Endowing urban business environments with an intelligent brain: empirical evidence from cities in western China – Nature

Executive Summary

This report analyzes the impact of Smart City Policies (SCP) on the business environment in less developed regions, using panel data from 82 cities in western China from 2006 to 2021. The study finds that SCP significantly enhances the regional business environment, a conclusion robust across multiple econometric tests. This improvement is crucial for achieving several Sustainable Development Goals (SDGs), particularly SDG 8 (Decent Work and Economic Growth), SDG 9 (Industry, Innovation, and Infrastructure), and SDG 11 (Sustainable Cities and Communities). The positive effects of SCP are most pronounced in megacities and those with superior human capital, financial support, and digital infrastructure. The core mechanisms driving this enhancement are the promotion of market-oriented, internationalized, and law-governed frameworks, aligning with SDG 16 (Peace, Justice, and Strong Institutions) and SDG 17 (Partnerships for the Goals). Furthermore, the study identifies a positive moderating role for Fintech and significant spatial spillover effects, indicating that SCP benefits extend to neighboring regions. These findings provide critical insights for policymakers aiming to leverage digital transformation to foster sustainable and inclusive economic development in line with the 2030 Agenda for Sustainable Development.

1. Introduction: Aligning Urban Innovation with Sustainable Development Goals

The establishment of a fair, efficient, and convenient business environment is fundamental to enhancing international competitiveness and achieving SDG 8 (Decent Work and Economic Growth). For emerging economies, optimizing this environment is a critical challenge. China, as the world’s largest developing country, has made significant strides, moving from 91st to 31st in the World Bank’s Doing Business rankings between 2005 and 2020. This progress is partly attributable to the implementation of Smart City Policies (SCP), an innovative urban development model focused on digital transformation.

Smart cities leverage intelligent technologies to create efficiencies that directly support the SDGs:

• SDG 11 (Sustainable Cities and Communities): SCP enhances key urban infrastructure and services, making cities more intelligent, coordinated, and efficient.
• SDG 9 (Industry, Innovation, and Infrastructure): By building advanced digital infrastructure, SCP fosters technological innovation and drives industrial upgrading.
• SDG 7 (Affordable and Clean Energy) & SDG 13 (Climate Action): Smart city development has been shown to improve urban ecological efficiency, reduce carbon emissions, and promote green, low-carbon development.

This report examines how SCP, as a quasi-natural experiment, has impacted the business environment in western China, a less developed region. It analyzes the underlying mechanisms through which these policies contribute to a sustainable economic ecosystem, providing a replicable model for other developing regions pursuing the 2030 Agenda.

2. Policy Framework and Theoretical Analysis

2.1. Smart City Policies as a Driver for Sustainable Development

Smart city development is a global strategy for optimizing urban governance and improving quality of life. It represents a systemic transformation of governance models that aligns with multiple SDGs. The core focus areas of SCP research highlight its contribution to sustainability:

1. Ecological Environment (SDG 11, 12, 13): SCP promotes the green transformation of industries by reducing energy consumption and carbon emissions through intelligent resource management, thereby enhancing urban green total factor productivity.
2. Technological Innovation (SDG 9): SCP fosters innovation in energy-saving and clean production technologies, enhancing resource efficiency and promoting sustainable industrialization.
3. Economic and Ecological Efficiency (SDG 8): As a governance transformation process, SCP drives sustainable urban development through institutional reforms that improve both economic performance and environmental outcomes.

2.2. Theoretical Linkages to Sustainable Institutions and Economic Growth

The impact of SCP on the business environment can be understood through several theoretical lenses that connect directly to the SDGs.

• Institutional Theory and SDG 16 (Peace, Justice, and Strong Institutions): SCP acts as an institutional reform that reduces transaction costs and uncertainty. By leveraging digital technologies, it improves governance capacity, enhances transparency, and strengthens the rule of law, creating the stable and predictable institutions necessary for sustainable development.
• Information Economics and SDG 8 (Decent Work and Economic Growth): Smart cities create data-sharing platforms that reduce information asymmetries, lowering transaction costs for businesses and improving the efficiency of financial resource allocation, which fosters a more dynamic market environment.
• Competitive Advantage and SDG 17 (Partnerships for the Goals): SCP supports the development of cross-border digital infrastructure, which reduces trade barriers, improves customs efficiency, and enhances a city’s ability to attract international capital, thereby promoting global partnerships for sustainable development.

Based on this framework, this report hypothesizes that SCP improves the urban business environment by advancing marketization, internationalization, and legal institutionalization, and that these effects create positive spatial spillovers.

3. Research Methodology

3.1. Empirical Model

To assess the policy’s impact, a multi-period difference-in-differences (DID) model was employed, treating the rollout of SCP across 37 cities in western China as a quasi-natural experiment. This method effectively isolates the policy’s treatment effect from other time-varying factors. The analysis also utilized a spatial Durbin model (SDM) to investigate spatial spillover effects, crucial for understanding regional development dynamics under SDG 17.

3.2. Data and Variables

The study uses panel data from 82 cities in western China from 2006 to 2021.

• Dependent Variable (Business Environment): A comprehensive index was constructed using the entropy weight method, covering six dimensions relevant to sustainable economic activity: public services, human resources, market environment, innovation environment (SDG 9), financial services, and government environment (SDG 16).
• Independent Variable (Smart City Policy): A dummy variable indicating whether a city was designated as a smart city pilot.
• Mechanism Variables:
  • Marketization (Financial loan balance)
  • Internationalization (Ratio of imports/exports to GDP)
  • Legal Institutionalization (Frequency of digital economy policy terms)
• Moderating Variable: The Digital Financial Inclusion Index was used to measure Fintech development, a key enabler of SDG 8 and SDG 9.

4. Key Findings: The Impact of SCP on Sustainable Economic Ecosystems

4.1. Baseline Impact on Business Environment (SDG 8 & SDG 11)

The baseline regression results confirm that SCP has a significant positive impact on the urban business environment. The implementation of smart city initiatives, by enhancing digital governance and improving the efficiency of urban services, creates a more favorable climate for enterprises. This directly contributes to SDG 8 by fostering economic growth and to SDG 11 by creating more productive and sustainable urban centers. The findings remain robust after a series of tests, including parallel trend, placebo, and PSM-DID analyses.

4.2. Mechanisms for Achieving Sustainable Growth and Strong Institutions

The analysis confirms that SCP enhances the business environment through three primary channels, each aligning with specific SDGs:

1. Marketization (SDG 8): SCP improves financial market efficiency by reducing information asymmetry, which eases financing constraints for businesses and supports investment in innovation and R&D.
2. Internationalization (SDG 17): By lowering transaction costs and entry barriers for cross-border trade, digital platforms fostered by SCP promote global commerce and partnerships.
3. Legal Institutionalization (SDG 16): SCP enables more effective and transparent governance, reducing administrative burdens and creating a more favorable regulatory environment, thereby strengthening institutions.

Furthermore, Fintech was found to positively moderate the relationship, amplifying the benefits of SCP by expanding financing channels and enhancing regulatory efficiency, thus accelerating progress toward SDG 8 and SDG 9.

4.3. Heterogeneity Analysis: Contextualizing Policy for Inclusive and Sustainable Cities (SDG 11)

The impact of SCP is not uniform, highlighting the importance of context in achieving SDG 11’s goal of inclusive cities.

• Urban Size: The policy effect is significantly stronger in megacities, which benefit from economies of scale and more developed information infrastructure.
• Human Capital (SDG 4 & 8): Cities with higher levels of human capital are better able to absorb and leverage the technological advancements of SCP.
• Digital Infrastructure (SDG 9): A strong foundation of digital infrastructure is critical for the successful implementation of SCP. The synergistic effect between digital infrastructure and policy is particularly strong, even in regions with limited fiscal resources.

4.4. Spatial Spillover Effects: Fostering Regional Partnerships (SDG 17)

The spatial Durbin model reveals significant positive spillover effects. The implementation of SCP in one city improves the business environment not only locally but also in geographically proximate cities. This finding underscores the interconnected nature of regional development and highlights how targeted investments in innovation and infrastructure (SDG 9) can catalyze broader regional progress, reinforcing the importance of partnerships as outlined in SDG 17.

5. Conclusion and Policy Recommendations for Advancing the 2030 Agenda

5.1. Summary of Findings

This report provides robust evidence that Smart City Policies are an effective tool for improving the business environment in less developed regions. By fostering market-oriented, internationalized, and law-governed frameworks, SCP directly contributes to achieving key Sustainable Development Goals, including SDG 8, 9, 11, 16, and 17. The policy’s success is contingent on local conditions such as city size, human capital, and, most critically, the level of digital infrastructure.

5.2. Policy Implications for Sustainable Development

Based on the findings, the following recommendations are proposed to leverage smart city initiatives for sustainable development:

1. Prioritize Digital Infrastructure Investment (SDG 9): Governments should prioritize investment in high-quality digital infrastructure, as it is a fundamental prerequisite for maximizing the benefits of SCP and can compensate for limited fiscal resources.
2. Strengthen Digital Governance and Institutions (SDG 16): Establish intelligent government platforms to enhance public service delivery, improve regulatory efficiency, and ensure data security. Incorporating digital governance into performance evaluations can drive meaningful transformation.
3. Promote Regional Cooperation and Knowledge Sharing (SDG 17): Create regional development funds, modeled on international examples, to support resource integration, promote inter-regional technology transfer, and reduce the digital divide, ensuring that the benefits of smart city development are shared broadly.
4. Ensure Inclusive Development (SDG 10 & 4): To mitigate the risk of widening digital divides, SCP implementation must be paired with inclusive digital-skills training programs. This ensures that all segments of the population can participate in and benefit from the digital transformation, aligning with the goal of leaving no one behind.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article on smart city policies (SCP) and their impact on the business environment in western China connects to several Sustainable Development Goals (SDGs). The analysis reveals links to the following goals:

• SDG 8: Decent Work and Economic Growth

  The article’s central theme is enhancing the business environment to improve international competitiveness and foster economic growth. It explicitly states that “optimizing the business environment has become a critical issue for enabling markets to play a decisive role in resource allocation and enhancing international competitiveness.” This directly aligns with SDG 8’s aim to promote sustained, inclusive, and sustainable economic growth.

• SDG 9: Industry, Innovation and Infrastructure

  This is one of the most relevant SDGs. The article is fundamentally about how developing “smart city” infrastructure, driven by digital technologies like “big data, cloud computing, and artificial intelligence,” fosters innovation and improves economic performance. The study examines how SCP, through “digital infrastructure development, contribute to business environment optimization and economic growth,” which is the core of SDG 9.

• SDG 11: Sustainable Cities and Communities

  The entire context of the study is urban development through “smart city” initiatives. The article defines smart cities as a “new urban innovation model” that leverages technology to “enhance the intelligence, coordination, and efficiency of key urban infrastructure and services.” It also notes that smart city development improves “urban ecological efficiency” and contributes to “urban green and low-carbon development,” which are key components of making cities sustainable and resilient.

• SDG 16: Peace, Justice and Strong Institutions

  The article extensively discusses how SCPs are a form of “institutional reform” that leads to a “systemic transformation of governance models.” It highlights the creation of a “law-governed business environment” through digital platforms that “increase institutional transparency, improve regulatory efficiency, and help curb corruption.” This focus on building effective, accountable, and transparent institutions is central to SDG 16.

• SDG 17: Partnerships for the Goals

  The article’s emphasis on creating an “internationalized” business environment connects to SDG 17. It discusses how smart cities support “cross-border digital infrastructure,” reduce costs for “cross-border trade,” and enhance a city’s ability to “attract international capital and enterprises.” This highlights the role of technology in strengthening global partnerships for sustainable development.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the article’s discussion, several specific SDG targets can be identified:

1. SDG 8: Decent Work and Economic Growth

   • Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading and innovation. The article supports this by demonstrating how SCPs foster “technological innovation” and drive “economic growth in western China.”
   • Target 8.3: Promote development-oriented policies that support productive activities, entrepreneurship, creativity and innovation. The study’s focus on how SCPs create a “favorable regulatory environment for businesses” and optimize the business environment directly relates to this target.

2. SDG 9: Industry, Innovation and Infrastructure

   • Target 9.1: Develop quality, reliable, sustainable and resilient infrastructure. The article’s core subject is the development of “digital infrastructure” as part of the Smart City Policy (SCP).
   • Target 9.b: Support domestic technology development, research and innovation in developing countries. The article mentions that SCP “fosters technological innovation, particularly in energy-saving and clean production technologies.”
   • Target 9.c: Significantly increase access to information and communications technology (ICT). The study uses “Internet penetration rate” and “number of broadband internet access users” as key variables, highlighting the importance of ICT access.

3. SDG 11: Sustainable Cities and Communities

   • Target 11.3: Enhance inclusive and sustainable urbanization and capacity for… sustainable human settlement planning and management. The article describes smart cities as an “innovative model of urban development” that improves governance and efficiency.
   • Target 11.6: Reduce the adverse per capita environmental impact of cities. The article explicitly states that smart city development “significantly reduces urban carbon emissions” and improves “urban ecological efficiency.”
   • Target 11.a: Support positive economic, social and environmental links between urban, per-urban and rural areas. The finding of a “significant spillover effect” where SCP benefits extend to “neighboring areas” supports this target of strengthening regional links.

4. SDG 16: Peace, Justice and Strong Institutions

   • Target 16.5: Substantially reduce corruption and bribery in all their forms. The article argues that digital governance initiatives “increase institutional transparency, improve regulatory efficiency, and help curb corruption.”
   • Target 16.6: Develop effective, accountable and transparent institutions at all levels. The study explains how SCPs represent a “systemic transformation of governance models” and create a “business environment that is fair, transparent, and conducive to sustainable growth.”

5. SDG 17: Partnerships for the Goals

   • Target 17.11: Significantly increase the exports of developing countries. The article connects digital infrastructure to the “expansion of international trade” and creating “new trade opportunities.”

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the article mentions or implies several indicators that can be used to measure progress towards these targets. Many are used directly in the study’s methodology as variables.

• Indicators for Economic Growth and Infrastructure (SDGs 8 & 9)

  • Business Environment Score/Index: The primary dependent variable of the study, constructed from 18 secondary indicators, measures the overall quality of the business climate.
  • Internet Penetration Rate: Used as a control variable, this directly measures access to ICT (Target 9.c).
  • Number of Broadband Internet Access Users: Used to measure the level of digital infrastructure, directly relevant to Target 9.c.
  • Urban Economic Density & Economic Development (GDP): Used as control variables to measure economic activity and productivity (Target 8.2).
  • Financial Services Indicators: The “year-end balance of loans from financial institutions” is used as a proxy for marketization, reflecting the financial infrastructure supporting businesses.

• Indicators for Sustainable Cities (SDG 11)

  • Urban Ecological Efficiency: Mentioned as a key outcome of smart city development.
  • Urban Carbon Emissions: The article cites studies showing that SCPs lead to a reduction in carbon emissions (Target 11.6).
  • Energy Efficiency: Mentioned as an area of improvement due to smart city policies (Target 11.6).

• Indicators for Strong Institutions (SDG 16)

  • Frequency of Digital Economy Policy Terms: The study uses this as a “proxy for legal institutionalization” to measure the development of a law-governed environment (Target 16.6).
  • Government Environment Score: This is one of the six dimensions used to construct the overall business environment index, reflecting the quality of governance.

• Indicators for Partnerships and Trade (SDG 17)

  • Ratio of Total Imports and Exports to Regional GDP: The study uses this as a “proxy for internationalization,” directly measuring a country’s participation in global trade (Target 17.11).

4. Summary Table of SDGs, Targets, and Indicators

Source: nature.com