The Impact of Digital Economy on Firm Performance: Evidence from China

ABSTRACT

This paper employs a multidimensional fixed effects model and examines the impact of the digital economy on the performance of firms in traditional industries. We have identified a pattern similar to the “IT productivity paradox” observed in the United States during the 1980s. Using data from A-share listed Chinese firms from 2011–2019, we find that the digital economy significantly reduces the short-term performance of firms by intensifying market competition and increasing adjustment costs. On the contrary, the digital economy improves firms’ long-term performance through accumulation of human capital and greater innovation capability. Competitive strategies strengthen the effect of the digital economy on the long-term performance of firms. Additionally, our research demonstrates that technology-intensive firms and small firms experience more pronounced negative effects in the short term but firms with high-tech titles suffer smaller shocks than other technology-intensive firms. These findings presents novel perspectives on the influence of the digital economy on firm performance, offering valuable insights for managers, investors, and policymakers involved in economic decision-making.

KEYWORDS:

• Digital economy
• short-term performance
• long-term performance

JEL:

• G31
• L25
• O33

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. Market competition is measured using the Herfindahl-Hirschman Index (HHI), which is the sum of the squares of the percentage of total industry assets held by each firm in an industry.

2. Following He and Liu (2019), we use the year-end percentage of funding for digital economy-related items disclosed in the notes of the financial reports of listed firms as an adjustment of expense for the digital economy. Specifically, when the item of intangible assets includes “software,” “network,” “client,” “management system,” “intelligent platform” or other keywords related to digital economy technologies, the item is marked as an adjusting item. All such items for the firm in the same year are then summed and their total proportion out of the current year’s intangible assets is calculated as a proxy variable for adjusting expenses.

3. Technological innovation uses the number of patent applications and is treated as a logarithm. Human capital is used as a percentage of R&D staffs.

4. Tobin Q is calculated from $TobinQ\left(\mathit{B}\right)=\frac{\mathit{market}\mathit{value}}{\mathit{total}\mathit{assets}-\mathit{net}\mathit{intangible}\mathit{assets}-\mathit{net}\mathit{goodwill}}$.

5. $\mathrm{Gross}\mathrm{margin}\mathrm{of}\mathrm{sales}=\frac{\mathrm{Operating}\mathrm{revenue}-\mathrm{Operating}\mathrm{costs}}{\mathrm{Operating}\mathrm{revenue}}\mathit{\hspace{0.17em}}$,$\mathrm{Cost}\mathrm{revenue}\mathrm{ratio}=\frac{\mathrm{main}\mathrm{operating}\mathrm{costs}+\mathrm{overheads}}{\mathrm{main}\mathrm{operating}\mathrm{revenue}}\mathit{\hspace{0.17em}}$.

Additional information

Funding

The work was supported by the Hunan Aokang Biotechnology Co., LTD [SKH2022075].