This paper argues that decentralized government equity investment is a key driver of productivity growth and innovation in the Chinese domestic semiconductor supply chain. Using government records matched to industry balance sheet data, I document three findings. First, while local funds invest in relatively productive firms in their jurisdictions, local-backed firms are initially less productive as productivity is unevenly distributed across provinces. Central funds instead target the most productive firms in their nation. Controlling for productivity rank and rich sets of firm characteristics, firm directors' ties to local government investment firms' managers via past education and work experience also predict future local government fund investment, suggesting that local government funds leverage soft information from personal ties to make investment decisions. Second, despite weaker ex-ante selection, event-study estimates show that locally backed firms experience faster post-investment growth in productivity, patenting, and capacity expansion than centrally backed firms, indicating dynamic gains from decentralization. Third, local backing is associated with more procurement contracts and faster expansion of firm management teams, especially through the appointment of directors with government, SOE, graduate, and technical backgrounds. At the industry-province level, lagged local investment intensity predicts aggregate productivity growth through within-firm growth and entry, while central investment does not. I develop a model of central-local strategic interaction to rationalize these patterns and quantify the productivity and size counterfactual of centralization.
This paper examines how large industrial policy programs reshape firm political investment. We argue that lobbying intensifies when large policy rents are on the line but the overall size and allocation across potential beneficiaries remains uncertain. Furthermore, the presence of large and yet to be distributed benefits will induce firms that had never lobbied to overcome initial fixed costs and start investing in politics. Using difference-in-differences event studies across two landmark industrial policies: the CHIPS and Science Act and the Inflation Reduction Act (IRA), we show that semiconductor and green energy firms significantly increased lobbying in response to key legislative milestones. Across the semiconductor and green energy industries, extensive and intensive margins each contribute to roughly half of the observed increase in expenditures. New firms started lobbying, while incumbent lobbying firms also raised within-firm expenditures. Among CHIPS Act awardees, lobbying intensity during the policy period is associated with larger subsidy allocations. These findings speak to the puzzle of why there is so little money in U.S. politics: firms spend on politics heavily only when individualized allocation limits free-rider incentives and raises the marginal return to political effort.