The impact of public fiscal expenditure on industrial transformation and upgrading: An inverted U-shape evidence from China

High-quality economic development relies on industrial transformation and upgrading. To promote industrial transformation and upgrading, efficient fiscal expenditures are undoubtedly important as pillars of national governance. However, in the context of the market economy, the government's excessive intervention in industrial development will lead to the "promotion tournament" of officials and the "beggar-thy-neighbor" local protectionism, resulting in the convergence of regional industrial structure, which will bring uncertain impact on the upgrading of regional industrial structure. Thus, this study empirically assesses how public fiscal expenditure impacts industrial transformation and upgrading as well as the mechanism by developing a spatial econometric model using the panel data of 250 Chinese cities from 2007 to 2020 and further discusses the differential impact from the perspective of urban scale. The findings disclose that public fiscal expenditure serves a crucial role in facilitating industrial transformation and upgrading, but their relationship resembles an inverted U. Therefore, an optimal scale of public fiscal expenditure exists. Heterogeneity findings reveal that the promoting effect of public fiscal expenditure on industrial transformation and upgrading decreases with the expansion of the city scale. The role mechanism implies that public fiscal expenditure indirectly leverages industrial transformation and upgrading through promoting technological innovation, reducing resource dependence, and expanding scale economies. The conclusion provides a theoretical and practical framework for the government to optimize public fiscal expenditure, promote the transformation and upgrading of China's industrial structure, and ultimately attain high-quality development.