Digital Wings: The Effect of Digital Technology Adoption on Market Power

ABSTRACT This paper evaluates the causal impact of digital technology adoption (DTA) on firms' market power using data from Chinese listed manufacturing companies. Employing staggered difference‐in‐differences strategies, we find compelling evidence that DTA has a significant and substantial positive impact on market power. We also find supportive evidence for several underlying channels through which this impact occurs: improved research and development intensity, the upgrading of human capital structure, enhanced manufacturing servitization, and increased external attention. Furthermore, we establish an inverted U‐shaped relationship between the share of DTA firms and resource misallocation within the industry‐province dimension. This study contributes to the existing literature on the digitalization paradox by extending the investigation of the market performance of digital transformation to the context of developing countries.