Government-guided funds and the rise of corporate AI: Evidence from China

We investigate how Government-Guided Funds (GGFs) influence corporate artificial intelligence (AI) development in China. Using panel data for Chinese A-share listed firms from 2012 to 2023, we find that GGFs significantly promote AI advancement through three complementary mechanisms: resource empowerment, signalling certification, and facilitation of firms' integration into platform ecosystems. This effect remains robust across multiple empirical tests. The positive impact of GGFs is stronger among firms facing more intense market competition, in regions with higher levels of intellectual property protection, and in areas where governments place greater policy emphasis on AI. Further analyses show that GGFs do not crowd out non-AI innovation; instead, they generate an innovation diffusion effect. By advancing firms' AI capabilities, GGFs contribute to employment growth, workforce upgrading, and higher labour income shares, highlighting their dual role in promoting technological innovation and improving social welfare. • Government-Guided Funds (GGFs) significantly promote firms' AI development. • GGFs enhance AI innovation through resource, certification, and platform-embedding effects. • The positive effect is stronger for firms in competitive industries and regions with strong IP protection and policy focus on AI. • GGFs foster diffusion of innovation rather than crowding out non-AI R&D. • By advancing AI, GGFs expand employment, upgrade workforce skills, and raise labour income share.