Digitalization and firm performance: channels and heterogeneities

In this paper we develop a text-based measure of digitalization using firms’ annual reports with which we examine the effects of digitalization on firm performance using a dataset covering manufacturing and service firms. Our findings show that digitalization increases profitability in manufacturing firms by improving the efficiency of asset utilization to generate sales, yet it has no significant effects on overall profitability in service firms. It is because, on the one hand, digitalization improves asset utilization in these service firms while, on the other hand, cutting into their profits from sales. We also find evidence suggesting that digitalization enhances performance more for firms operating in highly competitive industries, smaller firms and firms with fewer skilled workers. Finally, our main results are robust to the use of instrumental variable estimation, the inclusion of R&D expenses or spatial autocorrelation term as a confounder, the use of mediating model, and the use of alternative fixed effects.