How does vertical fiscal imbalance affect the upgrading of industrial structure? Empirical evidence from China

The vertical fiscal imbalance (VFI) caused by fiscal decentralization may have important implications on the upgrading of industrial structure. Based on the provincial panel data from 1995 to 2017 in China, this paper empirically studies the impact of VFI on the upgrading of industrial structure from the perspectives of regional heterogeneity, influence channels, and marginal effect. The empirical results show that: (1) VFI is not conducive to the rationalization and advancement of industrial structure, but this effect has significant regional heterogeneity. (2) VFI affects the upgrading of industrial structure through three channels, including investment-driven effect, market mechanism distortion effect, and technological innovation crowding effect. (3) With the increasing rationalization and advancement of industrial structure, the marginal restraining effect of VFI is gradually strengthened. Therefore, it is very necessary to control VFI between the central government and the local governments as much as possible for the upgrading of industrial structure.