Digital Transformation and Firm Innovation: A Dual-Path Analysis of R&D Investment and Governance Mechanisms

With the digital economy advancing at a fast pace, digital transformation plays a pivotal role in reinforcing firms’ innovation capability and promoting high-quality development. This study analyzes Chinese non-financial publicly listed firms on the A-share market over the period 2009–2023. Based on text mining of annual reports, this study constructs an index capturing digital transformation and empirically evaluate its impact on innovation output with firm and year fixed effects. The estimates suggest that digital transformation meaningfully increases firms’ innovation output; the inference is unchanged when applying instrumental-variable approaches and conducting extensive robustness checks. Mechanism analysis reveals two parallel channels: (1) the R&D investment mechanism, characterized by improvements in R&D intensity, capitalization rate, per capita efficiency, and investment growth; (2) the governance environment mechanism, reflected in enhanced internal control, improved information disclosure quality, and strengthened audit supervision. Once firms are stratified by characteristics, the estimated positive effect of digital transformation is most pronounced for firms with low financial constraints, large size, eastern locations, and state ownership. This study identifies both direct and indirect mechanisms linking digital transformation to innovation and highlights how firm- and region-specific features condition the magnitude of this effect, thereby offering empirical implications for corporate digitalization strategies and policy design.