Abstract: Government guidance funds have become a crucial tool for governments at all levels to deeply implement innovation-driven development strategies. Unlike existing research that primarily focuses on the innovative effects of government guidance funds on enterprises, this paper emphasizes the impact of these funds on urban innovation and analyzes the underlying theoretical mechanisms from the dual perspectives of "government guidance" and "market operation." Using data from 268 prefecture-level cities between 2008 and 2021, the study employs a Difference-in-Differences model to evaluate the effect of government guidance funds on urban innovation. The results indicate that the establishment of government guidance funds significantly enhances urban innovation levels, and this finding remains robust after a series of robustness checks. The underlying mechanism involves leveraging the dual attributes of government guidance funds to exert capital guidance effects and talent guidance effects, thereby attracting the aggregation of innovative resources. The innovative effects of government guidance funds vary depending on government capabilities and marketization levels. The research conclusions provide theoretical insights for relevant government departments to formulate government guidance fund plans tailored to local conditions and enhance urban innovation levels through the combination of an active government and an efficient market.

Key words: government guidance funds, urban innovation, capital guiding effect, talent guiding effect