The Chinese government has always seen science and technology as critical to the nations economic development and national security. As the country begins to move away from a central planning model to a more market-based model, its system of funding technology-based companies is also evolving. In this Working Paper, Steven White, Assistant Professor of Asian Business at INSEAD, and Jian Gao and Wei Zhang, both of the School of Economics and Management, Tsinghua University in Beijing, China, look at the historical roots of the venture capital industry in China and explore how it is shifting in order to respond to a more open market.
For years the responsibility of funding Chinas technology developments rested with the government. In this model, there were a large number of organizations that specialized in particular industries and at specific stages along the value chain (i.e., research, development, manufacturing, distribution). Each was answerable to one or several parts of the central and often local government, and with little or no horizontal linkages and information flows between these functionally specialized actors.
In addition, science and technology developments were driven by policy objectives, which placed a priority on such areas as atomic energy, electronics, semiconductors, automation, computers, and rocket technology. The system, which stands in stark contrast to what is found in most developed countries, where large private firms play a central role in R&D, removed all incentive for organizational actors in the innovative systemresearch institutes and manufacturers, in particularto introduce, adopt or diffuse innovations proactively.
The late 1980s saw a significant shift toward a new VC model in response to the (still evolving) market-oriented business system. At the time, say the authors, a growing number of policy makers and ministries began recognizing inefficiencies of the R&D system under central planning. By the mid- to late-1990s, after experimenting with a number of different VC approaches, a new brand of VC, with three major players, had emerged. In this system, R&D institutes and universities play a primary role at the start-up stage, providing both the original technology and the seed capital for the venture. Banks are also taking over many of the functions once managed by the government. Technology zones are a third important aspect of this new VC model, serving as incubators by providing physical space and infrastructure.
While its results have proven impressivethe system has already generated 86,000 new technology-based ventures employing 5.6 million people and generating revenues of RMB 1.5 trillionChinas VC system is still immature in terms of the resources and capabilities of the primary actors, say the authors. Among the remaining weaknesses is the lack of expertise within VC firms to select and manage new technology ventures (their role so far has been limited primarily to financing).
The authors conclude by explaining that the VC system in China is now in a stage of consolidation and evolutionary change. During this period, they predict, VC firms will be able to build up necessary experience and expertise, while government actors will begin to introduce appropriate policies, regulation and incentives to support the VC industrys ability to impact new technology development.