National Innovation Demonstration Zone policy and city innovation capability – a quasi-natural experimental analysis

Purpose This paper aims to understand the relationship between the National Innovation Demonstration Zone policy and city innovation capability and the underlying mechanisms. Design/methodology/approach This paper collects panel data of 283 Chinese cities from 2006 to 2018 for the quasi-natural experiment of National Independent Demonstration Zone (NIDZ) policy. It applies the difference-in-difference (DID) method to study the impact of NIDZ policy on city innovation capability and its underlying mechanism to enhance it. Findings The empirical result indicates that the establishment of NIDZ significantly enhances the city's innovation capability, which was verified through a series of robustness tests. The mechanism analysis shows that the NIDZ promote the inflow and outflow of knowledge, which implies NIDZ enhances the innovation capability of cities by facilitating the innovation sharing impact. Heterogeneity analysis indicates that the higher degree of digitalization, the higher the government service level induce a more favourable policy effect. The policy effect is more significant in the cities with a higher marketization or the eastern developed region. Practical implications This study’s empirical findings suggest that it is essential to improve the digital infrastructure to accomplish the digital transformation and upgrading of NIDZ. The government should improve the service efficiency and reshape the city market environment to ensure the fair competition of science and technology enterprises. Originality/value The paper first proposed and empirically tested that innovation sharing is an important mechanism that can significantly enhance the city innovation capability. The authors analyse the heterogeneity of NIDZ from four aspects: digitalization level, marketization level, government service level, and regional development and expanded research boundaries.