The double-edged role of the digital economy in firm green innovation: micro-evidence from Chinese manufacturing industry

Abstract

The digital economy, which gradually emerged with a new generation of information technologies, has become an unavoidable reality for manufacturing firms in conducting green innovation activities. In this context, using matched panel data at the province and manufacturing firm levels in China during the period 2011–2019 as the sample, this article examines the nonlinear impact of the digital economy on firm green innovation, and further identifies the moderation mechanism of government quality and the heterogeneity of its effects. The two-way fixed-effects model reveals that there is not a simple linear association between the digital economy and firm green innovation as traditionally perceived, but rather an inverted U-shaped relationship that first promotes and then inhibits, which remains robust after applying endogenous and robustness tests. And most provinces have not yet crossed the inflection point; thus, the digital economy overall positively impacts green innovation. Further analysis shows that government quality positively moderates the relationship between the digital economy and firm green innovation, statistically reflecting that the turning point shifts upwards to the right under a higher-quality government. It is worth noting that, when heterogeneity in firm ownership, scale, and region is considered, the inverted U-shaped curve still exists, but the level of the digital economy at the inflection point differs, and the digital economy plays a greater role in promoting green innovation for state-owned, large-scale, or midwestern firms. This research has significant policy implications as it establishes an inverse U-shaped relationship between the digital economy and firm green innovation and indicates that while a firm’s green patent output increases with the development of digitalization, it begins to decrease after a limit.

Appendix. Interpretation of the ZTE incident, the Huawei incident, and the list of entities

The ZTE incident in 2018: On April 16, 2018, the US Department of Commerce banned US companies from selling parts, commodities, software, and technology to ZTE for 7 years. The ban was eventually lifted, but ZTE paid a hefty fine. The Huawei incident in 2019: On May 15, 2019, the US Department of Commerce announced that Huawei and its subsidiaries were placed on the Entity List for export control, prohibiting US companies from selling related technologies and products to Huawei, and since then TSMC, Qualcomm, Samsung, SMIC, and many other companies no longer supply chips to Huawei. The ban escalated again in 2020, not only restricting Huawei from using US technology and software to design and manufacture semiconductors, but also prohibiting other non-US companies from using US software or US-made equipment to produce products for Huawei. These sanctions led Huawei into the dilemma of “no chips available,” thereby resulting in the discontinuation of production. The Entity List: It is export controls on specific objects made by the US Commerce Department’s Bureau of Industry and Security (BIS). At present, nearly 400 Chinese companies, scientific research institutions, and other entities, including ZTE and Huawei, have been included in the Entity List, covering military industry, technology, chips, nuclear power, security, AI artificial intelligence, network security, and other fields. The above incidents are apparently caused by the Sino-US trade friction, but the fundamental reason for the heavy blow of Chinese enterprises lies in their lack of innovation, chips and key technologies are still highly dependent on imports, so once the foreign supplies are stopped or disturbed, their normal production can hardly be sustained. Thus, these three things indicate that China’s manufacturing industry is “large but not strong” and remains in the middle and low end of the global value chain.