Introduction: The Business Environment Has Become the New Battlefield for Global Capital Competition
When the World Bank replaced the original Doing Business system with the B-READY framework in 2023, the international community's understanding of the business environment had shifted from simple "ease of doing business" to a more complex legal framework and regulatory quality. In the latest rankings, economies such as Singapore, Estonia, and Georgia rank at the top, while most developing countries remain in a catching-up position. For emerging markets, optimizing the business environment is not only a domestic reform issue but also a ticket to participate in global capital allocation.
China is the most striking example on this track. In 2005, China ranked 91st in the global business environment index; by 2020, it had jumped to 31st, becoming one of the ten fastest-improving economies in the world. But country-level data masks huge internal regional disparities. Western China—accounting for about 70% of the country's land area—has long been constrained by geographic isolation, lagging market development, and weak institutional soft environments, making it a lowland in the business environment.
However, changes in recent years are breaking this stereotype. A study based on panel data from 82 cities in western China from 2006 to 2021 shows that the implementation of smart city policies has significantly improved the business environment in the western region, and this improvement is statistically robust and mechanistically clear. Published in *Scientific Reports*, this study provides new empirical evidence for understanding "whether digital governance can become a lever for leapfrogging development in underdeveloped regions."
Smart City Policy: Not Just Technology, But Institutional Reconstruction
On the surface, smart city policies target the application of big data, cloud computing, and artificial intelligence in infrastructure and services. But from an institutional economics perspective, their deeper significance lies in reducing transaction costs and institutional uncertainty. The study points out that smart city policies are not a mere stack of technologies, but a systematic change in governance models and institutional arrangements.
Based on a multi-period difference-in-differences method, the study treats smart city policy as a quasi-natural experiment. Since 2012, China has established smart city pilot programs in batches. Among 94 cities in the west, 37 were selected, covering nearly 40 percent. This gradual implementation provides rare conditions for identifying the causal effects of the policy.
The study finds that smart city policies have a significant effect on improving the business environment of western cities. More importantly, this improvement is not "one-size-fits-all." The research shows that the policy effect is more prominent in megacities and cities with higher human capital levels, stronger financial support, and better digital infrastructure. This heterogeneity reveals a key logic: digital governance is not an isolated tool; it needs to form a synergistic ecosystem with talent, capital, and infrastructure.
Mechanism Breakdown: The Trio of Marketization, Internationalization, and Rule of Law
How do smart cities concretely improve the business environment? The study summarizes the mechanisms into three dimensions: First, marketization. Digital technology reduces information asymmetry, enabling the market to play a more decisive role in resource allocation. The cost for enterprises to obtain information on factors such as policies, land, and credit decreases, improving the efficiency of resource allocation.
Second, internationalization. Smart cities bring government services in line with international rules. Applications such as digital ports, cross-border data flows, and one-stop services for foreign-invested enterprises essentially embed internationally accepted business rules into governance processes.
Third, rule of law. Smart regulatory tools make government behavior more transparent and predictable, reducing arbitrary intervention. Institutional theory holds that only when rules are stable and enforceable will enterprises dare to make long-term investments.
The study also finds that fintech significantly amplifies the positive effects of smart city policies. Fintech applications such as digital payments, online credit, and intelligent risk control, together with urban digital governance, create a "double digital dividend," further reducing enterprises' financing costs and operational risks.
Spatial Spillovers: Cluster-Based Restructuring of Regional Competitiveness
It is worth noting that smart city policies also have significant spatial spillover effects on business environment improvement. This means that when a city implements smart city policies, it not only improves its own business environment but also affects surrounding cities through infrastructure connectivity, knowledge spillovers, and market integration.
This spillover effect has profound implications for the location choices of multinational enterprises. Traditional site-selection logic emphasizes the economic scale or preferential policies of a single city, but in the era of digital governance, the region-wide "institutional quality network" becomes a new locational advantage. When a group of western cities forms an institutional innovation cluster through smart city policies, their attractiveness to foreign investment becomes integrated rather than isolated.
Implications for the Global South and Multinational Investment Decisions
The value of this research is not limited to China. For the "Global South" regions such as Southeast Asia, South Asia, and Africa, the experience of western China provides a clear path: at a stage where hardware infrastructure is not yet fully mature, leapfrog improvements in the business environment can be achieved through the construction of "soft infrastructure" in digital governance.
For multinational enterprises, this finding means that traditional indicators such as cost, market, and resource endowments are no longer comprehensive when evaluating investment opportunities in emerging markets. A city's level of digital governance, policy coordination capacity, and degree of alignment with global rules are becoming new key variables. Those seemingly peripheral western cities, if they can continue to deepen smart city policies, may well become new nodes in the restructuring of global supply chains.
Long-Term Trend: Smart Governance Will Become Global Investment Infrastructure
Looking ahead, global capital flows will become more concentrated in regions that excel in both "institutional quality + digital infrastructure." Smart city policies are not merely a Chinese experiment; they represent a global trend—government governance capacity itself is becoming computable, comparable, and investable infrastructure.For policymakers, the key insight is that optimizing the business environment is not achieved through one-off reforms but requires sustained digital institutional supply. For investors, it means updating their locational analysis frameworks to incorporate digital governance capacity into risk assessment and opportunity identification.
The case of western China demonstrates that late-developing regions need not replicate the old path of coastal areas. By equipping the business environment with a "smart brain" through smart city policies, they can secure their place in global capital competition. This may be the most important strategic choice for underdeveloped regions in the new round of globalization.