Import demand, digital empowerment and firm innovation

Abstract

The mechanism through which external demand influences firm innovation has garnered increasing attention. However, the impact of digital technology on this relationship, particularly on the demand side within the context of digitalization, remains underexplored. Utilizing data from the Chinese Industrial Enterprise Database, a patent database, a customs database, and the CEPII-BACI database from 2000 to 2013, this paper investigates how external demand affects firm innovation through digital empowerment. The findings indicate: (1) Destination import demand has an inhibitory effect on firm innovation. (2) Heterogeneity analysis reveals that external demand positively impacts firm innovation when the primary export destination is a high-income country or the firm operates within a high-technology industry. (3) External demand enhances firm innovation capabilities through the information-sharing and technology-upgrading effects of digital empowerment. (4) Mechanism testing shows that international external demand influences firm innovation through the scale effect and the competition effect, with the competition effect generally having a negative impact on innovation decision-making as external demand expands. This research contributes to understanding the impact of external demand on the innovation of Chinese export firms, examining how digital empowerment mediates this relationship, and providing a theoretical foundation for leveraging digital technology to promote firm innovation.