China's Experience in Building a Venture Capital Sector
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CIGI Papers No. 248 — January 2021 China’s Experience in Building a Venture Capital Sector: Four Lessons for Policy Makers Anton Malkin CIGI Papers No. 248 — January 2021 China’s Experience in Building a Venture Capital Sector: Four Lessons for Policy Makers Anton Malkin About CIGI Credits The Centre for International Governance Innovation (CIGI) is an independent, Managing Director of Digital Economy Robert Fay non-partisan think tank whose peer-reviewed research and trusted analysis Program Manager Heather McNorgan influence policy makers to innovate. Our global network of multidisciplinary researchers and strategic partnerships provide policy solutions for the digital Publications Editor Susan Bubak era with one goal: to improve people’s lives everywhere. Headquartered Publications Editor Lynn Schellenberg in Waterloo, Canada, CIGI has received support from the Government of Graphic Designer Brooklynn Schwartz Canada, the Government of Ontario and founder Jim Balsillie. À propos du CIGI Le Centre pour l’innovation dans la gouvernance internationale (CIGI) est un groupe de réflexion indépendant et non partisan dont les recherches évaluées par des pairs et les analyses fiables incitent les décideurs à innover. Grâce à son réseau mondial de chercheurs pluridisciplinaires et de partenariats stratégiques, le CIGI offre des solutions politiques adaptées à l’ère numérique dans le seul but d’améliorer la vie des gens du monde entier. Le CIGI, dont le siège se trouve à Waterloo, au Canada, bénéficie du soutien du gouvernement du Canada, du gouvernement de l’Ontario et de son fondateur, Jim Balsillie. Copyright © 2021 by the Centre for International Governance Innovation The opinions expressed in this publication are those of the author and do not necessarily reflect the views of the Centre for International Governance Innovation or its Board of Directors. For publications enquiries, please contact [email protected]. This work is licensed under a Creative Commons Attribution — Non-commercial — No Derivatives License. To view this license, visit (www.creativecommons.org/licenses/by-nc-nd/3.0/). For re-use or distribution, please include this copyright notice. Printed in Canada on Forest Stewardship Council® certified paper containing 100% post-consumer fibre. Centre for International Governance Innovation and CIGI are registered trademarks. 67 Erb Street West Waterloo, ON, Canada N2L 6C2 www.cigionline.org Table of Contents vi About the Author vi Acronyms and Abbreviations 1 Executive Summary 1 Introduction 2 A Stylized History of VC in China 7 What Can Be Learned from China’s Experience? 16 Conclusion 17 Works Cited About the Author Acronyms and Anton Malkin is a CIGI fellow and assistant Abbreviations professor in the Department of Global Studies at the Chinese University of Hong Kong, AI artificial intelligence Shenzhen. His research looks at China’s role in the global economy, with a focus on finance and ARDC American Research and intellectual property. In his prior role as research Development Corporation fellow at CIGI, Anton published works on the CCP Chinese Communist Party impact of China’s industrial upgrading policies on global trade governance, the domestic politics COVID-19 coronavirus disease 2019 of capital account liberalization in China, and China’s relationship with the International FDI foreign direct investment Monetary Fund and regional financial governance arrangements. Anton’s current research examines GBFs government-backed funds the impact of China’s industrial policies on GGFs government guidance funds Chinese multinational firms’ acquisition of foreign- owned technology assets and China’s financing of ICT information and communications emerging technologies through venture capital. technology From 2012 to 2013, Anton was a senior visiting IDG International Data Group scholar at the School of International Studies at Peking University. His Ph.D. thesis examined IP intellectual property the role of foreign financial institutions in the transformation of China’s financial IPO initial public offering markets and state-owned enterprises. IPRs intellectual property rights LP legal partner M&As mergers and acquisitions NDRC National Development and Reform Commission PE private equity R&D research and development SCGC Shenzhen Capital Group Company SMEs small and medium-sized enterprises SOE state-owned enterprise VC venture capital vi CIGI Papers No. 248 — January 2021 • Anton Malkin in this area. It is notable that what distinguishes China’s experience from that of most other Executive Summary countries is not the presence of tech giants, as many countries have advanced, globally competitive This paper examines the history of China’s venture technology firms, but the presence of an active and capital (VC) sector from the late 1980s to the globalized VC sector that is able to help start-ups present day and draws lessons on its decades-long scale their technologies and other innovations. experimentation with creating financing channels for early-stage technology business growth. The This paper offers a discussion of the conditions author highlights four broad takeaways from the that have led to the growth of China’s VC market myriad of policies that China’s policy makers into the second biggest in the world, after that have employed. These include the importance of the United States. The purpose of this paper of labour market policies that encourage reverse is neither to offer a novel empirical case study migration of highly educated and experienced of China’s VC markets nor to offer a definitive expatriates; the observations that weak intellectual explanation of how and why China has developed property (IP) protection may not necessarily a large and sophisticated system for financing scare potential VC funds away, especially in technological growth and helping small and developing countries; that government finance, medium-sized enterprises (SMEs) to scale their when channelled appropriately and combined business models and technologies. Rather, this with selective deregulation and financial paper seeks to underline the lessons that policy incentives, can play a positive role in helping makers can learn from China’s experience with channel capital toward promising technology financing technological development. China’s firms; and, lastly, that open and liquid domestic experience is puzzling for various reasons, as capital markets are neither sufficient nor necessary the institutional and market conditions were for the formation of a vibrant VC sector. not clearly conducive to the growth of private sector technology financing channels. Chief among these conditions are the following: → China’s financial system is heavily state- permeated, with market-oriented and Introduction sociopolitical goals heavily intertwined. In the past decade, China’s impressive technological → IP protection was notably weak in the strides have been difficult to miss, even for the formative years of the VC industry. most casual observers. As articulated in Kai-Fu Lee’s now popular book AI Superpowers: China, → Investor protections and business contract Silicon Valley, and the New World Order (Lee 2018, 24), enforcement were initially weak or non-existent. China’s journey from being a technological → China limited the flow of capital backwater to a country increasingly known for across its borders. producing technological leaders and Fortune 500 companies seems to have taken place at breakneck → China was not at the technological frontier. speed. As if seemingly overnight, China’s information and communications technology (ICT) → China has struggled with, and continues industry produced record numbers of “unicorns”1 to struggle with, financing SMEs. (BBC News 2019) and created an internet sector to rival its American cousin in Silicon Valley. What lessons, if any, can policy makers and other countries draw from the emergence of As many policy makers around the world — China’s VC sector in the face of these obstacles? in developing and developed countries alike — struggle to create viable channels to fund and Four conclusions are drawn from surveying China’s nurture innovation, it is appropriate to ask what, if experience with encouraging the formation of a anything, can be learned from China’s experience VC sector: a reliance on labour market policies encourages reverse migration of highly educated and experienced expatriates; weak IP protection 1 A unicorn is a privately held, rapidly growing, early-stage technology may not necessarily scare potential VC funds away, company valued at $1 billion or more. All dollar figures are in US dollars. China’s Experience in Building a Venture Capital Sector: Four Lessons for Policy Makers 1 especially in developing countries; government finance, when channelled appropriately, and Table 1: Country Ranking by Number of combined with selective deregulation and financial Unicorns incentives, can play a positive role in helping Ranking Country Number of Unicorns channel capital toward promising technology firms; and, lastly, an emerging market does not 1 China 206 need to achieve financial maturity before exploring 2 United States 203 ways of creating sophisticated funding channels for technology ventures and entrepreneurship. 3 India 21 4 United Kingdom 13 5 Germany 7 6 Israel 7 A Stylized History of VC Source: Hurun (2019). in China Table 2: City Ranking by Number of Unicorns In the first quarter of 2018, the size of China’s VC financing surpassed that of the United States, Ranking City