Industrial policy in China’s semiconductor sector is often implemented through decentralized government investment. This paper argues that decentralization is a key driver of productivity growth and innovation in the domestic semiconductor supply chain by comparing firms backed by local and central government funds. Using government records matched to industry balance sheet data, I document three findings. First, central funds select firms by national productivity rank, while local funds select by provincial rank. Because productivity is unevenly distributed across provinces, local-backed firms are initially less productive than the national average, suggesting static misallocation. Second, 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 leadership 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 effects of centralization.