The phenomenon of digitalization and servitization paradoxes constrains the motivation of manufacturing firms to implement both strategies above. It has been shown that the role of digitalization in the link between servitization and firm performance in manufacturing firms has not yet been unanimously concluded. In this study, based on the theories of digitalization, dynamic capability, and the knowledge base view, we propose a research model to investigate the relationship between servitization, digital capabilities, and firm performance of manufacturing firms, conducting an empirical study based on questionnaire data from 435 manufacturing firms in China. The empirical results show that the three sub-dimensions of servitization of manufacturing firms have a significant positive impact on both financial and non-financial performance of firms. Meanwhile, digital capabilities act as a mediator between the three sub-dimensions of manufacturing servitization and firm performance (financial and non-financial). These results provide empirical evidence that manufacturing firms must emphasize knowledge-based digital capability development in current servitization and digitalization initiatives. Simultaneously, the study further addresses contradictions in the conclusions of existing studies on the interrelationships between servitization, digitalization, and firm performance.