Does digitalization crowd out environmental protection investment? Evidence from heavy-polluting enterprises

Heavy-polluting enterprises face a dual challenge: they are under growing pressure to pursue digitalization while also being required to increase environmental protection investment. Although prior studies generally emphasize the positive role of digitalization in promoting green transformation, limited attention has been paid to whether digitalization may crowd out other strategic investments under resource constraints. Drawing on the resource-based view, this study examines the effect of digitalization on environmental protection investment in Chinese A-share listed heavy-polluting enterprises. Using panel data from 2010 to 2022, we construct a text-based measure of firm digitalization from the Management Discussion and Analysis sections of annual reports and estimate a series of models, including OLS, DID, PSM, and 2SLS. The results show that digitalization significantly reduces firms’ environmental protection investment, suggesting a strategic trade-off in resource allocation. This crowding-out effect is weaker for firms with higher cash holdings, but stronger for firms facing greater financing constraints and more intense market competition. Further analyses show that environmental regulation mitigates this negative effect, whereas managerial short-term incentives and short-horizon shareholder pressure tend to intensify it. This study contributes to the literature by revealing a previously underexplored internal cost of digitalization, namely its potential to crowd out environmental protection investment in resource-constrained firms. It also enriches research on the relationship between digitalization and environmental performance by showing that the effect of digitalization is conditional on firm characteristics and institutional contexts. The findings provide implications for policymakers and managers seeking to better coordinate digital transformation and environmental responsibility.