Digital transformation and SME innovation: The mediating role of financing constraints

Abstract

This study explores the impact of digital transformation on the innovation of small and medium-sized enterprises (SMEs). Based on 2018–2024 firm-level datasets, our results verify that digital transformation delivers remarkable promotional effects on SME innovation, improving innovation across both quantity and quality dimensions. From an economic perspective, a one-standard-deviation increase in digital transformation brings a 3.5% gain in innovation quantity and a 5.7% lift in innovation quality. Specifically, digital transformation fosters more patent applications and grants, and also increases the technological value of patents. Financing constraints are found to partially mediate the relationship under investigation. Digital transformation can alleviate information asymmetry, enhance the credibility of enterprises, and thus alleviate financing constraints and promote more continuous innovation activities. Further heterogeneity analysis shows that the positive effect of digital transformation on innovation is significantly stronger for non-state-owned enterprises (non-SOEs) than for state-owned enterprises (SOEs) in terms of ownership. This could be because non-SOEs are more market-sensitive and have stronger incentives to transform. As for regional heterogeneity, digital transformation has a significant effect on promoting innovation in the eastern region, and also exerts a positive effect in the west, with a stronger marginal impact. This study builds theoretical bases and implementable guidance for enterprises, regulators, and financial lenders, helping SMEs overcome innovation challenges and encouraging the digital and real economies to become more deeply intertwined.