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| The Industrial Driving Effect of Government Investment Funds: Empirical Evidence from Firm Entry |
| XIE Zhenfa, ZHU Dongxia
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| School of Economics, Xiamen University |
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Abstract Currently, the increasingly complex domestic and international environment, coupled with the impact of a new wave of technological revolution and industrial transformation, imposes new requirements for establishing a scientifically sound and efficient development framework for Government Investment Funds.Government Investment Funds have emerged as a distinctive policy instrument that combines “government guidance” with “market operations,” leveraging fiscal resources to mobilize large-scale private capital. These funds enable targeted investment in critical segments of industrial and supply chains, especially in key, high-innovation firms. Beyond supporting individual investee firms, they can have systemic spillover effects: Revitalizing local markets, enhancing industry competitiveness, and reshaping regional economic dynamics. Based on the new context and the redefined role of Government Investment Funds, exploring how such funds influence the regional and sectoral innovation and entrepreneurship environment through targeted investments in specific firms, and how this, in turn, affects micro-level firm entry decisions, is of great significance. Answering these questions can deepen the understanding of government investment funds, optimize their institutional design and implementation pathways, and promote high-quality economic development in China.
This study investigates the broader systemic impact of Government Investment Funds at the regional and industry level, particularly focusing on how such investment activities affect firms' expected entry returns and costs, and thereby shape firm entry decisions. Using enterprise registration data from the China National Business Registry Database and investment data from the Zero2IPO database, the study aggregates the data at the year-city-industry level and employs a negative binomial regression (NBRM) model for empirical analysis. The results demonstrate that Government Investment Funds significantly promote new firm entry in local industry sectors. Mechanism analysis suggests two main channels: industrial agglomeration effects, driven by targeted investments in key, high-innovation firms that strengthen local industry chain development; and capital allocation effects, whereby policy signaling and government credit support help attract financial resources to strategic sectors and partially correct local capital misallocation. The organic coordination of “government guidance” and “market operations” plays a vital role in stimulating local market vitality and optimizing resource allocation. Heterogeneity analysis reveals that this positive impact is weaker in regions with higher levels of marketization and stronger social credit systems, suggesting diminishing returns where private investment mechanisms already function effectively. Additional analyses indicate two further findings: first, as the overall intensity of Government Investment Fund investment rises nationwide, the marginal impact on new firm entry declines; and second, these investments can generate competitive pressures that encourage the exit of inefficient incumbent firms, thereby raising regional innovation capacity. Based on these findings, the paper offers two policy recommendations: (1) adopt regionally differentiated strategies to implement Government Investment Fund policies, accounting for local variation in market conditions; (2) improve coordination among local governments to balance differentiated industry targets with the need for broader policy coherence.
This paper contributes to the literature in two key ways. First, while prior research has shown how Government Investment Funds affect the strategic behavior of investee firms as an important source of venture capital and private equity, their broader systemic impacts at the regional and industry levels have received less attention. This study fills that gap by analyzing how such investments shape firm entry dynamics through industrial agglomeration and capital allocation effects. Second, existing literature often treats government intervention and market efficiency as separate or opposing forces in explaining firm entry. The dual nature of Government Investment Funds, as both a government policy tool and a market-based mechanism, provides a unique context to examine their coordinated effects on resource allocation efficiency and entrepreneurial dynamics, thereby offering new insights into industrial policy and regional development strategies.
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Received: 24 January 2025
Published: 01 September 2025
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