Abstract:    The current complex and ever-evolving landscape has brought to the imperative question of how to facilitate the profound fusion of the digital economy and the tangible business world while concurrently bolstering the innovative capabilities of enterprises. This paper explored the underlying mechanisms through which economic policy uncertainty affects firm innovation, as well as the pivotal role played by digital transformation. Using the data from China′s A-share listed companies, this paper revealed a U-shaped relationship between economic policy uncertainty and firm innovation, the elevation of economic policy uncertainty fosters a surge in strategic innovation, while concurrently precipitating a decline in substantive innovation. After incorporating digitization into the analysis framework, it was found that enterprise digital transformation intensifies the negative impact of economic policy uncertainty on innovation. The U-shaped relationship weakens, and the inflection point shifts to the right, approaching an L-shape. Furthermore, the negative effects of digital transformation are more pronounced in companies with high financing constraints and low industry competition. This study will provide important policy implications for China to promote high-quality development in the ever-changing digital economy era. 

Key words: economic policy uncertainty, corporate innovation, digital transformation, nonlinear effect, innovation quality