Regional Innovation and Sustainable Development Interplay: Analyzing the Spatial Externalities of Domestic Demand in the New Development Paradigm

Building a great modern socialist country in all respects requires enhancing innovation capacity and establishing a new development pattern, especially in the context of sustainable development. This paper begins by analyzing the theoretical relationship between innovation and the spatial externality of domestic demand, constructing a theoretical model, and then empirically testing this model using provincial panel data from 2012 to 2020 through the Spatial Durbin model. The study underscores the importance of innovation in promoting sustainable economic growth, highlighting how it expands domestic demand through both supply and demand sides and positively affects the domestic demand in surrounding areas through spatial spillover effects. The empirical results reveal that innovation significantly boosts the level of domestic demand in the region and its environs, with the spatial spillover effect of domestic demand constituting 66.92% of the total effect. This underscores the relevance of spatial externality in sustainable economic planning. Innovation mainly stimulates domestic demand through consumption, aligning with sustainable consumption patterns, while exerting a moderate inhibitory effect on investment demand. The spatial externality of investment demand appears less significant. Overall, innovation drives the spatial externality of China’s domestic demand and significantly contributes to establishing a new development pattern of “dual circulation”, primarily focusing on the domestic cycle, within a framework of sustainable development. The paper concludes with policy recommendations that align innovation strategies with sustainable development goals.