Why digital transformation is not an equal opportunity innovation engine

Closer digital integration strengthens collaboration. Suppliers are drawn into joint development, data sharing, and coordinated production planning, which improves knowledge flow and reduces uncertainty around innovation investment. These dynamics create what the study identifies as a collaborative advantage, enabling suppliers to increase research and development spending and patent activity. Over time, this feedback loop becomes self-reinforcing, as digitally capable suppliers are better positioned to meet core firm requirements and secure long-term relationships.

A new peer-reviewed study published in Systems challenges the assumption that digital transformation delivers uniform innovation benefits across supply chain networks. Titled “The Spillover of Digital Transformation in Supply Chain Innovation,” the research provides a large-scale empirical analysis of Chinese listed companies from 2010 to 2024 and finds that digital transformation by dominant core firms produces sharply uneven innovation outcomes.

While upstream suppliers tend to gain innovation momentum, downstream customers often experience the opposite effect, with innovation activity constrained rather than enhanced.

Digital transformation as a network shock, not a firm upgrade

The study reframes digital transformation as a systemic event rather than a firm-level improvement. Instead of viewing transformation as an internal upgrade that ends at the company boundary, the authors analyze supply chains as complex adaptive systems in which firms continuously interact, adapt, and co-evolve. Within this framework, digital transformation by a core firm acts as a shock that propagates through the supply network, triggering different responses depending on a partner’s position.

Using detailed supply chain data and multiple measures of digital transformation, the study shows that upstream suppliers benefit from a reinforcing innovation cycle. When core firms digitize procurement, production, and coordination processes, they often extend digital tools, platforms, and technical standards to suppliers. This creates a resource pull effect, lowering suppliers’ innovation costs by giving them access to advanced technologies and data infrastructure they might not otherwise afford.

Closer digital integration strengthens collaboration. Suppliers are drawn into joint development, data sharing, and coordinated production planning, which improves knowledge flow and reduces uncertainty around innovation investment. These dynamics create what the study identifies as a collaborative advantage, enabling suppliers to increase research and development spending and patent activity. Over time, this feedback loop becomes self-reinforcing, as digitally capable suppliers are better positioned to meet core firm requirements and secure long-term relationships.

The impact on downstream customers is markedly different. As core firms digitize, their operational efficiency, market reach, and data control improve. This often increases competitive pressure on customers that rely on the core firm’s products, platforms, or distribution channels. Rather than receiving shared resources, customers face rising adaptation costs as they are required to align with new digital systems, interfaces, and standards.

The study finds that these adaptation costs crowd out innovation resources. Funds and managerial attention that might have supported long-term research and development are redirected toward short-term system integration and compliance. In some cases, digitally empowered core firms move closer to end markets, intensifying direct competition with customers and squeezing margins. This combination of competitive pressure and resource diversion forms a self-balancing loop that dampens downstream innovation.

Evidence from a decade of supply chain data

The study’s findings are based on a large empirical dataset covering thousands of supplier and customer relationships among Chinese listed firms over more than a decade. Innovation is measured using patent activity and research and development investment, while digital transformation is captured through multiple indicators, including strategic disclosures, operational focus, and digital asset investment.

Across all measures, the results remain consistent. Core firm digital transformation is strongly associated with increased innovation among upstream suppliers and reduced innovation among downstream customers. These effects persist after accounting for firm size, profitability, leverage, governance characteristics, and regional and industry trends. They also remain robust when alternative innovation measures and sample periods are used.

The study goes further by identifying the mechanisms behind these outcomes. For suppliers, increased research and development spending serves as a key transmission channel. As core firms digitize, suppliers raise their own investment in innovation, supported by shared platforms, technical guidance, and improved coordination. Enhanced collaboration efficiency also plays a role, as tighter digital integration reduces friction and speeds up innovation cycles.

For customers, the opposite pattern emerges. Research and development spending declines as resources are redirected toward digital adaptation. Increased market competition further suppresses innovation incentives, particularly in industries where margins are already tight. The study shows that these mechanisms operate simultaneously, reinforcing the asymmetric impact of digital transformation across the supply chain.

Importantly, the analysis reveals that these spillover effects are not uniform. They vary according to firm characteristics and market conditions. Non-state-owned firms experience stronger effects than state-owned counterparts, reflecting differences in flexibility, competitive pressure, and bargaining power. Larger suppliers benefit more from digital spillovers than smaller ones, while larger customers face greater innovation suppression, likely due to their deeper exposure to direct competition with core firms.

Industry competition also matters. In highly competitive sectors, digital transformation amplifies both positive and negative spillovers. Suppliers gain more from collaboration as competition encourages efficiency and integration, while customers face sharper innovation constraints as competitive pressure intensifies. Managerial capability further shapes outcomes, with stronger management teams better able to absorb positive spillovers upstream but also more exposed to competitive dynamics downstream.

Strategic and policy implications for digital supply chains

For core firms, digital transformation cannot be treated as a neutral upgrade. As central actors in supply networks, they effectively shape innovation trajectories beyond their own boundaries. Decisions about platform openness, data sharing, and collaboration models influence whether digital transformation strengthens or weakens the broader ecosystem.

The findings suggest that core firms seeking long-term supply chain resilience may need to balance efficiency gains with ecosystem health. While digital transformation can enhance supplier innovation through collaboration, unchecked competitive pressure on customers risks hollowing out downstream innovation capacity. Over time, this could reduce diversity, limit complementary innovation, and weaken overall system adaptability.

For suppliers, the research highlights the strategic importance of aligning with core firms’ digital trajectories. Rather than viewing digital requirements as compliance costs, suppliers that invest in compatibility, skills, and collaborative innovation stand to gain sustained advantages. The study suggests that proactive engagement, rather than passive adaptation, is key to capturing the benefits of digital spillovers.

Downstream customers face a more challenging landscape. The findings indicate a need for deliberate innovation strategies that protect research and development capacity amid digital pressure. Diversifying partnerships, negotiating data access and co-innovation arrangements, and establishing internal buffers for innovation investment may help counterbalance the crowding-out effects identified in the study.

From a policy point of view, the research raises questions about how digital transformation is supported and regulated. Traditional innovation policies often focus on individual firms, but the study shows that digital transformation produces network-level effects that can reinforce inequality within supply chains. Policymakers aiming to promote sustainable innovation may need to consider ecosystem-level interventions, such as encouraging interoperable standards, supporting shared digital infrastructure, and mitigating excessive concentration of digital power.

The study also challenges the narrative that digital transformation is inherently innovation-enhancing. By demonstrating that the same digital investment can simultaneously stimulate and suppress innovation depending on network position, it calls for a more nuanced understanding of digital change. Innovation outcomes, the research suggests, emerge not from technology alone but from the structure of relationships through which technology spreads.