This study investigates the relationship between digitalization and industrial value added in 28 Islamic countries, with particular emphasis on the moderating roles of institutional quality and economic development. Using a dynamic first-difference Generalized Method of Moments (Difference GMM) estimator over the period 2010–2022, the study finds that digitalization does not exert a statistically significant direct effect on industrial value added at the average levels of institutional quality and economic development. However, its impact is conditional on country-specific characteristics. Institutional quality significantly strengthens the contribution of digitalization to industrial value added, indicating that effective governance and sound regulatory frameworks enhance the ability of countries to translate digital technologies into industrial productivity gains. Conversely, the interaction between digitalization and economic development is negative, suggesting that the marginal contribution of digitalization declines as countries become more economically developed. The findings also confirm that labor force participation and gross capital formation remain significant drivers of industrial value added, whereas trade openness does not exhibit a statistically significant independent effect. Overall, the results demonstrate that the industrial benefits of digitalization are context dependent rather than universal. These findings highlight the importance of complementing digital transformation strategies with institutional reforms and tailoring digital policies to countries' stages of economic development in order to maximize the contribution of digitalization to sustainable industrial development in Islamic countries.