How Local Government Spending on S&T Influences AI Development

This paper examines whether local fiscal expenditure on science and technology (S&T) promotes regional artificial intelligence (AI) development in China. A main empirical challenge is the lack of consistent city-level measures of AI activity. To address this issue, the paper constructs a city-level AI indicator by identifying AI-related firms from business scope descriptions using TF–IDF text mining and aggregating firm counts for prefecture-level cities from 2011 to 2023. Using panel data for Chinese prefecture-level cities, the analysis first estimates the relationship between the local S&T spending share and AI development within a two-way fixed effects framework. To mitigate endogeneity concerns, the paper further employs an instrumental-variable strategy. The results show that a higher local S&T spending share is significantly associated with stronger AI development. In economic terms, a one-percentage-point increase in the S&T spending share is associated with an approximately 1.09% increase in the AI indicator. The main finding remains robust across alternative specifications and IV estimation. The paper also explores heterogeneity across cities with different initial AI endowments. The positive effect of local S&T spending is stronger in cities with higher baseline AI levels and weaker in lower-endowment cities. These results suggest that the effectiveness of fiscal S&T support depends on local initial conditions. Overall, the paper provides a replicable city-level measure of AI development and new evidence on the role of local public S&T expenditure in shaping regional AI development.