The effects of government support on enterprises' digital transformation: Evidence from China

Digital transformation has become a general trend for enterprises, and it is necessary to investigate the impact of government support on enterprises' digital transformation from the perspective of policy instruments. But so far, there is less empirical evidence on their relationship. Based on Chinese firm-level data, we investigate the effects of government subsidies and tax incentives on enterprises' digital transformation. The results show that two forms of government support both positively promote enterprises' digital transformation. Moreover, we analyze which factors mediate the observed effects. We demonstrate that easing financial constraints, increasing Research and Development (R&D) investment, and improving risk-taking ability are underlying mechanisms. Heterogeneity analysis indicates that enterprises that are non-state-owned, with higher technology level and higher absorptive capacity, have higher digital transformation. The higher the level of digital finance development and network infrastructure construction in a region, the greater the positive effect of government support on enterprises' digital transformation. The results provide clearer guidance for governments to provide government support so as to stimulate enterprises' digital transformation.