Digital Transformation and Firm Performance: Evidence from China

Abstract

In the modern world characterized by a high rate of technological change, digitalization has also turned out to be a strategic requirement of businesses in different parts of the world. The paper discusses the connection between digitalization and the performance of the firms in the Chinese manufacturing industry, which is one of the largest manufacturing industries in the world. It gives emphasis upon five critical digital investment areas: IT infrastructure (software and hardware), digital marketing, e-commerce, data analytics, and cybersecurity. Analytical work based on one 1,796-firm-year observations balanced panel dataset and a hybrid approach of fixed-effects regression and advanced machine learning (XGBoost, LightGBM) provides strong, highly accurate results (R² = 0.989). Genetic algorithms consequently optimize functionality of the model through feature evolution. The results indicate a definite performance hierarchy: the strongest predictor (relative importance = 1.0000) is the investment in hardware and software, next come e-commerce (0.1958), and the last one is digital marketing (0.1587). The minimal direct impact can be seen on cybersecurity (0.0100) and data analytics (0.0032). Based on Shapley value analysis, the impact of every component appears relative to the situation at hand. The paper focuses on how IT infrastructure is a prerequisite toward successful digital transformation. Based on the theory of Resource-Based View and TOE, it provides a theoretical basis and practical advice to managers and policymakers mainly in developing economies on the need to ensure that core infrastructure should be placed at the top in terms of priority so as to see the full benefits of digitalization.