How Does Digital Transformation Affect Total Factor Productivity: Firm-Level Evidence from China

Abstract

After the 2008 financial crisis, companies in China begun paying more attention to sustainable development. This article attempts to examine whether and how digital transformation affects total factor productivity (TFP) at the firm-level. Using 2913 listed companies in China from 2012 to 2018, this study finds that digital transformation is positively associated with corporate TFP in China. Our explanatory variable of firm-level digitalization index is constructed via text analysis methods. After a series of robustness checks and different attempts that mitigate endogeneity concerns, our findings remain valid. However, traditional information and communication technologies (ICT) cannot improve corporate TFP. Further analyses of three plausible channels indicate that digital technologies improve TFP primarily through cost reduction and human substitution rather than supervision advantage. The results indicate that firms achieve actual benefits from the digital transformation, and how digital transformation improve the sustainable development. This study could serve as a policy inspiration for other developing countries.