Faced with AI-fueled competition threats due to the rapid advances of AI technology and aggressive investment on it, firms are increasingly adopting AI technology in their businesses. To adopt and implement new AI technology in their business, knowledge sourcing is important for them. In this knowledge sourcing, firms face challenges when it comes to applying internal or external R&D activities to profit from their AI adoption. This study did transaction cost-based empirical research on organizational boundary (make, buy or ally) decision and its impact on the firm performance when firms adopt new AI technologies. Using the DID (difference-in-difference) analysis, this paper examines the influence of AI adoption on firm performance and the role of a firm’s technological knowledge sourcing strategy. According to the findings, firms that rely on internal R&D have a greater firm performance. By providing a better understanding of the impact of AI adoption and its mechanism at firm level, this paper helps firms to set an appropriate innovation strategy on AI investments.