ILLUSTRATION CASE: Government Guidance Funds (China)

New institutions are continuously being created at local to global scales, and older institutions are adapting. The TIAL library of illustration cases will bring together short overviews of some of the new and updated institutional options for addressing key environmental, societal, and technological challenges. Some of the cases are about one or more organizations; others are about different process building blocks for achieving a particular institutional capability (such as the ability to consider long time horizons). The cases provide a quick overview of options and innovations — they seek to provoke optimism and imagination for those in the process of creating or updating institutions.


Blending Public and Private – There has been growing interest in bringing together market forces and other directional cues to achieve broader public goals. Whether it’s the return of industrial policy, the calls for a “mission economy“, or strategies for “blended finance” and “public-private partnerships,” there are some common institutional issues in meshing private profit-seeking with public goal orientation. Sharing risks, balancing transparency with commercial privacy, building legitimacy, and balancing consistency and flexibility in a dynamic innovation environment are all important design challenges. 

Government Guidance Funds

China’s Government Guidance Funds (GGFs) represent one kind of public institution to bring together private and public participants in a shared goal.

In this case, the Chinese government is using a fund structure to steer private capital toward national priorities for technology innovation. GGFs are different from similar efforts in other countries due to their bigger scale, greater decentralization, and with a campaign-style rollout to all levels of government. 


Since the 2010s, innovation in technology sectors like artificial intelligence and big data has become a centerpiece of the PRC’s development strategy. Around 2015-2018 there was a boom in new GGF creation among local and provincial governments. This boom has been attributed to the central government promoting and planning for GGFs and creating policies that would drive investment in strategic and emerging technologies.


GGFs are designed to achieve multiple purposes. These include:

  1. furthering development for Chinese industrial technology,
  2. producing financial returns for partners,
  3. bringing private capital and information to government priorities, and
  4. providing longer-term capital for innovation start-ups (also known as “patient capital”).

Generally, GGFs are seen to avoid rent-seeking behavior and other inefficiencies that arise from a program of subsidies or traditional industrial policy tools leveraged by the central government. Simultaneously, government intervention through GGFs is perceived as correcting inefficiencies in venture capital funding, which can lead to under-investment in firms whose work aligns with government priorities. 


GGFs represent a type of public-private partnership where their funds are raised from both public and private sources. The fund is formed by or at the request of a government agency at any level of government. The sponsoring government agency sets the investment target, allocates capital from its own budget outlays (typically 20-30% of the target), and recruits private investors to fill the rest of the target. Private investors contribute what is referred to as “social capital,” representing 70-80% of the fund, but many contributors of social capital are themselves state-owned enterprises or banks. The structure differs from the Chinese Government Financing Vehicles of the early 2000s, which were all state-owned enterprises, and Township and Village Enterprises of the 1980s, which were collectively owned non-state-owned enterprises. 

The general (managing) partner of a GGF might be a public, private, or state-owned entity, depending on the fund, while contributors of social capital participate as limited partners. Regardless of who the general partner is, the GGF makes investments consistent with government priorities — be they to develop a particular industry, advance certain business activities, or drive regional growth overall. Funds do this either through direct investment or investment in sub-funds. Specific conditions are set and reviewed by the government partners, but review and governance are executed to a varying extent depending on the fund and partners themselves. 


Since 2018, overall GGF investment has slowed; as of 2021, investment sits at only a little over one-third of target size across all 1,741 funds. Fund management and performance appear to be heavily dependent on government partners. For example, the Big Data Investment Fund in Guizhou Province was founded in 2016 at the behest of the provincial governor, a rising member of the CCP. After July 2017, the governor was transferred to a different province and there have been no investments made by the investment fund as of 2021. 

The decentralized design of the funds, while originally seen as a qualitative liberalization of Chinese state investment, has suffered from a lack of national planning to reduce friction from competition. Particularly at local levels, there is often redundancy in targets for investment as well as inefficiencies induced by competition, both for social capital partners and good fund managers. 


Qualitatively, additional contact with local and regional governments can lead to effective growth for a firm’s general operations. New connections between “fund towns” also drive growth for each. Capital and talent accumulation driven by GGFs appears to be the main path to urban innovation, with some evidence that GGFs positively influence urban innovation for three years

Even more difficult to measure are spillover effects in other social, economic, or environmental domains. There is evidence that GGF establishment is correlated with an improvement in air quality at the city level. This may be due to the funds’ emphasis on innovation, leading to a greater number of green technology patents, as well as investment in technology sectors, like crowding out investment in dirty industries like coal, smelting, and construction. 

By Eva Louise Martin, with editorial inputs from Jessica Seddon and Geoff Mulgan

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