Virtual Agglomeration and Urban Innovation in China: Evidence from Digital Networks

Abstract

Digital technologies are reshaping the spatial organization of economic activities, expanding cities’ access to external innovation resources across geographical boundaries, and creating new pathways for sustainable urban development. Using panel data for 279 prefecture-level cities in China from 2011 to 2022, this study constructs an urban digital network based on the cross-city organizational linkages of listed digital firms and their subsidiaries and measures virtual agglomeration by combining network linkages with urban digital foundations. The results show that virtual agglomeration significantly promotes urban innovation, and this finding remains robust to instrumental-variable estimation, alternative measures, and lagged specifications. Virtual agglomeration also strengthens the ability of latecomer cities to translate innovation gaps into subsequent growth. Both local digital foundations and external digital linkages contribute to this effect, while knowledge-related variety serves as an important transmission channel. The positive relationship is more pronounced in resource-based, third-tier, non-urban-agglomeration, and western cities. Further analysis shows that virtual agglomeration significantly promotes urban green innovation, indicating that its innovation effect extends to environmentally oriented technological development. Overall, virtual agglomeration improves access to innovation resources, supports innovation catch-up in less-developed cities, and, by promoting green technological innovation, offers a digital-network-based pathway toward more coordinated and sustainable urban development.