Abstract:     In recent years, the Chinese government has been vigorously pursuing reforms to streamline the government, delegate power, and improve government services, hoping to optimize the business environment further and stimulate the innovation of firms by deepening the reform of administrative system and promoting the transformation of government functions. While the central government continues to overhaul and government streamlining, local governments are also gradually implementing policies such as the fiscal reform of enlarging the authority of counties and allowing the establishment of a county administrated by province. This flattening of government, characterized by streamlining of administrative hierarchies and decentralization of decision-making, is gradually becoming an important direction for China to deepen its administrative system reform. Government flattening reform leads to streamlining of administrative hierarchy and decentralizing decision-making. It would increase local governments′ administrative efficiency and development incentives and impact business innovation. However, there is a lack of existing research on the impact of government flattening reforms on business innovation.In this paper, the promotion of County A in Province J to the status of being a county administrated by province is taken as the quasi-natural experiment. The data of Chinese industrial firms from 2008-2013 were selected as the research sample, and their patent and geographic information data were matched. We used the discontinuity regression (RD) and discontinuity-difference-in-differences model (RD-DD) to examine the net effect of government flattening reform on firm innovation activities. On this basis, this paper also developed the methods of mechanism analysis, heterogeneity analysis, and extended analysis. The study found that the government flattening reform has significantly improved the scale and quality of firms′ innovation. Still, firms have shown a tendency to strategic innovation in the later stage. The mechanism analysis showed that reducing the firm tax burden, saving financing costs, and improving the financing environment are effective mechanisms for the government flattening reform to promote firms′ innovation. The heterogeneity analysis showed that government flattening reform has a more significant effect on promoting innovation activities of firms with more potent domestic capital attributes and a relatively more minor effect on innovation activities of non-state-owned and small firms. In addition, the conclusion that government flattening reform could promote firm innovation activities is also applicable to economically underdeveloped regions, and government flattening reform can also improve firms′ total factor productivity through technological innovation channels.For a long time, the existing studies on how the government affects firm innovation have mainly focused on government-firm interaction, such as innovation incentives and external regulation. In contrast, less attention has been paid to the internal reform of the administrative system. The conclusion of this paper showed that the government flattening reform within the source administrative system will significantly promote enterprise innovation, which has verified the correctness of the reform direction of the administrative system from the point of view of enterprise innovation. From the administrative level of streamlining and decision-making decentralization, this paper quantified the effect of administrative system reform within the government on micro-firms. In addition, most of the existing literature on decentralization or government flattening reform is limited to sample differences. It cannot control all the influencing factors, leading to differences in research conclusions. However, this paper took the administrative boundary of County A and County B as the geographical discontinuity. It used the two differences in space-time to construct the RD-DD model to identify the net effect of government flattening reform on enterprise innovation to make the results more reliable.Based on the above conclusions, this paper offered some policy suggestions. Firstly, focus should be given on the quantity and quality of innovation. Although the government flat reform areas can support enterprise technological innovation through a series of initiatives, the process should be based on the difficulty of enterprise innovation, technology content, and potential value of the screening and grading, and then implement different strengths of the support policy, to help enterprises to carry out substantive innovation activities and sustainable progress. Secondly, the county governments implementing flat reforms can support enterprise innovation through financial subsidies or tax incentives. Still, they should avoid concentrating these resources on well-funded enterprises to minimize the mismatch of policy resources. In addition, introducing more formal financial platforms and constructing high-quality financing channels to reduce the cost of enterprise financing is the focus of efforts to create a favorable market environment and stimulate overall innovation vitality. Thirdly, the county governments implementing flat reforms should also pay more attention to small and micro enterprises and non-state-owned enterprises and form a healthy market structure based on cultivating the scale of market players. Specifically, they should further reduce the project approval procedures and time for small and micro enterprises and non-state enterprises and cut their systemic transaction costs; actively promote inclusive financial services such as digital finance and microfinance and enhance the financing support for small and micro enterprises and non-state enterprises. Finally, for economically underdeveloped regions, it is more important to accelerate the reform of government flattening to boost local development enthusiasm and accelerate enterprise R&D innovation and regional economic development; for enterprises with insufficient productivity, it is more important to actively seize the policy dividends of the reform to improve the output and quality of innovation, and thus enhance the total factor productivity.

Key words: government flattening reform, innovation scale, innovation quality, enterprise tax burden, financing constraint