The emergence of the government’s “capital-based investment promotion” initiative is an inevitable step in local governments’ transition from “land-based finance” to “equity-based finance” against the backdrop of the gradual decline of the former, and it is also a sound strategy for actively adapting to the need to “tighten our belts.”

Why is this the case? Offense is the best form of defense.

In the current climate of emphasizing effective investment, the most crucial factor is taking the initiative; good projects cannot be attracted through a passive approach.

The “capital-driven investment promotion” model, which integrates investment and investment promotion, can generate a multiplier effect, directing more capital precisely toward industrial transformation and leveraging both investment and talent recruitment. This significantly enhances the initiative and selectivity of local governments and industrial parks in attracting investment.

01 Three Stages, Five Models

I believe many of us have only a vague understanding of “capital-driven investment promotion” and “fund-driven investment promotion.”

We often see updates on government-guided funds in local news, such as Shanghai’s recent announcement of a 10-billion-yuan Science and Technology Innovation Relay Fund.

We also see reports in major media outlets stating that in 2023, our government-guided funds entered the 100-billion-yuan era, with the total scale of newly established 100-billion-yuan-level guided funds exceeding 1 trillion yuan.

So, what stages has “capital-based investment promotion” by local governments actually gone through?

Here, we can broadly divide this into three major phases:

Stage One: Equity in Name, Debt in Substance. Due to policy changes, this stage has passed.

Stage Two: Equity Investment-Based Investment Promotion, also known as Fund-Based Investment Promotion. This essentially involves direct equity investment in projects.

By investing in project equity, the goal is to attract industries to locate locally, or even to relocate a company’s registered address to the local area.

Stage Three: Fund-of-funds investment promotion, also known as “funds of funds,” refers to funds that invest in other funds.

Fund-of-funds offer low risk, low liquidity, moderate returns, and the network effect of pooling resources;

By diversifying investments across various high-quality sub-funds and allocating capital to fund management teams with different styles and approaches, they balance returns while mitigating investment risks.

Having understood the basic development stages, we also need to know the common “strategies” used in capital investment promotion.

✧ Sub-fund Reinvestment

The government establishes a guiding fund to take equity stakes in sub-funds, imposing reinvestment requirements on them to ensure that the sub-funds facilitate the implementation of projects.

This model primarily relies on blind-pool sub-funds and represents the most traditional approach for guiding funds.

In addition to the guiding fund, sub-funds often have a significant number of private investors, making it difficult to monitor the progress of reinvestment commitments and posing challenges in securing investment commitments.

✧ Specialized Funds

Unlike blind-pool sub-funds, special-purpose funds target projects that are certain to be implemented locally.

Participating in dedicated funds requires the government fund to possess strong project evaluation capabilities.

✧ Direct Investment for Investment Promotion

As the name implies, this involves a fund fully funded by the government taking an equity stake in projects through direct investment to facilitate their establishment.

This places high demands on the fund manager’s capabilities, requiring them to possess both direct investment expertise and the ability to attract projects.

✧ Private Placement Investment

Investments in the primary market often cannot immediately cover mature, listed “industry leaders,” yet the high-quality projects that local governments most hope to attract typically originate from these “chain-leading” enterprises.

Consequently, the private placement investment model—which involves participating in private placements of listed companies to facilitate the implementation of funded projects—has become a path that many guiding funds are currently exploring.

This requires our government investment promotion teams to possess industry research and secondary market analysis capabilities.

✧ M&A-Based Investment Promotion

In short, this model involves government funds directly acquiring companies to facilitate their establishment in the local area.

The challenge with this approach lies in the need for government funds to intervene in corporate management, participate in the operations and business activities of the entity, and, in the case of listed companies, possess a thorough understanding of capital market operations.

02 How Do Leading Cities Put This into Practice?

Apart from Hefei, widely known as the “Venture Capital Capital,” which other cities have emerged as “leaders” in the field of capital-driven investment promotion?

First, let’s take a look at Suzhou—a city that supports businesses throughout their entire lifecycle.

The so-called “Suzhou Model” establishes a comprehensive portfolio of government investment funds designed to serve enterprises throughout their entire lifecycle, addressing different stages and needs—from angel-round investments for early-stage technology commercialization to subsequent rounds supporting growth and maturity phases by fostering excellence and strengthening leading enterprises.

Suzhou has a very clear plan for fostering industries, focusing on four major sectors to build innovation clusters and optimizing their layout based on local conditions. Accordingly, Suzhou has established an Industrial Innovation Cluster Development Fund with a total capital of over 200 billion yuan.

To put it more succinctly, what are the practical methods for implementing this?

The core of the Suzhou model lies in the aggregation of funds to achieve economies of scale, serving as a successful example of government-private partnership.

As the scale of the funds expands, an increasing amount of capital is being leveraged and injected into Suzhou.

On the one hand, by investing in Suzhou’s small and medium-sized enterprises, it directly promotes industrial development and economic growth in Suzhou;

on the other hand, by fostering more innovation and technological R&D, it enhances the competitiveness of Suzhou’s industrial development.

Furthermore, another standout example is Shenzhen, known for its “bailout and rescue” approach.

The “Shenzhen Model” features a “one body, two wings” state-owned capital structure, with infrastructure and public utilities as the core and finance and strategic emerging industries as the two wings.

By rescuing listed companies, it achieves targeted industrial introduction, and by leveraging high-quality industrial parks within the region, it continuously expands industrial development space and establishes a full-cycle technology-focused financial service system.

In other words, the “park + venture capital” model is Shenzhen’s unique approach to attracting investment through capital.

Using technology parks as platforms to expand industrial development space;

Using technology finance as a link to provide financial support for the development of technology parks and emerging industries, while sharing in the dividends of industrial growth.

Through a cooperative mechanism between state-owned capital and innovative technology enterprises, Shenzhen has acquired stakes in a group of small, medium, and micro-sized innovative technology enterprises, forming new competitive advantages in fields such as the biotechnology industry, artificial intelligence, and cultural creativity.

In addition to these three, Shanghai and Hangzhou have also performed exceptionally well; however, due to space constraints, we will not elaborate on them here.

03 How to Learn? How to Implement?

Taking a comprehensive look at Shenzhen and Suzhou’s practices in capital-driven investment promotion, we can identify some common characteristics.

To successfully attract capital investment, local governments must focus on key sectors and areas, fully leverage the mediating and pivotal role of capital, and build a development model where the government plays an active role and the market operates effectively.

First, adopt a goal-oriented approach to address the critical question of “what to attract.”

Both local governments have precisely identified emerging industries and launched capital investment initiatives through the establishment of guiding funds.

We must be clear on one point: government-led funds are not aimed at high investment returns; their core objective is to guide industrial development, thereby fostering industrial clustering and facilitating regional economic transformation.

As for specific investment targets, I believe everyone is well aware that there is a consensus on focusing on cutting-edge industrial sectors such as next-generation information technology, high-end equipment manufacturing, new energy vehicles, the bio-industry, energy conservation and environmental protection, and the digital economy—areas that are knowledge- and technology-intensive, consume few material resources, and offer significant comprehensive benefits.

While the seven frontier industries prioritized by the state are indeed promising, blindly following the trend may prove counterproductive.

Identifying the unique endowments and resource advantages of one’s own region, learning to compete through differentiation, and persisting in this approach over the long term is the right path.

Take Suzhou’s biopharmaceutical industry as an example. In 2009, Suzhou resolved to mobilize the entire city’s resources to build a world-class biopharmaceutical hub, transforming the Suzhou Industrial Park into an internationally renowned and domestically influential “China Pharmaceutical Valley.”

Over the past decade or so, while the leadership of the Industrial Park has changed several times, policy and financial support for the biopharmaceutical sector has never wavered. By pursuing multiple strategies in parallel—from providing full-cycle funding and incubation for startups to attracting mature multinational corporations—the sector has achieved its current scale.

Second, a path-oriented approach to address the critical issue of “how to attract talent.”

Leveraging our geographical advantages, we identified cutting-edge sectors suitable for development.

Next, the most critical question is: How can we use capital-driven investment promotion to bring high-quality projects to fruition? How can we mobilize social resources to serve our goals?

This is a well-worn topic, yet it remains equally challenging in the realm of capital-driven investment promotion.

In fact, there are two key issues to address here.

First, how to attract social capital to participate in our “investment” efforts, making government funds a key lever to achieve maximum impact with minimal effort;

Second, how to identify truly viable target projects and bring them to our region through capital-driven investment promotion while minimizing risk.

The first issue has already been addressed within the five major models; localities can combine these approaches based on their specific circumstances and the development cycles of their enterprises.

As for the second issue, we can also glean insights from the experiences of Shenzhen and Suzhou.

Ultimately, both models converge on a government investment portfolio and a full-cycle technology-focused financial service system designed to support enterprises throughout their entire lifecycle.

The concept of “full lifecycle”—whether in terms of enterprise growth or technology-focused financial services—places higher demands on local governments.

Understanding the industry is a prerequisite; for example, investment promotion officers at the grassroots level in Hefei are required to possess knowledge of the entire industrial chain.

Understanding capital is the foundation—using capital operations to facilitate industrial development.

Let’s get practical: not every region can “just happen” to recruit high-caliber talent who understand both industry and capital.

So what should be done?

Leveraging external expertise may be the optimal solution.

Local governments can establish a think tank of high-level experts in key industrial sectors, recruiting industry experts, scholars, and investment specialists from the industries targeted for investment attraction in their region.

These experts would conduct professional evaluations and reviews of investment projects requiring capital investment from local governments.

Given practical and cost considerations, these experts, scholars, and leading professionals can join as part-time consultants.

Of course, if constrained by limited local resources, local governments can also leverage the resources of third-party investment promotion agencies or consulting and research institutions to establish a “shared think tank.”