How Digital-Economy Policy Boosts TFP: Evidence and Quadruple Mechanisms from China’s Manufacturing Sector

Do China’s provincial digital-economy policies causally improve firm productivity and manufacturing sustainability? This paper addresses this question using a panel of Chinese manufacturers from 2008 to 2023. We first construct a novel, manually coded index of provincial policy intensity. We then use an instrumental-variable strategy, based on historical post-office density and governors’ STEM backgrounds, to identify causal effects. We find that digital-economy policy has a positive and significant impact on firm-level total factor productivity (TFP). Doubling the cumulative policy stock raises TFP by approximately 3%. This effect is transmitted through four key mechanisms: enhanced innovation quality, tax incentives, targeted digital subsidies, and knowledge spillovers. These channels support sustainable, innovation-led upgrading rather than mere input expansion. We also find the TFP gains are much larger in provinces with strong fiscal capacity and in firms with high digital absorptive capabilities. This paper contributes by providing clear causal evidence of the policy–TFP link and, crucially, by quantifying the four specific mechanisms that translate digital policy into durable, productivity-based sustainability in manufacturing.