Productive Government Debt and Urban Innovation: An Empirical Study Based on Chinese City Panel Data

Wu Haijun1, Yang Qijing*2, Yang Zhen1

1 Institute of Industrial Economics, Chinese Academy of Social Sciences (IIE-CASS), Beijing, China

2 School of Economics, Renmin University of China, Beijing, China

Abstract: Urban innovation is essential to strengthening national innovation capacity and technological capabilities, placing its sustained development at the heart of scholarly debate. This study explores the impact of productive-oriented local government debt expansion on urban innovation, leveraging China’s “Four Trillion Yuan” stimulus plan in 2008 as a natural experiment and drawing on urban panel data. Through the lens of productive government debt, we find that such expansion significantly boosts urban innovation, driven by three key mechanisms: infrastructure support, government innovation subsidies, and talent agglomeration. However, heterogeneity analysis reveals that this positive effect weakens in China’s central and western regions, cities with higher administrative status, and those with lower marketization levels, where the impact becomes negligible. Further scrutiny shows that local government financing vehicle (LGFV) bonds and special local government bonds earmarked for infrastructure effectively spur urban innovation, whereas general bonds and LGFV bonds used for “borrowing new to repay old” yield little to no benefit. These findings underscore that local government debt, when channeled toward productive ends, can fuel urban innovation. As the central government works to mitigate implicit debt risks, it must weigh the distinct roles of debt funds—considering regional economic conditions and institutional contexts—and tailor policies to time and place. This study offers theoretical insights and practical guidance for decoding the intricate link between government debt and innovation, enriching both scholarship and policy discourse.

Keywords: Financing platform; productive government debt; debt expansion; urban innovation

JEL Classification Codes: H74; O18; O31

DOI: 10.19602/j.chinaeconomist.2025.07.05