Cooperation within Competition: Can Local Government Guidance Funds Foster a Unified National Market

Building a unified national market is crucial for achieving a new development paradigm and promoting coordinated regional economic growth. However, local protectionism has hindered its formation. Against this backdrop, local government guidance funds (LGFs) -a novel policy instrument combining government guidance with market- oriented operations-have sparked debate over how their cross-regional investments affect inter-city market integration. This study manually collects and compiles data on fund investment events at the prefecture-level city scale across China from 2004 to 2022. We construct a city-pair panel dataset and employ an improved price-based approach and a market potential index to measure inter-city market integration. We then empirically examine the impact of LGFs' cross-regional investments on market integration and explore the underlying mechanisms. Our main findings are as follows. First, LGFs'cross-regional investments significantly enhance market integration between cities. Second, mechanism analysis reveals that these funds facilitate integration primarily by promoting cross-regional corporate mergers and acquisitions. Third, heterogeneity analysis indicates that LGFs' integration effect is stronger for non-neighboring or inter-provincial city pairs, suggesting a "befriend a distant state while striking a neighbor" strategic pattern.