A study on the impact of the digital economy on China's manufacturing upgrading

Zhong, Ni (2025) A study on the impact of the digital economy on China's manufacturing upgrading. PhD thesis, UTAR.

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Abstract

China has long held the position of the “world's factory,” however, its manufacturing sector remains concentrated at the lower end of the global value chain. This structural limitation, combined with rising domestic and international challenges, has made manufacturing upgrading an urgent national priority. In this context, the digital economy has emerged as a key driver in advancing manufacturing upgrading. However, existing studies often lack comprehensive measurement systems and fail to systematically examine the mechanisms linking digital economy development to manufacturing upgrading. This study aims to examine the impact of digital economy development on manufacturing upgrading in China, investigate regional heterogeneity in this relationship, and identify the mediating roles of technological innovation, human capital, and transaction costs. A multidimensional framework is developed to measure manufacturing upgrading, comprising three key dimensions, namely manufacturing structural upgrading (MUS), manufacturing efficiency upgrading (MUE) and manufacturing environmental upgrading (MUC). The digital economy is measured using an indicator system comprising four dimensions and seventeen indicators, constructed through literature review and content analysis. The system Generalised Method of Moments (GMM) model is employed to test the impact of digital economy development on MUS, MUE and MUC. Furthermore, this research conducts the heterogeneity analysis and mediating effect analysis based on the GMM model. Results show that digital economy development significantly promotes MUS and MUC but has a negative effect on MUE. The negative effect may be due to the adoption of digital technologies requires significant adjustments in manufacturing processes, leading to a transitional period where inefficiencies may arise. Digital technology may weaken labour-intensive manufacturing' s competitiveness which China relied on, hindering labour productivity gains. Regional analysis reveals that all three dimensions are positively influenced by digital economy development in the eastern region, while the effects are mixed in the central and western regions. Mediation analysis indicates that technological innovation, human capital, and transaction cost mediate the relationship between digital economy and both MUS and MUE, while only transaction cost mediates the effect on MUC. The findings highlight the need for region-specific policies to enhance digital infrastructure, human capital, and institutional efficiency to fully harness the benefits of digital economy development in manufacturing upgrading. Further, policies should be emphasised to promote the positive impact of DE on MUS and MUC through strengthening technological innovation, enhancing human capital and reducing transaction costs. Keywords: Manufacturing upgrading, digital economy, indicator system, dynamic panel model, mediating effect Subject Area: HD9720-9975 Manufacturing industries

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