Digital transformation and corporate performance: evidence from China

ABSTRACT

This study measures the enterprise digitalization index and investigates the relationship between digital transformation and corporate performance. The rapid development of digital technologies has transformed enterprise in significant ways. The main challenge in examining the impact of digital transformation is the lack of firm-level data. We use the method of text analysis to construct an enterprise digitalization index based on annual reports of listed companies in China during 2012–2018. We find that Enterprise digital transformation improves corporate performance. This holds in particular for non-state-owned firms and companies from service industries. Moreover, digital transformation enhances corporate performance by improving employee efficiency. The findings offer important policy implications for promoting digital economy in China.

KEYWORDS:

• Digital transformation
• text analysis
• corporate performance
• individual efficiency

JEL CLASSIFICATION:

• D22
• D24
• O12
• O33

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The research report ‘Learning from German Industry 4.0 to Promote the Transformation of China’s Manufacturing Industry’ (in Chinese) issued by the Development Research Center of the State Council of China pointed out: Companies in developed countries such as Germany and the United States have almost completed the transition from ‘Industry 2.0’ to ‘Industry 3.0’ and are moving toward ‘Industry 4.0’. However, Chinese companies is still in the transitional stage from 2.0 to 3.0. To realize 4.0, Chinese companies need to supplement basic digital technologies.

2. It was not until 2012 that digital technologies such as ERP began to be popularized in Chinese companies and earlier annual report documents are difficult to parse with Python programs, therefore our sample starts in 2012. In addition, the COVID-19 pandemic and Ukraine crisis have a significant impact on business activities, so we cut the TFP data to 2019 and the annual report data to 2018.

3. There is a reason for using compound words to count digitization-related keywords: The word frequency statistics are more accurate when use compound words, preventing more statistics [such as avoiding ‘intelligent digital systems’ (in Chinese) counting to two keywords] or less statistics [such as avoiding ‘digital marketing’ (in Chinese) not being counted].

4. The process of expanding synonyms based on Word2vec technology is detailed in Appendix 1.

5. The Chinese word vector dataset provided by Tencent is described in the appendix 1.

6. The LP method used to measure TFP is detailed in the Appendix 2.

7. The volume of telecommunications services in each province is scaled by the provincial population.

8. The average value of the enterprise digitalization index of all companies (excluding this company) in the province, lagged by one period.