Digital Industry Agglomeration and Firm Innovation: Theory and Evidence

ABSTRACT With the rapid development of the digital economy, digital industry agglomeration has become a key driver of firm innovation. This study develops a theoretical framework distinguishing between complex innovation and simple innovation from the perspective of data elements and examines the mechanisms through which digital industry agglomeration affects innovation. Using panel data of Chinese A‐share listed firms from 2013 to 2021, we find that digital industry agglomeration significantly promotes firms' overall innovation, as well as both complex innovation and simple innovation. Moreover, firms' absorptive capacity positively moderates this relationship, with a stronger effect on complex innovation than on simple innovation. The innovation‐enhancing effect of digital industry agglomeration is more pronounced in regions with lower marketization, varies with the intensity of environmental regulation—promoting complex innovation under stricter regulation and simple innovation under looser regulation—and is stronger in regions with higher government intervention. In addition, digital industry agglomeration generates significant positive spatial spillovers that enhance innovation in neighboring regions. These findings provide new theoretical and empirical evidence on the relationship between digital industry agglomeration and firm innovation, highlighting the importance of fostering digital industry agglomeration and strengthening firms' absorptive capacity to stimulate innovation.