Do political connections facilitate or inhibit firms' digital transformation? Evidence from China's A-share private listed companies.

Abstract

Given the advent of the digital era, digital transformation has become necessary for enterprise development. Political connections are the most important resources for enterprise development in most countries. However, the impact of political connections on corporate digital transformation has yet to be verified. This study uses ERNIE, a large language model, to construct a measurement of corporate digital transformation from the perspective of digital technology application through a textual analysis of the annual reports of A-share privately listed companies from 2008 to 2020 and analyzes the impact of political connections on corporate digital transformation and its mechanism of action. The findings demonstrate that political connections have a significant inhibitory effect on corporate digital transformation. This conclusion still holds after a series of robustness and endogeneity tests. The mechanism analyses demonstrate that political connections primarily affect corporate digital transformation through three mechanisms: weakening risk, inhibiting innovation, and enhancing resource crowding. We theoretically expand the understanding of the economic impact of political connections and provide new ideas for accelerating enterprise digital transformation from the perspective of policy makers.