Nonlinear effects of digital development on manufacturing innovation: evidence from China

The digital economy has brought innovative power to the manufacturing transformation. This study aims to investigate the nonlinear effects of digital development on manufacturing innovation using provincial panel data from China from 2011 to 2018. A two-way fixed effects model is used to examine the inverted U-shaped curve that represents the nonlinear impact of digital development on innovation. To explore the reasons behind the nonlinear digital innovation spillover, this study considered both the internal factors and external boundary conditions. We employ a moderation effect model to verify the interaction between digital development and user literacy which has a positive impact on manufacturing innovation. Especially, higher education can help users enhance digital literacy in driving digital innovation spillovers. Threshold effect model is used to examine the boundary conditions such as Internet penetration rate, information resources, and protection of intellectual property rights that contribute to the nonlinear effects. The research findings suggest that when these factors reach a critical point, the positive impact of the digital economy on manufacturing innovation turns towards a declining trend. The study provides insights into the complex relationship between digital development and manufacturing innovation and proposes policy implications.