Impact of digital city competitiveness on total factor productivity in the commercial circulation industry: evidence from China's emerging first-tier cities

The paper investigates how digital city competitiveness—reflecting a city’s digital capabilities and transformation—affects the total factor productivity (TFP) of the commercial circulation industry (wholesale and retail, accommodation and catering, logistics/express). Against China’s rapid digitalization and policy emphasis on the digital economy, the authors note robust growth of digitally enabled sectors and resilience even during COVID-19. They identify a research gap: while many studies examine digitalization’s effects on specific aspects (customer experience, supply chains), few evaluate the comprehensive construct of digital city competitiveness or its impact on industry-wide TFP. The research questions are: What is the level of digital city competitiveness among China’s emerging first-tier cities? How does it influence TFP in the commercial circulation industry? What mechanisms drive these effects? Focusing on 15 emerging first-tier cities—key growth hubs supported by national policy—the study aims to measure digital city competitiveness and empirically quantify its impact on industry TFP, providing evidence-based insights and policy guidance.

The review spans three strands: (1) Digital economy measurement and effects: Scholars have developed multi-dimensional indices at macro (internet, digital finance, industrial digitization) to micro (firm-level digital transformation) levels, finding that digitalization promotes innovation, sustainability, environmental performance, and green TFP, and supports real-economy transformation via data-driven endogenous growth mechanisms. (2) Digital economy’s impact on commercial circulation: Theory and evidence suggest ICT and advanced technologies (IoT, big data, AI, cloud) reduce transaction/logistics costs, enable information sharing and rapid response in logistics, support digital retail models, and reconfigure supply chains (e.g., platform-based industrial internet, reverse integration). (3) Development of the commercial circulation industry: Prior work measures development through scale, structure, efficiency, facilities, and sometimes TFP or added value; determinants include digital technology, industrial upgrading, government subsidies, and social capital. Empirically, digitalization enhances logistics efficiency and firm competitiveness, reduces interregional trade costs, and improves industry profitability—though effects can vary across city tiers. Research gap: Despite emerging work on digital city competitiveness, comprehensive evaluation of its effect on the commercial circulation industry’s TFP is scarce. The authors hypothesize that higher digital city competitiveness positively promotes TFP via technological progress, network effects, and knowledge spillovers.

Design: A panel study of 15 emerging first-tier Chinese cities over 2017–2021 assesses the effect of digital city competitiveness on the commercial circulation industry’s total factor productivity (TFP). Measurement of Digital City Competitiveness: Following the CCID approach, the authors construct a six-dimension index—(1) Urban information infrastructure (e.g., mobile base stations per capita, fiber length per capita, broadband ports, IPv4 addresses per 100 people, number of 5G base stations), (2) Urban governance capacity (internet government service capability score), (3) Urban service capability (digital life, digital healthcare, digital transportation), (4) Urban industrial development (digital economy output value; number of enterprises in big data, blockchain, AI), (5) Urban innovation capacity (R&D expenditure share of GDP; granted patents), and (6) Urban ecosystem (forest coverage; share of days with excellent air quality). Weights are derived via the entropy method, yielding city-year index scores (2017–2021). Dependent variable (TFP): TFP of the commercial circulation industry is computed using the Malmquist index based on input-output distance functions. Inputs: labor (number of employees in the urban commercial circulation industry) and capital (capital stock estimated by the perpetual inventory method). Output: value added of the trade/circulation industry. Model: Two-way fixed-effects panel regression: TFP_it = β0 + β1 DC_it + β2 Controls_it + μ_i + η_t + ε_it. Controls include: regional economic development (ln per capita GDP), technological innovation (ln patents granted), openness (ln FDI), and digital financial development (ln Digital Financial Inclusion Index). Estimation and diagnostics: Stata 17 used. Descriptive stats show variances < 0.4; pairwise correlations < 0.5; VIFs 1.05–1.37 (no multicollinearity). Hausman test p=0.000 favors fixed effects; two-way FE applied. Data sources: China City Statistical Yearbook, China Population Statistical Yearbook (inputs/outputs); Wind Database and China Intellectual Property Office (controls); additional yearbooks for dimension indicators (Information, S&T, Forestry & Grassland), CCID database, internet service capability Blue Book, and related official statistics.

• Digital city competitiveness significantly increases the TFP of the commercial circulation industry. Baseline coefficient (without controls) is 0.1426 (t=3.67, 1% level). With progressive inclusion of controls, coefficients remain positive and significant: 0.1263 (t=3.85), 0.1193 (t=2.78), 0.1037 (t=2.76), and 0.1173 (t=2.04), confirming robustness. • Control variables are all positively associated with TFP and significant: regional economic development (coefficients from 0.0746 to 0.0437), technological innovation (0.0773 to 0.05438), openness (0.0443 to 0.0362), and digital inclusive finance (0.0284). Technological innovation shows the strongest positive effect among controls. • Sub-dimensions of digital city competitiveness: All six pass 1% significance. Coefficients: Information infrastructure 0.1535 (t=4.41, strongest positive), Urban industrial development 0.1335 (t=2.54), Innovation capacity 0.1274 (t=3.23), Urban service capability 0.1215 (t=4.32), Governance capacity 0.0947 (t=2.64), Ecosystem −0.0432 (t=−2.69, negative). • City rankings (2017–2021 average Digital City Competitiveness Index): Hangzhou ranks first (>90), followed by a second tier (Chongqing, Tianjin, Chengdu, Qingdao, Ningbo, Nanjing, Wuhan); Suzhou, Xi’an, Dongguan, Changsha, Foshan, Zhengzhou, and Hefei lag behind. All cities show rising trends over 2017–2021.

The findings support the hypothesis that higher digital city competitiveness promotes TFP in the commercial circulation industry. Mechanistically, advanced information infrastructure accelerates information flow and real-time decision-making, reducing transaction and logistics costs and enhancing operational efficiency. Network effects from widespread digital platform adoption by firms, consumers, and government amplify efficiency gains. Strong innovation ecosystems foster knowledge spillovers that improve managerial and technological practices within circulation sectors. Urban industrial development and service digitization further streamline processes and enhance customer engagement. Governance capacity contributes positively—though to a lesser extent—by improving digital public services and administrative efficiency. The negative ecosystem coefficient likely reflects transitional compliance costs, stricter environmental regulations, or capital reallocation toward greener practices that temporarily suppress productivity; however, the authors stress that in the long run ecological improvements can underpin sustainable growth. Overall, the results indicate that comprehensive digital development—especially information infrastructure—yields substantial productivity benefits for commerce-related urban sectors, and that policy design should consider both enabling digital drivers and managing short-run ecological compliance costs.

The study constructs a comprehensive Digital City Competitiveness Index for 15 emerging first-tier Chinese cities and demonstrates a significant positive association between digital city competitiveness and the TFP of the commercial circulation industry. The strongest productivity gains are linked to urban information infrastructure, followed by industrial development, innovation, services, and governance, while the ecosystem dimension shows a short-run negative association. Policy implications include: learning from leading practices (e.g., Hangzhou), prioritizing investments in digital information infrastructure—especially communications equipment—supporting R&D and innovation, fostering industrial clusters to realize scale and complementarities, elevating urban services through digitalization and process optimization, and strengthening transparent, participatory governance. Policymakers should also balance ecological goals with economic objectives, mitigating short-run adjustment costs while pursuing sustainable development. Future research directions include expanding coverage to second- and third-tier cities and rural areas, conducting longitudinal analyses to capture long-term digital transformation effects, examining impacts on other sectors (manufacturing, education, healthcare), and undertaking international comparisons to refine strategies.

• External validity: The sample is limited to China’s emerging first-tier cities; findings may not generalize to smaller cities or rural areas. • Temporal validity: Rapid technological and market changes may reduce the timeliness of results, necessitating updates. • Measurement bias: Construction of the Digital City Competitiveness Index and TFP (Malmquist) relies on multiple data sources and proxy variables, which may introduce measurement errors. • Omitted variables/external shocks: National policies, international conditions, and market trends may affect outcomes but are not fully captured.