The impact of government industrial funds on the innovation of SMEs in China

This study examines the impact and mechanism of government industrial fund (GIF) investment on small and medium-sized enterprises’ (SMEs) innovation. Conducting empirical research on China’s National Equities Exchange and Quotation (NEEQ) listed companies from 2015 to 2021 using a time-varying difference-in-differences approach, we determine that GIF investment can significantly promote SMEs’ innovation input and output and the effect is superior to other forms of venture capital in promoting the innovation output. Heterogeneity analysis demonstrates that GIFs exert a more significant innovation-driven impact on those firms with relatively higher technology intensity and those who adopt market-based trading methods. We also determine that GIFs function as a guiding and synergistic investor in promoting investee firms’ innovation and identify that for more balanced investor structure on joint-investments, the innovation driven effect is more significant. Mechanism tests reveal that the main mechanisms of GIF investment on enterprise’s innovation are to improve decision-making scheme by standardizing corporate governance and to stimulate motivation by improving the efficiency of the property rights trading and promoting the market-oriented pricing of the innovation value. The results of this study provide novel evidence regarding the impact of GIFs on SMEs’ innovation in the context of the rapidly growing equity investment market in China and put forward some new ways to reveal the mechanism of the findings. Our findings may provide some valuable insights for improving the function of GIFs in emerging markets that may stimulate the innovation vitality and promote sustainable development.