Digital product trade liberalization and enterprises’ digital innovation in China——Evidence from the ITA expansion

• China’s tariff levels on IT products have been significantly reduced since the ITA expansion. • Product tariff rate and firm-level customs data are utilized to construct firm-level import tariff exposure. • Tariff cuts caused by ITA expansion increase enterprises’ digital innovation . • Digital product trade liberalization can relieve enterprises’ financial constraints and promote market competition. This paper investigates the impact of the Information Technology Agreement (ITA) expansion on enterprises’ digital innovation, utilizing a sample of Chinese listed firms between 2013 and 2019. We find that tariff reduction of IT products increases digital innovation activities of enterprises. Our results suggest two mechanisms through which the trade liberalization of IT products promotes enterprises’ digital innovation, one is to ease firms’ financial constraints and the other is to improve market competition. Our findings contribute to the growing literature examining the real impacts of IT product trade liberalization.