DIGITALIZATION'S IMPACT ON FINANCIAL PERFORMANCE IN CHINESE LISTED FIRMS: ROLE OF COST REDUCTION, EFFICIENCY IMPROVEMENT, AND INNOVATION CAPABILITIES
China's economic growth is increasingly driven by the digital economy, requiring enterprises to enhance their competitiveness through digitalization. This shift is not only a trend but also a critical component of national innovation strategies. However, many businesses face challenges in digital operations due to a lack of understanding of the processes and benefits of digitalization. This study aims to address these challenges by exploring how different digitalization levels affect firms’ financial performance, with a particular focus on cost reduction, efficiency improvements, and innovation capabilities. Data from 276 listed companies in China’s A-share market from 2018 to 2022 were analyzed using a fixed effects model. By incorporating time lags into the analysis, the temporal stability of these relationships was assessed. The research findings indicate that digitalization positively impacts firm performance both in the short term and over slightly longer periods, but this effect diminishes over time, highlighting the need for continuous investment and strategic adaptation to sustain these benefits. The findings further show that cost reduction and efficiency improvement capabilities mediate the relationship between digitalization and firm performance, suggesting that operational efficiencies are the primary drivers of performance gains from digital initiatives. However, innovation capability does not significantly moderate this relationship, implying that while digitalization enhances performance through improved operations, innovation does not substantially alter this effect. Therefore, companies should prioritize leveraging digitalization to optimize operations and continuously adapt their digital strategies to maintain performance benefits over time.
Cost Reduction, Digitalization, Efficiency Improvements, Fixed Effects, Innovation, Time Lag.