Threshold Effect of the Internet on Regional Innovation in China

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Abstract
Internet business adoption is an essential determinant of regional innovation which has received little attention in the literature. This paper emphasizes the role and threshold effect of Internet business adoption in increasing regional innovation outputs. We construct a threshold spatial autoregressive model to illustrate the nonlinear positive impact of Internet business adoption on innovation, simultaneously estimating interregional knowledge spillovers. To test threshold effect and interregional knowledge spillover, we use province-level panel data set in China and calculate Moran’s I and LR-like statistics to confirm the nonlinearity and spatial dependence. Within the empirical model, we find a positive relationship between the number of websites owned by local firms and the number of patents filed in that specific region. Our analysis suggests that Internet business adoption has a greater marginal benefit on the innovation of isolate regions. The results also indicate that ignoring interregional knowledge spillover may cause mistakes in the model on regional innovation systems. Policy implications for these results suggest that the government should not only pay attention to Internet development of the whole country but also encourage the reduction of digital divisions among regions

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