3 ways digital transformation enhances investment efficiency

Digital transformation significantly enhances investment efficiency and curbs inefficient investment behaviors under the dual pressures of operational diversification and environmental uncertainty.

That’s a key finding from a new research study conducted by academics in China. Empirical results demonstrate that digital transformation significantly inhibits inefficient investment, effectively mitigating both underinvestment and overinvestment. This effect intensifies in firms with higher diversification levels and those operating in stable environments, the research found.

The findings come as many businesses continue to struggle to drive meaningful value from digital transformation investment. Separate research by VML Enterprise Solutions recently portrayed a rather damning image of digital transformation success rates, revealing that while initiatives are frequent and costly, they often fall short of expectations. The research indicated that digital transformation projects cost an average of US$10.9 million, with 37 percent of projects failing. 

Operational diversification and environmental uncertainty hamper investment

“Enterprise digital transformation is a strategic process that fundamentally reshapes organizational management structures, information systems and operational workflows,” the China-based researchers wrote. “It is driven by digital technologies such as big data, cloud computing and artificial intelligence [AI].”

However, the complex information transmission systems arising from the diversified operations of enterprises hampers successful investment, exacerbating issues such as moral hazard and adverse selection, according to the research. Likewise, heightened environmental uncertainty exacerbates information friction, leading to inaccurate cash flow forecasts and overinvestment due to opportunistic behavior by management.

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3 ways digital transformation enhances investment efficiency

The researchers developed a digital transformation index with neural network models and Python-based web scraping tools, empirically testing these relationships while considering the effects of corporate diversification and environmental changes.

The paper outlines the impact of digital transformation on inefficient investment through three key dimensions: 

1. Digital transformation reduces inefficient investment by restructuring enterprise resource systems and decision-making processes. “This dual governance model of ‘data-driven + process embedding’ allows enterprises to monitor investment execution in real-time and quickly correct deviations, ultimately enhancing the scientific rigor of investment decisions and reducing inefficient investment.”
2. Digital transformation can reduce information asymmetry and improve investment decision accuracy. “By improving information quality, digital transformation reduces the risk of adverse selection in capital markets, providing high-quality signals externally and eliminating internal decision-making blind spots.” This helps to correct biases between overinvestment and underinvestment and mitigates inefficient investment.
3. Digital transformation can enhance enterprises’ access to resources, reduce financing constraints and address investment insufficiencies by overcoming bottlenecks through policy adaptability and stronger market signals. “This alleviates the challenges of costly and difficult financing. In sum, digital transformation has alleviated financing challenges and supported more efficient investment through multidimensional resource integration and capability enhancement.”

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