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Promoting digital governance is a key direction for the Chinese government’s governance reform. Based on panel data from 280 prefecture-level and above cities spanning 2008–2023, this study treats the “National Pilot Policy for Information Benefiting the People” as a quasi-natural experiment. Employing a difference-in-differences model, it examines the impact of government digital governance on urban innovation and its underlying mechanisms. Findings indicate that digital governance significantly enhances urban innovation, with conclusions remaining robust after rigorous stability tests and endogeneity treatments. Mechanism tests reveal that digital governance enhances urban innovation by cultivating innovation entities, improving the innovation environment, and optimizing the allocation of innovation elements. Further analysis indicates that the impact of digital governance on urban innovation is influenced by city location and development level. In eastern regions, areas with lower government fiscal pressure, and regions with higher levels of informatization, government digital transformation is more effective in boosting urban innovation. In addition, digital governance has significantly promoted sustainable and strategic innovation in cities and can influence innovation in neighboring areas through spillover effects. These findings can provide valuable insights for promoting urban innovation.