Market-Based Innovation Policy: Evidence from High-Tech Incubators in China

Using proprietary data of all high-tech incubators in China, we study a new approach by government to implement industrial policy through market intermediaries instead of directly allocating resources. Exploiting a highly localized industrial policy that targets different “strategic emerging industries” across provinces, we find that the incubators in policy-targeted industries receive higher government subsidy after the policy relative to their peers in other industries. Moreover, we find evidence that government subsidy to high-tech incubators increases the incubated startups’ innovation activity. Privately owned incubators in targeted industries, relative to their state-owned peers, receive less government subsidy, although they utilize government subsidy much more efficiently than do their state-owned peers.