Digitalization as a Factor of Production in China and the Impact on Total Factor Productivity (TFP)

Abstract

In the digital transformation era, digitalization integrates deeply into production, bolstering output efficiency and economic value. Through stochastic frontier analysis (SFA), this research positions digitalization as an input in the production function, dissecting its elasticity impact on capital, labor, and output. The effect of digitalization on total factor productivity change (TFPC) is explained by comparing TFPC with and without digitalization. Findings reveal that digitalization’s integration into economic growth displays a U-shaped trajectory, with initial productivity setbacks transitioning to long-term benefits as industries adapt. The periodic complementarity and substitution between digitalization and labor, along with a weak substitution relationship with capital, illustrate that, as a production factor, digitalization dynamically interacts with other factors, both complementing and substituting them. This dynamic interplay highlights the intricate role that digitalization plays within the production function. Furthermore, digitalization has played a crucial role in China’s TFP growth, which also highlights the lack of other technological progress. Meanwhile, the pace of digital transformation presents scalability challenges, evident in the fluctuating scale efficiency change (SEC). Policymakers are advised to address these early stage challenges through supportive measures, ensuring smoother digital transitions. Concurrently, industries should embrace this non-linear transformation, emphasizing adaptability to maximize digitalization’s long-term advantages.