The impact of hardening local government budget constraints on corporate digital transformation: evidence from China

Strengthening the management of local government debt is crucial for safeguarding national economic and financial security. As a central instrument for regulating government borrowing and preventing local debt risks, whether hardening budget constraints generates spillover effects on firms’ digital transformation remains an open question. From the perspective of China’s ongoing efforts to reinforce fiscal discipline, this study examines the impact and mechanisms of local government budget constraint hardening on corporate digital transformation, using matched data on listed firms and regional debt conditions. Our baseline evidence indicates that tighter budget constraints significantly accelerate firms’ digital upgrading. Mechanism analyses show that the effect operates primarily through the reallocation of financial resources and the improvement of internal corporate governance. Heterogeneity results further demonstrate that the promoting role of fiscal discipline is more pronounced among non-state-owned enterprises, firms operating in competitive industries, and capital-intensive producers. By uncovering how macro-level fiscal reforms shape micro-level strategic transformation, this paper enriches the literature on the real effects of local government budget constraint hardening and provides new empirical evidence on the institutional foundations of corporate upgrading.