In recent years, the China has been investing heavily in innovation. In an attempt to inspire entrepreneurship, the government currently has a US$337 billion startup investment fund set aside to inspire the growth of companies such as online giant Alibaba that can help shift China’s economy from basic manufacturing to more skilled, high-tech industries (1). An approximate US$100 billion is predicted to be specifically targeted at financial and technology (fintech) startups; this speaks to the great emphasis of China’s initiative on cultivating high-skilled industries at home (1).
The causes for this push are relatively straightforward and apparent. With its overall economic growth rate slowing in recent years, China aims to move up the ladder of development and definitively shed its former identity as an economy of cheap manufacturers. In this way, it hopes to inspire lasting economic growth. Broadly speaking, this means cultivating a socioeconomic culture emphasizing the traits that originally allowed Western countries to become the wealthiest in the world: science, property, competition and work ethic (2). More specifically, this translates into a government-backed push to create the type of innovation-driven society in which startups prosper and new inventions abound. Essentially, the government recognizes that the next stage of economic growth depends upon China’s successful transition from an “innovation sponge” – absorbing and appropriating existing technology from other parts of the world – to a global innovation leader (3). In this way, the Chinese economy can continue to flourish and its society advance to higher levels of prosperity.
By many measures, government investment has had success in inspiring innovation. As of 2015, China was home to four of the world’s top 10 Internet companies (ranked by number of visitors): Alibaba, Baidu, Tencent and Sohu (2). Furthermore, according to research by McKinsey, China has been particularly successful in encouraging innovation in certain types of companies: those that rely on customer-focused and efficiency-driven innovation (3). More specifically, these include industries like consumer electronics, construction equipment, household appliances and Internet services and software (3).
However, in the fields most crucial for China’s development, innovation has yet to reach desired levels. All four of the science-based industries that McKinsey experts examined are underperforming on a global scale, measured in terms of actual versus expected company revenue given China’s share of the global GDP (3). Even given the government’s huge push to raise R&D spending, train more specialists and file more patents, progress in this sphere remains slow.
Furthermore, recent Chinese efforts to jump-start entrepreneurship by building so-called innovation centers around the country are deeply flawed. Using slogans like “mass entrepreneurship” and “Internet plus,” this initiative aims to encourage geographically diverse people to start their own companies with a centralized push for local governments to build incubators to house these start-ups (4). Within the next five years, around 5,000 such centers will exist across China, though current occupancy rates for existing centers across the country stand at lower than 40% (4).
A variety of factors prevent this initiative from being as successful in driving innovation as policymakers hope. For one, many centers are located in remote cities and towns far from established innovation communities, which are concentrated in large cities like Beijing, Shanghai, Guangzhou, Zhuhai and Shenzhen (China’s top five startup cities) (4). This puts new centers – and potential entrepreneurs – physically out of reach of the markets, talent and start-up expertise that allow new businesses to flourish. In the words of the founder of Chinese VC firm Qiming Venture Capital, Gary Rieschel, “the idea that you can predict location or the idea that every geography happens to have this nascent group just waiting to be given capital to go create the next Alibaba is just not true” (4). Essentially, the government assumption that a successful startup can spring up anywhere if local talent is provided with the basic amenities necessary (in this case, lower startup costs) is flawed in failing to consider the critical but intangible social aspect of innovation.
As such, the proliferation of innovation centers across China represent a government investment that is unlikely to have the expected payoff, at least without the implementation of further measures. According to Shi Jiqiang, a partner at a firm managing a startup base in Tianjin, there simply “aren’t enough entrepreneurs” to fill existing and planned future centers (4). If construction continues as planned, China may even stand at significant risk of incurring debt and another bubble, comparable to the ghost towns, abandoned steel mills and theme parks that resulted from former such initiatives.
Part of the reason for the lack of entrepreneurs, beyond the geographical limitations of some centers, may lie more deeply in Chinese culture and society. According to the chief executive of a private co-working space in Beijing, Bo Yiqun, the education system tends to focus on memorization over creativity, which cramps students’ potential as innovators (4). Furthermore, there is significant cultural pressure for young people to find steady employment; starting one’s own business is discouraged as being too high-risk (4).
This is not to say that China is doomed to be lag behind in innovation; the main obstacle remains the centralized nature of the government’s initiative, not any inherent national traits. As we can see from examples like Silicon Valley, innovation and invention tend to flourish organically in environments that reward independent thinking and risk taking and where policy and regulation make it easy to turn an idea into a business. Today, this is not the description that one automatically associates with China, land of SOEs and strict bureaucracy. As such, one of the main steps the government can take is to foster such a climate while providing potential inventors and entrepreneurs with the resources – and perhaps more critically, the freedom – to drive development. The country is moving in this direction already; its success in doing so will have huge implications for the future of the Chinese economy and its ability to drive global innovation and sustained economic growth.
(1) Allison, I (2016). Chinese government’s startup investment fund is bigger than the GDP of Denmark. Available at: http://www.ibtimes.co.uk/chinese-governments-startup-investment-fund-bigger-gdp-denmark-1555093 (Accessed: 18 July 2016).
(2) Sheng, A and Xiao, G (2015). As China’s economy slows, innovation accelerates. Available at: http://www.marketwatch.com/story/as-chinas-economy-slows-innovation-accelerates-2015-06-16 (Accessed: 18 July 2016).
(3) Roth, E and Seong, J (2015). Gauging the strength of Chinese innovation. Available at: http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/gauging-the-strength-of-chinese-innovation (Accessed: 18 July 2016).
(4) Wong, S (2016). China’s innovation economy a real estate bubble in disguise? Available at: http://www.reuters.com/article/us-china-economy-innovation-insight-idUSKCN0ZM2KY (Accessed: 18 July 2016).
Image: © Waihs | Dreamstime.com - <a href="https://www.dreamstime.com/editorial-stock-photo-seventeenth-china-international-optoelectronic-expo-held-shenzhen-convention-exhibition-center-attracted-image58825138#res14972580">The seventeenth China International Optoelectronic Expo, held in Shenzhen Convention and Exhibition Center</a>