Impacts of industrial guidance funds on the performance of Chinese manufacturing enterprises

Industrial guidance funds are Chinese public-private investment funds aiming to optimise industrial structure. There are debates over the fairness of these funds for competition and more broadly on their effectiveness. This column analyses the effects of industrial guidance funds on various measures of firm performance. It finds that firms which receive investment from a fund significantly increase their fixed assets and employment. However, the effects on other measures, including sales and labour productivity, are less clear.

Industrial guidance funds (IGFs) are China’s public-private investment funds collected from government agencies, financial institutions, corporations, private equity funds, public pensions, and other financing entities aiming to “optimize industrial structure.” IGFs have attracted attention as a policy instrument for directing a wide range of capital from the whole society into venture capital and early-stage technology-based small and medium-sized enterprises. According to Zero2IPO Research (2023), a total of 2,107 funds were established or in progress as of the end of 2022, and their target and actual amount of investment summed up to RMB 12.84 trillion and 6.51 trillion, respectively. Figure 1 shows the number and the investment amount of new funds by year. Considering that annual fiscal subsidy related to industrial policy is in the order of 100 billion yuan, the role IGFs play is very important in China’s industrial policy today.

The US government heavily criticises IGFs as a bad industrial policy that distorts the market and undermines the fairness of competition. For example, its report titled “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World” takes as an illustration one of the IGFs, China Integrated Circuit Industry Fund, and argues that the Chinese government uses those funds as an instrument to rapidly acquire foreign assets and technologies (White House Office of Trade and Manufacturing 2018).

Whether the funds constitute a bad policy is a complex issue. They might be an innovation-promoting ‘industrial policy of the 21st century’, and more market-oriented than traditional infant industry protection. Naughton (2021, p.110) argues that “the benefit of IGFs in the eyes of government policy-makers—and to a certain extent in reality—is that they create clearly specified responsibilities and incentives, and therefore permit professionalization and market-responsive behavior.”

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