Abstract: China′s economy fundamentals have changed in essence, which has stepped to a new stage of economic development. In the new normal state, China′s economy of high-quality development is the key point of realization of shifting from that of factor-driven and investment-driven to innovation-driven. The report of the 19th CPC National Congress pointed out that it is necessary to accelerate the construction of an innovative country and strengthen strategic and technological strength and it will be among the forefront of an innovative country from 2020 to 2035. In theory, innovation is not only the result of market choice, but also the result of government promotion. Perfect regional innovation system cannot be formed endogenously in the process of operation by market mechanism and economic system. Therefore, the development of regional innovation activities is intrinsically dependent on government forces. The government plays an important role in the innovation system, including formulating the innovation strategy and guiding the direction of innovation, shaping the innovation environment, coordinating the economic and social interests of the innovation subjects, and providing basic knowledge and common technology for the application research. As an important state function, fiscal decentralization has some unique advantages in stimulating regional innovation, and can play an important role in both supply side and demand side. Based on this background, the paper reveals how the China′s fiscal decentralization system impact on regional innovation level: race to the bottom or race to be better? Therefore, spatial panel Durbin model is used to explore the impact of China′s fiscal decentralization system on regional innovation based on the panel data of 30 provincial-level regions in China from 2000 to 2018. The empirical results show that: First, regional innovation level itself has spatial spillover effect, and innovation activities of adjacent areas have formed a good effect of collaborative innovation agglomeration. Second, China′s fiscal decentralization system improves the regional innovation level, and further deepening fiscal system reform is conducive to mobilize regional government enthusiasm, which will be helpful to stimulate innovation outputs. Third, there is an obvious spatial correlation for the effects of China′s fiscal decentralization on the regional innovation, which indicates that regional innovation of both local and surrounding regions will increase as fiscal decentralization enhances, which is the fundamental cause of race to the better of regional innovation. This study contributes to better understanding of the external driving force of local innovation investment and provides some helpful ideas for stimulating regional innovation. Based on the above research conclusions, the enlightenment of this paper mainly includes the following points: Firstly, strengthen the linkage effect among different provinces. Considering the spatial spillover effect of regional innovation in empirical outcomes, provincial-level regions should strengthen cooperation with each other in innovation activities. Secondly, perfect financial incentive mechanism of supporting the implementation of innovation driven strategy. The central government should also further decentralize the financial power, gradually improve the self-determination of local fiscal revenue and expenditure, and guarantee the flexibility and regional suitability of local fiscal expenditure. Thirdly, setting up fiscal system of innovative powers appropriate to expenditure responsibility, which will gradually transfer grass-roots governments′ innovative expenditure responsibility to upper-level governments, and reduce the pressure on grass-roots governments′ innovative expenditure. Finally, changing government performance appraisal mechanism, and the central and local governments should gradually change the content of performance appraisal oriented by short-term GDP growth. The innovations of this paper are as follows: Firstly, this paper focuses on the provincial spatial effect, and analyzes spatial effect of fiscal decentralization on regional innovation, which enriches the relevant research on the impact of fiscal decentralization on regional innovation. Secondly, the paper will establish a theoretical model of fiscal decentralization and regional innovation, which further explore its theoretical mechanism. The contribution will expand the research content and perspectives of fiscal decentralization on regional innovation and deepen the theoretical knowledge in the fiscal decentralization′s innovation effect. Thirdly, the paper crystallizes the mechanism of the role of fiscal decentralization in regional innovation and provides new empirical evidence for the State and local governments. The evidence will help policymakers improve regional innovation incentive mechanisms and the institutional environment. Moreover, the paper also offers policy recommendations to ensure that fiscal decentralization can bring in the positive effect of regional innovation and shed light on the good uses of fiscal decentralization for governments.

Key words:  China′s fiscal decentralization, regional innovation, race to be better, race to the bottom