Understanding the Determinants of Innovation in U.s. Local Governments: Does Fiscal Health Matter?

Abstract: Fiscal pressures faced by American cities in the late 1970s renewed attention of fiscal policy analysts to financial health of the localities. Numerous efforts were made to evaluate governments’ fiscal conditions, and to identify new forms of activity that could assist in maintaining fiscal health of the communities. Essentially, fiscal difficulties faced by U.S. cities stimulated their governments to innovate. From the perspective of the innovation literature though, innovation is an expensive process that requires upfront and continuous investments. Given these two sets of arguments the question raises whether or not availability of financial resources is a determinant of city innovation. This study examines the relationship between fiscal health of the U.S. city governments and the scope of their adopted innovation. The importance of fiscal slack, existing institutional arrangements, city government type and its fiscal authority for a government’s incentives to innovate is analyzed. A multifaceted index of government fiscal health and a measure of the innovation scope are developed in the course of the study of 140 cities in 8 states. More precisely, this research will analyze how the variation in governments’ ability to meet their financial and service obligations affects the degree of their performance measurement innovation implementation. The research findings will contribute to better understanding of innovation management issues the public sector faces today.