Enterprise digitalization, business strategy and subsidy allocation: Evidence of the signaling effect

Abstract

Government subsidies are often used to overcome market imperfections that constrain investment and other business activities. Since the Chinese government proposed the “Internet Plus” action plan in 2015, many companies in a number of traditional industries have made significant efforts toward enterprise digitalization. Our paper investigates the signaling effect of enterprise digitalization on government subsidy allocation. Using a panel dataset of Chinese listed enterprises from 2013 to 2018, our fixed effects model shows a significant positive relationship between companies' digitalization efforts and the amount of government subsidies they receive. Furthermore, our analysis highlights the role of business strategy in moderating this relationship. These findings suggest that enterprise digitalization efforts can send valuable signals to the government agencies responsible for subsidy allocation.