Navigating digital frontiers: The impact of China's cybersecurity law on corporate digital innovation

Abstract

In this paper, we find that after the enactment of China's Cybersecurity Law, firms in core digital industries produce more digital innovation than those in industries with lower digital adoption. Leveraging this regulatory shift as a quasi-natural experiment, we examine its impact on corporate digital innovation using a text-based analysis of annual reports. The promotional effect of privacy regulations on digital innovation resembles the Porter hypothesis, which addresses the positive effect of environmental regulations on innovation. Our study delves into the nuanced dynamics, revealing that firms facing high market competition, customer concentration, and fewer financial constraints prioritize digital innovation. This research contributes by highlighting how strengthened data privacy regulation promotes firms' digital innovation, fostering sustained growth and productivity in the digital era.