Government subsidies, digital transformation, and innovation dynamics

This study investigates the role of government subsidies in reshaping corporate innovation pathways through digital transformation, with a focus on China's regional development dynamics. Utilizing panel data from Chinese A-share listed firms (2007–2022) and institutional theory, we uncover three key contributions to regional innovation scholarship. First, government subsidies significantly enhance corporate innovation outcomes, with digital transformation acting as a critical mediator that amplifies subsidy effectiveness across regions. Second, the mechanism operates through dual channels: subsidies not only directly stimulate R&D investments and cross-sector collaborations but also mitigate regional institutional voids by fostering digital infrastructure for knowledge recombination. Third, the findings challenge conventional assumptions about state intervention inefficiency, demonstrating how regional governments strategically deploy subsidies to (a) compensate for localized financial system imperfections, (b) orchestrate spatially embedded innovation ecosystems, and (c) accelerate technological catch-up within global value chains. By integrating macro-institutional analysis with firm-level digital capability development, this study advances a co-evolutionary perspective on state-corporate interactions, emphasizing the spatial dimensions of innovation policy. The results offer actionable insights for regional policymakers designing Industry 4.0 transition strategies and highlight the importance of aligning subsidy programs with digital transformation initiatives to foster sustainable regional competitiveness.