Enterprise Digital Transformation and Compliance in Cross-Regional Development: A Dynamic Capabilities Perspective

Abstract

The cross-regional development of enterprises has comparative advantages, but it also brings a new challenge to internal control. To address this challenge, this study suggests enterprise digital transformation as a solution and empirically tests the effect of enterprise digital transformation on the violation of nonlocal subsidiaries as a proxy of compliance in cross-regional development. Using the unique data from the internal control survey questionnaire of Chinese listed companies, this study measures the level of enterprise digital transformation. The empirical results reveal a significant negative correlation between the level of enterprise digital transformation and the degree of violation of nonlocal subsidiaries. The findings remain robust after a series of heterogeneity tests. The mechanism test reveals that enterprise digital transformation strengthens the governance over the violation of nonlocal subsidiaries by alleviating information asymmetry and improving internal control quality. The heterogeneity analysis addresses the issues regarding the factors influencing the effect of enterprise digital transformation including strategic focus, technical input-efficiency balance, and the role of organizational culture. And the results of heterogeneity analysis indicate that the governance effect of enterprise digital transformation is more pronounced at the business level rather than the functional level and at the transformation stage where technical investment and efficiency are balanced. Additional analysis indicates that the governance effect of enterprise digital transformation is more pronounced in nonlocal subsidiaries established through autonomous investment. Furthermore, economic benefit analysis reveals that enterprise digital transformation promotes cost reduction and the increase in efficiency in nonlocal subsidiaries. This study enriches the quantification and economic consequences of enterprise digital transformation, and it also offers valuable implications for promoting digital transformation in traditional enterprises and strengthening internal control and compliance in the context of cross-regional development.