Impact of Local Government Debt on Regional Innovation and Entrepreneurship: Evidence from China

Abstract

Local government debt serves as a crucial source of funding for local governments to provide public services and steer regional economic development. Exploring the impact of local government debt on regional innovation and entrepreneurship holds significant practical importance. This paper uses the data of 295 cities in China from 2015 to 2020 and uses the fixed effect model for empirical analysis. Our findings reveal a positive association between local government debt and regional innovation and entrepreneurship. This positive effect is attributed to the amplification of both the venture capital agglomeration effect and the technology agglomeration effect. Moreover, this relationship is particularly pronounced in cities characterized by high fiscal transparency, officials’ promotion pressure, and poor business environment. Ultimately, this paper enriches the existing literature by enhancing our comprehension of the economic implications of local government debt and the factors influencing regional innovation and entrepreneurship. Furthermore, it furnishes empirical evidence regarding the effectiveness of local government debt management in China.