Last summer I spent some time meeting entrepreneurs and investors in Beijing and Shanghai to try and get a snap shot of the Chinese entrepreneurial ecosystem (background here). I finished up a research paper based on my interviews which I’ve now put online.
And if that’s a bit much to digest, here’s a shorter version.
Having spent close to a year trying to understand what’s happening in the Chinese Internet sector, summarising key points doesn’t really do justice to the complexity and nuance of Chinese business and entrepreneurial culture. But I’ll allow myself to begin with one simple claim; China is the crucible in which the next billion dollar Internet companies are being forged and, whilst the continued growth of the sector may not be straight-forward, anyone interested in the future of the industry elsewhere in the world would do well to try to understand the Chinese market, consumer and entrepreneur.
This report begins with a brief overview of the Chinese Internet industry to provide context for the environment Chinese entrepreneurs are working in. Next, the report seeks to outline some characteristics of the China-based entrepreneur: their motivations, hopes and dreams. Finally, the report will turn to the question of what these entrepreneurs are creating; this looks in detail at how we should understand innovation in the Chinese context.
The Chinese Internet industry is in a time of flux; it is growing, consolidation in the market is still low and competition is fierce. The Chinese consumer is also uniquely demanding; there are cultural and economic factors that make building products and services for this market unique. This is part of the reason that US Internet companies have had a fractious relationship with the country, but it’s not the whole story; foreign entities also contend with censorship and protectionism practiced by the Chinese government. Until 2012, investment dollars were pouring into the market – particularly for later-stage, revenue generating companies – which has probably contributed to an inevitable shakeout in 2012.
As the market has developed, entrepreneurship in China has been gaining popularity. There is, however, a struggle between the traditionally conservative nature of Chinese culture and a ‘fearless frontierism’ which has been encouraged through the country’s period of economic reform over the last 30 years. An entrepreneur’s experience of the process of starting a company can also be very different depending on where they come from; a natively educated, experienced entrepreneur is very different to a sea turtle – a Chinese citizen who has returned from education or work abroad – and very different again from foreign-born entrepreneurs. Any advantage Westerners used to experience in Chinese business in the past has been greatly diminished by a better-educated Chinese workforce, which has a greater cultural understanding of the market and business practices. The greatest challenge for entrepreneurs – whether Chinese or Western – is hiring high-quality, reliable employees from a large pool of potential candidates. Finally, the ecosystem as a whole suffers from a lack of serial entrepreneurs, as role models, mentors and angel investors.
To the outside world, China’s Internet industry suffers from a reputation for copying. Although this practice is used extensively in the country, the causes and significance of this reputation are often misunderstood. Imitating successful products and services is partly the result of the current economic development in the country – China is the West’s first follower – and has been institutionalized to some extent by China’s investment community and the dominant Internet companies founded in the country’s first Internet boom. This, however, is beginning to change. Copying is also a cultural phenomenon; you learn by imitation and then you do better than the original. This has been institutionalized by the Chinese education system.
Whilst the institutionalization of copying certainly causes problems, there is also value to be found in the practice of imitation. The definition of innovation is context specific and the US, as an advanced post-industrial economy, defines innovative products and services in a way that is meaningful to the American context, but it not particularly useful in understanding the Chinese market. Looking at the ways in which Chinese companies create locally meaningful products and services, there is actually a great deal of innovation to be found in the market. Entrepreneurs and incumbent companies also go about the process of innovation in a unique – and apparently highly effective way – which involves very fast iterations of products to test ideas with users very quickly. These features put Chinese entrepreneurs in a good position for making the most of the rapidly changing market.
For further details, you’ll have to read the full report!
Finally, I wanted to thank the many people who’ve helped with this project – especially everyone who gave up many hours of their time for in depth interviews and as my guide, both whilst I was in China and afterwards.
I’m also very grateful to Jie Wu, for planting this idea in my head in the first place, to the Clausen Center for International Business and Policy at Berkeley for funding it and to Prof Jerry Engel and classmate Emilie Deng for reading various draft versions of the report.