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| The Influence Mechanism of Government Industrial Funds on Firm Innovation：The Perspective of Political Connection |
| Li Yuchen1,2,Hao Xiangchao3,Liu Jingshan4 |
| (1.Postdoctoral Research Workstation of Agricultural Bank of China, Beijing 100005, China;2.Postdoctoral Research Mobile Station of Renmin University of China, Beijing 100872, China;3.School of Economics, Nankai University, Tianjin 300071, China;4.Bohai Securities Co.,Ltd, Tianjin 300081, China) |
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Abstract The government industrial funds have greatly improved the management and operation efficiency by introducing market-oriented management institutions. Compared with the science and technology subsidies, the government industrial funds can better screen firms and improve the efficiency of fiscal funds, and they have aroused great attention from the central and local governments. With the rapid expansion of the government industrial funds, the Ministry of Finance issued a document in 2020 requiring attention to the investment efficiency of government industrial funds. Firm innovation is an important indicator. Understanding the impact mechanism of government industrial funds on firm innovation is of great significance for improving the investment efficiency of government industrial funds and better serving innovative firms.#br#Previous studies have explained the impact of government industrial funds based on the financing gap mechanism and the certification mechanism. They argue that government industrial funds should invest in early-stage and high-risk firms to make up for the lack of private venture capital investment, and release a positive signal of business prospects to the capital market to attract more investments. However, in a developing country like China, private venture capital is still in its initial stage, and the market order, the protection system of property rights and financing environment need to be improved. Firms can greatly alleviate these problems by obtaining government investment and then establishing a political relationship. Innovation activities require sustained and stable R&D investment. Compared with the early-stage and one-time investment of government industrial funds, political connection can provide continuous help for firm production and operation, and it is also critical to firm innovation. Therefore, it can provide new theoretical support for the positive impact of China's government industrial funds by exploring the impact of government industrial funds on firm innovation from the perspective of political connection.#br#Using the complete list of government industrial funds published by the National Development and Reform Commission in September 2017 and the WIND global enterprise database, this paper has built a new database that includes the master and sub government industrial funds, firms that have received investment from government industrial funds and firms that may be invested by venture capital in the same period but have not received any venture capital investment actually. The database is believed to be the most complete and accurate government industrial fund database with 7 000 government industry funds, including 1 046 master funds and 5 954 sub (grandchild) funds. It also contains 11 992 firms invested by government industry funds and 48 423 matching firms. This paper uses the difference-in-difference model to study the mechanism of government industrial funds to promote firm innovation from the perspective of political connection. It is found that the government industrial funds, through the natural political relationship formed between government and firms, have significantly alleviated the risk of firm litigation and formed an alternative protection mechanism for firm property rights. At the same time, the government industrial funds have also brought a variety of business resources to firms and formed an alternative mechanism for firm financing constraints. The government industrial funds have significantly promoted firm innovation through the above two mechanisms. The study uses the PSM method to further control the influence of sample selection bias, measures political correlation indicators with substitute variables, and re-divides stricter samples according to the proportion of contributions of the master funds. After a series of robustness tests, the conclusions are robust and reliable.#br#There are two main contributions in this study. First of all, it explains the impact mechanism of government industrial funds on firms' innovation activities from the perspective of political connection. The mechanism better reveals the obstacles faced by innovative firms in the development process, and explains the role of government industrial funds in China. Secondly, by employing rarely-used information including litigation cases, bidding information and other business information of unlisted firms, this study helps to explore the mechanism of the impact of government industrial funds on firm innovation from a new perspective.#br#
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Received: 08 September 2022
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