Technological advancements have become a crucial driver of economic growth, particularly in the digital economy, where they have significantly spurred innovation and entrepreneurship across various sectors. This progress has also led to the rise of smart cities, which serve as practical contexts for implementing the digital economy. By integrating technological advancements and the digital economy, smart cities have further unlocked their potential through the development of digital and intelligent infrastructure. However, research on the impact of the digital economy on urban entrepreneurial activity remains limited, especially regarding its underlying mechanisms. To address this gap, this study constructs a panel dataset covering 284 prefecture-level cities in China from 2010 to 2021 and employs Difference-in-Differences (DID) and Propensity Score Matching-Difference-in-Differences (PSM-DID) models. The findings indicate that the digital economy has a significantly positive impact on urban entrepreneurial activity, particularly in northern and less developed cities, as well as in the information transmission, software, and information technology service industries. Mechanism analysis reveals that this impact is mediated through the optimization of the urban business environment and enhanced social credit levels. Additionally, the study identifies heterogeneous effects across different regions, levels of urban development, and industries. The study concludes that technological progress, the digital economy, and smart cities have a synergistic effect, driving high-quality economic development. Technological progress supports the digital economy, which in turn provides the foundation for smart city construction. Based on these findings, the paper recommends advancing the digital economy, optimizing the business environment, improving the social credit system, and formulating targeted policies to promote coordinated development between the digital economy and entrepreneurial activities.