The Effect Of Local Government Competition On Firm Innovation From The Perspective Of Fiscal Decentralization

For more than 40 years of reform and opening up,under the dual incentives of economy and politics,local governments have actively participated in the development of China’s economy,which has greatly promoted China’s economic growth.However,as China enters a new stage of development,it is difficult to maintain the traditional extensive growth mode.The Fifth Plenary Session of the 19th Central Committee of the Communist Party of China proposed to accelerate the construction of a new development pattern and promote high-quality development,and innovation is an important path to achieve high-quality development.To this end,the central government has successively introduced a series of supporting policies to encourage firm innovation and promote local governments to "compete for innovation".Because local governments have a special position in the local economy,factors such as the motivations and methods for local governments to participate in competition will have a great influence on the market.Therefore,exploring the effect of local government competition on firm innovation is of great significance for effectively guiding local governments to conduct rational competition,giving full play to the role of local governments in promoting firm innovation,and promoting China to achieve high-quality development.Based on the research on local government competition and firm innovation,this paper constructs a horizontal and vertical analysis framework for local government competition,summarizes the motivations,methods,effects of local government competition,and the effect path of local government competition on firm innovation.The central government influences the motivation of local governments to participate in competition by changing political and economic incentives,and local governments mainly participate in competition through two ways: institutional competition and resource competition,leading to changes of factors,such as local institutional arrangements and factor prices,which have an impact on firm innovation.In addition,the central government can also influence the participation of local governments in resource competition through fiscal decentralization.This paper selects panel data from 232 cities in China from 2007 to 2018,takes the level of firm innovation,that is,the number of patents granted,as the explained variable,uses the local government competition index constructed by the spatial weight matrix as the core explanatory variable,and adds fiscal decentralization as the interaction term.This paper empirically tested the effect of local government competition on firm innovation by a dynamic spatial panel data model.The empirical results show that:(1)For the full sample,local government competition has a significant inhibitory effect on firm innovation.Fiscal decentralization effectively alleviates this negative effect and makes the interaction term has a significant positive effect on firm innovation.(2)In terms of the effect mechanism,the negative effect of local government competition on foreign direct investment has a significant inhibiting effect on firm innovation.Fiscal decentralization can effectively reduce the hindrance of local government competition on foreign direct investment,and finally make the interaction effect positive,which means that the interaction term has a significant promoting effect on firm innovation.Local government competition has a distorting effect on the structure of fiscal expenditure,and then inhibits firm innovation,but this negative effect has not yet passed the significance test.Fiscal decentralization can significantly alleviate the distortion effect of local government competition on the structure of fiscal expenditure,and ultimately make the interaction effect positive,which means that the interaction term has a significant promotion effect on firm innovation.(3)In terms of sub-sample regression,this paper conducts sub-sample regression according to patent type,period and city type,and the regression results are basically consistent with the fullsample benchmark regression.This paper studies the effect of local government competition on firm innovation by using a more refined level panel data to construct the dynamic spatial panel data model,which can enrich related literature,expand the research perspective of local government competition and firm innovation,and provide reference about guiding the transformation of local government competition,promoting firm innovation and achieving high-quality development.Based on the research results,this paper puts forward the following policy recommendations:(1)Promote the reform of the fiscal decentralization system.(2)Optimize the incentive design of local officials,build a scientific and thorough performance evaluation index system,and actively guide local governments to change their competition mode.(3)The heterogeneity of different regions at different stages should be fully considered in policy formulation to avoid the "one-size-fits-all" system design.