Exploring the Solow Paradox: Evidence from a Quasi-Natural Experiment in China on Smart City Pilots and Corporate Total Factor Productivity

Abstract

The development of smart cities plays a crucial role in facilitating the integration of economic and ecological benefits within urban contexts. However, whether this could benefit firms has received limited attention in existing studies. This study aims to investigate the relationship between smart city pilots (SCPs) and corporate total factor productivity (TFP), examining the potential mechanisms and different heterogeneities. Utilizing a difference-in-difference strategy with Chinese listed firms’ data from 2005 to 2020, a quasi-natural experiment was conducted to test the proposed hypotheses based on the three batches of SCPs in China from 2012 to 2014. The empirical analyses showed that SCPs can significantly decrease corporate TFP (β = −0.075, p < 0.01). It was further revealed that this association is mediated by corporate governance practices (z = −2.4, p < 0.05). Moreover, the results uncovered the presence of heterogeneities, particularly concerning geographical location and urban scale, with a stronger inhibitory impact on TFP in the eastern region and supercities. These findings provide empirical evidence supporting the Solow paradox theory and furnish insightful references for other similar developing countries to refine the strategies in smart city development, thereby achieving more favorable outcomes.