Effects of government digitalization on firm investment efficiency: Evidence from China

Abstract

In the digital era, digitalization has a significant impact on economic development and firm growth. However, compared to digital economy, there is still a lack of studies exploring the impact of government digitalization on firms' behavior. This study aims to provide new evidence that the digital technology-driven change in the public sector also influences the efficiency of resource allocation at the micro level. This study examines the impact of China's government digitalization reform on firm investment efficiency using the difference-in-differences model and a firm-level sample of China's listed firms for the period 2012–2020. The study finds that government digitalization enhances firm investment efficiency, alleviating both underinvestment and overinvestment. Government digitalization improves firm investment efficiency by reducing the real option value of investment, easing financial constraints, and mitigating agency problems. Additional analysis shows that government digitalization behaves better in NSOEs, unregulated firms, and firms in the regions with higher levels of digital technology infrastructure.