How Does the Establishment of Government Industrial Funds Affect Enterprise Innovation in China? A Perspective from “Bridging the Equity Gap”

Focusing on the role of government industrial funds in bridging the equity gap, in this paper, we examine how the establishment of government industrial funds (GIFs) affects enterprise innovation and the underlying mechanism of the guiding and synergistic effects on social capital. By conducting an empirical study employing a fixed-effect model comprising panel data of Chinese industrial enterprises covering the recent period of 2014 to 2024, we found that GIFs play a positive role in promoting local enterprise innovation. We also provide supporting evidence that China’s GIFs are effectively designed in bridging the equity gap, which hinders innovation, and that they are productive in alleviating the structural friction of the venture capital market. The findings of this study also offer some new evidence regarding the influence of fund-level characteristics on the innovation-promoting effect of GIFs, which has not been previously explored for the Chinese context. Our research also reveals the “seeding” role and “patient capital effect” of GIFs, which guide social capital to gather towards early-stage and long-term funds, improve the structural supply shortage in the local venture capital market, and thereby alleviate the financing gap for corporate innovation. The focus on early-stage and long-term capital is an innovative perspective of this paper. Our results also indicate that private capital, as an important participant in government industrial funds, can positively moderate the innovation-promoting effect of government industrial funds. The impact of funds’ internal governance mechanisms on their innovation-promoting effect is also one of the unique contributions of this paper.