Industrial policy, congruence, and innovation: Evidence from “Chinese NASDAQ”

This paper investigates the association between firm innovation and endowment-based fundamental factors through the lens of congruence and then examines the impact of a national-level industrial policy on this newly established link. Based on a sample of small and innovative firms listed on the National Equities Exchange and Quotations, China's NASDAQ counterpart, we find that firms with greater congruence with local endowment structure tend to have more innovation inputs and outputs. Additionally, in a quasi-experimental setting, we further examine the effect of the “Made in China 2025” (MC2025) industrial policy. Our findings indicate that MC2025 increases bank loans for treated firms and weakens the positive association between congruence and firm innovation. This suggests that MC2025 has a dual impact: while it increases access to capital, it may also lead to capital misallocations and policy distortions, ultimately hindering long-term innovation capabilities.