THE IMPACT OF DIGITALIZATION ON INNOVATION 1

The Divergent Effects of Early-Stage Digitalization on Product and Process Innovation:

Sectoral Evidence and Strategic Imperatives for Vietnamese Firms

Ngo Manh Thu and Nguyen Duc Son

Department of Applied Sciences, VNU-International School

INS310001: Project II

Duong My Hanh, MSc

May 11, 2025

THE IMPACT OF DIGITALIZATION ON INNOVATION 2

Abstract

This study explores the impact of digitalization on innovations in Vietnam enterprises.

Empirical analysis utilizes the World Bank Enterprise Surveys (WBES) dataset across years

2005, 2009, 2015, and 2023, with the firms primarily operating in manufacturing and service

sectors. We employ an instrumental variable (IV) probit model to address potential

endogeneity concerns in the relationship between technology adoption and innovation

outcomes. The study finds that, in the context where digitalization in firms is only

implemented in the early stages, digitalization has a significant negative impact on product

innovation while the relationship between digitalization and process innovation is positive.

Empirical results demonstrate that the influence of digitalization on innovation activities is

consistent across firm size, ownership types, and exporting versus non-exporting enterprises.

Moreover, the study also find that skilled labor has an indirect effect on innovation activities

at firms. Based on these findings, the study offers some recommendations.

Keywords: digitalization, product innovation, process innovation, Vietnam.

THE IMPACT OF DIGITALIZATION ON INNOVATION 3

Introduction

In recent years, the rapid advancement of science and technology drives the

emergence of the digital economy in the context of extremely rapid changes in the global

economy. In that context, an important condition for businesses that want to maintain

competitiveness and drive innovation is to grasp the process of digital transformation, which

helps improve business models and company operations. From production to marketing and

customer service, the fourth industrial revolution is defined by incorporating digital

technology into all facets of corporate operations (Gong & Ribiere, 2023; Zhao et al., 2015).

The integration of technologies such as artificial intelligence, big data, cloud computing, and

blockchain helps businesses improve their company capabilities and streamline operations

and forces them to reassess their strategic priorities and innovation capabilities in the context

of the global industry (Li et al., 2023; Wu et al., 2024). This process reshapes the global

economy and transforms how companies create and promote goods and services. Digital

transformation has the potential to significantly boost efficiency, drive innovation, and

enhance economic prospects. Notably, some businesses show initial progress in innovation

capabilities and production efficiency thanks to their efforts in implementing digital

transformation. This explains why businesses quickly adopt digital transformation to drive

innovation through digital technology and new business models (Li et al., 2023). Empirical

evidence shows that digitalization strategies help people understand the changes that digital

technology brings to businesses, thereby recognizing the importance of effective digital

transformation in today's society (Chanias & Hess, 2016). To adapt to the trend of digital

transformation, businesses must accept changing outdated, inefficient traditional business

models that have not yet optimize costs and processes, which remain cumbersome (Kotarba,

2018).
THE IMPACT OF DIGITALIZATION ON INNOVATION 4

However, while the strategic potential of digital transformation is widely recognized,

the implementation of digital transformation, especially in countries classified as developing

economies, is still hindered by factors such as people, cultural customs, employee resistance

to change, lack of appropriate knowledge and best practices, insufficient resources, limited

infrastructure, outdated technology, and low-skilled labor (Shvertner, 2017). The digital

economy is globally recognized as a "new driving force" driving economic development,

creating new industries and reviving traditional industries. For many countries, this

transformation is the key to improving the quality of economic growth (Li et al., 2023). For

instance, one of the rapidly developing economies in Southeast Asia, Vietnam, illustrates the

dual potential and challenges of digital transformation. Vietnam aims to be among the top 50

countries in the world and ranks third in ASEAN in the digital economy by 2030. To create a

foundation for seizing opportunities from the Fourth Industrial Revolution, the Vietnamese

government makes efforts to achieve this goal by focusing on building a legal framework for

the digital economy. In all areas of the socio-economic sector, strong policies and processes

support digital transformation, promote innovation, and protect intellectual property rights.

An open and honest investment environment strongly attracts both domestic and international

capital for growth and technological innovation . In the context of digital transformation in

Vietnam receiving more attention than ever, the Government continues to actively implement

policies and programs to support businesses in their digital transformation efforts.

Additionally, the National Innovation Center (NIC) highlights the economic potential of

digitalization in Vietnam, predicting that "the annual economic impact of digital technology

in Vietnam could reach approximately 74 billion USD by 2030"1. This forecast highlights the

importance of proactively pursuing comprehensive digitalization in all aspects of Vietnamese

businesses to drive sustainable growth. The government implements programs such as the

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THE IMPACT OF DIGITALIZATION ON INNOVATION 5

National Digital Transformation Program by 2025, with a vision towards 2030, signed by

Prime Minister Nguyen Xuan Phuc in Decision No. 749/QD-TTg on June 3, 2020, and

commitments under the EU-Vietnam Free Trade Agreement (EVFTA), which lay a solid

institutional foundation for the digital transformation and innovation process (D. C. Nguyen

& Dao, 2023).

However, the adoption of digital technology in Vietnamese enterprises shows

significant disparities, leading to an increasing gap in innovation capabilities (D. C. Nguyen

& Dao, 2023). Surveys indicate that more than 57% of small and medium-sized enterprises in

Vietnam face difficulties in implementing digital transformation, mainly due to resource

constraints, outdated technology, and limited human resources (Luong et al., 2024; Nguyen et

al., 2021)

Although the government recognizes the crucial role of digitalization and innovation

for the economy and businesses through government incentives and policy decisions on

digital transformation and innovation, and there are many international studies exploring the

relationship between digital transformation and innovation, currently, in Vietnam, there is still

no official research examining the relationship and specific impact of digital transformation

on innovation, especially at the enterprise level. That gap drives our research. In this study,

we use data from the World Bank's enterprise surveys on Vietnamese companies, including a

dataset of 4,224 Vietnamese enterprises, to explore this relationship in four phases, including

2005, 2009, 2015, and 2023. Using this dataset, we develop a linear regression model to

empirically test the relationship between digital transformation and innovation in Vietnamese

businesses.

The rest of this article is divided into five sections. The second part provides an

overview of the literature and theoretical perspectives, the factors influencing company

innovation, the impacts of digital transformation on business innovation, and the digitization
THE IMPACT OF DIGITALIZATION ON INNOVATION 6

performance and innovation activities in Vietnamese enterprises. This section also describes

the legal framework currently being applied in Vietnam to stimulate digital transformation

and innovation activities of businesses. The third section describes and explains the methods

used to complete this research. The fourth section presents and explains the research results.

And finally, the fifth part is the discussion of the results and the limitations of this study.

Literature review

The influential factors of firm innovation

Corporate innovation is crucial for the development of businesses. An innovative

organization may provide items that satisfy the dynamic requirements of the market and

customer expectations. Consequently, it is feasible to enhance the competitiveness of firms in

the market, particularly in the present, perpetually intense competitive landscape. Therefore,

establishing robust innovation is a critical undertaking for businesses and policymakers. Firm

innovation is affected by several internal and external elements of the organization (Doan,

2023). Government grants, R&D funding, and ownership structure are factors that influence

business innovation. For a long time, there have been debates about the positive impact and

"trap" of government subsidies. Government subsidies not only help promote innovation

investment at the company level and drive the company's technological innovation activities

but also compensate for market failures in the process of innovation (Lin & Luan, 2020; Liu

et al., 2020). However, on one hand, scholars who hold a negative view of government

subsidies believe that selective government subsidies have a crowding-out effect on company

innovation (Wu et al., 2022). On the other hand, the conclusions of many other scholars show

that the company's R&D investment has a positive impact on innovation (Alam et al., 2020;

Xu et al., 2021). The ownership structure influences the company's creativity; the preferences

of controlling shareholders guide the company's strategic innovative decisions. Major

shareholders' stability gives them the drive and authority to oversee corporate managers'
THE IMPACT OF DIGITALIZATION ON INNOVATION 7

activities, gain greater advantages from technological innovation, boost innovation

investment, apply technology accumulation, and aggressively accept innovation risks (Li et

al., 2023). In the extensively studied academic literature, factors influencing a company's

innovation capability are identified. These factors, which play a crucial role in driving

innovation, are broadly classified into internal and external determinants.

Internal factors

Internal factors encompass the firm’s intrinsic capabilities and resources, which

provide the foundation for innovation activities. The main internal factors significantly affect

the level of innovation, including company size, the education level of managers, company

age, and job growth (Cokgezen & Hussen, 2019; Olurinola et al., 2021). For instance, in

Ethiopia, owner-manager traits influence the expansion of small and medium-sized

businesses. The results reveal that companies owned and managed by people with extensive

prior experience exhibit superior growth (Engidaw, 2021). Failing enterprises relate to

managers lacking drive and dedication about their work, whereas successful companies link to

managers who are passionate about their job (Worku, 2014). Many factors, including

management factors, influence the performance of businesses, particularly small and medium-

sized enterprises (Fetene, 2017). Managers avoid reducing the performance of individuals and

the company by clearly dividing tasks to prevent creating a stressful environment due to

confusion and conflicts among employees (Engidaw, 2021).

Additionally, the key determining factors for the company's innovation potential are

financial resources and human capital, R&D investment, technological capabilities,

organizational structure and culture, and innovation strategy. These factors shape the

company's ability to explore new ideas, develop innovative products, and apply advanced

technologies. Many studies mention the essential role of innovation strategy, technological

capability, and investment in R&D in driving innovation at the enterprise level, along with
THE IMPACT OF DIGITALIZATION ON INNOVATION 8

factors such as business scale, managers' educational background, and company age (Bogetoft

et al., 2024; Tajpour et al., 2024). Simultaneously implementing both product and production

process innovations helps increase production efficiency and reduce costs compared to

businesses that do not participate in innovation. Factors such as financial resources and high-

quality skilled labor play an intermediary role in helping businesses effectively digitalize,

thereby enhancing their innovation capabilities. In other words, businesses find it easier to

access and implement innovative solutions if they have good financial management

capabilities and a skilled workforce proficient in technology. Technological capability is a

crucial factor in determining the creation and maintenance of a competitive advantage based

on innovation for a business. They include the ability to apply modern technology and

implement digital systems. There is a positive impact on innovation demonstrated by R&D

investment. Its important role in driving technological progress and product development is

emphasized in many research papers (Alam et al., 2020; Xu et al., 2021). Moreover, the

ownership structure, which includes the influence of controlling shareholders, significantly

affects a company's investment decisions and technology adoption, shaping the trajectory of

its innovation efforts (Alam et al., 2020).

Eternal factors

External factors create the context in which companies operate, either enabling or

hindering innovation. Customer demand and market requirements are among the most

important external factors. Access to capital, market competition, consumer behavior, and the

broader economic and institutional environment are indeed those external factors. According

to Felin & Zenger (2014), market competition drives companies to innovate to keep a

competitive edge, while consumer preferences guide innovation efforts, which is precisely

what market competition brings. In addition, the development of the local digital industry

plays a crucial supporting role, providing infrastructure and a technological ecosystem that
THE IMPACT OF DIGITALIZATION ON INNOVATION 9

fosters the company's innovation. Government policies and subsidies play a dual role in

influencing innovation. According to Lin & Luan (2020), by stimulating investment in R&D

and encouraging companies to adopt new technologies or participate in the innovation

ecosystem through government subsidies, market failures in the innovation process can be

addressed. The innovation capacity of a company can also be significantly influenced by the

legal framework, intellectual property rights, and innovation policies. The growth of

technology is a significant external element influencing innovation, since it generates new

possibilities or compels enterprises to embrace new technologies to remain competitive.

Government grants and incentives contribute to encouraging businesses to invest in

R&D activities, address issues, and support the commercialization of new technologies.

Besides, some scholars argue that selective government subsidies can have a "crowding out"

effect, where excessive intervention reduces innovation efforts led by companies (Wu et al.,

2022). For example, access to financial resources remains a major barrier for small and

medium-sized enterprises in developing countries, where limited infrastructure and financial

resources hinder innovation activities (Olurinola et al., 2021). The innovation capacity of

companies, by facilitating or hindering access to necessary resources and support, is directly

influenced by the institutional environment, including the legal framework and enforcement

mechanisms. In addition, strong competition in the market encourages companies to

continuously differentiate their products, enhance efficiency, and adopt new technologies

(Felin & Zenger, 2014).

The impact of digital transformation on firm’s innovation

In government agencies, companies, and research institutes, digital transformation is

one of the key drivers of innovation that can be considered important for them (OECD, 2020).

Bringing value to customers, alongside creating opportunities and challenges, is achieved by

changing the operational methods that have existed for a long time within the business (Kraus
THE IMPACT OF DIGITALIZATION ON INNOVATION 10

et al., 2019). Advanced digital technologies such as social networks, mobile platforms, big

data, the Internet of Things (IoT), and blockchain enable companies to redefine business

models, modify core processes, and restructure organizational frameworks (Matt et al., 2015).

Technologies like artificial intelligence (AI), Industry 4.0 machinery, 3D printing, and social

media revolutionize business operations, accelerating innovation across industries (Vaska et

al., 2021). For instance, in the economy of a developing country like Pakistan, business

efficiency in enterprises, especially small and medium-sized ones, is enhanced by the

implementation of digital transformation (Mubarak et al., 2019). The business efficiency of

small and medium-sized enterprises, specifically big data, the Internet of Things design

network, interoperability, and the Cyber-Physical Systems (CPS) network, are the four

influencing factors that are examined in the study (Nguyen et al., 2023). Enterprises store data

more efficiently by using big data in recent decades. Digital transformation not only reduces

costs and increases productivity but also adds value to products. Additionally, people say that

digital transformation helps businesses operate efficiently and adapt to changes in the

business environment, which is why they are actively investing heavily in it (Zealand &

Sirisukha, 2020). In an era where technology is booming and developing rapidly, such as

nowadays, if businesses want to survive long-term and operate efficiently, digital

transformation is almost mandatory. Enterprises will no longer have much of an advantage

over their competitors if simply introducing new products is not enough; the difference lies in

how companies mobilize their resources for innovation activities.

Digital transformation helps companies maximize resource usage, reduce operational

costs, enhance workforce productivity, streamline supply chains, and improve customer

loyalty and satisfaction (Kaufmann, 2015; Loebbecke & Picot, 2015; Rachinger et al., 2018).

It also fosters innovation by facilitating data collection, integration, and application,

supporting the platform economy, and identifying growth opportunities (Vaska et al., 2021).
THE IMPACT OF DIGITALIZATION ON INNOVATION 11

This ongoing revolution reshapes relationships within and between ecosystems, introducing

both new managerial opportunities and challenges (Bresciani et al., 2018; Gustafsson et al.,

2012). Previous studies emphasize the pivotal role of digital transformation in driving product

innovation. Defined as the incorporation of digital technology into corporate procedures,

digital transformation enables companies to create newfangled goods and services (Vaska et

al., 2021). Technologies such as big data, machine learning, and 3D printing redefine

operational approaches, fostering novel value propositions (Bresciani et al., 2021). Disruptive

innovators like Uber and Spotify exemplify how technology adoption leads to groundbreaking

products and services. Empirical evidence confirms a positive correlation between digital

transformation levels and product innovation performance, though the extent of this impact

may vary by industry, firm size, and adaptability (Masoud & Basahel, 2023; Olurinola et al.,

2021; Radicic & Petković, 2023; Zhao et al., 2024). The successful implementation of digital

transformation plays a very important role in promoting economic benefits (Zhang et al.,

2021). From those points, it can be seen that there is a positive relationship between digital

transformation and the innovation performance of businesses (Li et al., 2023). However,

people say that among the reliable factors for innovation, R&D costs are the most important.

They also show that innovation is not significantly impacted by digital technology (Usai et al.,

2021).

In addition, they also show that digital technology has very little impact on innovation

(Usai et al., 2021). Digital transformation's contribution to innovation is multifaceted,

influencing not only product development but also operational efficiency, customer

experience, and IT innovation (Bresciani et al., 2021). For instance, the transformation of

digitalization is more noticeable in enterprises with strong innovation capabilities but may be

limited in smaller firms due to resource constraints (Gaglio et al., 2022; Radicic & Petković,

2023). The regional digital infrastructure and innovation ecosystem significantly moderate the
THE IMPACT OF DIGITALIZATION ON INNOVATION 12

relationship between digital transformation and innovation. Firms located in regions with

advanced digital industry innovation levels may face diminishing marginal innovation returns

(Li et al., 2023). Conversely, a high regional digital innovation environment can create

spillover effects, enhancing the innovation efforts of surrounding firms. Furthermore, the

interplay between servitization and digitalization highlights the synergy in driving innovation

performance. Servitization enhances firm innovation by increasing digitalization levels, with

digital technologies acting as a mediator (Shen et al., 2021). Organizational capabilities such

as learning, coordination, and integration further optimize the outcomes of these strategies,

demonstrating the crucial role of digitalization in advancing innovation.

Legal framework and firm performance in Vietnam's digital innovation

Legal framework

International organizations and friends consider Vietnam to be one of the countries

with the highest growth rates in Asia and the world in recent years. The process of renewal

has helped Vietnam transform from one of the poorest countries in the world into a middle-

income nation with an increasingly high status on the international stage, as assessed by the

World Bank (Nguyen, 2024). However, the country's economic competitiveness is still

inferior to developed nations, largely due to a lack of science and technology in production,

commerce, and low worker productivity. Therefore, strong digital transformation is essential

for leading the region in the Fourth Industrial Revolution and is a fundamental solution for

achieving breakthrough advancements in the new era, narrowing the gap with developed

countries, overcoming the middle-income trap, and moving towards sustainable development.

The digital transformation of business models, the improvement and digital transformation of

management models for production processes and technology processes, the connection of

digital transformation enterprises, and the innovation of new products and services are the

three stages corresponding to the specific technological requirements of the digital

THE IMPACT OF DIGITALIZATION ON INNOVATION 13

transformation process. Previous studies demonstrate the importance of the digital

transformation of businesses, especially for small and medium-sized enterprises in developing

countries (Chen et al., 2021; Wang et al., 2023). To adapt to the changes in the digital era,

businesses need to enhance employee training, facilitate access to and nurture new

technological knowledge, improve innovative thinking, and cultivate digital skills in the

context of rapidly changing technology. By means of this, it provides the advantages that

digital transformation brings to enterprises, especially small and medium-sized ones, in

aspects including economic, environmental, and social dimensions of sustainable firm growth.

The ministries, sectors, and localities promote reforms and issue policies to support

digital transformation in both public and private enterprises; these are implemented in

accordance with the government's directives and orientations on digital transformation.

Digital transformation of the entire economy is what the Vietnamese government is building

and implementing to ensure the country achieves effective and sustainable growth and

development. Current regulations and decrees related to trade are issued by the ministries

within the legal framework. The operation and adjustment of various aspects of the digital

economy and digital transformation are issued at multiple administrative levels through legal

documents. The main goal of the Party and the State of Vietnam is currently to promote

digital transformation and develop the digital economy. Rapid and sustainable growth mostly

depends on science and technology, creativity, and digital transformation; the legal system

has to support innovation, digital transformation, and the creation of new goods, services, and

economic models, which are the goals emphasised by the party and state Vietnam in the

documents of the 13th Party Congress. Identifying key tasks and priority solutions to improve

the legal system, facilitating the country's digital transformation process, is critical. In fact,

the enormous potential of the economic development strategy driven by science, technology,

and innovation, especially the development of the digital economy, is considered an inevitable
THE IMPACT OF DIGITALIZATION ON INNOVATION 14

trend that drives economic growth for Vietnam, which the government recognised before

2020. This fact can be demonstrated through numerous decisions, directives, and laws of the

government aimed at preparing the foundation for the development of the domestic digital

economy. The table below will list the major current policies aimed at promoting the digital

transformation and innovation process of the Vietnamese government.

Vietnam enacts several laws, decrees, and directives to facilitate digital

transformation, including policies that incentivize investment in research and development

(R&D) and digital technology. Public-private partnerships provide a roadmap and support,

helping small and medium-sized enterprises become more competitive in the new economic

environment, playing a crucial role in the digitalization process of these businesses in

government policy. Previous research on government support also indicates that it can yield

several beneficial outcomes at the company level, such as capacity building, performance,

globalization, innovation, and business orientation (Faria et al., 2023). For example, while the

German government strongly encourages technological growth by supporting the

digitalization process of small and medium-sized enterprises, the Vietnamese government

tends to stifle the potential participation of small and medium-sized enterprises and favors

state-owned enterprises more (Radicic & Petković, 2023). In fact, the policies of the

Vietnamese government show a preference for foreign enterprises and state-owned enterprises

over domestic small and medium-sized enterprises.

In summary, the Vietnamese government deeply recognizes the importance of digital

transformation during the booming period of the Fourth Industrial Revolution and establishes

a comprehensive legal framework with numerous resolutions, decrees, and national programs

to encourage businesses to actively implement digital transformation and innovation. From

there, it contributes to laying a solid foundation for the development of the digital economy.

Vietnam sets specific and ambitious goals to rank among the top 50 countries in e-
THE IMPACT OF DIGITALIZATION ON INNOVATION 15

government and digital economy, increases the digital economy's share to 20% of GDP, raises

labor productivity by at least 7% annually, and improves international indicators on

information technology, global competitiveness, and innovation. With the aforementioned

legal foundations, one can see Vietnam's efforts in promoting the digital transformation

process in all aspects to narrow the gap with developed countries and aims for sustainable

development in an era where digital technology is the cornerstone of society.

Firm performance in Vietnam's digital innovation

The creation of primary employment sources and contributions to domestic income

and exports, as well as overall value added, are due to small and medium-sized enterprises,

which account for more than 90% of the total number of companies outside the agricultural

sector in developing countries (Love & Roper, 2015). For instance, small and medium-sized

enterprises account for 98% of all businesses, 40% of the gross domestic product, and 50% of

employment in Vietnam2 . From that, it can be seen that policymakers as well as company

owners and boards of directors are attracted to the development and improvement of the

performance of small and medium-sized enterprises. During the 2021 – 2030 period, one of

the components of the strategic breakthrough is the rapid growth of digitalization, innovation,

science, and technology. Regarding the development of the digital economy, the digital

economy accounts for 20% of GDP, the proportion of the digital economy in each industry

and sector reaches at least 10%, annual labor productivity increases by at least 7%, and

bringing Vietnam into the top 50 countries in information technology (IDI), into the top 50

countries in the Global Competitiveness Index (GCI), and into the top 35 countries in the

Global Innovation Index (GII) are the goals by 2025 to enhance the competitiveness of the

economy (Tran, 2021).

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By 2024, the rapid implementation of the national population database, ensuring

seamless data connectivity between 18 ministries, sectors, and 63 localities, makes

remarkable progress. As of September 2024, more than 537 million data synchronization

instances and over 1.3 billion queries are conducted3. In addition, over 14 million citizens are

integrated into the electronic health record system, 8 million accounts are registered for

accessing the online public service portal, and over 20 million electronic citizen ID cards with

chips are issued. Vietnam climbs to the 71st position out of 193 countries and territories in

September 2024, rising 15 places compared to 2022, according to data from the United

Nations e-Government Survey4.

In addition, Vietnam's Global Innovation Index also rises two places to 44/133, while

the Global Security Index increases by 8 places to 17/19474. Also in 2024, 1.5 million jobs

are created for workers by 51,000 technology companies in the country, generating an

estimated total revenue of 118 billion US dollars for the industry in the first nine months of

the year4. Revenue from software and digital services is reported to increase by 9.9%,

reaching 6.64 billion dollars, while technology product exports are expected to grow by

18.3%, reaching 100.8 billion dollars4. Moreover, in 2023, Vietnam's e-commerce sector is

one of the fastest-growing in the world, with total revenue increasing by 23% to 20.5 billion

dollars4. Not only in the business sector but also in the digital transformation of social and

welfare services, significant progress is made, especially in education and training, healthcare,

social insurance, and administration. Not only that, as of October, more than 82.4% of

households are using fibre optic internet, an increase of 3.3% compared to the same period

last year, surpassing the target of 80% set for 20253. The percentage of people using

smartphones also accounts for more than 87% of the population3. In addition, the launch of

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the largest and most modern data centre by the telecommunications service provider, Viettel

Group, also marks an important milestone that Vietnam achieves in 20243. The advanced

technology equipped at this secure data centre plays an important role in contributing to the

protection of national sovereignty and personal data in Vietnam. Alongside these

developments, semiconductors, artificial intelligence, and 5G chipsets, which are key

technologies of the digital age, are also being heavily invested in by Vietnamese technology

companies with the aim of mastering these critical technologies.

The scale of the global digital transformation market reaches 695.5 billion USD in

2023, and by 2030, this figure is expected to rise to 3,144.9 billion USD with a compound

annual growth rate of 24.1% from 2024, according to data provided by Research and Markets5

. From the data provided on the global digital transformation market, comparing it with

Vietnam, we can see that the level of digital transformation and digital economic growth in

Vietnam is quite strong. The rapid development of Vietnam's digital economy in recent times

is due to the increasingly tech-savvy population, which contributes to the smooth process of

digital transformation. According to data provided by Vietnam’s General Statistics Office, the

digital economy market in Vietnam is expected to reach 45 billion dollars by 2025, and by

2030, this figure will reach between 90 billion and 200 billion dollars6 . The close integration

of digital transformation and the application of modern science and technology is the driving

force for Vietnam's future development7 . Digital transformation is not simply a technical

process that electronicizes the bill-invoicing process, but it is about realizing the potential

value of business by utilizing digital technologies. In other words, to fundamentally improve

and transform business operations, it is necessary to apply advanced technologies such as

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social media, modern data analysis tools, and automated connection systems (Luong et al.,

2024).

In the aforementioned examples, one can see the impressive achievements of Vietnam

in reaching its e-government goals. Achievements in digital transformation across the pillars

of digital government, digital economy, and digital society have helped to build a strong basis

for the digital transformation path of the nation.

Theoretical basis

(doing)

Data & methodology

Data

This study utilizes data from the World Bank Enterprise Surveys (WBES) conducted

in Vietnam. The WBES is a recurring data collection program designed to analyze the

business environment and firm performance. The surveys focus on formal enterprises with

five or more employees, operating in the manufacturing and service sectors, excluding wholly

state-owned enterprises, firms in agriculture, real estate, public utilities, and most financial

intermediaries.

For Vietnam, we use firm-level microdata from the survey waves conducted in 2005,

2009, 2015, and 2023. The selection of these years allows for the analysis of aspects such as

digital technology adoption and innovation activities of firms over nearly two decades,

thereby enabling the tracking of important changes and trends.

The WBES consistently applies a stratified random sampling methodology across all

survey rounds. This approach ensures representativeness for the entire population as well as

for each stratum, and provides unbiased estimates with lower standard errors compared to

simple random sampling of the same size (Ding et al., 1996). The main stratification criteria
THE IMPACT OF DIGITALIZATION ON INNOVATION 19

include industry, firm size (detailed size classification is presented in Table 8), and

geographical region. The regional criteria were slightly adjusted across the years to reflect the

regional economic structure: in 2009, the sample was stratified into 5 regions based on 14 key

provinces/cities; in 2015, it was 4 regions; and in 2023, 5 regions were used, with some

adjustments in the grouping of provinces and cities compared to previous years (details on

regional classification can be found in Appendix A).

The sampling frame is primarily based on data from the General Statistics Office

(GSO) of Vietnam at the time closest to each survey wave and the list of enterprises that

participated in the previous survey round (e.g., the 2023 panel frame was drawn from the list

of firms participating in 2015). The questionnaire used follows the standard WBES structure,

including a core module applicable to all types of enterprises and sector-specific modules for

manufacturing or services or retail firms, along with some customized questions. Notably, the

2023 wave included an additional "Business Ready" module. The fieldwork for the surveys

was conducted by market research firms selected by the World Bank (e.g., Mekong

Economics LTD conducted the 2015 and 2023 rounds).

Variables

Dependent variables

The two dependent variables are binary indicators. Variable Product innovation is

equal to 1 if a firm responded “Yes” to the question “During the reference year, has this

establishment introduced new or significantly improved products or services?” and 0

otherwise. Similarly, variable Process innovation is equal to 1 if a firm responded “Yes” to

the question “During the reference year, has this establishment introduced any new or

improved process? Besides, the variable R&D is alternative variable and it is a binary

indicator and takes the value 1 if the firm responded “Yes” to the question: “During the

reference year, did this establishment spend on research and development activities, either in-
THE IMPACT OF DIGITALIZATION ON INNOVATION 20

house or contracted with other companies, excluding market research surveys?”; and 0

otherwise.

Independent variable

The variable Digitalization is a binary variable, it is coded as 1 if the firm responded

“Yes” to the question: “During the reference year, does your establishment regularly use

websites or social media pages in its interactions with clients and suppliers?”, and 0

otherwise.

Other control variables

We account for firm and market characteristics by incorporating the following control

variables. Given that a firm's innovation performance is related to the number of years of

operation of the firm, we include the variable Firm age (Huergo & Jaumandreu, 2004;

Messeni Petruzzelli et al., 2018; Withers et al., 2011). As stated by Crowley & Jordan (2016),

increased competition is often associated with higher innovation levels. Therefore, we

consider Competitor as a dummy variable equal to 1 if the firm face competitors by the firm's

main product in its primary market and 0 otherwise. Experience is measued as number of

years the top manager has worked in this sector. Okrah & Irene (2023) find that top managers

with more years of experience tend to enhance a firm's innovativeness. Variable Training is a

dummy variable euqal to 1 if a firm have formal training programs for its permanent, full-time

employees. This variable is a proxy for employee training programs at firm, which enhance

innovative performance by promoting learning practices (Paul et al., 2024; Sung & Choi,

2014).

Methodology

The data utilized in this research consists of panel data, and the dependent variables are

dummy variable. Therefore, to explore the impact of digital transformation on innovation,

THE IMPACT OF DIGITALIZATION ON INNOVATION 21

probit model is commonly employed. However, this model has an important assumption that

independent variables must be exogenous, meaning they cannot be correlated with the model's

error term (Greene, 2017; Rivers & Vuong, 1988). In practice, this assumption is often not

satisfied due to endogeneity problems that frequently occur, resulting in biased and

inconsistent estimates. This is particularly serious in observational studies, where complete

control of factors is impossible (Sarrias, 2021). With the endogeneity problems that the probit

model cannot solve, there are many other models and approaches that can replace the probit

model in addressing endogeneity problems, such as the two recursive equation model, the

instrumental variables approach, …(de Grange et al., 2024; Sarrias, 2021). In the context of

this study, the instrumental variables approach is used to analyze instead of the probit model.

According to Buzas & Stefanski (1996), the instrumental variable probit model is

defined as a statistical method used to analyze binary dependent variables, serving as an

alternative to the probit model when there are endogeneity issues, meaning when independent

variables are influenced by unobserved factors which lead to biased results. The instrumental

variable probit model is an extension of the standard probit model, combining it with

instrumental variables to ensure consistent estimation when explanatory variables are

correlated with the error term, making the instrumental variable probit model considered a

powerful tool for researchers when addressing endogeneity problems.

The two-stage estimation method is a common approach in instrumental variable

probit modeling, hence it is used in this study. This method includes two stages: the first stage

involves predicting the endogenous variable using the instrumental variable, and the second

stage involves estimating the probit model using these predicted value (Li et al., 2022).

𝐷𝑖𝑔𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛𝑖𝑡 = 𝛼0 + 𝛼1 𝑆𝑘𝑖𝑙𝑙𝑒𝑑𝑙𝑎𝑏𝑜𝑟𝑖𝑡 + 𝛼2 𝑋𝑖𝑡 + 𝜃𝑖 + 𝜃𝑡 + 𝑒𝑖𝑡 (1)

𝑌𝑖𝑡 = 𝛽0 + 𝛽1 𝐷𝑖𝑔𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛𝑖𝑡 + 𝛽2 𝑋𝑖𝑡 + 𝑧𝑖 + 𝑧𝑡 + 𝑒𝑖𝑡 (2)

THE IMPACT OF DIGITALIZATION ON INNOVATION 22

The first stage is expressed in equation (1) and the second stage is expressed in

euqation (2). Where Digitalization in first stage is selected as a endogenous variable and

Skilled labor is an instrumental variable, which is measued by the total number of skilled

production workers. In second stage, Y is the dependent variable and it is dummy variable

referring to the introduction of product and process innovations, respectively. Variable

Digitalization in second stage is independent variable, after being predicted in first stage and

𝑋 repesents other control variables. Other ingredients such as 𝛼0 , 𝛼1 , 𝛼2 , 𝛽0 , 𝛽1 , 𝛽2 are the

coefficients and 𝜃, 𝑧 is fixed effect with 𝑒 is error term. Additionally, i denotes the firm and t

denotes the year.

Result & discussion

Statistics of summary

Table 11 presents descriptive statistics. Notably, 38.4% of surveyed firms introduced

product innovations and 16.1% implemented process innovations, indicating a higher rate for

the former. This suggests Vietnamese firms prioritize product improvements to meet market

demands and enhance competitiveness, possibly due to limited resources for process

innovation. R&D investment was a modest 17.8%. For digitalization, 42.1% of firms used

websites or social media for client/supplier interactions, showing considerable engagement.

Additionally, 33.1% of firms provided formal employee training. Top managers averaged

17.37 years in their sector, average firm age was 12.68 years, and 18.5% of firms exported.

State-owned enterprises accounted for 7.05%.

Correlation

The correlation matrix is presented in Table 10, showing Pearson's correlation

coefficients among the variables. The correlations are overall low to moderate. Especially, the

negative correlation coefficient between the Competitor and Digitalization suggests that an
THE IMPACT OF DIGITALIZATION ON INNOVATION 23

increase in the number of competitors is associated with a decline in the firms’ level of digital

transformation. Therefore, the result suggests that multicollinearity is unlikely to occur, Gay

et al. (2011) note as a low correlation when a The correlation coefficient is below 0.35 (in

absolute terms). A moderate correlation occurs if a correlation coefficient is between 0.36 and

0.65 (in absolute terms). Finally, correlation coefficients whose magnitude is above 0.66 (in

absolute terms) indicate variables that can be considered highly correlated. We find no

evidence of multicollinearity (i.e., a correlation coefficient above 0.66) in any firm size

category.

Empirical findings

Table 2 reveals that in the first stage, Skilled labor positively impacts Digitalization at

a 1% statistical significance level. This indicates that skilled labor, with a solid knowledge

foundation to understand and acquire new knowledge, can subsequently utilize digital tools

more proficiently, maximizing their features to enhance productivity and work quality. In the

second stage, after being predicted with Skilled labor, Digitalization negatively

impacts Product innovation at a 5% statistical significance level. This is because digitalization

in Vietnamese firms is often confined to the "early-stage" or "surface-level," meaning firms

are merely “doing digital” rather than truly “being digital.” At this initial stage, digitalization

typically focuses on digitizing and altering existing processes, and enhancing communication

capabilities or establishing an online presence. It targets operational efficiency and market

reach rather than concentrating on new product development. Moreover, developing new

products requires a more profound digital transformation than the superficial application of

technology currently seen in Vietnamese firms, which is insufficient to drive product

innovation. Additionally, firms in Vietnam tend to prioritize actions that yield rapid

efficiencies rather than investing significant time in researching and applying digital

technologies to launch new products.

THE IMPACT OF DIGITALIZATION ON INNOVATION 24

One reason explaining this picture stems from the current competitive landscape and

the strategies chosen by firms. With China, a powerhouse in manufacturing and innovation, as

a direct neighbor, the innovation strategies of Vietnamese firms are directly impacted. They

may show less enthusiasm for product innovation research, as China is exceedingly strong in

this area, making competition exceptionally challenging. Consequently, Vietnamese firms

tend to leverage digital transformation for process innovation to reduce costs and improve

operational efficiency, rather than for product improvements that might entail longer

development cycles and greater risks. This is also clearly demonstrated in Table 2,

where Digitalization has a positive impact on Process innovation at a 1% significance level.

Concurrently, Competition negatively impacts Product innovation and positively

impacts Process innovation at a 1% statistical significance level, further substantiating this

argument.

Regarding other control variables like Firm age, there is no evidence to prove

that Firm age impacts Product innovation, as the result in Table 2 is not statistically

significant. However, Firm age negatively impacts Process innovation at a 5% statistical

significance level. This finding reflects that long-established firms in Vietnam tend to be

change-averse and innovation-shy, preferring to follow established, safe paths.

To reinforce the robustness of these results, robustness checks were conducted. As

shown in Table 3, the results are similar when the IV logit model is used as an alternative to

the IV probit model. Furthermore, the results were also tested using a linear probability

model, and the findings in Table 3 indicate no substantial differences.

To further investigate the impact of Digitalization, a model measuring its effect on the

alternative variable R&D was implemented. The results in Table 5 show

that Digitalization positively impacts R&D at a 1% statistical significance level. This suggests

that even when firms are only in the initial stages of digitalization, “doing digital” plays a
THE IMPACT OF DIGITALIZATION ON INNOVATION 25

crucial role in foundational R&D. Early-stage digitalization can significantly enhance access

to knowledge and information, which are vital inputs for R&D. More specifically,

digitalization at this stage provides companies with access to global research, industry trends,

patent databases, and competitor analyses, thereby reducing initial barriers to exploring and

implementing new ideas. Additionally, Digitalization facilitates easier connections for

companies with experts, research institutions, or potential R&D partners, fostering an

environment conducive to knowledge sharing and joint development.

To gain a deeper understanding of the impact of Digitalization on different entities,

this study considers heterogeneous effects. Table 6 shows that for domestic firms, the results

do not change at certain significance levels. For firms with foreign

ownership, Digitalization also negatively impacts Product innovation at a 1% significance

level, consistent with the previous findings. However, Digitalization does not impact Process

innovation in these foreign firms, suggesting that their operational and organizational

processes are already well-established, and early-stage digital transformation does not

significantly alter their operational machinery. The results in Table 7 indicate that there is

insufficient statistical evidence to prove Digitalization impacts Product innovation in private

firms, a result similar to that for state-owned enterprises. However, Digitalization still has a

positive impact on Process innovation in private firms at a 1% statistical significance level,

while conversely, there is insufficient statistical evidence to demonstrate

that Digitalization affects Process innovation in state-owned enterprises. This suggests that

within the long-established and tightly regulated frameworks of state-owned

enterprises, Digitalization does not affect the firm's innovation capabilities. Table 8 shows

that Digitalization has no statistically significant impact on Product innovation in either non-

exporting or exporting firms, indicating that the effect of early-stage digital transformation

on Product innovation remains rather faint across firms. However, Digitalization positively
THE IMPACT OF DIGITALIZATION ON INNOVATION 26

impacts Process innovation in non-exporting firms at a 10% statistical significance level, with

the opposite result for exporting firms. This may indicate that the quality of the operational

machinery and activities of exporting firms is already high, as they must meet numerous

international requirements and regulations regarding products and processes to be able to

export. Therefore, early-stage digitalization does not bring about significant changes in

exporting firms.

Conclusion

This study investigated how digitalization impacts the innovation capabilities of

Vietnamese firms over the period between 2005 and 2023 by employing an instrumental

variable probit model. The research findings indicate that, in the context where digitalization

within firms is merely at a superficial, early stage, digitalization exerts divergent effects on

innovation. Specifically, digitalization at this phase negatively impacts product innovation but

demonstrates the potential to foster process innovation. Furthermore, other factors such as the

years of experience of top managers, employee training programs, the firm's operational

duration (firm age), and industry competition all have certain impacts on a firm's innovation

capabilities. Notably, the results suggest that innovation is considerably challenging for long-

established firms, and as industry competition intensifies, firms tend to innovate processes to

save costs and improve operations rather than making long-term investments in product

innovation. The research results remain consistent across various robustness checks.

Additionally, with R&D as an alternative variable, despite digitalization being only in its

initial stages, it also shows a definite positive impact on foundational R&D. Moreover, after

considering heterogeneous effects, the impact of digitalization varies across different aspects

depending on the firm type. Particularly for state-owned enterprises and exporting firms,

digitalization appears to have no discernible impact on their innovation capabilities, owing to

the specific characteristics of each firm type.

THE IMPACT OF DIGITALIZATION ON INNOVATION 27

Strategy implication

(doing)

Policy recommendation

From these findings, several important policy implications can be proposed. For

policymakers in Vietnam, there is a need for more targeted support aimed at product

innovation in the digital era. It is crucial to recognize that firms merely remaining in the early

stages of digital transformation, "doing digital" instead of "being digital," is insufficient and

ineffective. Programs should be implemented to encourage and financially support the

development of new products, offering tax reductions for businesses that invest more deeply

in digitalization or advanced digital tools with the aim of fostering innovation. Additionally,

consideration should be given to supporting enterprises in new product testing, thereby

cultivating a culture of experimentation within each firm to encourage bolder decisions

regarding product innovation. Concurrently, government initiatives should focus on

developing advanced digital skills, moving beyond basic digital literacy, towards the

profound goal of promoting an ecosystem supportive of digital product innovation. Business

managers, on the other hand, should adopt a strategic and balanced approach to digital

transformation and innovation, not neglecting long-term product innovation while pursuing

immediate efficiency gains. They should not only chase short-term or simple benefits such as

process innovation and optimization but should also nurture a culture of experimentation,

ultimately aiming for the deeper purpose of creating new, highly innovative, and applicable

products.

Limitations

The limitations of this study could be used as recommendations for future research.

First, this is a panel research that exclusively included a single country. Future research could
THE IMPACT OF DIGITALIZATION ON INNOVATION 28

investigate the impact of Digitalization on the innovation performance of firms in other

developing economies, as well as in countries that are similar to Vietnam, which is considered

to have strong innovation potential. Regarding the generalization of our findings, these results

should be applied cautiously, and should only be applied to other developing economies in the

region similar to Vietnam, such as Southeast Asian countries. This is because the results

maintain specificity to the Vietnamese context throughout the survey periods. Second, the

survey data was collected in 2005, 2009, 2015, and 2023. Although the inclusion of 2023 data

significantly increases the timeliness, the data points from 2005 and 2009 still reflect a very

early stage of the digitalization process in Vietnam, before core technologies of modern

digital transformation (such as Cloud, Big Data, AI, IoT) became widespread. Therefore,

results from the earlier years may not fully correspond with the current context. Moreover, the

intervals between survey years are uneven with large gaps, with a four year interval between

2005 and 2009, a six year interval between 2009 and 2015, and an eight year interval between

2015 and 2023. These long periods, especially the 2015-2023 period when digital

transformation made significant breakthroughs, may have caused the research to miss

important changes in technological turning points, or short-term or medium-term impacts of

Digitalization on innovation occurring between survey milestones. Third, the research data

was collected based on self-reporting by enterprises through surveys, therefore there remains

potential for various types of bias such as: social desirability bias, subjective perception bias

regarding "innovation" and "digitalization", and recall bias. Consequently, the reliability of

the data depends on the understanding and honesty of the respondents. These limitations

suggest ideas for further research.

THE IMPACT OF DIGITALIZATION ON INNOVATION 29

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THE IMPACT OF DIGITALIZATION ON INNOVATION 37

Table 1

Current policies on digital transformation and the innovation process in the Vietnamese government

Law Decrees, directives and decision Master plans and initiatives

• Law on intellectual • The program until 2010 provides public telecommunications services • Strategy until 2010 and
property (2005). and is approved by the Prime Minister on April 7, 2006, under Decision orientation until 2020 for
• Law on information No. 74/2006/QĐ-TTg. the development of
technology (2006). • Decree of Government No. 35/2007/ND-CP of March 08, 2007 Vietnam's postal and
• Law on high technology regulates banking e-transactions.. telecommunications.
(2008). • On August 28, 2008, Decree No. 97/2008/ND-CP specifies the • Overall plan until 2010,
• Law on technology management, provision, and use of Internet services and electronic vision until 2020 for the
transfer (2008). information on the Internet. Vietnamese electronics
• Law on radio frequency • The Science and Technology Development Strategy for the period 2011- industry.
(2009). 2022 is approved by the government on April 11, 2012, in Decision No. • Planning until 2020 for the
• Law on network 418/QD-TTg. development of national
information security • On May 16, 2013, Decree No. 52/2013/ND-CP regulates e-commerce. information technology
(2015). • Decision No. 392/QĐ-TTg of the Prime Minister: Approves the Target security.

• Law on support for Program for the Development of the Information Technology Industry • Program until 2020, vision
small and medium-sized until 2020, with a vision until 2025. until 2025, goals for
enterprises (2017). information technology
development.
THE IMPACT OF DIGITALIZATION ON INNOVATION 38

• Law on cybersecurity • The 2020 infrastructure development program is approved in 2016 • The 2020 program for
(2018). under Decision 149/QD-Tg. developing broadband
• Law No. 24/2023/QH15 • Enhancing the capacity to access the Fourth Industrial Revolution is telecommunications
of the National clearly stated in Directive 16/CT-TTg of the government. infrastructure.
Assembly: • Decision No. 1563/QĐ-TTg of the Prime Minister: Approves the overall • Project until 2025 on
telecommunications plan for e-commerce development for the period 2016 – 2020. supporting the national
law. • The establishment of the National Committee on E-Government is innovative startup
• Law No. 20/2023/QH15 signed by the Prime Minister in Decision No. 1072/QD-Tg. ecosystem.
dated June 22, 2023 on • Resolution No. 17/NQ-CP, signed by Prime Minister Nguyen Xuan • Strategy until 2010,
electronic transactions. Phuc on March 7, 2019, outlines several key tasks and solutions for the oriented towards 2020 for
• Law No. 60/2024/QH15 period 2019-2020, with a vision towards 2025 for the development of e- the development strategy
of the National government. of information and
Assembly: data law. • On February 1, 2019, Prime Minister Nguyen Xuan Phuc signs Decree communication
• The corporate income No. 13/2019/ND-CP on scientific and technological enterprises. technology.
tax law offers tax • Some guidelines and policies are issued by the Politburo in Resolution • National Digital
incentives for No. 52-NQ/TW on proactively participating in the fourth industrial Transformation Program
businesses investing in revolution on September 27, 2019. by 2025, with a vision
R&D and digital • Decree No. 85/2021/ND-CP of the Government regulates e-commerce. towards 2030
transformation to
• Decision No. 749/QD-TTg on June 3, 2020 is approved and signed by
encourage companies to
Prime Minister Nguyen Xuan Phuc aimed at placing Vietnam among the
THE IMPACT OF DIGITALIZATION ON INNOVATION 39

invest in new top 50 leading countries in the world and the top 3 in the ASEAN region
technologies. in terms of e-government and digital economy.

• The project for developing digital infrastructure by 2025, with a vision

towards 2030, is approved by Deputy Prime Minister Nguyen Hoa Binh.

• General Secretary To Lam signs Resolution No. 57-NQ/TW of the

Politburo concerning advances in the development of science,
technology, innovation, and national digital transformation on
December 22, 2024.

• On January 8, 2025, Prime Minister Pham Minh Chinh signs Resolution

No. 01/NQ-CP, which outlines the main tasks and solutions for
implementing the state budget plan for 2025 and the socio-economic
development plan.

Source: Author’s compilation

THE IMPACT OF DIGITALIZATION ON INNOVATION 40

Table 2

Baseline results

First stage Second stage

Variables Digitalization Product Process

innovation innovation

Digitalization -0.409** 0.407***

(0.171) (0.127)

Skilled labor 0.001***

(0.000)

Experience 0.007*** 0.007** 0.012***

(0.002) (0.003) (0.003)

Competitor -0.078 -0.262*** 0.610***

(0.051) (0.077) (0.082)

Training 0.552*** 0.682*** 0.380***

(0.048) (0.121) (0.101)

Firmage 0.011*** 0.004 -0.006**

(0.002) (0.004) (0.003)

Constant -1.265*** 1.788*** -2.329***

(0.065) (0.239) (0.231)

Observations 4,214 4,214 4,214

Number of Firm_id 3,597 3,597 3,597

Notes. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

THE IMPACT OF DIGITALIZATION ON INNOVATION 41

Table 3

Results with IV logit model

First stage Second stage

Variables Digitalization Product Process

innovation innovation

Digitalization -0.927** 0.765***

(0.399) (0.221)

Skilled labor 0.001***

(0.000)

Experience 0.011*** 0.016** 0.021***

(0.003) (0.006) (0.006)

Competitor -0.119 -0.325** 1.111***

(0.084) (0.150) (0.150)

Training 0.898*** 1.394*** 0.717***

(0.079) (0.258) (0.180)

Firmage 0.017*** 0.010 -0.012**

(0.003) (0.008) (0.006)

Constant -2.103*** 3.313*** -4.232***

(0.112) (0.544) (0.424)

Observations 4,214 4,214 4,214

Number of Firm_id 3,597 3,597 3,597

Notes. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation
THE IMPACT OF DIGITALIZATION ON INNOVATION 42

Table 4
Result with linear probability model

VARIABLES Product innovation Process innovation

Digital_tranformation -0.707*** 0.276***

(0.043) (0.046)

Experience 0.014*** 0.002

(0.001) (0.001)

Competitor -0.200*** -0.035

(0.035) (0.038)

Training 0.630*** -0.034

(0.037) (0.040)

Firmage 0.009*** -0.004**

(0.002) (0.002)

Constant -0.282*** 0.260***

(0.032) (0.034)

Observations 4,214 4,214

R-squared 0.471 0.075

Number of Firm_id 3,597 3,597

Notes. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author calculation
THE IMPACT OF DIGITALIZATION ON INNOVATION 43

Table 5

Results with alternative variable

Variables R&D

Digitalization 0.561***

(0.076)

Experience -0.011***

(0.003)

Competitor -0.246***

(0.068)

Training 0.371***

(0.054)

Firmage 0.008***

(0.002)

Constant -0.632***

(0.078)

Observations 4,214

Number of Firm_id 3,597

Notes. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

THE IMPACT OF DIGITALIZATION ON INNOVATION 44

Table 6

Results with classification of domestic ownership and foreign ownership

Domestic Foreign

Variables Product Process Product Process

innovation innovation innovation innovation

Digitalization -0.620*** 0.283* -1.776*** 1.031

(0.185) (0.151) (0.184) (0.673)

Experience 0.010*** 0.011*** 0.011 0.033

(0.004) (0.003) (0.007) (0.024)

Competitor -0.338*** 0.660*** -0.927*** -0.116

(0.080) (0.078) (0.240) (0.678)

Training 0.834*** 0.476*** 1.535*** 0.115

(0.129) (0.111) (0.182) (0.653)

Firmage 0.006 -0.004 -0.004 0.019

(0.004) (0.003) (0.016) (0.049)

Constant 1.531*** -2.419*** -1.390*** -5.090***

(0.249) (0.215) (0.252) (1.529)

Observations 3,800 3,800 414 300

Number of Firm_id 3,269 3,269 410 296

Notes. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

THE IMPACT OF DIGITALIZATION ON INNOVATION 45

Table 7

Results with classification of private and government ownership

Private Government

Variables Product Process Product Process

innovation innovation innovation innovation

Digitalization -0.361 0.576*** -0.528 0.224

(0.243) (0.172) (0.894) (0.192)

Experience 0.007* 0.013*** -0.017 0.013

(0.004) (0.003) (0.036) (0.011)

Competitor -0.246*** 0.696*** -1.247 0.086

(0.087) (0.094) (2.119) (0.322)

Training 0.690*** 0.349*** 0.452 -0.028

(0.176) (0.124) (0.877) (0.274)

Firmage 0.003 -0.011*** 0.004 0.006

(0.005) (0.004) (0.013) (0.007)

Constant 1.918*** -2.261*** 3.973 -1.923***

(0.377) (0.287) (6.438) (0.493)

Observations 3,917 3,917 297 297

Number of Firm_id 3,448 3,448 295 295

Note. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

THE IMPACT OF DIGITALIZATION ON INNOVATION 46

Table 8

Result with classification of non exporting and exporting state

Non exporting Exporting

Variables Product Process Product Process

innovation innovation innovation innovation

Digitalization -0.268 0.311* -0.224 0.495

(0.324) (0.173) (0.267) (0.351)

Experience 0.007 0.007* 0.010 0.027**

(0.005) (0.004) (0.007) (0.013)

Competitor -0.371*** 0.827*** 0.495* 0.458

(0.103) (0.088) (0.272) (0.322)

Training 0.652*** 0.452*** 0.673*** 0.368

(0.227) (0.127) (0.241) (0.291)

Firmage 0.001 -0.006 0.005 -0.007

(0.005) (0.004) (0.007) (0.009)

Constant 2.114*** -2.553*** 0.864* -2.342**

(0.496) (0.244) (0.503) (0.977)

Observations 3,433 3,433 781 781

Number of Firm_id 3,065 3,065 747 747

Note. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

THE IMPACT OF DIGITALIZATION ON INNOVATION 47

Table 9
Firm size based on World Bank's classification approach
Firm size Number of employees (denoted by N)
Small firm 5 ≤ N ≤ 19
Medium firm 20 ≤ N ≤ 90
Large firm N ≥ 100
Note. Employees is the number of employees defined as official, full-time employees

Source: WBES (2023)

Table 10

Correlation matrix

Variable (1) (2) (3) (4) (5)

(1) Digitalization 1.0000
(2) Experience 0.2342* 1.0000
(3) Competitor -0.0777* 0.3267* 1.0000
(4) Training 0.4266* 0.1280* 0.1499* 1.0000
(5) Firmage 0.4837* 0.2987* 0.0621* 0.1261* 1.0000
Notes. * p < 0.01.

Source: Author’s calculation

THE IMPACT OF DIGITALIZATION ON INNOVATION 48

Table 11
Descriptive statistics

Mean Std. dev. Min Max

VARIABLES

Dependent variable
Product innovation 0.384 0.486 0 1
Process innovation 0.161 0.367 0 1
R&D 0.178 0.383 0 1
Independent variable
Digitalization 0.421 0.494 0 1
Control variable
Experience 17.37 11.08 0 70
Firm age 12.68 10.74 1 115
Training 0.331 0.471 0 1
Competitor 0.303 0.460 0 1
Subsetting variable
Government ownership 0.0705 0.256 0 1
Firm size 2.181 0.759 1 3
Exporting 0.185 0.389 0 1
Instrumental variable
Skilled labor 93.68 354.1 0 6,978

Source: Author’s calculation