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China's InnoFund Supports Startups

How tech-based SMEs can qualify for financing

China's InnovoFund Supports Startups Since China opened up its economy decades ago, innovation by small and medium enterprises (SMEs) has been responsible for the majority of technological innovation in the country.  According to the Ministry of Science and Technology, more than 65% of patents filed since 1990 have been by SMEs, with many of these being in the profitable electronics, information technology, bio-medical sectors.

However, the risks involved in establishing a new venture keep many companies from reaching the patent stage, and dissuade many more entrepreneurs from ever launching a company. To help overcome this barrier, China established the Innovation Fund for Small Technology-based Firms (Innofund) in 1999.

Although many companies, including notable success stories like Suntech and Lenovo have taken advantage of the fund's resources over the last ten years, many more investors are unaware of the fund or unsure how to enroll in the program. While the process can involve significant interaction with the Ministry of Science and Technology, investors who are able to work with China's high-tech parks, business incubators, and other business support organisations effectively can have access to grants, low-interest loans and equity financing through Innofund.

What the Innofund Is

The Innovation Fund for Small Technology-based Firms was set up by the State Council to promote the government's goals of encouraging innovation and fostering research by making funds available to entrepreneurs. As a government non-profit program, the Innofund is intended to contribute to China's development by helping to increase GDP and create jobs.

According to the Ministry of Science and Technology's website, “Innofund is targeted at decreasing the risks of 'market failure' by supporting innovative and commercially appealing projects in their early stages of development.” The ultimate goal of Innofund is to provide access to capital for innovative start-ups which might otherwise lack the means to develop. The fund is administered by the Torch High Technology Industry Development Center which belongs to the Ministry of Science and Technology.

Success of the Fund to Date

According to the newsletter of the Ministry of Science and Technology, since its establishment in June 1999, the Innofund, has financed 14,450 projects, with a total investment of RMB 8.84 billion. As of 2008, the fund had reviewed the implementation of 7,921 projects, of which 5,523 projects reached the desired targets, (69.73% of the projects reviewed), 1,113 projects fell short of the desired targets but were still considered viable, (14.05% of the total), and 1,295 projects failed to reach the desired targets and were terminated, (16.35% of the total).

In addition to the funds provided by the Innofund directly, the ministry estimates that matching funds and other contributions from local governments and other sources have increased the amount of funding provided to high-tech startups supported by the fund by 17 times.

The Torch High Technology Industry Development Centre points out that among the most noteworthy companies to emerge from the Innofund are some of China's current industry giants, including Lenovo, Huawei, and Suntech Power.

Primary Industry Sectors for Innofund

Over the past decade, the Innofund has invested in a number of high technology sectors with most support going to companies active in the areas of electronics and information, biopharmaceuticals, new energy and energy efficiency, advanced materials, optic-mechanic-electronic integration, resources and environment, tech service, and transforming traditional industries with advanced technologies. In recent years, Innovation Fund has enhanced its support to energy efficiency and emission reduction related R&D activities. 

The chart below (based on data from the Ministry of Science and Technology) illustrates how the fund's capital has been distributed during the last 10 years.

Industry bkdown Chart








Who Qualifies for the Innovation Fund

To take part in the fund, companies must be small or medium-sized ventures registered in China. Companies of up to 500 employees cannot be considered for participating in the fund.

Priority is given to projects with innovative technology or independent intellectual property and which have the potential for significant growth. The programme also favours companies founded by researchers or returned overseas students transferring their scientific achievements, projects developed in cooperation with universities and research institutions, and those making use of new and high technology to revive traditional industries and create jobs.

What Types of Financing Are Available

Depending on the type of project and what stage it is at in its development, the Innofund provides funding in the form of grants, low-interest loans or equity investment.


Grants are provided mainly as start-up capital for small firms founded by research personnel who have already established recognised scientific achievements and who possess rights to the intellectual property for those breakthroughs. Grants are also provided to subsidise new product development. The appropriation amount to each project will generally not exceed RMB 1 million with a maximum of RMB 2 million for key projects.

Low Interest Loans

The fund works with commercial banks to make available subsidised loans for qualifying high-tech SMEs.  Under this programme the State Development Bank provides loans to commercial banks, which in turn provide loans to tech-based SMEs, with responsibility for the default reserve being assumed by the Innofund. These loans are intended to help bring existing projects up to scale and qualifying projects may  be eligible for up to RMB 1 million in loan financing, with some key projects able to received as much as RMB 2 million.

Equity Investment

A select number of projects may be considered for equity investment by Innofund. Generally these companies possess unique technological or other market advantages, and the investment from the fund would not exceed 20% of the invested companies registered capital. The fund sets clear time limits for redeeming these equity investments in accordance with Chinese law.

How to Participate in the Fund

Taking part in the Innofund means more than filling out an application and waiting for a check. Participating in the fund means becoming part of China's high-tech business eco-system which, besides the fund, involves science and technology parks, business incubators and other organisations set up to promote innovation and support new businesses.

What Organisations Can Recommend Companies for the Fund

While anyone can fill out an application for the fund, this application needs to be endorsed by an organisation approved by the Ministry of Science and Technology before it can be considered for eligibility.  The types of organisations that may make application recommendations to the fund include the following:

  • Science & Technology Industrial Parks
  • Torch Program Specialized Industrial Bases
  • Torch Program Software Parks
  • Productivity Promotion Centers
  • Technology Business Incubators (TBIs)

All of these organisations are part of China's national new technology development network, and are charged with supporting technological innovation by SMEs. The Productivity promotion Centres set up by the Ministry of Science and Technology play particularly important roles in supporting SMEs.

How to Apply

Application forms for the Innofund can be downloaded from www.innofund.gov.cn. Applicants are recommended to consult with their high-tech park or incubator management before submitting an application.  The flow chart below outlines the steps involved in the application process:
Fund flowchart












The Role of Incubators and High Tech Parks

Perhaps the easiest way to develop a high tech business and take part in the Innofund is to work with a Technology Business Incubator.  These incubators can provide modern, subsidised facilities and services, as well as advice and assistance on how to take advantage of China's many incentive programmes for high-tech companies.

While incubators can be independently based and operated, those located within high tech and science parks have developed more successfully than others. In China, nearly half of technology business incubators are built by high-tech zones. Currently there are 53 state level high-tech zones and a great number of provincial level high-tech zones.

The success of incubators in high tech parks can largely be attributed to the zone's long-term interest in fostering high tech companies within their communities. Once incubated firms graduate from the incubator they can become full-fledged tenants of the park. As a tenant of the park, the enterprise will still be well-positioned to take advantage of preferential policies and modern facilities.

Finding Out More

To find out more about how to participate in China's Innofund, visit www.innofund.gov.cn or consult with the investment promotion bureau at any of China's science and technology parks.  Full listings of China's science and technology parks may be found here on RightSite.asia.