Air pollution and the digital transformation

Abstract

This paper examines whether air pollution increases the digital transformation of companies. Using observations of 18,101 firm-years from China over 2014–2021, we find a positive relation between air pollution and firms’ digital transformation. Our findings are robust to a battery of endogeneity tests and robustness tests. Moreover, the impact of air pollution on digital transformation is more responsive to companies that are labor-intensive, generate lower profits per capita, and pay less per capita. Additional analysis shows that digital transformation to combat air pollution can increase total factor productivity in companies. In general, we emphasize that companies mitigate the negative impact of air pollution on the productivity of their workforce and labour costs through digital transformation.