Research on the Impact of Financial Deepening on Digital Economy Development: An Empirical Analysis from China

Abstract

Financial deepening aims to promote economic development. In the past years, China’s digital economy has achieved remarkable development achievements, and its role in guiding and supporting sustainable economic and social development has become increasingly prominent. Therefore, it is worth considering whether financial deepening can effectively support the development of the digital economy and what the impact pathway is of financial deepening on digital economy development. Based on panel data from 2013 to 2021 at the provincial level in China, this study constructs a comprehensive indicator system for digital economy development using the entropy method. The indicator comprises four dimensions: digital infrastructure, digital industrialization, industrial digitalization, and digital services. By utilizing fixed effects models and mediation effects models, this study investigates the impact and transmission mechanisms of financial deepening on digital economy development. The research results indicate that financial deepening significantly improves the level of digital economy development and passes the robustness test. Heterogeneity tests indicate that financial deepening contributes more to promoting digital economy development in the central and western regions compared to the eastern region. Financial deepening promotes the digital economy development through the intermediary pathway of technological innovation, where technological innovation serves as a mediator between the two. In the future, it is crucial to fully leverage the supportive role of financial deepening, promote technological innovation, and further drive the sustainable development of the digital economy.

1. Introduction

The world is currently undergoing unprecedented changes, and the 21st-century COVID-19 pandemic has had far-reaching impacts, impeding the global economic recovery. In this context, the digital economy has emerged as a pivotal force, reshaping global factors and transforming the economic structure and competitive landscape worldwide. Since the 18th Party Congress, the government has attached significant importance to digital economy development, recognizing its critical strategic position. It can be seen that the digital economy has become a powerful driving force for economic development and a key to economic recovery. In 2022, China’s digital economy made a new breakthrough, with the digital economy size reaching 50.2 trillion, representing a nominal year-on-year growth rate of 10.3%. The proportion of the digital economy to GDP was as high as 41.5%, indicating its increasing importance in the national economy. Therefore, the support of finance is indispensable. Financial deepening aims to expand various products and services in the financial market and system, enhance inclusiveness in the financial system, and provide more comprehensive and diversified financial services and support for economic development. The 19th Communist Party Congress clearly proposed deepening the financial system. In October 2022, the 20th Communist Party Congress emphasized the importance of improving the function of the capital market and promoting healthy capital development. The financial industry should focus on supporting strategic emerging industries [1]. These economic policy directions align with the goals of financial deepening, highlighting its growing significance. The digital economy has the characteristics of large scale, rapid development, and strong interconnectivity, which require providing more precise and efficient financial support [2]. Financial deepening can further guide financial institutions to optimize the credit structure and provide sufficient financial support to better meet the needs of the digital economy development. As the digital economy is a crucial component of national development, the financial industry must understand the trends and patterns of the digital economy development and prioritize financial resources into the frontier areas, critical links, and important industries to drive the sustainable development of China’s economy. Regions or countries with a high degree of financial deepening can better mobilize resources, lower risks, and allocate funds more efficiently to support innovative projects with higher risks. Therefore, it is essential to examine whether financial deepening can further promote the digital economy development and drive it through technological innovation.

The contribution of this paper lies in the following aspects. Firstly, according to the existing researches on the digital economy development, this paper establishes a comprehensive indicator of digital economy development consisting of four dimensions: digital infrastructure, digital industrialization, industrial digitalization, and digital services. This indicator can provide a relatively comprehensive and objective reflection of the level of digital economy development, which is of practical significance for measuring the development of the digital economy. Secondly, in the backdrop of rapid digital economy development, this paper investigates the relationship between financial deepening and the digital economy development. This paper conducts robust tests to ensure the accuracy of the results and investigates the regional heterogeneity, thus, further enriching the existing literature. Thirdly, while considering how financial deepening affects digital economy development, this paper adopts a mediating effects model to further explore the relationship between financial deepening and digital economy development, filling in the corresponding research gaps. Additionally, it provides a valuable reference for policy-making in the field of digital economy development.

The rest of this paper is organized as follows. Section 2 provides the relevant literature and the development of hypotheses. Section 3 presents the data and methodology used in the study. Section 4 discusses the empirical results. Section 5 presents a discussion. Section 6 summarizes the study and provides policy implications.

2. Literature Review and Research Hypothesis

2.1. Literature Review

2.1.1. Financial Deepening

Schumpeter [3] emphasizes the importance of finance in economic development theoretically. Goldsmith [4] finds that economic growth and financial support are interconnected through the perspective of financial structure. Shaw [5] argues that the liberalization of financial markets and systems helps countries develop. Mckinnon [6] argues that developing countries are hindered by backward financial institutions and economic inefficiencies. Robert et al. [7] find that financial intermediary enhances capital formation, total factor productivity growth, and long-term economic growth. Marco et al. [8] argue that banks can act as catalysts for industrialization provided they are sufficiently large to mobilize a critical mass of firms and that they possess sufficient market power to make profits from coordination. Nader [9] finds that deregulation and a more developed banking sector prompt firms to increase the capital intensity of production, fostering more rapid growth. Graff et al. [10] find that if financial activity fails to keep pace with or exceeds what balances with a coordinated expansion path, countries benefit less. Osuka et al. [11] find that financial deepening improves human capital in Nigeria, indicating a long-term relationship between financial deepening and economic development. Sugiyanto et al. [12] find that financial deepening has a positive effect on economic growth. Xu et al. [13] find that a series of macro and micro-level financial liberalization policies significantly enhanced the productivity of the manufacturing sector. Wang [14] distinguishes financial deepening from financial liberalization by defining the former as a catalyst that promotes savings, investment, and improves the efficiency of the financial sector, ultimately boosting the national economy. Yang et al. [15] argue that insufficient financial development in the central region and weakened financial performance impact on the region’s economic growth. Based on the endogenous development of finance and economic growth, Shen et al. [16] argue that improving financial intermediary efficiency is a means of smoothing the transmission mechanism between financial deepening and economic growth, achieving the dual goals of financial liberalization and economic growth. Zhan [17] emphasizes that sustainable financial deepening reforms in developing countries require prioritizing domestic macroeconomic stability and rationalizing government revenue structures. Xiong et al. [18] argue that capital accumulation is the most critical transmission channel of financial deepening for China’s economic growth. Tian et al. [19] identify private capital as an essential factor for rural economic development, facilitated by microfinance companies as a carrier for financial deepening. Hu [20] finds that financial deepening in Gansu Province has a significant promotional effect on poverty reduction. Liao [21] emphasizes the importance of strengthening the financial infrastructure and enhancing the collaboration in serving the digital economy, providing more financial strength to facilitate the current economic recovery.

2.1.2. Financial Deepening and Technological Innovation

Yang et al. [22] argue that financial deepening and optimizing the allocation of financial resources can promote technological progress and high-quality economic development. Zhang et al. [23] find that financial scale, financial deepening, and financial efficiency significantly enhance regional innovation quality. Xu et al. [24] find that “bank-led” financial deepening hinders technological progress in middle–high income countries and regions. Li et al. [25] find that financial deepening significantly promotes technological innovation, and technological innovation plays a vital mediating role in realizing financial support for industrial upgrading. Liu et al. [26] find that financial deepening policies enhance “capital allocation” and “technological progress,” promoting economic efficiency through the enhanced output efficiency of social labor. Yuan [27] finds that financial deepening has a positive impact on enterprise motivation in input efforts. Hu et al. [28] argue that finance and technological innovation should be deeply integrated to serve regional innovative development and rapidly and efficiently align with the digital economy. Liu et al. [29] find that bank credit is the primary financial support for technological innovation. Pei [30] finds that the inflow of bank loan funds enables technology-oriented companies to have the financial means and resource advantages to develop innovative projects. Dong et al. [31] find that both government subsidies and bank loans have a significant positive impact on the development of technology-oriented companies. Li [32] finds that financial supply-side support has a positive and significant effect on the development of technology in high-tech industries.

2.1.3. Technological Innovation and Digital Economy Development

Chen et al. [33] find that fintech facilitates technological innovation while also weakening financial decentralization in local governments, promoting the development of the digital economy in China. Yuan et al. [34] find a stable, long-term relationship between the determinants of technological innovation including the digital economy, bank financing for R&D expenditures, GDP, and financial risk. Wu et al. [35] find that fintech expedites data accumulation, enhances total factor productivity, and drives growth in the digital economy by promoting industry innovation. Xue et al. [36] argue that fintech can optimize resource allocation, improve information collection and transmission efficiency, and promote risk management in the financial industry to facilitate high-quality real economic development and the construction of digital industrial infrastructure, thus supporting China’s economic transformation. Liu et al. [37] find that science and technology finance can facilitate the development of high-tech industries, leading to industrial restructuring and upgrading. Li et al. [38] discover that scientific and technological development has a region-wide impact on the digital transformation of enterprises in China. Qi [39] emphasizes the importance of actively exploring new paths in scenario finance to enable the digital transformation in China’s fast-growing digital economy. Li [40] emphasizes the importance of strengthening financial services through technological innovation and fully supporting the development of the digital economy. Zhou et al. [41] emphasize the need to intensify theoretical research and technological innovation to promote digital transformation. Lei [42] argues that capital and financial support drive technological innovation and the upgrade of underlying technologies in the digital economy. Zhou et al. [43] argue that the digital economy enabled by digital technologies is reshaping economic and social development, leading to a digital revolution in entrepreneurship and innovation.

In summary, there are few existing studies on the relationship between financial deepening and digital economy development. Moreover, few studies have integrated financial deepening, technological innovation, and the digital economy into a single theoretical framework. Therefore, this paper attempts to construct an index system for digital economy development based on the connotations of digital economy development; furthermore, it examines whether financial deepening promotes digital economy development and investigates if it can promote digital economy development through technological innovation, thus accelerating China’s digital economy development.

2.2. Research Hypothesis

2.2.1. Financial Deepening and Digital Economy Development

Financial deepening refers to the multidimensional approach of developing a multi-level, market-oriented financial system to enhance economic growth. This approach includes opening and developing financial markets, creating innovative financial products and services, initiating reforms in financial institutions, and strengthening financial supervision. Nowadays, the digital economy is no longer limited to the electronics, communication, and information industries, it is also achieving deep integration with the traditional economy. The digital economy is no longer merely a part of the economy, but it represents the economy as a whole. Given its high growth potential and profitability, the digital economy and its associated industries require substantial financial support. Financial deepening can increase the reserve of liquid assets and expand the scale of financing [44], guiding the flow of capital into highly competitive, high-yield digital industries and thereby promoting their rapid development. Financial institutions have increased their support through credit policies towards emerging industries, promoting the digital transformation of traditional industries [45]. Moreover, regional financial deepening can improve the access of financial intermediaries, such as banks and venture capitalists, to real enterprise information, thereby alleviating the financing constraints faced by enterprises [46], broadening enterprise financing channels, reducing financing costs, and providing more options for digital economy enterprises. Financial deepening can enhance the efficiency of resource allocation within the digital economy through the integration of modern technologies such as Big Data. The effective investment of funds in key aspects of the digital economy can be facilitated by financial deepening, thereby promoting its development. With the rapid development of the digital economy, it becomes imperative to manage the associated financial risks. Financial deepening can address these risks by enhancing the financial market system and regulatory environment, and implementing other measures to ensure the healthy and sustainable growth of the digital economy. Additionally, financial deepening drives innovation in digital payment systems, digital currency, financial technology, and other related areas, thereby providing more efficient and convenient financial services to support the growth of the digital economy. In conclusion, financial deepening plays a crucial role in supporting the healthy and sustainable development of the digital economy. It eases financing constraints, enhances resource allocation efficiency, manages financial risks, and provides crucial financial support and services where necessary.

Therefore, based on the above analysis, this paper proposes the following hypotheses:

Hypothesis 1 (H1):

Financial deepening can promote the digital economy development.

2.2.2. Financial Deepening, Technological Innovation, and Digital Economy Development

Technological innovation exhibits characteristics of long cycles, high returns, and high risks. However, financial institutions often hesitate to provide financial support to innovation projects with lengthy cycles and high risks, setting a capital constraint on technological innovation for enterprises. Firstly, financial deepening can mitigate this challenge by expanding the scale of savings, increasing the availability of loanable funds, and easing competition for enterprise funds [47]. Secondly, financial deepening promotes a wide range of financial instruments that reduce investor’s investment risks and foster their willingness to invest. With the advancement of financial deepening, financial institutions can enhance their ability to collect information on corporate innovation, alleviating the challenge of information asymmetry. Furthermore, financial deepening can enhance the efficiency of converting savings into investments, reduce innovation funding costs, mitigate investment risks, alleviate information asymmetry, and thereby increase investment in innovative projects that drive technological innovation. Financial intermediaries will evaluate the value of technological innovation and explore avenues such as product innovation and technological empowerment to expand the range of collateral. These efforts will provide greater financial support for enterprise innovation and foster technological advancements [48]. Technological innovation is not only the fundamental source of productivity but also a critical driver of digital economy development. Achieving technological innovation in traditional industries can reduce energy consumption and accelerate the digitalization process, helping promote sustainable economic development [49]. It facilitates the digital transformation of traditional industries and promotes digital economy development.

Through the above analysis, it is obvious that financial deepening can promote technological innovation. Technological innovation, in turn, lays the foundation for achieving digital economy development.

Therefore, based on the above analysis, this paper proposes the following hypotheses:

Hypothesis 2 (H2):

Technological innovation has a mediating effect between financial deepening and the digital economy development.

3. Methodology and Data

3.1. Models

3.1.1. Basic Model

When studying the relationship between financial deepening and digital economy development, Cheng et al. [50] use a fixed-effects model controlling time and region factors to study the influence of financial deepening on digital economy development. To avoid omitted variable bias, referring to Fang et al. [51] and Du et al. [52], this paper constructs a fixed-effects model controlling time and region as a way to investigate the study of the impact of financial deepening on the digital economy development to test Hypothesis 1:

$$D{e}_{it}={\theta }_0+{\theta }_{1}F{d}_{it}+{\theta }_{2}Control{s}_{it}+{\delta }_{it}$$

(1)

where De stands for digital economy development index; Fd stands for financial deepening; Controls stands for control variables; $i$ stands for province; $t$ stands for time; $\theta$ stands for coefficient; and $\delta$ stands for residual term.

3.1.2. Mediating Effect Model

To investigate whether there is a mediating effect of technological innovation between financial deepening and digital economy development, considering the greater applicability, referring to Wen et al. [53], Zhang [54], and Ma et al. [55], this paper constructs a mediating effect model as a way to test Hypothesis 2:

$$D{e}_{it}={\alpha }_0+{\alpha }_{1}F{d}_{it}+{\alpha }_{2}Control{s}_{it}+{\epsilon }_{it}$$

(2)

$$I{n}_{it}={\beta }_0+{\beta }_{1}F{d}_{it}+{\beta }_{2}Control{s}_{it}+{\eta }_{it}$$

(3)

$$D{e}_{it}={\gamma }_0+{\gamma }_{1}F{d}_{it}+{\gamma }_{2}I{n}_{it}+{\gamma }_{3}Control{s}_{it}+{\zeta }_{it}$$

(4)

where In represents the technology innovation index; $\beta$ and $\gamma$ represent the coefficients; $\eta$ and$\zeta$ represent the residual terms; and the rest of the letters represent the same meaning as above. In addition, in the mediating effect model, ${\alpha }_1$ represents the total effect of financial deepening on the digital economy development, ${\gamma }_1$ represents the direct effect of financial deepening on the digital economy development, and the result of multiplying ${\beta }_1$ and ${\gamma }_2$ represents the indirect effect of financial deepening on digital economy development through the path of technological innovation.

The Mediating effect model is shown in Figure 1. Perform regressions for Equations (2)–(4) in sequence. If${\alpha }_1$, ${\beta }_1,$and ${\gamma }_2$ are all significant, it indicates the presence of a mediation effect. Based on this, if ${\gamma }_1$ is significant, it suggests the presence of a partial mediation effect, meaning that a portion of the impact of financial deepening on digital economy development is mediated by the intermediary variable of technology innovation.

3.2. Description of the Data

3.2.1. Dependent Variables

Tapscott [56] first proposes the concept of the digital economy, arguing that the digital revolution of information technology has made the digital economy a new economy based on human intelligence networking. Margherio [57] defines the digital economy as encompassing the Internet infrastructure, e-commerce, digital transaction payments for goods and services, and retail tangible goods. Mesenbourg [58] regards the digital economy as consisting of the infrastructure of electronic business, e-commerce, and electronic commerce. Kim [59] introduces the inclusion of digital infrastructure as a driving force for digital economy growth. Tae [60] emphasizes that the digital economy is a new approach to economic development, particularly in light of the rapid advancements in information technology that have profoundly impacted the global economy. Xie [61] argues that the digital economy promotes “dematerialization” of production and life, reducing energy and resource consumption. Liu et al. [62] argue that the digital economy is a new economic form which utilizes the core element of digital information and is supported by the development of informatization and the Internet. In the digital age, various traditional industries are integrating to varying degrees with digital technologies. The digitization of industries is an important aspect when measuring the digital economy. In July 2022, the “China Digital Economy Development White Paper (2022)”, released by the China Academy of Information and Communications Technology, defined the digital economy as “a new form of economy that uses digitized knowledge and information as the key production elements, digital technology as the core driving force, and modern information networks as important carriers. By deeply integrating the digital economy with the real economy, it continuously enhances the level of digital, networked, and intelligent economic and social development, and accelerates the reconstruction of the economic development and governance models [63]”. This paper draws on relevant research, including the “Classification of the digital economy and its core industries (2021) [64]” and follows the principles of scientificity, systematicity, comprehensiveness, and comparability in selecting indicators, finally categorizing the digital economy development level into four dimensions: digital infrastructure, digital industrialization, industrial digitization, and digital services. Each dimension includes various sub-indicators that were carefully selected to construct a comprehensive measurement system to assess the level of digital economy development at the provincial level. The specific indicators are detailed in

Table 1. Index system of digital economy development.

First-Level Indicators	Second-Level Indicators	Third-Level Indicators	Properties
Digital economy development level	Digital Infrastructure	Length of fiber optic cable line	+
		Number of Mobile phone base stations	+
		Mobile Phone Penetration Rate	+
		Number of Internet broadband access ports	+
		Number of Internet domain names	+
		Number of ipv4 addresses	+
	Digital Industrialization	Total Amount of Telecommunications Services	+
		Software industry revenue	+
		Number of Employees in Information Services Industry	+
		Output Value of Information Technology Industry	+
	Industrial Digitization	E-commerce Sales Revenue	+
		Proportion of Enterprises with E-commerce Transactions	+
		Number of Websites per Hundred Enterprises	+
	Digital Services	Digital Inclusive Finance	+

, where + represents the positive indicators in the entropy method, and the data of each indicator are from the CSMAR database.

The entropy method is a commonly used method for determining the weights assigned to multiple indicators. It has strong objectivity and accurately reflects the utility value of information [65]. To enhance objectivity and reduce subjectivity, this paper adopts the entropy method to determine the indicator weights and obtain the comprehensive digital economy development index by province. The weights of each indicator are measured as shown in

Table 2. Indicator weights (Unit: %).

Indicators	Weights	Indicators	Weights
Length of fiber optic cable line	4.571%	Software industry revenue	14.600%
Number of Mobile phone base stations	4.273%	Number of Employees in Information Services Industry	9.261%
Mobile Phone Penetration Rate	2.242%	Output Value of Information Technology Industry	15.006%
Number of Internet broadband access ports	4.495%	E-commerce Sales Revenue	10.526%
Number of Internet domain names	10.038%	Proportion of Enterprises with E-commerce Transactions	2.215%
Number of ipv4 addresses	10.994%	Number of Websites per Hundred Enterprises	0.733%
Total Amount of Telecommunications Services	8.830%	Digital Inclusive Finance	2.225%

. From Table 2, it can be observed that the Output Value of Information Technology and Industry Software industry revenue have relatively high weights, 15.006% and 14.600%, respectively. This indicates that Digital Industrialization is an important component of digital economy development.

3.2.2. Independent Variable

The measurement of financial deepening is commonly assessed by the scale and structure of the financial system. China’s financial system currently heavily relies on indirect financing, and bank loans are the main source of financing for digital economy enterprises. Financial deepening is reflected in the increasing penetration of credit in the banking sector and the investment bias of loans from banks or other financial institutions [66]. This paper decides to use the logarithm of loan balances of financial institutions to measure the actual situation of financial deepening.

3.2.3. Mediating Variable

Compared to R&D expenditure data, patent data are considered to be more objective and transparent. Following the approach of Xiong et al. [67], this paper decides to use the logarithm of the number of patents granted per ten thousand people to measure the level of technological innovation.

3.2.4. Control Variables

This paper aims to study the impact of financial deepening on the digital economy development. Therefore, other important control variables should be taken into account to control for the effects on the independent variables. Based on the existing researches by Wang et al. [68] and Zhu et al. [69], this paper includes the following control variables: government support (Gov), measured as the ratio of regional fiscal expenditure to GDP; foreign investment (FDI), measured as the ratio of foreign direct investment to GDP in each province; openness (Open), measured as the ratio of total imports and exports to GDP in each province; transportation level (Transport), measured as the logarithm of the number of grade kilometers; and human capital (Edu), measured as the ratio of regional education expenditures to regional fiscal expenditures.

3.3. Data Source

Due to the unavailability of data from the Tibetan province, this paper finally utilizes panel data from 30 provincial administrative units (excluding Hong Kong, Macao, and Taiwan) in China from 2013 to 2021. In this paper, Digital Inclusive Finance is from the Digital Inclusive Finance Index released by Peking University, and other data are from the National Bureau of Statistics, the China Financial Yearbook, statistical yearbooks of each province, and the CSMAR database.

3.4. Descriptive Statistics

Table 3. Descriptive Statistical Results of Main Variables.

	Variables	Symbols	Mean	Standard Deviation	Min	Max
Dependent Variables	Digital Economy	De	0.3704	0.4143	0.0254	2.5897
Independent Variables	Financial Deepening	Fd	10.3072	0.8083	8.1647	12.3115
Intermediate Variables	Technology Innovation	In	2.1724	0.9971	−0.1288	4.5087
Control Variables	Government Support	Gov	0.2522	0.1023	0.1066	0.6430
	Foreign Investment	FDI	0.0188	0.0170	0.0001	0.1210
	Openness	Open	0.2529	0.2643	0.0076	1.3418
	Transportation Level	Transport	11.6327	0.8258	9.4441	12.8607
	Human Capital	Edu	0.1613	0.0257	0.0989	0.2099

presents the descriptive statistics of each variable, with no missing values. The mean values in the table reflect the overall average situation of the sample, representing the overall trend. The standard deviation, minimum value, and maximum value provide insights into the sample’s central tendency and dispersion from a statistical perspective. According to Table 3, the standard deviation, minimum value, and maximum value of high development in the digital economy are 0.4143, 0.0254, and 2.5897, respectively. This indicates significant disparities in the level of digital economy development among different provinces. The standard deviation, minimum value, and maximum value of the financial deepening indicator are 0.8083, 8.1647, and 12.3115, respectively. This reflects the imbalance in financial deepening levels among different regions in our country. The standard deviation, minimum value, and maximum value of the technology innovation indicator are 0.9971, −0.1288, and 4.5087, respectively. This suggests the presence of imbalances and regional differences in technology innovation.

3.5. Correlation Matrix

Preliminarily to the regression analysis, this study conducts correlation analysis for each variable, and the results of correlation coefficients are shown in

Table 4. Correlation matrix.

	De	Fd	In	Gov	FDI	Open	Transport	Edu
De	1.000
Fd	0.7679 ***	1.0000
In	0.7416 ***	0.7870 ***	1.0000
Gov	−0.4615 ***	−0.7373 ***	−0.5271 ***	1.0000
FDI	0.0966	0.1727 ***	0.2813 ***	−0.3808 ***	1.0000
Open	0.6599 ***	0.5560 ***	0.6722 ***	−0.4027 ***	0.3538 ***	1.0000
Transport	−0.0687	0.2384 ***	−0.2122 ***	−0.1866 ***	−0.3509 ***	−0.5255 ***	1.0000
Edu	0.2130 ***	0.3960 ***	0.1257 **	−0.4705 ***	−0.0079	0.0426	0.4062 ***	1.0000

Note: **, and *** represent significance at the level of 5%, and 1%.

. The results demonstrate that financial deepening is significantly and positively correlated with both the digital economy and technological innovation. Additionally, the digital economy is significantly and positively correlated with technological innovation. The correlation analysis conducted provides a solid basis for this paper to proceed with regression analysis and further support the hypothesis.

4. Empirical Results and Analysis

4.1. Regression Results

4.1.1. Benchmark Regression Results

This paper conducts a regression analysis to examine the relationship between financial deepening and digital economy development controlling region and time. The benchmark regression results are shown in

Table 5. Benchmark regression results.

Variables	Coefficient
	De
Fd	0.5327 ***
	(4.88)
Gov	−0.5976
	(−1.61)
FDI	−0.4554
	(−0.64)
Open	−1.3771 ***
	(−9.93)
Transport	−0.8053 ***
	(−7.11)
Edu	1.8827 **
	(1.98)
Constants	4.4564 ***
	(2.99)
Number of Observations	270
R-squared	0.7133
Province	YES
Year	YES

Note: **, and *** represent significance at the level of 5% and 1%, respectively, and the values in brackets are T-values.

. According to Table 5, after controlling for the effects of other factors, financial deepening is positively correlated with digital economy development and is significant at the 1% level, with a correlation coefficient of 0.5327, indicating that financial deepening can significantly improve the level of digital economy development, thereby proving the validity of Hypothesis 1. Financial deepening facilitates the allocation of funds to digital economy industries through credit and financing channels, fostering the growth of digital industries, and ultimately promoting the development of the digital economy. Additionally, financial deepening introduces innovative financial products and services, such as online banking and third-party payments, which contribute to the efficiency and effectiveness of financing for enterprises engaged in the digital economy. Among the control variables, the human capital level is positively correlated to digital economy development, indicating that human capital is a crucial force driving digital economy development. In contrast, openness is negatively correlated to digital economy development, which could potentially be attributed to external factors such as the trade war between China and the U.S., resulting in a declining trend in China’s total imports and exports and potentially weakening the driving force for the digital economy. Furthermore, the transportation level is negatively correlated to digital economy development, possibly because communication technology and the Internet have reduced spatial barriers and provided convenience for digital economy development.

4.1.2. Robust Regression Results

To ensure the reliability of the benchmark regression results, this paper conducts robust tests, and the robust test results are shown in

Table 6. Robust regression results.

Variables	(1)	(2)	(3)
	De	De	De
Fd		0.7119 ***	0.3575 ***
		(8.31)	(2.82)
Depth	0.4727 ***
	(7.33)
Gov	−0.3423	−0.3525	−1.0407 ***
	(−0.97)	(−1.19)	(−2.73)
FDI	0.5627	−2.1270 ***	0.1055
	(0.86)	(−2.87)	(0.15)
Open	−1.0843 ***	−1.3750 ***	−1.2803 ***
	(−8.62)	(−8.79)	(−9.66)
Transport	−0.3962 ***	−0.6851 ***	−0.7700 ***
	(−3.57)	(−7.16)	(−6.30)
Edu	1.0860	−0.1615	0.9034
	(1.19)	(−0.20)	(0.96)
Constants	4.1334 ***	1.7104	6.0617 ***
	(3.11)	(1.33)	(3.75)
Number of Observations	270	234	240
R-squared	0.7439	0.7598	0.7217
Province	YES	YES	YES
Year	YES	YES	YES

Note: *** represent significance at the level of 1%, respectively, and the values in brackets are T-values.

.

(1)

Replacing the indicators of the independent variable. In column (1) of Table 6, the regression outcomes are displayed using the financial depth index (Depth) released by Peking University to represent the level of financial deepening. The regression coefficient of the new indicators of financial deepening is significantly positive, indicating robustness of benchmark regression results;

(2)

Excluding the sample of centrally governed municipalities. The data from four municipalities governed by the central government, Beijing, Shanghai, Tianjin, and Chongqing, are not included in the sample. The regression results for the remaining 26 provinces are shown in column (2) of Table 6; the regression coefficient of financial deepening is significantly positive, ensuring the reliability of benchmark regression results;

(3)

Referring to Hu et al. [70] concerning possible causality issues between financial deepening and the digital economy development, this paper lags the explanatory variable and control variables by one period. The regression results are shown in column (3) of Table 6. Financial deepening with one-period lagged continues to have a significant positive effect on the digital economy development, which is consistent with the benchmark regression results.

4.2. Heterogeneity Results

To examine the heterogeneity in financial deepening for the digital economy development, this paper conducts heterogeneity tests from regions, and the test results are shown in

Table 7. Heterogeneity test results.

Variables	Eastern Region	Central and Western Regions
	De	De
Fd	0.3367	0.3235 ***
	(1.42)	(5.46)
Gov	−1.6639	−0.9222 ***
	(−1.58)	(−5.34)
FDI	1.5259	−3.0301 ***
	(1.44)	(−3.68)
Open	−1.1580 ***	0.2209
	(−5.19)	(1.44)
Transport	−1.0944 ***	−0.0869
	(−4.06)	(−1.39)
Edu	5.655 ***	−1.8109 ***
	(2.91)	(−3.39)
Constants	8.9299 **	−1.3915 *
	(2.29)	(−1.96)
Number of Observations	90	180
R-squared	0.8496	0.8217
Province	YES	YES
Year	YES	YES

Note: *, **, and *** represent significance at the level of 10%, 5% and 1%, respectively, and the values in brackets are T-values.

. Due to regional differences in the distribution of financial resources across China, the impact of financial deepening on the country’s digital economy varies across regions. This analysis has categorized the 30 provincial administrative units into eastern, central, and western regions for analysis. The results indicate that the impact of financial deepening on digital economy development is more significant in the central and western regions compared to the eastern region. The central and western regions are predominantly characterized by industries such as construction, energy, and manufacturing, which have relatively lower levels of financial development. By increasing financial support in the central and western regions, financial deepening can better prioritize the allocation of financial resources to the digital economy sector and accelerate the digital transformation of these traditional industries. As a result, it has a greater marginal effect on promoting the digital economy development in the central and western regions, thereby emerging as a driving force in promoting the digital economy development in these regions.

4.3. Mechanism Results

4.3.1. Mediating Effect Results

For studying mediation effects, the product coefficient method is more effective compared to the causal stepwise regression, which can be divided into the Sobel test and Bootstrap test [71]. This paper uses the Sobel test to verify whether there is a mediating effect of technological innovation between financial deepening and digital economy development, and the test results are shown in

Table 8. Mediation effect test results.

Variables	(1)	(2)	(3)
	De	In	De
Fd	0.4139 ***	1.3581 ***	0.3226 ***
	(11.32)	(18.96)	(5.77)
In			0.0672 **
			(2.15)
Gov	0.6701 ***	0.8968 *	0.6098 ***
	(2.87)	(1.96)	(2.61)
FDI	−2.8917 ***	0.1550	−2.9021 ***
	(−2.86)	(0.08)	(−2.89)
Open	0.3685 ***	−0.6949 ***	0.4152 ***
	(3.35)	(−3.23)	(3.73)
Transport	−0.0795 **	−0.6482 ***	−0.0359
	(−2.43)	(−10.13)	(−0.94)
Edu	0.3935	−1.5896	0.5004
	(0.59)	(−1.22)	(0.76)
Constants	−3.2431 ***	−4.0827 ***	−2.9685 ***
	(−8.28)	(−5.32)	(−7.25)
R-squared	0.7036	0.7992	0.7088
Sobel		0.0913 **
Indirect effect		0.0913 **
Direct effect		0.3226 ***
Total effect		0.4139 ***

Note: *, **, *** represent significance at the 10%, 5%, and 1% levels, respectively, and t-values are in parentheses.

. According to Table 8, financial deepening and digital economy development are positively correlated at the 1% significance level, indicating that financial deepening has a significant impact on the digital economy development, which is consistent with the prior research. Financial deepening can facilitate technological innovation, thereby optimizing capital allocation, reducing financing costs for enterprises, and eliminating information asymmetry; thus, this increases investors’ investment in innovation projects to promote technological innovation. Technological innovation acts as a catalyst for productivity enhancement and serves as a crucial driver of economic growth. Technological innovation contributes to the upgrade of production processes, improves efficiency, and accelerates the digital transformation of traditional industries, which in turn promotes the development of the digital economy. According to Table 8, the Sobel intermediary effect test is significant at the 1% level, and every 1% increase in the degree of financial deepening increases the degree of digital economy development by 0.4139%, of which the direct effect accounts for 0.3226% and the indirect effect accounts for 0.0913%. The direct effect accounts for 77.94% of the total effect, and the mediating effect accounts for 22.06% of the total effect. Consequently, there is a partial intermediary effect of technological innovation between financial deepening and digital economy development, and financial deepening can promote the digital economy development through the channels of technological innovation.

4.3.2. Bootstrap Mediating Effect Test

To ensure the accuracy of the mediating effect results, this paper uses a Bootstrap self-sampling method for testing, and the test results are shown in

Table 9. Bootstrap mediating effect test.

	Coefficient	p-Value
Indirect effect	0.0913	0.005
Direct effect	0.3226	0.000

. According to Table 9, the direct effect of financial deepening on digital economy development is 0.3226, which is significantly positive at the 1% level; the indirect effect is 0.0913, which is also significantly positive at the 1% level, showing that there is a mediating effect of technological innovation between financial deepening and digital economy development. Financial deepening can promote digital economy development through the intermediary effect of technological innovation.

5. Discussion

The international power structure has recently undergone significant adjustments, presenting new strategic opportunities for China’s economic development. The digital economy has emerged as a powerful driving force for sustainable economic growth, playing a pivotal role in the recovery of China’s economy. Nevertheless, digital industries and sectors frequently encounter challenges in obtaining the adequate financial support. To address this issue, this paper constructs a comprehensive evaluation system for the digital economy development. In the research, we have found a positive relationship between financial deepening and the digital economy development. Financial deepening encourages an increase in domestic savings, foreign capital inflows, and the overall amount of savings. These increased savings can bolster the pool of loanable funds; thus, promoting investment in the digital economy. Moreover, intense market competition ensures an efficient allocation of investment opportunities, emphasizing high-return projects, thereby supporting the development of new digital industries and promoting the growth of the digital economy. For a long time, China’s central and western regions have experienced significant economic disparities, with relatively lower levels of financial development. In this context, financial deepening can optimize resource allocation and accelerate the development of the digital economy in these regions. The intermediary effect test also reveals that technological innovation plays a crucial role. By reducing the financing costs faced by innovative projects, financial deepening stimulates technological innovation. These advancements in technology facilitate the implementation of new digital projects and industries, accelerate the digital transformation of traditional industries, gradually phasing out backward industries with high energy consumption and pollution, and ultimately promote the development of the digital economy. In conclusion, from the above discussion, we can see that financial deepening can promote the digital economy development.

6. Conclusions and Policy Recommendations

6.1. Conclusions and Policy Recommendations

This article constructed a comprehensive indicator system for the digital economy development based on its concept and connotation. By using panel data from 30 provincial-level administrative units in China from 2013 to 2021, we empirically examined the impact of financial deepening on the digital economy development. The results obtained through a fixed-effects model show a positive and significant correlation between financial deepening and the digital economy development at a 1% level of significance, indicating that financial deepening can significantly improve the level of digital economy development, thus confirming Hypothesis 1. Robustness tests were also conducted to ensure the reliability of the conclusions. Moreover, through heterogeneity tests, it was found that the promoting effect of financial deepening on digital economy development is more significant in the central and western regions. Additionally, this article conducted an in-depth analysis of the intrinsic connection and mechanism between financial deepening and the digital economy development. We explored the effective path of the impact of financial deepening on the digital economy development by establishing a mediation effect model. Through the Sobel test and Bootstrap test, the empirical results demonstrate that financial deepening has a significant promoting effect on technological innovation. Furthermore, we found that technological innovation acts as a mediator between financial deepening and the digital economy development, with the mediating effect accounting for 22.06% of the total effect, thus validating Hypothesis 2. This paper provides a theoretical basis and effective approach for the Chinese government to promote financial deepening and further support the development of the digital economy. Based on the research conclusions, the following suggestions are proposed:

Firstly, it is crucial to pursue progressive reforms to the financial system, focusing on enhancing the efficiency and quality of financial services based on an effective regulatory framework. Enhancing the capacity of financial services for the real economy and guiding traditional financial institutions, such as banks, to enhance their service capabilities, will thus ensure strong service delivery. Meanwhile, approval processes for digital economy enterprises should be simplified, and financing thresholds lowered, to facilitate the swift development of this crucial sector. Innovation in financial products and services tailored to the digital economy is essential for driving further progress, including the introduction of e-commerce finance and blockchain-based solutions. Additionally, increasing direct financing by moderately opening up the capital market and raising its proportion can play a vital role in powering growth. By welcoming foreign investments and facilitating the entry of foreign financial institutions, China can attract additional financial resources and advanced technology, thereby accelerating the process of digital economy.

Secondly, the digital economy development can be impacted heterogeneously by financial deepening. Hence, it is imperative for the government to prioritize top-level design that focuses on regional coordinated development while taking into account the specific characteristics of each locality. The central and western regions of China, which have relatively weaker financial development, require improvements in the construction of relevant financial institutions. Furthermore, corresponding policies and measures should be promoted to create a conducive environment for digital economy development by enhancing financial support. On the other hand, the eastern region, with its more advanced financial business development, should focus on enhancing the service capacity of financial institutions through the adept use of modern technologies such as artificial intelligence and Big Data, to allocate and manage financial resources effectively to provide high-quality and convenient services to promote digital economy development. To foster coordinated development between the eastern region and central and western regions, it is crucial to strengthen regional exchanges and establish cooperative frameworks. Leveraging the financial resources of the eastern region to radiate and assist the central and western regions will facilitate regional synergy and integration, ultimately contributing to the overall progress and economic development of the digital economy.

Thirdly, to facilitate the implementation of digital projects and the digital transformation of enterprises, financial institutions should enhance the availability of credit funds moderately, reduce financing costs, and provide more financial support. Efforts should be made to prioritize the training of professionals in digital technology, financial technology, and hybrid professionals to meet the accelerating pace of digitalization. The government should incentivize the provision of reasonable support in financing, technology, and talent development for digital industries and enterprises. Led by the government, in-depth industry-research cooperation should be carried out, involving participation from enterprises, universities, and other relevant stakeholders, to enhance their innovation ability and enthusiasm. This will accelerate digital transformation, promote the high integration of technological innovation and the digital economy, actively cultivate new dynamic modes within the digital economy, and inject significant momentum into the sustainable development of the Chinese economy.

6.2. Research Deficiencies and Prospects

Due to certain limitations, this paper acknowledges the presence of shortcomings that require further improvement. Firstly, because there is no unified standard for measuring the digital economy, this paper establishes a relatively comprehensive indicator system based on relevant research of the literature. In future studies, additional indicators can be considered. Secondly, this paper primarily focuses on analyzing the impact of financial deepening on digital economy development through technological innovation as an intermediate variable. It is worth exploring other potential influencing paths to provide a more holistic understanding. With the continuous accumulation of relevant knowledge and the improvement of understanding of this issue, it is believed that the shortcomings of this paper will be further addressed and improved in future research.