Transcript Slide 1

Gateway Conference
April 2011
Entrepreneurship & China
Where Do We Move in the Future
What We Want To Talk About Today
• China great success
• Success driven by policy not entrepreneurship
• Entrepreneurship in China today large numbers
– firms very small in size
• Why entrepreneurship is where it is why?
• Contrast to India
• Future for China entrepreneurship is critical
• As scholars what do we need to look at?
MACRO – China Growth Impressive
GROWTH OF REAL GDP PER HEAD (per cent a year)
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
Source: World Bank
1971-1980
1981-1990
1991-2000
2001-2009
MACRO – China Growth
• China’s share in global exports has risen from 1.2 per
cent in 1982 to 10 per cent & continues to grow.
• Over the ten years 1999-2008, the volume of China’s
exports grew at 23 per cent a year, twice the rate of the
growth of world trade.
• Between 1979 and 2001, China’s terms of trade
deteriorated by 30 percent, while her export volume
increased 17-fold
MACRO – China’s Trade in Goods
MACRO
• Asia’s rise is the fourth largest transformation in relative
economic power since the industrial revolution
– Early 19th century: rise of the UK
– Late 19th and early 20th centuries: rise of US and
Germany
– Post-second world war: Japanese miracle
– 1970 onwards: rise of the rest of Asia, including China
and India
GDP, standard and PPP Calculations
2009
Country
GDP
Standard and PPP
United States
$ 14.12 trillion
$ 14.12 trillion
Japan
$ 5.07 trillion
$ 4.14 trillion
Germany
$ 3.33 trillion
$ 2.97 trillion
China
$4.99 trillion
$ 9.09 trillion
India
$ 1.31 trillion
$ 3.78 trillion
Korea (Rep. of)
$0.83 trillion
$ 1.32 trillion
$ 58.14 trillion
$ 72.44 trillion
World
Entrepreneurship Given Credit
• National Bureau of Statistics
– 70% of GDP by firms not majority state
owned
• Keystone Capital
– 75% of profits by firms not majority state
owned
• Weak measure
– China has complex ownership structures
with mixed models more predominate today
China has Large Firms but…
• Fortune’s ranking of largest firms by assets
– China: 46 or so compared with less than 8 from India
– But almost all of the Chinese firms are large SOEs,
especially in resource and monopolistic sectors; some
property. Private firms are mostly small.
• Medium firm measure: China does not do well
– Forbes List of “exciting new firms”
• 2002 list: 13 from India and 4 from China (all in
Hong Kong)
• 2003 list: 13 from India and 1 from China
• China is a policy story, not a growth story.
Chinese Private Sector Lacks Depth
• Size of employment
– Average private enterprise employment in 2003: 14.3
persons – this has declined in China since the early 1990s
(stood at about 25 employees per private firm at that time).
– Very few large firms in private sector:
• Out of 3.4 million private firms:
• 100-500 in employment: 35,000 firms
• 500-1,000 in employment: 3,335 firms
• More than 1,000 in employment: 1,130 firms
• Other comparable emerging economies from Japan (in
the 1960s, Korea in the 1980s and increasingly India
today) were developing much larger and globally
competitive private firms.
Entrepreneurship in China Today
• Private sector firms are large in aggregate but small
individually
• Collectively, private sector is a large part of China’s economy:
– Between 30 to 40% of China’s non-agricultural GDP
– Rapid growth
• Employment: 3.7 million in 1993; 47 million 1st half of 2004
• Output value: 42.2 billion yuan in 1989; 2 trillion yuan in 2003
• Dominant in some regions of the country
One Reason:
Ease of doing Business
Rankings out of 181 economies
Country
2008 Ranking
2009 Ranking
United States
3
3
Japan
12
12
China
90
83
India
120
122
Republic of Korea
22
23
Taiwan, China
58
61
Hong Kong, China
4
4
Singapore
1
1
Some Comparisons Ease of Business
USA
Japan
China
India
OECD
# of procedures required to start business
6
8
14
13
5.8
Days to start business
6
23
40
30
13.4
Employment rigidity index
(1-100 = rigid)
0
17
27
30
31.4
Credit information index
(1-10 = best)
6
6
4
4
4.8
Days required to enforce contract
300
316
406
1,420
462.7
Cost of enforcing contract
(% of claim)
9.4
22.7
11.1
39.6
18.9
China a Harsh Home Country Institutional
Environment for Entrepreneurs
• China invests more in British Virgin Islands ($6.6B in
FDI stock) than in the UK ($0.95B) – 7 times (!)
• The British Virgin Islands in turn, invests more in China
than the UK
• The British Virgin Islands also beats the USA as a
recipient of Chinese FDI and as an originator of Chinese
inward FDI
•Why? Firms and entrepreneurs escape harsh home
country institutional environments and domicile their
cash and HQ outside of China if possible, & bring back
cash with institutional protection (so-called round trip
investment).
Additional Factors in
Entrepreneurship Environments
 Availability of high-risk capital
 Angels, venture capital firms, bank lending policies
 People willing to work for start-up companies
 Workers: education level, skill sets, costs
 Managers: experienced - - willing to work with
entrepreneur




Difficulty of acquiring early customers
Availability of mentors
Exit options
Social valuation of entrepreneurial careers
Continuing Problems For Encouraging
Growth Entrepreneurship in China
• Still lots of pitfalls:
– Entrepreneurs extremely reluctant to give up control
• They grew their businesses in this extraordinarily difficult
environment
• 2004 survey: Average equity by the single entrepreneur was
70%
– Difficult business environment breeds difficult firms
• Very suspicions of outsiders
• Do not listen to venture capitalists and banks
• A habit of false accounting to avoid government suppression
and (varying) tax bills
• Short-term horizon: Cheating on business partners and
overseas alliance partners.
Greatest Entrepreneurship Success –
Low Cost
• To date greatest success in low cost
manufacturing
• But value creation and greatest impact
on society comes from technology and
greater value added activities
• But high technology entrepreneurship
challenged
High Technology Entrepreneurship –
Issues to Consider
•
•
•
•
Protection of intellectual property
Expansion of financing for small firms
Increase international integration
Education - barrier
– Computer Science v s MIS
– Test driven system
• Education/Culture – barrier
– Credential society
– The best people work for large corporations
Continued Low Investment in R&D and Technology
Indigenization: R&D by Region, 2006
Total $478bn
China & India
Rest of Asia 0.6% Other 0.5%
4.8%
Japan
21.5%
Europe
28.9%
North America
43.7%
Source: Booz Allen Hamilton as cited in The Economist, 2007
Computers, Components, and
Peripherals Exports from China - 1993
Coproduction
4%
JV 19%
WOFE
51%
SOE = State-Owned
Enterprises Collectives
SOE 26%
1993: $0.7 Billion
SOURCE: Customs General Administration, People’s Republic of China
FFE = Foreign-Funded Enterprises
(WOFE = Wholly Owned Foreign
Enterprises; JV = Joint Ventures;
Coproduction)
Computers, Components, and
Peripherals Exports from China - 2003
Private 1%
Coproduction
3%
Collective
1%
SOE 6%
JV 15%
WOFE
75%
2003: $41 Billion
SOURCE: Customs General Administration, People’s Republic of China
SOE = State-Owned
Enterprises Collectives
FFE = Foreign-Funded Enterprises
(WOFE = Wholly Owned Foreign
Enterprises; JV = Joint Ventures;
Coproduction)
Electronics and Telecommunications
Equipments Exports from China - 1993
Coproduction
7%
JV 23%
SOE 54%
WOFE
15%
Collective
1%
1993: $12.3 Billion
SOURCE: Customs General Administration, People’s Republic of China
SOE = State-Owned
Enterprises Collectives
FFE = Foreign-Funded Enterprises
(WOFE = Wholly Owned Foreign
Enterprises; JV = Joint Ventures;
Coproduction)
Electronics and Telecommunications
Equipments Exports from China - 2003
Private
Collective 5%
3%
Coproduction
3%
SOE 18%
WOFE
43%
JV 28%
2003: $89 Billion
SOURCE: Customs General Administration, People’s Republic of China
SOE = State-Owned
Enterprises Collectives
FFE = Foreign-Funded Enterprises
(WOFE = Wholly Owned Foreign
Enterprises; JV = Joint Ventures;
Coproduction)
China Challenges Many of Our
Assumptions on Entrepreneurship
• But have to take great care with the
emphasis that over stresses
entrepreneurship in China today
• Great success but impact not
necessarily what expect
• Looking deeper at China there are
other challenges to popular
misconceptions
China Performance Similar to Asia
CATCH UP IN EAST ASIA
(per cent of US GDP per head at PPP)
100.0%
10.0%
1.0%
China 1978-2004
Japan 1950-2004
South Korea 1962-2004
Taiwan 1958-2004
India & China Also Similar Patterns
China & Japan Economic Source of
Growth Different
• Japan in the early 1980s?
– Beginning of the rise of Japanese corporate giants &
outward investment
– Japan: These firms created “lean production”,
“Toyota way” all created by domestic Japanese firms
– Nothing similar China
• A story of two ratios
– Japan (1981): 25.8 times {outward FDI over its
inward FDI}
– China (2004): 33.6 times {inward FDI over its
outward FDI}
India vs China
Trade – China & India
• In 1990 $270m trade between China & India
• Approximately $60 billion trade in 2010
• 70% of trade from India – natural resources – ie
iron ore
• Core competency of each nation – knowledge
& services India & China manufacturing
China Has Export Dominance
Over India
• Percent share of world export in garment:
– Identical shares in early 1980s: China: 3.93%; India: 3.95%
– Late 1990s: China: 20.5%; India: 5.3%
– Apparel export to US: China is five times that of India (by
quantity)
– Same story in fabrics, leather and leather manufactures,
textiles
• China even did better in jewelry exports:
– 1998-2000: China: 9.48%; India: 4.61%
– Not constrained by quotas
• Labor-intensive FDI in China
– About 50% of China’s FDI was in labor-intensive industries in
the 1990s: between $15 to $20 billion
– Total FDI inflow to India: $4 to $5 billion
But Future Is Complex
Source: Goldman Sachs
GROWTH OF THE TWO GIANTS - 2000-2050
(per cent a year)
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
China
2000-2005
2005-2010
2040-2045
2045-2050
India
2010-2015
2015-2020
2020-2025
2025-2030
2030-2035
2035-2040
Economic Growth
• Chinese economy is four times bigger
• India’s economic growth rate will
overtake China’s by 2013
• Then India will grow faster than any
other large country over the next 25
Issues – China vs India
• Government – India’s democracy chaotic
but result is patronage government is nonfactor
• Protection of intellectual property better
India – critical as move to more knowledge
economy in future
• Age of people in nation
India Younger
India More Workers in Future
Pharmaceutical Industry as a
Case Study
• China
– Larger market as measured by sales
– Larger export value
– More FDI-dominant but also a large state sector
• India
– More competitive firms
– Export higher value-added
– Higher operating margins
– More R&D intensive
– Declining MNCs’ market share but almost no public
sector presence in this industry
China has the Scale in
Pharmaceutical Industry
• Size of market: Annual sales
– India: $8.2 billion (2010)
– China: $22.9 billion (2009)
• Export
– India: $9.4 billion in 2009; $3.2 billion in 2003
– China exports more, about $24.6 billion (2007)
– China second only to the US in pharmaceutical
chemicals
…but India has the Depth
• Export
– Yes, China exports more
– But mainly pharmaceutical chemicals: $3.7 billion in
2003
– Drugs: $790 million in 2002
– Even in herbal medicine, China is losing to Japan and
Korea
– Herbal medicine export: 1995: $770 million but in
2002: $600 million
• Internationally approved new drugs:
– China: Only two
– India: Many
A Story of Two Firms
• Biggest firms
– India: Ranbaxy with $972 million (2003)
– China: Shanghai Pharma Group (SPG): $1.53 billion
(1998)
SPG has the Size; Ranbaxy has the
Competitiveness
• Export
– Ranbaxy: $680 million and 70% of the sales (2003)
– Shanghai Pharma Group: $31 million and 1.3% of sales
(2003)
• Operating performance
– Ranbaxy: Operating margin at 28.4% in 2003 (1995: 20.9%)
– SPG: Operating margin at 3.3% in 2003
• Strategy
– Ranbaxy: 1) 6.1% in R&D, 2) Formed strategic alliances
with Eli Lilly to conduct research, drug development and
clinical trials.
– SPG: 1) A loose government -owned holding structure with
45 JVs, etc. 2) Most revenue generated by JVs from
manufacturing operations
Future for China Will Depend on
Entrepreneurship
• China officials realize that need to move up
value chain
• Key to ability to move up value chain is
entrepreneurship
• State
– 5 year economic plan recognizes need for
moving up value chain & entrepreneurship
– Encourages R&D
• Domestic firm R&D
• Location of research centers by MNE
Scholarship on Entrepreneurship &
China
• Take a balanced non-political view
– China will be success but its outcomes may
not be what is expected looking at mature
economies
• Recognize the difference in entrepreneurship
and small business – value creation is key
• Expand our understanding of entrepreneurship
to mixed models of ownership
Scholarship Continued
• Theory still applies
– China is setting
– Not a theory of Chinese entrepreneurship
• Qualitative in-depth understanding is
often needed before we do large scale
investigations – don’t just duplicate
Western study in China
Scholarship Continued
• Greatest success is in low cost
manufacturing – not as sexy but
dominate
– OEM manufacturers and how they bring
skills back to China
– Emergent economy to emergent economy
What May Research Look
Like?
• Bruton, G. D. & Ahlstrom, D. (2003).
An institutional view of China’s venture
capital industry: Explaining the
differences between China and the
West. Journal of Business Venturing.
18: 233-259.
Research
• Qualitative research
– 36 interviews with venture capitalists
– 3 funded firms
– Follow up multiple industry experts &
government officials
• Transcripts of all interviews
(translation to English when needed)
Topics Examined
• Four broad topical areas:
– (1) selection process for firms to be funded,
– (2) structuring of relationships & monitoring
of the funded firm,
– (3) value-added activities provided to the
funded firm, and
– (4) exit.
Findings – Selection
Clear nature of the investment
framework employed in China differs
from West.
• Screens employed to initially evaluate
ventures
– Fund ventures within reasonable physical
distance to accurately monitor those firms
and the avoidance of firms without proven or
checkable financials
– Due diligence focuses on entrepreneur’s
background
Findings
Value Added & Monitoring
• Once the deal funded fewer valueadded activities provided by the
venture capitalist - Chinese culture
promotes resistance to such activities
• Monitoring function by venture
capitalists more direct monitoring of
funded firms.
Findings - Exit
• Exit opportunities through IPO are still
very limited.
• Purchase of firm by strategic buyer is
more likely, though market for
corporate control is in nascent stage.
Future
“Let China sleep, for
when she wakes, she
will shake the world.”
Napoleon Bonaparte