Customer concentration and digital transformation

Abstract

Using a sample of Shanghai and Shenzhen A-share listed firms during 2009–2020, we examine how customer concentration would influence firms' digital transformation. In this study, we construct a proxy for digital transformation based on a text analysis approach. Our baseline results show that customer concentration hinders digital transformation at the firm level. Moreover, we design a series of tests including instrumental variables and 2SLS regression to mitigate the endogeneity concern. Still, we find results consistent with the baseline regression. The results hold after multiple robustness tests. Furthermore, this negative effect of customer concentration on digital transformation is more pronounced when firms are subject to 1) more market competition, 2) more financing constraints, 3) higher transaction costs, and 4) less efficient use of resources. Overall, our results demonstrate the role of customer concentration in inhibiting firms' digital transformation from the perspective of supply chain management.