Previous studies have recognized the important impact of digital transformation on innovation, there is a lack of a holistic examination of the innovation process and a systematic analysis of the relationships between the various parts of the innovation process. From a process perspective, we examine how digital transformation affects all parts of the innovation process, which in turn affects the innovation output of firms. We propose that the changes in firm functions brought about by digital transformation have had a very different yet interrelated impact on the various parts of the innovation process, which have reshaped the entire flow of the innovation process of firms, and compensated for the many disadvantages of the firm in carrying out technological innovations in many ways, and thus have a positive impact on the innovation output of firms. Moreover, this relationship is more significant for firms with weaker absorptive capacity, lower recombination potential, and smaller firm size. Using panel data of A-share manufacturing firms from 2007 to 2020, the findings of this research support our hypothesis. We reveal the deep logic behind how firms can solve the difficulties in all parts of the innovation process through digital transformation to drive innovation in the face of the high failure rate of innovation, provide a systematic analytical framework for the study of the relationship between digital transformation and firm innovation, and provides multiple insights for firms, especially SMEs, to solve their innovation dilemmas and drive technological innovation.