Research on the impact of firms' perception of economic policy uncertainty on their digital transformation

• Main Author: MENG, Fanwei
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: perception of EPU; digital transformation; financing constraints; dynamic capabilities; Accounting
• Online Access: https://ink.library.smu.edu.sg/etd_coll/646; https://ink.library.smu.edu.sg/context/etd_coll/article/1644/viewcontent/GPBF_AY2024_PhD_Fanwei_MENG.pdf
• Institution: Singapore Management University

In an era characterized by globalization and digital advancement, economic policies play a critical role in the governmental regulation of economic activities. These policies are characterized by uncertainty due to a variety of internal and external factors, including international politics, economic cycles, and market fluctuations. The way firms, as microeconomic entities, perceive economic policy uncertainty (EPU) has a direct impact on their investment decisions and innovation activities. Nowadays, digital transformation has emerged as a vital strategy for firms seeking to enhance their competitiveness and adapt to evolving markets. However, digital transformation often comes with challenges, such as high input costs and long payback periods. Throughout this process, a firm's perception of EPU may affect its adoption of digital technologies, intensity of digital investment, and progress of digital transformation. Additionally, financing factors and dynamic capabilities are key variables influencing both firms' digital transformation and their perception and responses to EPU. Specifically, in terms of financing factors, financing constraints can hinder a firm's capabilities in financial integration and digital investment amidst EPU. Excessive debts and financial risks can further restrict a firm's agility in responding to market and technological shifts, thereby inhibiting firm innovation and investments in digital fields. With respect to dynamic capabilities, absorptive capability enables a firm to swiftly obtain and apply external technologies and knowledge, while innovative capability spurs a firm's development of new digital products and services. Furthermore, adaptive capability allows a firm to rapidly align its strategies with changing external environments, including policies and markets. Based on the above content, the study explores the impact of firms' perception of EPU on their digital transformation from a micro perspective, investigating the mechanisms through which financing factors and dynamic capabilities mediate this impact. In contrast to existing studies that predominantly address macro-level EPU, the findings from the study offer both theoretical value and practical guidance for firm management. The study reviews existing research outcomes, organizing relevant literature on the perception of EPU and firms' digital transformation chronologically and theoretically. It elucidates the concepts of both the perception of EPU and digital transformation, their impacts on firm development, and their interconnections. Furthermore, it examines the effects of financing factors and dynamic capabilities. Grounded in uncertainty theory, strategic choice theory, dynamic capabilities theory (DCT), and resource-based theory (RBT), the study proposes research hypotheses regarding the impact of a firm's perception of EPU on its digital transformation and the moderating effects of financing factors and dynamic capabilities on this impact. The study establishes a robust theoretical foundation through a thorough analysis and synthesis of existing literature and theories, as well as a deep understanding of prevailing academic perspectives and research trends. In terms of empirical research, the study focuses on firms listed on the Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE) in China. To measure the dependent variable—digital transformation, the study draws on established methodologies of text and financial data analyses employed by previous scholars, comprehensively evaluating firms' digital transformation levels from "words" and "actions" perspectives by using tools including Support Vector Machine (SVM), Feedforward Neural Network, factor analysis, and Entropy Weight Method. To measure the independent variable—perception of EPU, the study builds on achievements by scholars such as Nie Huihua and sources listed companies' management discussions in TXT from the CNRDS database. The Jieba word segmentation technique is utilized to extract word frequency and sentences as basic data. The word frequency proportion and sentence proportion are used to measure a firm's perception of EPU. The study also examines the mechanisms of financing factors and dynamic capabilities in the context of the impact of firms' perception of EPU on their digital transformation. The chosen moderating variables for financing factors include financing constraints, excessive debts, and financial risks, while for dynamic capabilities encompass absorptive capability, innovative capability, and adaptive capability. Subsequently, the study develops both the main and moderating effect models. To ensure data applicability and model reliability, descriptive statistical analysis and basic tests are conducted on the variables. A fixed effects model regression is then applied to test the research hypotheses, supplemented by robustness testing to validate the validity and robustness of the model. The study also investigates the moderating effects of financing factors and dynamic capabilities, in addition to exploring the impact of digital transformation on corporate performance, thereby enriching the research findings. Through a synthesis of theoretical research and empirical analyses, the study reaches the following conclusions: First, the perception of EPU has a significantly negative impact on firms' digital transformation; specifically, higher levels of perception of EPU correspond to more substantial inhibiting effects on digital transformation. Second, financing factors (financing constraints, excessive debts, and financial risks) and dynamic capabilities (absorptive capability, innovative capability, and adaptive capability) have significant moderating effects on the pathways through which the perception of EPU affects firms' digital transformation. Based on these conclusions, the study offers several policy recommendations for both firms' digital transformation and governmental policy initiatives. On the one hand, firms should recognize the negative impact of the perception of EPU on digital transformation and establish dynamic monitoring mechanisms to track market and policy changes. They should focus on enhancing their financing and dynamic capabilities, improving financial management, and optimizing financial structures to better navigate shifts in external environments such as economic and policy conditions during digital transformation. On the other hand, government departments should acknowledge the critical influence of policy stability on firms' digital transformation. By fostering a stable and transparent policy environment and providing clear, coherent policy guidance, they can enable firms to successfully achieve digital transformation and pursue high-quality development.