Can Trade Liberalization Promote Digital Industry Innovation in Cities? Evidence from China's Pilot Free Trade Zones

The establishment of pilot free trade zones represents a significant step in trade liberalization. Exploring its influence on urban digital innovation, as well as the mechanisms involved, holds crucial theoretical and practical significance for enhancing urban competitiveness and achieving economic development. Drawing from panel data spanning 2000 to 2023 from 281 prefecture-level cities, this study constructs a staggered DID model to systematically examine the effects and mechanisms through which free trade zone policies promote urban digital innovation. The research findings suggest that the construction of free trade zones significantly boosts urban digital innovation. Mechanism analysis reveals that free trade zones empower urban digital innovation through three pathways: promoting industrial collaborative agglomeration, strengthening knowledge spillover effects, and optimizing the business environment. Heterogeneity tests indicate that the effects of digital innovation are more pronounced in cities with relatively advanced digital infrastructure and higher levels of opening-up. Further investigations show that free trade zones has significant spatial spillover effects. Therefore, it is imperative to continue refining the top-level design of free trade zones, unleashing their positive effects on industrial collaborative agglomeration, knowledge spillover, and optimization of the business environment, fully harnessing the catalytic role of trade liberalization in driving urban digital innovation.