Digital Transformation in the Market Competitive Environment: Impact of Enabling Enterprise Innovation

Abstract

In the context of the rapid advancement of the digital economy and its deep integration with the real economy, enterprise digital transformation emerges as a pivotal force driving sustainable innovation. Nonetheless, this transformation encounters significant challenges, notably the “transformation dilemma of digital” and the “innovation paradox of digital”, impeding both digital transformation and innovation within enterprises. Existing literature has overlooked the influence of market environments on enterprise digital transformation while predominantly focusing on its enabling effects rather than considering its potential burdens.

This paper addresses these gaps by constructing a theoretical framework that elucidates the interplay among market power, digital transformation, and innovation. It demonstrates the phenomenon of reduced innovation caused by excessive digital transformation in the market power. Through empirical analysis using data from Shanghai and Shenzhen A-share manufacturing companies spanning from 2007 to 2021, the study examines the nonlinear indirect effect of enterprise digital transformation on the relationship between market power and innovation output. Results indicate that while market power facilitates digital transformation, excessive transformation can hinder innovation output, with an optimal inflection point for innovation empowerment. We show that digital transformation indirectly impacts the influence of market power on innovation output. Specifically, companies with greater market power can achieve digital transformation more efficiently and rapidly. However, excessive digital transformation can impose burdens and impede innovation output within enterprises. Further analysis demonstrates that government interventions adjust the nonlinear relationship between digital transformation and innovation empowerment to varying extents through industrial support and property rights mechanisms.

Contributions of this research include expanding the endogenous growth model to incorporate the digital decision index, thereby demonstrating the nonlinear relationship between digital transformation and innovation performance within market structures. Moreover, it offers the first empirical evidence of the impact of enterprise market power on digital transformation decisions and tests the innovation paradox with a substantial sample size. Furthermore, the study highlights the guiding role of government functions, providing insights for policy formulation to address barriers to digital transformation and foster innovation.

Overall, this paper provides a theoretical basis for the scientific understanding of the relationship between market structure, digital transformation, and innovation performance. Its findings enrich the literature on industrial organization and digital transformation, offering practical implications for improving market structures and facilitating the deployment of innovation strategies in industrial digital transformation. It provides valuable guidance for policymakers to navigate enterprise digitalization challenges and alleviate digital and innovation insufficiencies resulting from intense competition.