Financing Technological Innovation in China: Neo-developmental Financial Statecraft through Government Guidance Funds

Driven by geopolitics and the threat of climate change, industrial policy has reclaimed center stage in the comparative political economy of national economies, irrespective of their level of per capita income. 

However, this turn has been criticized for primarily enticing private capital into serving public agendas in ways that reduce the state to a “derisking” function for capital. The proposed alternative is a more directive role for the state, with conditionalities that ensure private capitalists align with the state’s industrial policy objectives.

In a new working paper, Xuan Li and Cornel Ban examine China’s dirigiste approach to financing innovation policy, contributing to debates on the derisking state, neo-developmentalist alternatives and economic statecraft. The paper focuses on the pivotal role of China’s state-owned non-bank financial channels specialized in financing the innovation-focused side of industrial policy—Government Guidance Funds (GGFs)—in terms of their distinctiveness from government-owned venture capital vehicles in the European derisking state or liberal-developmental states like Korea. 

By making the case for the adoption of a financial statecraft perspective in the comparative studies of these funds, the authors argue that three defining features set Chinese GGFs apart: 

• Strong sectoral innovation targets subject to strong disciplining by the state.
• Conversion into risk capital of both state fiscal resources and state assets in state-owned firms.
• Adoption of geographic investment conditionalities to spread innovation while enduring central control.

The paper reveals that these features are derivative of both the structural features of the Chinese political economy and the fast institutional innovations of the Chinese innovation bureaucracy. Their role is not merely financial but also strategic, with governments at many levels actively steering the funds to meet politically chosen goals. The shadow cases from Europe and Korea make the case for studying the nexus between national varieties of financial statecraft and national policy regimes.