This paper analyzes local government investments durning China's reform era. Fiscal incentives are regarded as the principal factor in decisionmaking of local government investment. As the central-local fiscal relations change, the incentive structure of local governments have adapted to fiscal systems. Therefore, the salient differences in local government investments are to respond to the change of revenue resources. Consequently, local governments heavily invest in the processing and manufacturing industry under the revenue-sharing system(RSS)during the 1980s and the early 1990s. The tax-sharing system(TSS)reform in 1994, however, shifts local tax base to business tax and value-added tax. These taxes are closely associated with local infrastructure investment. Accordingly, local governments have plunged into local infrastructure investment since the mid- 1990s.