Financial Agglomeration and Real Economy Development in China: Evidence from Technological Innovation and Industrial Structure Upgrading

Abstract

The real economy is a fundamental component of the national economy, and the efficient allocation of financial resources is essential to promoting its development. Drawing on panel data for 30 Chinese provinces spanning 2007–2022, this study applies two-way fixed-effects and mediation models to investigate the effect of financial agglomeration (FA) on real economy development (RED), with particular attention to the mechanisms through which this relationship operates. The baseline results show that FA significantly promotes RED at the national level, and this findings remains robust under a range of robustness checks. The heterogeneity analysis indicates that the effect of FA on RED differs markedly across regions. The largest positive impact is observed in Central China, followed by Western China, while the positive association is relatively weaker in Eastern China. In contrast, FA is negatively and significantly associated with RED in Northeastern China. The mediation results further suggest that technological innovation (TI) serves as a partial mediator in the relationship between FA and RED. Specifically, FA further promotes RED by enhancing TI. Further analysis reveals a significant inverted U-shaped relationship between IS and RED. The turning point analysis indicates that China's IS remains on the left side of the inverted U-shaped curve, suggesting that it continues to promote RED. In addition, FA mediates the effect of IS on RED. This study broadens the existing literature on the relationship between FA and RED by demonstrating the dual functions of FA. The analysis reveals that FA directly facilitates RED and, in addition, functions as a mediating mechanism linking IS to improvements in RED. The results offer new theoretical perspectives and policy implications for optimising the spatial allocation of financial resources, strengthening financial support for TI, and promoting IS,thereby improving the financial sector's effectiveness in supporting the real economy.