| Abstract | Chinese style decentralization points to the decentralized regional economy under centralized political governance. Under centralized political governance, local officials are mainly responsible for upper-level governments which usually assess, due to information constraints, local officials’ performance based on easily observed production indicators, thus inducing local officials to lay more stress on production investment and less on innovation investment for the sake of their interests. Meanwhile, regionally economic decentralization makes local governments control massive economic resources and own administrative powers to allocate resources and to intervene in markets, thus forming government-dominated economy. As a result, local officials’ self-interested investment preference can largely affect investment behaviors of market participants through the government’s “visible hand”, resulting in local governments, enterprises and even the whole society to invest more in production and less in innovation. This paper confirms the above theoretical assumptions using China’s provincial panel data since the reform of tax sharing. The empirical results show that fiscal decentralization, under the circumstance of centralized political system, has negative effects on the innovation-production investment ratios of local governments, enterprises and the whole society. This paper provides an explanation for the puzzle of China’s extensive economic growth pattern. |