Unveiling the affecting mechanism of digital transformation on total factor productivity of Chinese firms

The importance of digital transformation (DGT) for increasing productivity cannot be negated and Chinese firms are rapidly embracing the digital transformation for their sustainability. But the mechanism and impact of digital transformation on total factor productivity (TFP) of firms is still unclear and this study is intended to fill this gap using the data of 3112 listed firms of China during 2011 to 2022. We applied various econometric techniques like stepwise regression analysis, instrumental variable approach, differences in difference approach, and mediating analysis to determine the relationship between digital transformation and TFP and robustness of estimated findings. The findings indicate that DGT has a positive impact on overall TFP of firms in China while operating efficiency, cheaper costs, and a stronger capacity for innovation mediates this relationship. Moreover, it is explored that conventional information and communication technologies have not significant impact on TFP of firms. The findings of the study remain valid even applying many robustness checks and attempts to control the issue of endogeneity. To fully leverage the potential benefits of digital transformation on TFP, it is essential to focus on enhancing digital literacy and skills among the workforce. Governments and relevant stakeholders should prioritize and invest in comprehensive digital literacy and skills training programs to empower the workforce with the knowledge and expertise needed to navigate the digital age effectively.