Can Digital Transformation Definitely Improve Firms’ Markups?

Dai Xiang, Ma Haowei and Zhang Erzhen ()
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Dai Xiang: School of Economics, Nanjing Audit University Nanjing China
Ma Haowei: School of Economics, Nanjing Audit University Nanjing China
Zhang Erzhen: School of Economics, Nanjing University Nanjing China

China Finance and Economic Review, 2024, vol. 13, issue 1, 23-42

Abstract: In this paper, digital transformation is included in the heterogeneity model of firms. Based on a general equilibrium analysis, we find that under the effect of diminishing marginal productivity, digital transformation does not always have a positive impact on firms’ markups, but has an “inverted U-shaped” nonlinear influence, which first promotes and then inhibits markups. Firm innovation and firm productivity are the key micro-mechanisms for the above effects to play a role. Based on the analysis of typical facts and empirical data of listed companies, the measurement test yields the following results. First, digital transformation can significantly improve firms’ markups when it is below a specific threshold value, but it will have a negative impact when it exceeds this value. That is, there is an “inverted U-shaped” nonlinear relationship between digital transformation and firms’ markups. Second, the heterogeneity analysis shows that digital transformation has a greater effect on the markups of state-owned firms, export firms and technology-intensive firms than on the markups of other firms. Third, digital transformation has an impact on firms’ markups through two key mechanisms: firm innovation ability and production efficiency. The quantitative empirical results confirm the correctness of the theoretical expectations. Therefore, firms need to grasp the strategic opportunities brought by the progress of digital technology and accelerate the process of promoting the digital transformation. Firms should make proper choices in the selection and arrangement of key areas, as well as avoid possible problems such as “too much”. In this way, we can better consolidate the micro foundation of China’s high-quality economic development.

Keywords: digital transformation; firm markup rate; inverted U-shaped (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:cferev:v:13:y:2024:i:1:p:23-42:n:2

DOI: 10.1515/cfer-2024-0002

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