The double-edged nature of merchant guild culture: how informal institutions shape firms’ heterogeneous digital innovation

Radical digital innovation is central to the digital competitiveness of emerging markets and the evolution of global competition. Yet incumbent firms often prioritise incremental over radical digital innovation, constraining the development of sustainable digital advantage. Drawing on new institutional economics and institutional logics theory, we investigate how merchant guild culture (MGC), as an informal institution, shapes firms’ incremental and radical digital innovation. Using information on China’s ten major Ming-Qing merchant guilds and a panel of Chinese A-share listed firms from 2012 to 2023, we construct a geographic proximity metric to measure MGC at the firm level. We find that MGC fosters incremental but inhibits radical digital innovation, revealing a clear double-edged effect. Mechanism analyses show that MGC promotes incremental digital innovation by enhancing contractual compliance and risk-taking, whereas it suppresses radical digital innovation by strengthening dependence on government-business ties and customer relationship lock-in. Furthermore, the double-edged effects are primarily driven by inland MGC and commodity-circulation-oriented MGC, and are more pronounced in lower-informatization areas, firms with weaker managerial incentives, and firms with more distracted institutional investors. Our findings identify MGC as an important institutional driver of structural imbalance in digital innovation and the associated decline in firm value.