Digital economy and fiscal decentralization: Drivers of green innovation in China

Abstract

The impact of government behavior under a fiscal decentralization system on the interplay between the digital economy and both the quality and efficiency of green innovation poses an intriguing question. To address this, the present study employs two-way fixed-effects models, instrumental variables, and spatial econometric techniques, using data from 30 provinces and cities in China spanning 2004 to 2019. The findings reveal that the advancement of the digital economy significantly enhances the quality and efficiency of green innovation. In the context of China's fiscal decentralization, local governments frequently employ a “race to the top” strategy, amplifying the digital economy's beneficial impact on green innovation. This effect is particularly pronounced in economically prosperous regions that prioritize environmental assessments. Additionally, the study identifies a spatial demonstration effect, indicating that fiscal decentralization bolsters the digital economy's influence in adjacent regions. Consequently, policy recommendations include deepening the digital economy, advocating for increased fiscal autonomy for local governments, refining the performance appraisal systems for local officials, and establishing a well-calibrated environmental transfer mechanism. Further, leveraging the positive spatial correlations among local governments can foster a competitive yet collaborative landscape for green innovation.