Digital economy, official promotion pressure, and firm innovation

Abstract

Currently, China's economic cycle is experiencing instability, and the pressure for economic growth is increasing. The digital economy is crucial for China's economic breakthrough and industrial transformation. Literature generally suggests that the digital economy can boost the economy at the macro level and improve the total factor productivity (TFP) of firms at the micro level. The significant role of the digital economy in promoting firm technological innovation highlights the importance of studying its impact on firm innovation. Using microdata from China's listed companies from 2013 to 2022 and meso data from prefecture-level cities, this paper innovatively incorporates the unique factor of official promotion pressure in China into the analytical framework, and empirically analyzes the impact of the digital economy on firm innovation and its underlying mechanisms using a panel model. The results show: (1) The digital economy effectively promotes firm innovation, and this conclusion holds after a series of robustness tests. (2) Official promotion pressure plays a key role in the digital economy's impact on firm innovation. The greater the promotion pressure on local officials, the more the digital economy fosters firm innovation. (3) The impact of the digital economy on firm innovation is heterogeneous. It significantly promotes innovation in large firms, emerging firms, eastern regions, and regions with a good business environment. However, its impact on small firms, established firms, central and western regions, and regions with poor business environments is weak or insignificant. (4) Mechanistically, the digital economy primarily promotes innovation by affecting firms with large financing scales and low levels of R&D investment. This paper recommends optimizing the performance appraisal system for local officials, formulating region-specific policies, and promoting the deep integration of the digital economy with firms to enhance their innovation capacity.