An analysis of government expenditures on innovation and regional economic growth in China’s provinces using regime-switching modeling

This study examines the impact of government innovation spending (GEI) on regional economic growth (GRP) in China, utilizing data from 2003 to 2022 for 31 provinces in China. The relationship between GEI and GRP is examined using a regime-switching model with the Panel Smooth Transition Autoregression (PSTAR) model. The analysis reveals a non-linear connection with a lnGEI threshold of 4.259 (i.e., GEI = 70.739). The results demonstrate that government innovation spending has a statistically significant favorable influence on regional economic growth, with an effect of 0.015% below the threshold and 0.004% above it. To ensure the robustness of the findings, a GMM-System robustness test was employed to verify the non-linear relationship between government innovation spending and regional economic growth. The findings confirm the non-linear relationship and demonstrate a positive effect of 0.087%. In contrast, the squared term exhibits a 0.008% negative effect, indicating an inverted U-shaped relationship between government innovation spending and economic growth across China’s provinces. This ensures that government innovation spending accurately reflects regional economic growth trends. Consequently, policymakers are advised to optimize innovative government spending, target regional needs, foster public-private partnerships, and align investments with economic and technological priorities to maximize economic growth.