Examining the dynamics of digital economy transition and sustainable innovation: A total factor productivity-based approach in prefecture-level cities of China

Abstract

This investigation explores the impact of digital economy transition (DET) on sustainable innovation total factor productivity (SITFP) across China's prefecture-level cities from 2007 to 2019. Addressing critical gaps in urban-level data and the nonlinearity of effects, the research employs a spatial Durbin model (SDM) to capture direct and spillover influences, complemented by threshold regressions to identify key transition points. Findings indicate that DET not only directly enhances SITFP but also generates significant spillover benefits in neighboring cities, emphasizing the role of interregional digital infrastructure diffusion. Moreover, threshold analyses reveal distinct breakpoints beyond which the positive effects of DET on innovation productivity become more pronounced. The investigation further underscores the function of FER and IER in amplifying digital transformation benefits, with regulatory rigor and public awareness acting as key enablers. Subgroup analyses suggest that economically advanced regions and resource-dependent cities experience the most substantial improvements, while certain areas exhibit weaker or even adverse spillover effects. This observed heterogeneity highlights the importance of tailoring policy interventions to the unique economic and infrastructural characteristics of each region. Through the integration of spatial econometric techniques and threshold modeling at the urban scale, this study advances our understanding of how digital transformation, environmental regulation, and innovation interact in diverse city contexts. The results carry significant policy relevance, advocating for strategic digital investment, strengthened regulatory frameworks, and enhanced cooperation among cities to fully realize the benefits of sustainable innovation.