Factor Market Integration and Inter-jurisdictional Investment Flows of Government Venture Capital Funds: Evidence from China's Urban Agglomeration Initiative
TANG Wei, QIU Xuan
College of Public Finance and Investment, Shanghai University of Finance and Economics; Research Institute of Financial Innovation, Shanghai University of Finance and Economics & Shanghai Pudong Development Bank
Summary:
Government investment is a pivotal policy instrument for stabilizing growth and facilitating industrial upgrading in China. Recent policy directives, including the 2024 Central Economic Work Conference and the fourth plenary session of the 20th CPC Central Committee, underscore the need to strengthen the guiding role of government investment funds, coordinate fiscal and financial policies, energize private investment, and remove bottlenecks and obstacles hindering the development of a unified national market. Within this policy context, a systematic understanding of how government capital is allocated across regions, and how institutional reforms reshape government investment behavior, is of substantial theoretical and policy significance. Government Venture Capital (GVC) represents a hybrid form of public capital that combines policy objectives with market-oriented operations. Although GVC funds are typically established by local governments to support local development, a substantial share of their investments flows across administrative boundaries. Existing studies primarily examine the effects of GVC on firm performance and innovation, while the institutional determinants and economic implications of their cross-regional allocation remain underexplored. This paper seeks to fill this gap by investigating whether urban agglomeration policies promote cross-regional GVC investment and identifying the mechanisms through which such effects operate. The urban agglomeration construction constitutes a central component of China's regional coordination strategy. By promoting interjurisdictional cooperation and policy alignment, the initiative seeks to reduce administrative fragmentation and improve the cross-regional allocation of factors. However, under fiscal decentralization, local governments face strong territorial incentives that may impede capital mobility. Whether urban agglomeration policies can effectively reshape these incentives and facilitate the cross-regional deployment of policy-oriented capital remains an open empirical question. Using detailed data on cross-city investments by GVC from 2011 to 2022, this study exploits the State Council's approval of national urban agglomeration as a quasi-natural experiment and employs a staggered difference-in-differences design at the city-pair-year level to identify the causal impact of urban agglomeration policies on cross-regional investment. The results show that urban agglomeration designation significantly increases both the likelihood and scale of cross-city GVC investments within the same cluster. Mechanism analyses suggest that this effect operates through changes in local government incentives: urban agglomeration policies reorient performance evaluation toward regional coordination, thereby mitigating interjurisdictional competition, and facilitate interregional benefit-sharing through joint fund sponsorship and cross-city delegation of fund management, which reduces transaction costs and administrative frictions. Further analysis indicates that cross-regional GVC investments outperform local investments, implying more efficient capital allocation, and generate an “investment-attraction effect” by strengthening long-term linkages with high-quality external firms. Moreover, cross-regional GVC investments exhibit a capital-leading role, crowding in cross-regional private investment and fostering intercity innovation collaboration, as evidenced by increased joint patenting. Overall, the findings suggest that under urban agglomeration policies, GVC are gradually evolving from instruments of local competition into institutional bridges that promote regional integration. This study makes three main contributions. First, it advances the literature on cross-regional capital flows by focusing on GVC, a form of policy-oriented capital that has received far less attention than market-based capital. In the context of building a unified national market, examining the cross-regional investment behavior of GVC offers novel insights into how administrative barriers can be dismantled and capital mobility enhanced. Second, the paper contributes to the evaluation of economic integration policies by providing new evidence on the effects of national urban agglomeration development. By using cross-regional GVC investments as a direct and observable outcome, it elucidates how urban agglomeration policies reshape local government incentives and strengthen interregional coordination. Third, the study offers micro-level evidence relevant to improving the institutional design and investment practices of GVC, demonstrating how regional integration policies transform their investment logic and reinforce their role in promoting coordinated regional development.
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