PARPCC #19 – Are Guided Investment Funds effective in financing research in China? ?

In the current context of Sino-American scientific and technological competition, research funding is a major topic – especially that of “risky” research. So-called “tech” companies often require significant financing to get started. These are unlikely to bring returns on investment in the short term – which scares away private investments. In order to limit the temptation of foreign financing or departure abroad of Chinese talents or ideas, China uses Guided Investment Funds to facilitate mixed public-private financing of technology companies. The results of these funds are very uneven across the country and remain unattractive for private investors..

Guided Investment Funds (FIG for friends) are funds serving state public policy objectives in which local or national authorities invest start-up capital which must be matched by private investors. According to Wei, Ang et Jia, most of the time, the objectives of the FIGs are linked to those of the current five-year plan or the ten-year plan “Made in China 2025”.

These funds were created to stimulate national private investment (only Chinese companies registered in mainland China can invest) and thus increase tenfold the capital available for scientific research. In the facts, they are mainly used to finance Chinese scientific development in key telecoms sectors, digital and pharmaceutical and medical products.

FIGs have existed since 2005 but reached their peak ten years later. With time, guided investment funds helped finance the development of cybersecurity companies like domestic champion Qian (Qian) and during COVID, they contributed significantly to the development of the Sinovac vaccine.

In 2021, we counted 1849 FIG in China for a targeted amount greater than the total Chinese public investment in science and technology – a colossal amount. Nevertheless, the figures show that only 26% FIGs achieve their funding objectives. Furthermore, on the amounts raised, alone 15% actually come from the private sector. In the facts, these funds have a number of disadvantages which repel private investors: they are guided by the State, initial investments are relatively low compared to financing possibilities on the market, and the places of investment are sometimes not conducive to the success of the companies targeted by the investments.

Thereby, most FIGs that raise funds and invest them in R&D are initiated by the Chinese coastal regions where there are both private investors, promising companies and the “business” environment capable of making them succeed. The vast majority of FIGs initiated in poorer regions of China have either failed to raise funds, or have never invested these funds in companies. In most remote areas, a FIG is created by a local politician wishing to show his goodwill towards Beijing's priorities, then is left abandoned when the politician is transferred to another position.

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Finally, the authors emphasize that these funds tend to advance the public sector at the expense of private actors in the areas targeted by the FIGs. Thereby, some public companies replace private companies in certain sectors such as Sino Pharm and Sinovac Biotech in the pharmaceutical sector or Shenzhen Longsys Electronics in semiconductors. They therefore have a structural impact on the targeted areas of activity.

Globally, the financial windfall that constitutes the FIGs is far from being negligible. Nevertheless, funds still remain unattractive for private investors except in already very well-endowed coastal regions.

Reference: Wei, Yifan; The, Yuen Yuen; Jian Nan (2023), “The Promises and Pitfalls of Government Guidance Funds”, The China Quarterly, Vol. 256, pp. 939-959.