Firm Performance and State Innovation Funding: Evidence from China's Innofund Program

Can firms leverage public entrepreneurship investments to improve innovation and financial performance? Analysis of this question is frustrated by the difficulty of distinguishing treatment from selection. We take advantage of internal administrative data on applications to China’s Innofund program in order (a) to identify which project application features are associated with higher chances of obtaining grants and (b) to evaluate the causal impact of grants receipt on firm performance using a regression discontinuity (RD) design. We find that firms whose applications report more innovation and better financial performance and whose founders have political connections are more likely to win funding. The role of political connection is particularly strong during the years in which Innofund grants were easier to obtain. Firms receiving high project application scores and Innofund grants perform higher than those that do not receive grants and have lower scores. However, when selection effects and treatment effects are distinguished via RD analysis, we find limited evidence that Innofund funding boosts survival, patenting, or venture funding, except for firms whose CEOs or Founders have political connections. Our analysis demonstrates the value of administrative data for enabling causal analysis and for uncovering evidence regarding the possibility that bureaucratic intervention affects firm and program outcomes.