Driving digital innovation through quality incentives: Evidence from Chinese cities in the digital transformation era

The digital era has fundamentally reshaped the innovation landscape. Contextually, quality incentive policies have gained prominence as pivotal instruments for driving technological advancement. This study investigates the causal impact of government quality incentives (GQI) on urban digital innovation (UDI) in China, exploiting the introduction of quality awards as a quasi-natural experiment. Drawing on panel data from 278 cities between 2000 and 2020, the analysis employs difference-in-differences, mediation, and threshold models. Our results show that GQI significantly propels UDI. Heterogeneity analysis reveals that this effect was most robust in the eastern and central regions, in cities with low digital attention, and in those with relatively developed economies. Crucially, the local GQI exerts positive spatial spillovers, fostering digital innovation in geographically and economically proximate areas. The mechanism analysis indicates that GQI promotes UDI by bolstering digital infrastructure and industrial upgrading. Additionally, a double-threshold effect of intellectual property protection (IPP) is identified, indicating a non-linear relationship between IPP and policy effectiveness. These findings provide empirical evidence for leveraging quality incentives for digital transformation in developing economies.