As an external capital source of innovation, government subsidies are inefficient due to the lack of effective supervision. How to improve the efficiency of government innovation funds is a major issue that academia and policy-makers care about. It is not yet clear whether the National Industrial Investment Fund combines government subsidies with financial capital and conducts market-oriented operations to improve the efficiency of capital and thereby promote corporate innovation.

Based on the establishment of this policy practice by the China National Integrated Circuit Industry Investment Fund in 2014, this paper uses the data of listed companies in China’s manufacturing and service industry from 2009 to 2019, and evaluates the impact of industrial funds on corporate innovation using the DID method. The research finds that the National Industrial Investment Fund has significantly increased the level of innovation input by enterprises, and also has a significant impact on innovation output. This effect is concentrated in large enterprises, capital-intensive and technology-intensive industries and cities with high human capital. The role of the National Industrial Investment Fund on corporate innovation depends on the principal-agent relationship. The National Industrial Investment Fund exerts innovative incentives on corporate agents through institutional shareholding, which not only guides the flow of funds, but also improves the efficiency of state-owned capital, thereby achieving corporate technology upgrades.

The marginal contribution of this paper is as follows: （1）For the first time, this paper evaluates the effect of the National Industrial Investment Fund on corporate innovation, and provides a new policy idea to solve the inefficiency of government subsidies, that is, to achieve effective supervision and operation through state-owned capital investment in the form of industrial funds.（2）This paper provides empirical evidence for enterprises to improve their governance through institutional shareholding. Through the logical chain of external funds–institutional shareholding–corporate innovation, this paper discusses the mechanism of the role of institutional shareholding on the agency relationship of enterprises, and provides a reference for clarifying and perfecting the governance structure of listed companies in China.（3）This paper provides a strategic choice for the integrated circuit industry to break through the development dilemma. China’s integrated circuit industry is facing domestic and foreign problems, including backward technology and moral hazard, and supply chain obstruction. The state can guide the integrated circuit industry to transform from import dependence to independent innovation through the National Industrial Investment Fund.