Financing Green Technological Innovation: The Role of Local Government Debt in China

Effectively harnessing the productive potential of local government debt while mitigating financial risks is critical for urban sustainable development. Focusing on the standardized development phase of local government debt in China, this study examines how local government debt affects green technological innovation using Chinese A-share listed firms from 2015 to 2021. We find that regulated explicit debt significantly promotes firms’ green innovation through three channels: green bond issuance, digital infrastructure investment, and improved firm profitability. In contrast, implicit debt exerts a nonlinear inhibitory effect, with significant negative impacts only after a threshold is exceeded. Heterogeneity analysis shows stronger effects in developed regions, areas with more optimized industrial structures, and state-owned, large, and high-ESG firms. Our findings suggest that optimizing debt structure and directing funds to productive green and digital sectors can effectively drive urban green innovation.