ABSTRACT
Therefore, the findings of this research encourage us to modify classic theoretical hypotheses on geographical proximity, competition, and vertical intervention concerning innovation diffusion.
China’s authoritarianism is such a political structure that has a central government that plays a pivotal role in the process of local government innovation and diffusion. On the one hand, the central government is in a position to manoeuvre administrative measures to popularize a certain local government institutional innovation within a short time. On the other hand, the central government can strongly inspire local governments to try out different policy instruments for similar policy goals through a vertical governmental fiscal decentralization and a horizontal governmental performance competition. Both mechanisms can internalize the learning externality innovation for local governments and contribute in popularizing successful local government innovations to other areas nationwide. Therefore, despite the lack of sufficient autonomy in authoritarian China, local governments continue to have a strong desire for innovation, which endows the entire country with vitality and diversity. More importantly, local governments also provide sufficient policy alternative solutions to the macroeconomic decisions that the central government will formulate in the future.
