Government spending efficiency, fiscal decentralization and regional innovation capability: Evidence from China

Abstract

Improving regional innovation is the key to achieving high-quality development, and regional innovation requires government support. However, a notable research gap exists in studies examining the relationship between government spending efficiency and regional innovation. Based on the panel data of 30 provinces in China from 2000 to 2021, this study verifies the positive impact of government spending efficiency on regional innovation capacity and its mechanism. Notably, the Consumer Price Index has been selected as an instrumental variable through a rigorous theoretical analysis to address the potential endogeneity and ensure the robustness of the findings. The findings also suggest that government spending efficiency can do better in promoting regional innovation capability in higher-investment preference areas, less financial development level regions. Further analysis reveals that human capital and advanced industrial structure play a great channel effect, while fiscal decentralization positively moderates the relationship between government spending efficiency and regional innovation capability. This study deepens our understanding of the impact of fiscal policy on local innovation development from different perspectives. Furthermore, it provides a reference to developing countries on the importance of local government in optimizing regional innovation.