability and external trustworthiness shape the performance impact of servitization distinctiveness. This study extends the application of the optimal distinctiveness perspective to servitization and advances understanding of how manufacturing firms strategically balance differentiation and legitimacy in pursuing servitization.