Social insurance contribution and firms’ digital transformation: Evidence from China

Abstract

ABSTRACT We examine the relationship between social insurance contribution and firms’ digital transformation by using the data of Chinese firms listed in the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) from 2007 to 2017. We find that social insurance contribution has increased the degree of firms’ digitalization transformation. We also explore two important mechanisms through which the Social Insurance Law (SIL) affects firms’ digital transformation: cash flow effect and factor substitution effect. The results indicate that the positive impact of the social insurance contribution on firms’ digitalization is more significant for firms that are not state-owned, have smaller sizes, labour intensive, with low tax burden, low financial leverage, and low productivity. One important implication of our study is that firms’ digitalization can be a strategic choice made by labour-intensive firms to overcome rising cost of labour as a result of the SIL.