Digital transformation along the supply chain

Abstract

In the last two decades, digital transformation has been critical for firms' survival and development. Thus, it is important to understand what factors might help facilitate firms' digital transformation. We investigate this problem in the supply chain context by examining whether and how a supplier's major customers influence its digital transformation. Using a sample of Chinese public firms from 2007 to 2020, we document that major customers' level of digital transformation is positively associated with their supplier's level of digital transformation, and the effect is more pronounced when customers are of greater importance to suppliers. The finding holds to a battery of robustness tests. Cross-sectional tests reveal that the impact of customers' digital transformation on suppliers' digital transformation is stronger for suppliers with technology-experienced executives, more high-skilled labor, fewer financial constraints, and narrower digital gap. Moreover, suppliers headquartered in regions with more digital infrastructure also show a more pronounced effect. Further analyses show that the underlying channels through which customers impact their supplier's digital transformation are knowledge transfer and market competition. Finally, we show that suppliers' digital transformation helps increase innovation outcomes. Overall, our paper extends prior literature on the real effects of customer-supplier relationships on suppliers' digital investment decisions.