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| The Innovation Externalities of the “Strong Provincial Capital”: From the Perspectives of Intra-provincial Knowledge Exchange and Industrial Division |
| CAI Qingfeng, CHEN Yihui, YAN Jiajia
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School of Economics, Xiamen University;
College of Finance and Statistics, Hunan University;
School of Economics and Management, Fuzhou University |
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Abstract In recent years, a growing number of Chinese provinces have adopted the “Strong Provincial Capital” (SPC) strategy, aiming to leverage the leading and radiating role of provincial capitals to propel regional economic development. However, academia and policymakers warn that severe resource concentration in capital cities may generate a “siphoning effect”, exacerbating intra-provincial development disparities and hindering regional coordination. The emergence of SPC patterns varies across provinces: some evolved through market forces and historical accumulation, whereas others stem from government-led, policy-driven initiatives. The “invisible hand” of the market and the “visible hand” of the government jointly attract to provincial capitals the agglomeration of innovation elements, such as capital, talent, and technology. Unlike conventional investment activities, innovation inherently exhibits spatial externalities, implying that resource concentration in provincial capitals may exert profound economic impacts on neighboring cities.
Our study empirically examines the effects of the “Strong Provincial Capital” strategy on corporate innovation in non-capital cities within the same province, using data from Chinese A-share listed companies from 2007 to 2023. We find that the “Strong Provincial Capital” strategy significantly enhances the innovation level of firms in non-capital cities, demonstrating positive innovation externalities. These results remain robust when we instrument SPC adoption with the cumulative years a city served as an ancient dynastic capital and when we perform extensive robustness checks. Mechanism analysis shows two channels of innovation spillover effect: (1) knowledge-exchange effects, reflected in heightened cross-city learning and patent citations, and (2) industrial-division effects, whereby SPCs deepen the province-wide division of labor among firms. Heterogeneity analysis further shows that the innovation spillovers are stronger for privately owned enterprises, high-tech sectors, provinces with lower market segmentation, and areas whose industrial structures align closely with that of the capital. These findings yield three policy implications. First, the “Strong Provincial Capital” strategy generates positive innovation externalities that can stimulate development in non-capital cities. Accordingly, national and local governments should strengthen the “leading role” of provincial capitals when pursuing balanced regional development. Crucially, policymakers should avoid relying exclusively on administrative policies to concentrate resources; instead, they should harness the market's “invisible hand” to channel innovative factors while strengthening the radiating and spillover functions of provincial capitals. Second, the innovative spillover effects of “Strong Provincial Capitals” can operate through knowledge exchange and are stronger in samples with lower market segmentation levels. Local governments should therefore advance regional integration, dismantle inter-city market barriers, and narrow development gaps to maximize SPC-led growth. Third, because the industrial division of labor serves as another crucial channel for realizing the spillover effects, policymakers should encourage non-capital cities to develop complementary industries and extend industrial chains around the dominant industries of provincial capitals, adopting collaborative models such as “provincial capital R&D+peripheral manufacturing” and “provincial capital headquarters+peripheral production bases”, which foster complementary, synergistic industrial structures between capital and non-capital cities.
Compared to existing research, this study makes three principal contributions. First, it extends the SPC literature by focusing on micro-level corporate behavior rather than the aggregate growth that most existing studies examine. Because macro-level outcomes ultimately emerge from firm-level decisions, our micro perspective offers richer theoretical and practical insights. Second, we add to the literature on the determinants of corporate innovation. By juxtaposing siphon and spillover perspectives, we shed new light on how regional development policies shape firm-level innovation. Third, we identify and empirically validate the mechanisms—knowledge exchange and industrial division—through which SPC spillovers operate, an area previously under-explored. Our evidence that SPC spillovers flow through enhanced knowledge sharing and a finer division of labor offers novel perspectives on coordinated regional development and resource allocation.
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Received: 23 March 2023
Published: 22 May 2025
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