Southern Xinjiang, historically dependent on traditional industries, faces dual challenges of environmental stress and economic stagnation. Leveraging digital technologies alongside green innovation offers a transformative pathway, yet little is known about how these trajectories interact in peripheral, culturally distinctive regions. This study develops a co-evolutionary framework combining Innovation Diffusion Theory and the Multi-Level Perspective to explain the mechanisms and conditions enabling industrial upgrading. Using fuzzy-set Qualitative Comparative Analysis (fsQCA) on 12 enterprises across textiles, agriculture, and mineral processing, supplemented by embedded case studies, the research identifies three dominant pathways: (1) digital acceleration, (2) green-led structural response, and (3) digital-green synergy. Findings reveal that digital capability acts as a necessary but insufficient condition; the most robust upgrading occurs when digital infrastructures integrate with ecological technologies and institutional incentives. These interactions enhance real-time transparency, operational flexibility, and market legitimacy. The study contributes theoretically by contextualizing socio-technical transition models for frontier economies and provides practical implications for policymakers and managers, emphasizing targeted infrastructure, policy alignment, and socio-cultural adaptability for sustainable industrial transformation.