The Twin Transition: Does Intelligent Manufacturing Crowd Out or Catalyze Green Innovation?

ABSTRACT Firms facing the “twin transition” toward digital transformation and environmental sustainability face a critical resource allocation problem: Do capital‐intensive digital upgrades compete for resources with or catalyze investments in green innovation? We examine this issue within the context of China's Intelligent Manufacturing Demonstration Project (IMDP), a hybrid industrial policy combining digitalization and environmental targets. Using a staggered difference‐in‐differences design with 25,125 firm‐year observations (2010–2022), we find that IMDP participation boosts green invention patent applications by 27%. This innovation is substantive, reflected in enhanced energy efficiency and reduced pollutant emissions, especially among nonstate‐owned and capital‐intensive firms operating under strict environmental regulations. Mechanism analysis suggests that these effects occur through easing financing constraints, lowering agency costs, and upgrading human capital.