Digital Transformation and Corporate Innovation in SMEs

Whether and how digital transformation affects innovation in small and medium-sized enterprises (SMEs) remains to be examined. This study aims to answer this question using a sample of SMEs listed on the Chinese National Equities Exchange and Quotations (NEEQ) market from 2012 to 2023. Employing textual mining techniques, this paper measures the degree of digital transformation through keyword frequency analysis of annual reports, while innovation is measured by the number of patent grants. Panel fixed effects models show that digital transformation significantly enhances corporate innovation in SMEs. This relationship remains robust after comprehensive endogeneity and additional robustness tests. Mechanisms analysis reveals that digital transformation alleviates financial constraints and enhances supply chain diversity, enabling SMEs to allocate more resources toward innovation activities. Heterogeneity analysis reveals that the positive effect of digital transformation on innovation is more pronounced for firms located in cities with higher digital finance coverage, in midwestern regions, and in industries with lower digitalization levels. These findings shed light on the power of digital technology, highlighting how its adoption can significantly bolster the innovation capacity of SMEs and drive their growth in a rapidly evolving digital economy.