Marco Polo Think Tank
Entrepreneurship in China
2013
The Marco Polo Think Tank is a French and English speaking discussion group founded
in Beijing in June 2012. Its objective is to identify innovative public policies and corporate
management good practices in Asia, with a strong focus on China. Mostly made up of young
executives coming from various countries in the world (China, France, United States, United
Kingdom, Canada, India, etc…), our group meets twice a month and focuses on one study theme
per year. During each meeting, we welcome a speaker, whether an expert or a main actor on the
studied topic.
We publish a report in French and English at the end of each study cycle, describing the
Chinese environment on the studied topic in the most objective way, and delivering a set of
propositions for both public and private actors. Public administrations, embassies and chambers of
commerce are our main communication targets. Company management teams can also be interested
by our findings.
Introduction
After more than thirty years of economic and social mutations, China has become one of
the most powerful economic power in the world, breaking the world record of the time needed
for the recovery of one country’s economy. This “Chinese miracle” relies on a reform of its
infrastructures (going from a rural to an urban society), a transformation of its economic model
(from a planned economy to a progressive integration to the globalized market economy), and a
strong and fast improvement of the living conditions of the Chinese population. This economy
revolution was so strong and happened so fast that it raises nowadays a significant number of
governance issues, one of the most important ones being to maintain a strong and sustainable
growth rate while promoting at the same time a more harmonious society on the social, societal
and environmental scales.
In this context, entrepreneurship, whether local or international, developed progressively
in China and is nowadays at the heart of the modernization of the country’s economic system. In
the shadow of big State owned companies (SOEs) which paved the way of the Chinese economic
revolution, a culture of entrepreneurship is dominant in Chinese society. Carried at first at the
microeconomic, local level, this culture of entrepreneurship has been then developed by the
arrival in growing numbers of foreign investments, and is at the heart of several national
industrial successes. These “rising stars” are nowadays considered as models in the Chinese
economy and motors in terms of employment, wealth production and innovation.
In this unique social and economic ecosystem, the risks taken in order to generate wealth
through the creation of a company (definition of entrepreneurship) raise many questions that the
Marco Polo Think Tank wished to explore. Our group tried to take a critical look at several issues
related to entrepreneurship in China, made up of the eyes of young executives living and working
in China.
This report has two objectives, closely related to the mission of the Marco Polo Think
Tank: our group gathered young economic and institutional executives in order to share their
knowledge and impressions on entrepreneurship in China, and to identify the particularities and
the limits of Chinese public policies on this topic. We also put up a set of tips and
recommendations for foreign entrepreneurs as for foreign institutional players. In order to do so,
our group invited several experts and actors in the studied topic, whose testimonies and points of
view enriched the members’ individual experiences.
Given the characteristics of the Chinese economy, the national economic environment
generate a favorable field for the development of entrepreneurial projects? What are the
particularities of entrepreneurship in China? What are the advantages and bottlenecks or such
activity in a country in the middle of both economic and social transformations?
I- Entrepreneurial environment in China :
1- China’s growth still offers significant opportunities, but is not an Eldorado
Even if it remains at a high level, China’s potential growth gradually decreases. The main
reasons that explain this slowdown are the aging of the population, the raise of labor costs and
the technological catch-up. Compared to major OECD countries or even to the other emerging
countries, China’s growth reached unparalleled levels. If Chinese economy saw a 10% annual
growth during the thirty last years, the recent tendency is a notable slow down : 10.4% in 2009,
9.2% in 2011 and 7.8% in 2012. There is no question that global financial crisis, coupled to the
Eurozone crisis are some of the reasons of that slow down. However, the fact that some
structural factors affect China’s growth suggests that it will be a real challenge for China to
resume with such high levels of growth. On the one hand, demographic evolutions and the end
of the « demographic dividend » might lead to a smaller labor force. On the other hand, the
technological gap is becoming smaller and smaller, therefore, earnings from the technological
catch-up are expected to be smaller and smaller.
Chinese economy has to be ready to meet the challenges of a high cost economy (« high
cost era ») and to assist its enterprises in their standard improvements. As a consequence of the
diminution of the labor force, wages in China have risen considerably – multiplied by four during
the last ten years in the manufacturing industry – and will presumably keep rising. Chinese
economy’s needs and prices liberalization might also have consequences on both energy and raw
materials prices. The industrialization and urbanization of the country might put pressure on real
estate prices while the reforms of the financial sector might bring the relatively cheap funding to
an end.
The Chinese economy can still expect a few years of high growth rate, despite a gradual
decline, it will still remain much higher than Western economies, but we cannot ignore several
risks linked to the current Chinese growth model. In order to ensure a strong and sustainable
growth, Chinese government now faces new challenges created by this growth model. From 2000,
the economic development mainly relied on the country’s good performance in the export of
goods but also on massive public investment campaigns aiming at developing the country’s
infrastructures. The success of those policies has been absolute. However, we can surely call into
question the efficiency of those same policies when China will reach a higher stage of
development, where it will not only have to free the innovation capacity at a national scale but
also to ensure an optimal allocation of the resources, becoming more expensive and rare. Chinese
authorities will have to find new growth drivers, particularly coming from their domestic market
and household consumption. To strengthen the financial system and the labor market also seem
to be necessary. Environmental issues will also have to be taken into consideration.
Finally, the Middle Kingdom is still an developing country. The needs for more
infrastructures all around the country are important. The relatively low capital stock is more
similar to the situation of Japan at the end of the 1970s than that of an advanced economy.
Besides, an imbalance development can be observed between cities on the East coast (already
developed) and other cities. Those less developed cities in the middle and West of China are now
driving the global growth with, for some of them, annual growth still higher than 15%.
2- The transformation of the economy brings new opportunities
Moving towards a new growth model, the Chinese economy will certainly create new
opportunities for entrepreneurs who can hope to reach new markets in various industry.
Focusing a new growth model on the development of the domestic demand, the increase of
wages and the support of household consumption might promote new consumer goods markets
but also more upscale market such as tourism, luxury or healthcare. New needs (household
equipment for example) might appear as a consequence of urbanization – a major trend in the
past thirty years in China. The service sector also carries numerous opportunities, as it is still
underdeveloped today. Finally, switching to a new growth model that will take environmental
issues into account offers strong opportunities for entrepreneurs positioned on green technology,
energy efficiency, etc…
Officially, the Chinese government supports the development of seven strategic
industries : energy efficiency technologies, new generation computer technologies,
biotechnologies, high-end equipment production, alternative energies, advanced materials and
alternative fuel cars. The twelfth « Five year plan » identified those seven industries as priority
industries and gave them specific objectives in terms of annual growth : more than 20% annually
for the period 2011-2015 ; and in terms of production’s added value : 8% of the GDP in 2015.
Therefore, the « Foreign Investment Industrial Guidance Catalogue » which was edited in January
2012, jointly written by the National Development and Reform Commission (NDRC) and the
Ministry of Commerce (MOFCOM), focuses on attracting foreign investments in those seven
specific industries considered as key priority industries.
It is important to notice that, despite those measures, several restrictions still remain or
become stronger. For example, the automotive industry (thermal) stopped being pushed by
Chinese government. Surplus in production capacity is used by the Chinese authorities to justify
those new restrictions.
Moreover, some specific sectors supposed to be open are now completely closed to
foreign companies, mainly to support SOEs or Chinese companies but also to protect sensitive
industries (cryptology is a relevant example). Chinese companies are also becoming more and
more competitive.
Last but not least, in first tier cities that are Beijing, Shanghai, Guangzhou and Shenzhen,
many markets are already mature and it is now extremely difficult for new players to find access.
During the last thirty years, many business models have had time to be tested and certified
efficient.
3- The business environment brings new challenges for foreign entrepreneurs
The economic environment is still extensively influenced by a development model where
the Chinese administration plays a key role. Even if SMEs represent 80% of the urban
employment and played a significant role in China’s economic takeoff, the business environment
remains – especially in urban areas – deeply affected by SOEs and administrations. Even though,
during the last few years, some Chinese companies became important multinational players
(Huawei, Tencent, Alibaba), the Chinese government still keeps a strong control on its strategic
industries through its SOEs and maintains strong relations with private companies. For example,
Huawei is a Chinese private company that received the strongest support from China
Development Bank, a State-owned bank whose financing capacity is more important than the
World Bank. One must not forget that, in reality, the difference between a SOE and a private
company is not always very clear.
It is easier for big companies, especially SOEs, than it is for SMEs and start-ups to access
the credit market. The financial system is still controlled by the Chinese government : almost all
the banking sector, except for one bank, is actually controlled by the Chinese authorities.
However, this system aims at financing public investment policies and sustaining SOEs, and
interest rates have been kept low in order to allow companies to find cheap financing solutions.
This situation did not only discouraged Chinese companies to take risks but also to pay much
attention to the « profitability assessment » of their investments, especially for infrastructure
projects. Therefore, SMEs in China experience many difficulties to access funding solutions and
have to use some less formal channels with higher rates. The current system does not leave much
space for foreign financial institutions. Foreign banks assets in China represent only 1% of
China’s total assets. Those foreign banks in China do not offer specific solutions to support
business creation. Finally, private equity in China is very ambitious but has not yet reached a
development stage that could represent a large scale alternative.
Besides financing difficulties, entrepreneurs in China face critical intellectual property (IP)
issues. Copy and counterfeiting are common in China and it is a real challenge to keep one’s
technological advantage. Evolution of IP protection in China is a complex topic and it is not
really easy to clearly give answers. However, the more and more competitive Chinese domestic
market and new authorizations for technological transfers lead to new challenges. In a quickly
moving country, pitfalls are numerous. Several examples of entrepreneurs who lost they brand or
technology can illustrate how important it is to protect one’s strategic assets as early as possible.
It is also important to weight pros and cons of sharing one’s technology.
4- Is China’s fiscal and financial environment discouraging entrepreneurs ?
It is rather difficult to access traditional funding in China. Nowadays, actors of the
banking system are not willing to support young entrepreneurs to grow because legislation does
not push them to do so. Both fundraising obligations and the legal framework lead actors of the
banking system to be closer to larger companies, which are already strongly established. The
result of those difficulties to access the traditional funding system is the creation of a parallel
funding market for SMEs. According to Mr. Philippe LELARGE, deputy head of commercial
and personal banking at French bank Société Générale, « Shadow banking was the response to
the slowdown in bank lending. The problem is that it’s really expensive, uncontrolled and risky ».
In addition to the growth of private equity funds or business angels, the banking system
needs a more flexible legislation in order to support SMEs. Moreover, the taxing system is a
heavy burden for small entrepreneurs. Chinese entrepreneurs do not only suffer from relatively
high tax rates but also from banks’ high borrowing rates. Those high rates represent a crucial
competitive advantage for public companies over private ones.
Despite a complex environment, why is entrepreneurship so popular in China ?
According to Mr. Canh TRAN, State support is not necessarily required for a Chinese
entrepreneur to succeed. Mr. Gilles CROFILS and Mrs. Ninie WANG also gave us a few ideas.
After years and years spent trying to control the Chinese economic growth, the government
released China’s private players’ energies in order to create an entrepreneurial environment.
« Nowadays in China, being an entrepreneur is well considered by public opinion because it is
fully in line with everyone’s strong desire for individual success ». Even though entrepreneurs in
China face difficulties, the societal acceptance and the current macroeconomic dynamics bring an
enthusiasm that goes beyond those difficulties. A philosopher from the Enlightenment period
recognized that it is on infertile lands that Humans become fertile. This is exactly what is
happening in China : enthusiasm, dynamism, and desire to innovate and to create. An example to
illustrate this new tendency could be the ever growing number of events related to
entrepreneurship, especially in Shanghai and in Beijing.
II-
Being a foreign entrepreneur in China
1- Foreign entrepreneurship in China: History and challenges
What do we mean by foreign entrepreneurship?
Entrepreneurship is the discovery and exploitation of opportunities to provide goods and
services1. Foreign entrepreneurship in China therefore is the individual or collective discovery
and exploitation of opportunities by foreigners based in China or the internationalization of
existing firms by establishing a physical presence in China, typically through joint ventures or new
investments2.
1949 – 1979: The socialist squeeze
We might therefore imagine the history of foreign entrepreneurship in China stretching as
far back as the likes of Marco Polo and thirteenth century mercantilism. What concerns us here
however, is foreign entrepreneurship as it relates to modern China, as we look to draw lessons
and offer recommendations to policy makers, financial institutions, and today’s entrepreneurs.
Following the establishment of the People’s Republic of China in 1949 existing space for
foreign entrepreneurship in China was squeezed out under the weight of expanding socialist
control over the means of production and distribution, and indeed of living as life re-orientated
around the work unit (Danwei)3. While never completely eliminated, it was not until Deng’s Reform
and Opening Up began in 1978 that foreign – and indeed Chinese – entrepreneurship had the space
to take root.
1979 – 2001: Reform and Opening
Beginning with reform to agricultural production in the late 1970’s and early 1980’s Reform
and Opening permitted foreign investment allowing foreign entrepreneurs to establish businesses
in China. In reality however entrepreneurial space in the China remained constrained as control
of the majority of commercial enterprises was retained by the state. It was not until the wave of
privatization in the late 1980’s and early 1990’s that the doors to foreign entrepreneurial activity
were opened wide.
Hexter and Woetzel (2007) set out what was perhaps the most common approach for
foreign entrepreneurs looking to step over that threshold. Early foreign companies succeeded in
China through “developing strategies to create privileged or first-mover access within highly
1
Shane and Venkataraman 2000
(Naudé and Rossouw 2009)
3
Liao and Sohmen (2001) The Development of Modern Entrepreneurship in China
2
focused markets. They secured government position to enter, partnered with Chinese companies,
and sold existing brands”. Engagement was often limited to the top few of China’s first-tier cities.
Yet this type of early entrepreneurism is not necessarily common to all emerging
economies, rather the product of the specific conditions and constraints in China’s early journey
towards a market economy. Comparing early entrepreneurialism in China and India Khanna
(2004) suggest that entrepreneurism in China focused on businesses able to take advantage of
China’s “hard” infrastructure: ports, roads, rail and power, particularly following heavy
investment after East Asian Financial Crisis in 1997. India’s early entrepreneurialism meanwhile
developed in response to a focus on “soft infrastructure” and included businesses such as,
software, biotechnology, and advertising.
Such opportunities were not without significant challenge and constraint, which equally
shaped the nature of early foreign entrepreneurialism in China. These included, a lack of
information, an uncertain political and legal environment, a lack of skilled labour, cultural
differences, language barriers, as well as limited domestic consumption. Perhaps most
significantly, prior to China’s accession to the World Trade Organization in December 2001,
market access was limited to joint-ventures in specific sectors: electronic-equipment, processedfood, consumer goods, and the pharmaceutical sector4.
Despite such challenges, Hexter and Woetzel (2007) conclude that “simply showing up in
China was a strategy that paid dividends”.
2001 – To date: Post-World Trade Organization Accession
China’s accession to the World Trade Organization in December 2001 significantly
altered the opportunities – and some cases the challenges – for foreign entrepreneurship in China.
WTO accession removed impediments to foreign investment in: accounting and legal services;
banking and insurance; chemicals; construction; distribution and retailing; and internet services.
The opening up of new sectors to foreign investment created significant opportunity for
foreign entrepreneurs, particularly as such sectors were often more naturally aligned with existing
expertise and industry in advanced economies, including those of Western Europe.
At the same time however, while opportunities were created, existing sectors became
more mature, bringing with them a new set of challenges. As business licenses became readily
available both domestic and international competition expanded, necessitating changes to the
entrepreneurial approach. “As multinationals expand beyond the big cities and Chinese
companies become more competitive, executives will need to ensure that their organizations
develop, produce, sell, market, and distribute goods to customers as effectively and efficiently as
possible .”5 Simply showing up was no longer sufficient.
4
5
Kenevan and Pel (2003) China Partners, McKinsey Quarterly
Hexter and Woetzel (2007)
Recent trends and challenges
Despite trend towards a market economy and increasing openness to foreign
entrepreneurs, challenges remain, and in some quarters there are signs that it is becoming more
difficult. In addition to an increasingly crowded market space, there are reports of an increasingly
hostile business environment in China to foreign entrepreneurs. 38 percent of US businesses
surveyed by the American Chamber of commerce in March 2010 felt foreign companies were
now “unwelcome” in China, the highest number since they started polling in 2006.6 In part this
was the result of high profile cases like Google, but also changes in the legislative environment,
for example the 2009 National Indigenous Innovation Product (NIIP) accreditation policy, which
in part would focus government procurement on such “indigenous” products. Thirdly, the cost
of doing business in China is rising: wages have increased on average by 15 percent per year since
2000, and the value of the renminbi continues to rise.7
Such changes again create the conditions to spur new, innovative forms of
entrepreneurialism for foreign entrepreneurs in China. It is to this issue that we now turn.
2- The characteristics of entrepreneurship in China
The entrepreneur in China, whether foreign or local, must demonstrate a fertile mind,
especially creative methods adapted to this complex ecosystem.
This part does not intend to be the encyclopedia of business settlement in China, but a
compilation of some ideas or evidences which we have, is fundamental after our sessions. This
precision seems essential because one often look for technical answers to questions that require a
more strategic approach. China is not necessarily a complex field, but it requires a new and
strategic methodology that many businessmen refuse to apply. How many owners or CEO are
proud of their "success story" in their homeland and came to China without taking the time to
rethink their business model or adapt their offer? The difference requires the reflection for a
better adaptation.
After a quick analysis of the Chinese environment, we will consider three specific issues
that entrepreneurs need to face: legal constraints, the construction of a new business plan and the
establishment of a rationalized organization with strong human resource policies. Then, we will
conclude with some basic questions that every entrepreneur should ask before entering to China.
6
7
[Mckinsey Quarterly: cautious sentiments
[Mckinsey Quarterly: cautious sentiments],
Chinese environment & context
Social environment
Demographic environment
‐ Very large population of very large areas (+)
‐ Development of a middle class (+)
‐ Urbanization of Chinese society (+)
‐ Strong risk of reversal of the age pyramid – aging population (‐)
Political environment
‐ Strong cultural difference between China and the rest of the world (‐)
‐ Emergence of a social conscience (‐)
‐ Difficulties to recruit Chinese employees (‐)
‐ Importance to have a network for making business: Guanxi (+) (-)
‐ China income inequality (‐)
‐ Waiting for new politic orientations after the settlement of new government in China (‐)
‐ Instability in the European zone (‐)
Economic Environment
Ecological environment
‐ Development of environmental awareness (+)
‐ Green economy is a growing market (promoted by the Government) (+)
‐ World economic crisis affecting the Chinese market (‐)
‐ Very important economic market with a growth of domestic consumption (+)
‐ Currency risk (‐)
‐ Strong competition in the market & in some market too much players (‐)
‐ Power of State owned company (‐)
‐ Difficult to finance new business or project / “Bank don’t take risk” (‐)
‐ Property bubble ( ‐ )
Entrepreneurship
in China Regulatory Environment ‐
‐
‐
‐
Long administration process to settle Company status (‐ )
Strong control of the state (government and local authorities) (‐)
Problem with the imitations (‐)
Necessity to develop relationships with political or administrations members (+) Problem of corruption (‐)
Technological environment
Cultural environment
‐ Internet, viral marketing, buzz (+/‐)
‐
‐ Growth and importance of E‐marketing (+/‐)
‐ Innovation is coming more and more from SMEs (+/-)
‐ Technical expertise growing (+/-)
‐
‐
‐
Development of entrepreneurship spirit in the Chinese society (+/‐)
Nationalism on consumption (‐)
Individualism growing (+/-)
Strong uncertainty in the business & in the society (‐)
a) Legal constraints
Entrepreneurs are often absorbed by the complexity of juridical and legal aspects of
setting up a business in China. It is worthy to note that China is ranked number 151 in the list of
the most convenient countries to start a business in the report « Doing Business 2012 », with for
instance some administrative lead times up to ten times longer than those in practice in some
European countries.
The constraint of a much regulated and bureaucratic environment also proves to be a
hindrance when it serves local companies. Indeed, a few entrepreneurs witness a nationalist
approach from local authorities, informally or very formally with legal frameworks that clearly
discriminates foreign companies. Such a frameworks can take several form such as standards,
limited choices regarding the legal entity to enter the market, long delays or a complete lack of
transparency when it comes to getting licenses.
Examples of national preferences make the economic context complicated to navigate
and in the end not very liberal for foreign companies. For instance we can quote the obligation of
joint-venture in the automotive industry, meaning a partnership with a local player to reach the
Chinese market, or the irrational behavior of Chinese authorities in terms of license approval for
foreign banks willing to operate on the Chinese market inside the framework designed by the
same Chinese authorities.
M. Canh TRAN, CEO of Design Zone, also highlights a lack of dynamism and presence
of Europeans and European Institutions compared to Americans when the market opened. The
latter, very dynamic in various strategic fields, worked on making standards out of their own
norms that resulted in a loss for European standards. Many European companies now struggle in
such sector as pharmacy.
The entrepreneur Gilles CROFILS, CEO of Second Bureau, proposes a more pragmatic
approach: « It is true that you need a year in China to start your company, when 15 days are
needed in France. In reality, you can start doing business very fast. ». It is however critical to
analyze beforehand how open is the sector of activity in which the company operates:
-
Are your business activities in line or not with national and/or local authorities?
-
What are the legal constraints imposed for your sector?
-
What is the required level of relationship with authorities and how to develop this « Guanxi »?
If the context is favorable or acceptable, it is usually a good idea to transfer the
management of legal aspects to local experts who will be more efficient in getting the job done
through their knowledge of local and cultural habits and their own connections.
b) Strategic thinking: Business plan
Vincent Perrin, Director of Ubifrance Beijing office, states that « doing business in China
is often easier than it seems ». A micro-economic observation of the Chinese market shows that
it does have an offer and demand. However, its regulations and rules differ from our European
and American markets because of its regulation constraints, its cultural specificities and because it
is still emerging.
Although its size makes it very attractive, a high level of competition makes it more
difficult to settle. The complexity of all these aspects imposes to have a clear and localized
strategy and business plan. Copy-pasting the conditions of a success story used in other countries
has proved to fail dearly. This comes partially from the fact that a non-mature market cannot
react in the same way a developed one would do. Although not a sure guaranty of success, it is
essential to adapt the offer while accepting to educate clients and the market.
The experience of M. Canh TRAN and M. Gilles CROFILS shows that the market of
consulting targeting Chinese entities has taken time to shape up. The offer had to be adapted
with very operational proposal and a pricing based on very specific needs. Professionals built
acceptance of these service products toward their clients through a long process of education and
legitimization.
-
Which business model for your company in the Chinese market?
-
What is the demand from Chinese consumers for your offer?
-
What are the constraints related to distribution and what are the relevant distribution channels?
-
How to organize or integrate operations in China with the rest of activities?
c) Organization and Human resources
All successful businesses across have in common a qualified, competent and relevant staff.
It is however a key aspect on a market where access to information is limited and complicated.
According to most of our speakers, success on the Chinese market can be summarized in two
words: patience and information. Patience is required because it takes time to build a local
expertise and a network that will allow a strong and successful business model to emerge.
Information is paramount to follow the right trend, and it is complicated to gather in a Chinese
environment that is complex, codified, and culturally different. Therefore, recruitment is a key to
understanding and accessing the market through efficient resources such as distributors,
regulators, etc.
It is interesting though to observe that the concept of « Guanxi », that is mentioned as a
key to entrepreneurial success is not so different of what it would be on another market. Gilles
CROFILS was asking the following question: « Is it possible to develop a company in France or
in any other country in the world only with ideas and no relationships? »
However, it is complicated to read profiles and competences of candidates due to cultural
and linguistic differences. This aspect becomes even more complex in a very dynamic job market
experiencing high rates of turnover and yearly salary growth around 10 to 15% in average, all
sectors considered.
-
What model of organization and level of autonomy to chose in case of a branch?
-
What are the required competences and profiles for candidates to hire in terms of experience and network?
-
What human resource policy to implement in order to keep the staff?
What are the main questions that every entrepreneur should ask before to come in China?
1. What is your market?
1.1
What’s the demand of Chinese consumers? And what are their positioning and attitudes of the competitors facing this demand? 2. What Are Your Legal and political constraints?
1.2
2.1
What are the Is your business main 1.3
aligned or not distribution What is your with the constraints business model political and therefore in Chinese orientations of what market?
the national and channels to local authorities?
promote?
2.2
2.3
What are the What is the legal level of constraints for information your industry required for and to your business establish your and what kind business? of Guanxi is needed? 3. What kind of organization? 3.3
3.1
3.2
What are the How to organize What type of skills needed to and integrate organization to look for in terms your activities promote and of experience and value chain what level of and networks? in China with the autonomy in With what kind the rest of your the case is a of Human business?
subsidiary?
resources policies?
3- Comparison between China and European countries
Entrepreneurship in developed and developing countries is an economic growth and
development activator; it is a driving force for employment, competitiveness and growth.
Diversity and special features of economic, cultural and political situations abroad involve the
importance of understanding entrepreneurship in its local context. A closer look at the Chinese
and European entrepreneurship ecosystems not only allows the clarification of these two regions’
possibilities but also helps to better understand how China and Europe can benefit from an indepth knowledge analysis of their mutual specificities.
a) Different types of entrepreneurship
The History of entrepreneurship in a country like China dates back from far and has been
shaped in different ways. The first category emerged in 1980 and is made of educated people,
usually engineers or heads of old state-owned companies. In this category entrepreneurs operate
on bigger scale businesses, they are in it by choices not by necessity. These companies, well
known as Siying qiye (私营企业), are present in all industries and sectors; from restaurants to
transportation companies, but also in manufactures of products intended to government
companies.
The second category of entrepreneurship refers to educated Chinese people or Chinese
that have travelled abroad. They came back to China to build up their own businesses. These
companies are particularly present in the booming Internet sector. Both categories operate in a
specific environment, under different constraints and distinctive features.
b) Main obstacles in the Chinese environment
The private Chinese sector in its whole, despite transition being a trend, does not benefit
from favorable conditions to launch new businesses and to efficient management.
The political and legal uncertainty
The first issue is the one of uncertainty in politics and in the legal area. Although the
government started to promote favorable entrepreneurship policies, the Chinese government’s
behavior towards entrepreneurs has been more than fickle. Rights to property are unstable and
the Rule of Law in China is still at the earliest stage: companies are still subject to (内部)
unofficial/un-published regulations and to court’s own desires. They have to compromise with
local, provincial and central governments that most of the time, have different or even
contradictory objectives. The Chinese trend to build businesses on governmental guanxi (关系) is
crucial for entrepreneurs’ success.
Access to resources
The second obstacle is the one of access to resources, hence the access to funding,
manpower and technologies. For entrepreneurs, the main resources access remains personal
savings, family and friends. Loans to banks are still rare, capital-risk in China is still at a very early
stage and is still too little for entrepreneurs to have sufficient finances for start-ups. Moreover,
Chinese entrepreneurs are not in the habit of making business plans to approach investment
funds. To keep on developing, Chinese private companies first, need rational banks and efficient
financial markets. Recruiting in China is also an important issue that entrepreneurs face: it is a
country well known for its lack of qualified manpower. Although the unemployment rate is high,
unemployed are in majority farmers with little education. What’s more, university graduates have
academic expertise but very little are those with professional experience. Chinese workers also
usually do not take much risk in taking jobs within private companies even though the salary is
higher. Eventually, Chinese directors are used to acting like bureaucrats more than entrepreneurs,
they like stability and statu quo better than creating real value in taking risks that could affect
their political position within the administrative system.
Social and cultural barriers
The third obstacle is the one of low social statue given to private companies in China.
Traditionally, retailers belonged to the lowest social class and it was reinforced later by the Maoist
persecution under the Bourgeoisie. Although mentalities change and grow, a preconceived idea of
this social status remains today and has difficulties going away.
c) A better future for entrepreneurs in China?
Throughout the last past ten years, new technologies and the Internet have originated
radical changes, especially for entrepreneurs. Indeed, the Chinese government aims at turning
China into a world leader in the sector of new technologies, modernization and innovation being
necessary conditions to its development. The new tax incentives, monetary subventions and the
implementation of more flexible laws have generated an environment which is more welcoming
for dynamic technology companies. The Chinese government also attempt to make the “sea
turtles” come back to China – Chinese citizens who have lived for many years abroad and who
finally come back to China to set up a business. Finally, the Chinese government has
progressively become much more flexible regarding the process to set up a company.
China has a major competitive advantage in terms of entrepreneurship over developed
economy countries, and taking initiatives in this still not too mature yet economically booming
market can be quickly and sharply rewarded.
However, although the private sector remains China’s main hope for its future, its
financial and accountable system are among the main handicaps of the country and could put a
brake to the development of private businesses. Although entrepreneurial spirit is more and more
socially accepted, chances of success of start-ups in China are still low, as they have to continually
fight for survival in a complex economic and political environment. For those new businesses,
daily survival entirely lays on arbitrary political decisions. As a consequence, most Chinese
entrepreneurs – even those from overseas, tend to favor short-term profit over long-term
company strategies.
The Chinese government needs to fully recognize the fundamental role played by
entrepreneurs in the Chinese economy and to adopt necessary measures in order to support the
development of a prosperous entrepreneurial economy.
d) The ecosystem of entrepreneurship in Europe:
Entrepreneurship requires a favorable environment, including a low-rate taxation system
on capital gains, favorable financial markets and political initiatives supporting entrepreneurial
projects and SMEs. When looking back to only forty years ago, such system did not exist in any
European country. All the more worrying, wealth creation and risk-taking initiatives were
perceived as prejudicial. Things have changed. The European integration and the adoption of the
single currency contributed to the establishment of a full transparency on prices and to the
creation of a market which is more efficient and more competitive. Nowadays, the evolution of
people’s mindset towards entrepreneurs is far from being over, although, each European, if a
good occasion arises, would be willing to create value.
e) Main challenges entrepreneurs face on the European market:
The current state of the economy
Since 2008, Europe has been through the consequences of the most important economic
crisis over the past fifty years. Most of the few existing European entrepreneurs are pessimistic
regarding growth perspectives in Europe. A study made by Ernst & Young showed that last year,
entrepreneurs from Germany, Italy and France were much less confident in their respective
countries for the development of a company than those from the United States, Brazil and China.
The hurdles of start-ups to raise money
The second major issue is about funding. A company requires between 1.5 and 4 million
euros in order to turn a business idea into a business model, and access to this kind of funding is
very difficult. Institutional investors like pension funds usually consider European capital-risk
funds as bad assets.
The hurdles to find a job
In order to survive from the variability of the demand, and to initial strategic mistakes –
almost impossible to avoid for a starting business, young start-ups need to be able to quickly
reduce their labor costs and without too much hassle. This issue is much more complicated to
resolve than in any other part of the world. The legal complexity and the cost for companies of
laying-off their workforce in Europe worry capital-risk funds.
The inability for Europe to speak with one voice
Europe is still determined by its national borders, which make Europe a very fragmented
market. National particularities are still present, just like linguistic barriers still exist. For example,
there still does not exist a common European policy regarding fundraising in several European
countries. This means that in case of fundraising, one needs to register in each concerned country.
One of the major challenges for Europe is the extreme fragmentation of its innovation
system. Europe needs to create a real single market for innovation.
The fear of failure: the cultural barrier.
Failure in Europe is still negatively seen and the stigmatization which follows after it
makes it really challenging to get a second chance. In other parts of the world, especially in the
United States, the risk of failure is not as much of a big deal: trying and failing are fully part of the
life cycle of a company. If an entrepreneur fails, he will be seen as someone legitimate to build a
business because he will have had the experience of failure. Although, in Europe, his failure
would mean that he is unable to build and manage a company.
The European Commission, after a careful study of the several regimes of insolvability,
realized that most European countries consider their entrepreneurs unsolvable, whereas in reality
only a small percentage of bankruptcies are due to frauds. Some countries leave their
entrepreneurs hopeless for years. For example, the United Kingdom would reimburse the debt of
an entrepreneur 12 months after he declares bankruptcy. In Germany, an entrepreneur would
have to wait another six years in order to subscribe to a loan. In France, such period lasts nine
years.
f) The future of entrepreneurship in Europe
The advantages of the consequences of the economic crisis for entrepreneurship
Although the European crisis has considerably slowed down domestic growth and made
it even more difficult to access funding, this last recession may have enhanced a change of
perception of risk in Europe. Nowadays, it is not seen as risky as before for a manager to join a
start-up, given the massive lay-offs European companies have had to go through.
European governments are paying more and more attention to entrepreneurs. They try
via several channels to foster the creation of companies. Several policies are implemented in
order to create a positive environment for start-ups, to attract foreign graduates and to expose
their university students to the values of entrepreneurship. For example, the French government
proved to be particularly innovative when implementing a tax-break policy on R&D activities.
Unfortunately, the main bottleneck for the creation of a business in France remains the high cost
of labor and a rigid labor law system.
Europe has to maintain a low tax-ratio on capital benefits and to create a financial market
and an European stock-market similar to the American NASDAQ. Indeed, European
entrepreneurs have been negatively impacted by the absence of an European liquid financial
market allowing start-ups to find funding from scratch. In Europe, the proportion of investment
in start-ups is not even 50% of such investments in the United States. As such, Europe has a
considerable delay in terms of technological innovation. The gap has become so big that an
European entrepreneur – especially in the field of new technologies – would rather start his
business in the United States in order to take advantage of the financial market when he will need
to raise funds.
A large consensus has emerged over the fact that an exclusively austere economic policy
will not resolve the crisis that Europe is facing today. Entrepreneurship is part of a positive and
constructive action plan which would help the Old Europe stand again. The creation of
businesses, the encouragement of entrepreneurial attitudes within big corporations, freelance
activities are other possible solutions.
The biggest challenge for European governments is their ability to make of Europe a
favorable place to company creation, growth and full-employment.
4- The action of governments and agencies in China
Foreign Missions and Chambers of Commerce have two different mandates when in a
foreign country, and I will give a brief summary on the working of both; and also provide a brief
on how these institutions facilitate bilateral relations, trade and entrepreneurship.
Embassies focus on bilateral relations between two countries. Their primary focus is
improving political relations, increasing trade, visa facilitation, cultural and educational exchanges
and monitoring and supporting the activities of their respective countrymen in the locality
through fiscal, political and policy support. In regards to entrepreneurship, embassies and their
respective consulates generally only involve themselves in a pre and or post operation setup, and
or when large amounts of investment or jobs are concerned. Pre-operation setup could for
example be where the embassies would liaison with the local government and or other
institutions to allow sectors (i.e. banking) to be allowed operation into China. Post operation
setup would be if a company, individuals and or entrepreneurs from the host country is in trouble
with the local government (i.e. Google in China), in which case the embassy can provide support
and guidance to the legal persons concerned. Large amounts of investment and or jobs would
only be covered by an embassy when a substantially sized institution would enter, scale up and or
exit a market; in which case, due to political reasons, an embassy would require to be involved.
This is the extent to which the embassies contribute, in regards to entrepreneurship; clearly this
would impact trade and bilateral relations at a global level however would be out of scope when
discussing grassroots level entrepreneurship.
Chambers of Commerce (COC) have a completely different modus operandi. These
associations are not only involved and well represented with the local government, respective
embassies and business community. They are also staffed and funded by members of the
business and entrepreneurial community. This allows COC to be ideal institutions when
concerning large scale business, trade and mass-entrepreneurial projects and support in China.
However, COC are limited in their scope as well; only being able to support the select few with
large enough businesses and wallets. COC are unable to support all grassroots level institutions
and small scale startups, like some of the individuals we spoke with during our meetings.
In the 90’s, COC worked closely with local and international government institutions to
promote trade and business; however at this time, these institutions were working more like
community clubs for expats as compared to the full blown commercial institutions they are today.
Dr. Michel GRENIE, a long term French diplomat in the PRC and founder of two startup
companies in China believes: “the way forward for global institutions in the development of
education and or entrepreneurship, is through connectivity and low cost access to data. This will
allow individuals to maintain their global and local ecosystems, which will further allow these
individuals to develop in an international arena while simultaneously being connected to
opportunities in their locality”. In the past, COC in China were ideal institutions for the time;
they were the global institutions that connected businesses (entrepreneurs) with respective local
government entities. This fostered the business dynamics of the day when large foreign MNC
entered into China and were unaware of local procedures, processes and applicable laws
governing them; making them no better than entrepreneurial institutions at the time. Today
however, since the legal framework and daily operations in China are a little more transparent;
grassroots level entrepreneurs and businesses are finding other mediums of connecting with
governments around the world; which gives them a medium to voice their worries and request
for fiscal and or policy support. Such methods of communication in China now are: direct
communication, Weixin, Xinlang and the like.
A good example of this was given when we were discussing governmental, institutional
and or COC support with Ms. Ninie Wang, Founder and Managing Director at Pinetree Times
Services. Ms. Wang explained that after her studies in Insead, when she set out to serve the
elderly citizens in China, namely the “silver industry” in mid-2000; there was absolutely no
support from the Chinese government or international institutions. The business model was not
profitable, like every other normal business model of a startup, or developed enough for the
institutions to take seriously. Therefore, since none of them would give her the time of day to
discuss and help setup the business, she ventured out on her own and started from the very
beginning without any support: “Entrepreneurs in China should not wait or expect any
governmental support”. Only after many years of building the business and lobbing, did the
government notice that the population in China is aging and therefore there could be a need for
such a silver industry in the near future, making the industry profit generating. Only when the
government institutions realized this did they start meeting with Ms. Wang and discussing
financing and other options like capital injections. She states that “Even though I have noticed a
change in attitude from the government during the last 5 years, the impact on policies is still very
small. Officials have only started to take my business more seriously now that it seems
profitable.” Some of the active participation that the Chinese government has taken into action
after many rounds of meetings with Ms. Wang has been, to setup and promote local associations,
of which Ms. Wang and Pinetree are leading members of; furthermore, development of
incentives and cash payment through the local social support system, that was set up during the
times of Mao Zedong and which are highly inefficient according to Ms. Wang. However, since
this is the start of government support for this industry, it is a good first step in the right
direction.
In the future, more importance is being given from by the Chinese government to the
silver industry; since the industry is now being viewed as an institutions for the common good;
however we should keep in mind that this could have some political reasons behind. The way the
government is enacting this strategy is to study the business modules of similar industries
internationally and localizing it to Chinese need. Once that is complete, they try to implement
locally; however as any good CFO would tell you, strategy and implementation are two different
matters. When referring to the silver industry, Ms. Wang mentioned that the “Chinese 12th 5year plan is due to encourage private actors to invest in this sector”, furthermore, other local and
internationally international socially acceptable causes are a top priority for the local government,
therefore further actions of the sorts of local industry specific associations and or organizations’
could be in the woodworks. Let’s just hope they reach the goals that are intended in the strategic
phase.
Meanwhile COC and other such institutions have evolved, as mentioned by Mr. Gilles
CROFILS, CEO of Second Bureau, they are now at the forefronts of providing support to large
member institutions. They help entrepreneurs with deep wallets, with an “experienced local
network, sourcing of human resources and other material and if required major administrative
matters”.
The accumulation of the direct communication method, support from the local COC and
the new found interest in socially acceptable causes by the Chinese government (learned and
localized from international models), could make for a better business environment for
customers, hopefully translating to best products for the best customers.
III- What about the future? Trends and perspectives
1- Current trends
China has been attracting entrepreneurs for decades now. In recent years, Shanghai and
Beijing have been increasingly developing into large hubs with conducive ecosystems for
entrepreneurs, for both the Chinese and international markets. More specifically, there are an
increasing number of networks and knowledge-sharing platforms in China on various themes
(technology, urban development, energy, etc.) which enable people from different backgrounds
to meet. Moreover, entrepreneurship was probably very manufacturing/industrial-focused a
decade ago, and is increasingly spanning public relations/marketing, financial services, healthcare,
food catering/restaurants, etc. Some success stories in China developed by foreign entrepreneurs
may potentially become more international success stories with business exposure overseas.
Despite this, entrepreneurs in China still face a number of challenges. One of the greatest
challenges facing entrepreneurs is the difficulty of access to information. Access to information
is crucial to success in China; however, this is almost impossible for the entrepreneur to gain due
to cultural reasons. Another challenge facing entrepreneurs is the administrative one. To start a
company in China can take up to one year
The importance of “guangxi” is always underestimated by foreigners who are new to the
Chinese market business development dynamics: build relationships with several foreigners as
well as Chinese who can “sponsor” your effort (business and institutional contact introductions,
potential partners, seed financing, identifying the right market/product segment in China, etc.)
Another big challenge facing the entrepreneur in China is the education system. With an
educational system that is not designed to foster free-thinking, culturally, this presents a number
of difficulties for the entrepreneur. Although an increasing number of Chinese students are
educated abroad and are very talented and capable, their capability is only useful if the
government allows their education to be implemented in China, rather than have these
individuals join an SOE through the promise of a big salary and safe position. (Michel GRENIE)
Finally, it is important to underline the difficulty of finding capital easily in China.
Foreign entrepreneurs need to rely heavily on offshore financing as a start. An entrepreneur
should not expect financing from local banks or foreign institutions.
2- Future perspectives
Despite challenges, there is reason to be cautiously optimistic about the future for
entrepreneurs in China. According to the Global Entrepreneurship Monitor 2011 report,
entrepreneurship is rapidly becoming to be seen as something very positive in Chinese culture.
Based on job creation, the current generation of entrepreneurs in China are making a strong
contribution to the Chinese economy. However, with the growing number of patents, the
growing maturity of the market and the strong competition, this indicates that in the future,
innovation and creative will be carried out by small entrepreneurs in the near future.
Over the next five-years, the government plans to refocus the economic goals from pure
invest-driven GDP-growth to more stable long-term economic growth. (Mac Kinsey quarterly)
To achieve this, the Chinese government has identified seven key sectors to its economic
growth. These key industries are: new and alternative fuels for the automotive industry,
information technology, biotechnology, high-end manufacturing, new materials, new energy and
environmental protection. The government aims to increase the share of these seven key sectors’
total added value to GDP
contribution to 8% in 2015 and 15% in 2020.
(http://www.forbes.com/sites/bmoharrisbank/2012/12/14/chinas-five-year-plan-rewriting-itsreputation-with-a-focus-on-emerging-industries/)
These particular sectors offer exciting
opportunities for entrepreneurs.
Key recommendations
1- For entrepreneurs:
1. Be patient: setting up a company in China is a time-consuming process;
2. Familiarize yourself with the regulatory environment governing your commercial activity
(in particular, the NDRC’s Foreign Investment Catalogue);
3. Prefer industrial sectors which have the best growth prospects and enjoy government
support;
4. Be aware of IP theft and fraud risks;
5. Spend enough time on the drafting of a feasibility study prior to the establishment of your
company in China:
6. Carefully select your Chinese partner and make sure that you both share a common longterm vision;
7. Be careful of legal “gray areas”: Laws and regulations are not always clear and sometimes
do not even exist for certain types of services, but this should not prevent entrepreneurs
from carefully approaching the relevant market, with appropriate commercial and
political support;
8. Develop a clear HR policy, from the establishment of your company in China:
compensation is not the most important factor, compared to physical security, continuing
education, team spirit, and career prospects in China and abroad;
9. Use all informal channels of communication with Chinese commercial authorities (local
associations and Chinese Chambers of Commerce);
10. Do not start a business in China without financial resources.
2- For institutions:
a) Foreign administrations
11. Create awareness programs in universities and business incubators on opportunities of
entrepreneurship and commercial development abroad.
12. Put in place a “social toolbox” for entrepreneurs abroad (access to financing, legal advice
and social insurance);
13. Embassies and governmental organizations involved in bilateral negotiations with China
should address the following topics with their Chinese counterparts:
 put an end to monopolies, except for natural monopolies;
 reduce the importance of State-owned enterprises in the Chinese economy;
 facilitate access to finance for private enterprises;
 accelerate the development of capital markets;
 sign bilateral agreements on the development of entrepreneurship;
 reduce market entry barriers in China;
 encourage innovation and protection of intellectual property;
 facilitate access to regulations;
 raise the awareness of Chinese authorities on the need to establish an educative
system emphasizing importance of critical mind and higher tolerance for failure.
b) non-governmental institutions
14. Target SMEs and VSBs;
15. Develop a wider range of services for entrepreneurs;
16. Foster the creation of foreign entrepreneur networks in China.
c) private actors
17. large industrial groups should develop assistance initiatives for entrepreneurial projects in
their sector
18. foreign financial institutions should develop services and products tailored to the specific
needs of entrepreneurs.
List of speakers:
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Mr. Canh TRAN, Founder and President of Design Zone;
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Mr. Vincent PERRIN, Director of UBIFRANCE Beijing branch;
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Mr. Matthieu DAVID, Founder and President of Daxue Consulting;
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Ms. Ninie WANG, Founder and President of Pinetree Healthcare;
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Mr. Alexis FREDET, Founder and President of Margaux & Louis;
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Mr. Gilles CROFILS, Founder and President of Second Bureau;
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Mr. Paul GILLIS, Professor at Beijing University;
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Mr. Michel GRENIE, entrepreneur and Dean of Ecole Centrale (Beijing branch);
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Mr. Philippe LELARGE, director of Société Générale China region.
Writing committee :
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Mr. Alexis BONHOMME (France), CEO for China, Groupon – Tencent ;
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Mr. Alexandre CHENESSEAU (France/USA), Associate, Lazard;
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Mr. Olivier DESSAJAN (France), COO for China, Colisée Patrimoine;
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Mr. Arnaud FAVRY (France), business development manager for China, Institut Mérieux;
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Mr. Stephen HILL (UK), diplomat, UK Embassy in China;
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Mr. Aish KASHTURIA (India), in charge of M&A for China, Siemens;
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Mr. Florent MANGIN (France), diplomat, French Embassy in China;
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Ms. Aliénor MARION (France), Masters student, Tsinghua University;
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Mr. Matthew SQUIRE (Canada), teacher in international high school.