How digital transformation becomes strategic lever for internationalization

Digital transformation is a critical force propelling the international expansion of enterprises, according to a new study published in SAGE Open. The research, based on data from over 40,000 annual firm-level observations of Chinese enterprises, indicates that digitalization significantly enhances a company’s capability to invest and operate abroad, particularly when supported by favorable financial and institutional environments.

Titled “How Can Enterprise Digital Transformation Facilitate Internationalization?”, the research explores how digital transformation strengthens outward foreign direct investment (OFDI) by reducing operational frictions, boosting productivity, and minimizing transaction costs. It also identifies internal and external variables that influence how effectively firms can harness digital tools for global growth.

How does digital transformation affect internationalization strategies?

The study confirms that digital transformation directly facilitates outward foreign direct investment by modernizing core business functions and improving strategic decision-making. Utilizing a custom-built Digital Transformation Index (DTI) derived from text mining corporate disclosures, the researchers demonstrate that firms with higher digital maturity are more likely to pursue and succeed in international ventures.

Digital transformation promotes internationalization through two primary channels: enhancing productivity and reducing transaction costs. On the productivity front, the integration of digital technologies such as artificial intelligence, big data analytics, and Internet of Things platforms helps firms optimize labor structures, streamline supply chains, and transition from traditional enterprise-centric innovation to collaborative, consumer-driven ecosystems. These improvements enable firms to adapt quickly to foreign market demands and maintain a competitive edge.

At the same time, digital tools reduce the frictions associated with operating across borders. Digital platforms improve transparency, facilitate real-time communication, and enhance cross-border coordination, thereby minimizing the institutional and cultural barriers typically encountered in foreign markets. These enhancements reduce the cost of information gathering, strengthen stakeholder governance, and allow firms to proactively manage risk.

The study’s regression models consistently show a statistically significant and positive relationship between the level of digital transformation and both the breadth and depth of OFDI. These effects remain robust even after controlling for financial metrics, regional economic variables, and institutional differences.

What internal and external factors influence this relationship?

While the overarching impact of digital transformation on OFDI is positive, the study finds that certain internal corporate characteristics and regional economic conditions moderate this effect, either amplifying or constraining the benefits.

Internally, equity concentration plays a decisive role. Firms with highly concentrated ownership structures, where decision-making power is controlled by a small group of shareholders, tend to be more risk-averse and less receptive to large-scale digital investments. The analysis indicates that high ownership concentration weakens the influence of digitalization on international expansion, likely due to reluctance to invest in long-term, uncertain projects like global market entry. Conversely, firms with more distributed ownership are more likely to support digital initiatives and leverage them for overseas investment.

Financial constraints also significantly affect outcomes. While digital transformation improves efficiency and reduces operational risks, its implementation often requires substantial capital. Firms facing capital shortages may struggle to invest in both digital capabilities and international operations. The research finds that firms with strong internal finances or access to favorable lending environments experience greater benefits from digital initiatives in the context of OFDI.

Externally, banking competition and market liberalization are shown to amplify the positive effects of digital transformation. In regions where banks compete for clients and offer better access to credit, firms find it easier to finance their digital infrastructure and overseas ventures. Similarly, in more marketized regions, those with transparent regulations, strong legal protections, and institutional support, digital transformation yields greater improvements in internationalization outcomes.

The study employs several empirical strategies, including fixed-effects models, instrumental variable regressions, and propensity score matching, to confirm the robustness of these moderating effects. In all models, digital transformation remains a statistically significant predictor of OFDI, though the magnitude varies based on financial and institutional environments.

What policy and strategic recommendations arise from the study?

Based on the findings, the authors call for a multi-pronged approach to promote enterprise-level digital transformation as a pathway to global competitiveness. On the corporate side, firms are encouraged to embed digitalization into their long-term strategy, not merely as a tool for internal efficiency but as a core enabler of international growth. Investing in technologies that enhance innovation, reduce costs, and improve cross-border operations can help firms gain a foothold in increasingly competitive global markets.

From a policy perspective, the research underscores the importance of improving access to finance for technology-driven enterprises. Financial institutions, particularly commercial banks and investment firms, are urged to develop specialized instruments such as low-interest loans and digital venture capital to support firms pursuing both digital upgrades and overseas expansion.

Governments are also advised to modernize their regulatory frameworks to support digital adoption while maintaining cybersecurity and data integrity. Policies that encourage cross-border data flows, protect intellectual property, and incentivize the use of emerging technologies like blockchain, AI, and big data analytics are seen as essential to fostering a digital ecosystem conducive to global business development.

Localized measures, such as regional tax breaks, digital training programs, and streamlined export procedures, can further strengthen the link between digital transformation and international expansion, the study suggests. These initiatives are especially vital for small and medium-sized enterprises, which often face greater financial and operational barriers when expanding abroad.