Digital M&A triggers innovation: When the going gets tough, the tough get going

As an emerging digital investment behavior, digital mergers and acquisitions (M&A) have garnered significant attention. However, research examining the impact of digital M&A on the decision-making and performance of connected enterprises remains limited. This study employs textual analysis to develop indicators of digital M&A, assessing their impact on and mechanisms for fostering innovation among upstream suppliers. The findings reveal that a one standard deviation increase in downstream firms’ digital M&A activity is associated with a 2.16% increase in innovation investment and a 10.45% increase in innovation output among upstream firms. The study highlights that the bargaining power accrued through digital M&A significantly drives upstream innovation, with knowledge and resource transfers being particularly beneficial when suppliers possess high absorptive capacity. However, the positive effects on innovation may be mitigated by the “digital divide” and excessive reliance of upstream firms on the supply chain. Upstream innovation is shown to enhance supply chain resilience and contribute to overall quality and sustainable development. This research provides valuable insights for enterprises within the supply chain to strengthen their sustainable development capabilities, thereby supporting the long-term, high-quality progression of the supply chain ecosystem.