Beijing has been a focus of political attention this year ahead of its once-in-a-decade transfer of political leadership within the Communist Party expected to be won by vice-president Xi Jinping – to see the world map of others in the innovative regions series click here.
In recent manoeuvres, Bo Xilai has been forced down as head of Chongqing city in what some senior government figureshave described as a move that could encourage greater financial services liberalisation.
Bo had encouraged multinationals to set up in his city of nearly 30 million people but had built a popular following partly by opposing reform and liberalisation.
China’s reforms, however, have helped it continue its steady progression in the World Economic Forum’s Global Competitiveness Report 2011-2012 rankings.
China rose by one place to 26th, having improved its score and rank each year since 2005. As in previous years, its macroeconomic situation is again favourable (10th), despite a prolonged episode of high inflation.
China ranks high in business sophistication (37th) and innovation (29th), particularly when considering its level of development, the Forum said. China has benefited from increased technological readiness especially from the growth in internet users towards an estimated 650 million people by 2015, according to management consultancy Boston Consulting Group.
At last month’s China Europe International Business School (CEIBS) Corporate Venturing Conference, about 100 companies from around the country met to discuss ways to use open innovation, research and development and corporate venturing as ways to move up the value and growth charts.
The interest follows a large increase in private equity firms in China. Suyang Zhang at IDG Ventures, the country’s oldest corporate venturing unit set up in 1992 by US-based publisher International Data Group, said he estimated there to be about 5,000 private equity and venture capital firms, although data provider Dow Jones said it tracked 1,009 with the others being mostly family offices or real estate-focused.
But while Zhang said the outlook for venture capital (VC) fundraising was uncertain for the second half of the year, there was "more desire" for corporate venturing among local companies than in the US or Europe.
He said: "The big challenge in Chinese corporations is innovation. Many business executives do not yet have a mindset for innovation and corporate venturing."
But where the mindset had developed, Zhang said demand was especially strong among manufacturing and research and development-orientated companies looking to catch up with peers in developed economies.
But it has also spread to newer industries, such as games and media. In September, Nasdaq-listed Perfect World, an online games developer and operator based in China, said it would commit RMB643.5m ($100m) to a corporate venturing fund investing in companies with high-growth potential in the technology, media and telecommunications sector.
Michael Chi, executive chairman of Perfect World, said: "Our extensive knowledge in the industry and our own growth experience will enable us to better analyse and capture the significantmarket opportunities. We are also excited about the potential synergies we can achieve with our portfolio companies through this venture capital fund, which we believe will help us further build up our user base and strengthen our online platform."
John Chiang, a professor at the department of technology management and director of the Global Innovation Research Center at Peking University, in a speech at the CEIBS event said that while corporate venturing was a new concept in China it would continue to grow alongside open innovation.
China has one of the highest proportions of corporate venturing involvement in the overall venture capital industry, at 18% of all financing rounds last year, according to Martin Haemmig, a professor at Switzerland-based university Cetim, using data from Dow Jones VentureSource.
Haemmig, in his keynote speech at CEIBS, said competition was increasingly intense, as was the search for innovation in business models, services and technology.
This often required collaboration of parties to build different elements of an innovation ecosystem, usually around a platform (see box below for five rules of success).
Haemmig said search engine Google had acquired 79 companies last year worth $1.9bn but had also made a large number of minority equity investments to build its innovation network.
The pace of globalisation is speeding up with ideas crossing borders among start-ups and nascent businesses. China-based seed-stage, prerev-enue venture capital firm Innovation Works, set up by Lee Kai-Fu, the former China country head of Google, has seen some of its start-ups take ideas from the US and add features to make them more suitable for the local market, while, in return, US companies, such as messaging service Twitter, has copied ideas from Chinese peers.
Haemmig’s research, based on data from Dow Jones VentureSource, said between 2006 and 2010, 183 VC-backed US companies and 92 European peers had set up an office in China.
He said 36 venture-backed Chinese companies had set up in the US during this period.
Part of this interest in China comes from the country’s rapid economic growth – its gross domestic product has been doubling every seven to eight years for about two decades.
As VC is a procyclical asset class, which means more deals are done and funds raised when economic conditions are good, China’s industry is now nearly as big as Europe’s.
Haemmig, using VentureSource data, said last year there were 323 deals worth $5.9bn in China, com-pared with $6.1bn in 1,012 deals in Europe and $32.6bn in 3,209 American deals.
China’s venture capital dealflow was more than double the $2.5bn struck in 268 deals five years earlier in 2006, while Europe and the US had been broadly level by value.
On a regional level, Haemmig said it was likely VC activity in so-called second-tier cities outside the main conurbations of Beijing, Shanghai, Guangdong, Jiangsu, Zhei-jiang and Shandong would increase.
Between 2002 and 2008, Beijing along took in about 40%, an aggregate $3.9bn, of the near-$10bn invested by the top six regions, according to data provider Zero2IPO Research Center.
In second place, Shanghai took in 29%, $2.8bn, according to Zero2IPO in its report China: 10 Years of Vicissitudes: A Review of China’s VC Sector by Size.
Yonge Qian at Zero2IPO said: "Beijing and Shanghai have overtaken the other four economic [provincial] powers to become the regions with the most active VC investment in China."
To promote the development of strategic emerging industries in Beijing, the local Municipal Development and Reform Commission in November set up four VC funds of at least RMB250m in size in digital content services, high-end equipment, cloud computing and internet.
This regional concentration in Beijing and Shanghai is attracting foreign corporate venturing units, even as more established groups, such as ShenzhenVC, IDG, Daiwa and SBI go more nationwide in search of competitive advantage.
In March, BASF, the world’s biggest chemical maker, told news provider Bloomberg it was considering opening an investment officein Beijing or Shanghai to complement its existing Hong Kong base.
Dirk Nachtigal, head of the Germany-based company’s BASF Ventures, told Bloomberg it had invested in its first, undisclosed VC fund in China and identified universities as a likely source of early-stage, high-potential opportunities.
Nachtigal said: "We are seeing more and more technology development in China that is interesting to us. The government has put lots of money into universities in the last 10 to 15 years. Now you can see the results."
Atsushi Sunami, a fellow at the Research Institute of Economy Trade & Industry, wrote in an article in 2002: "China has a long history of university-affiliated enterprises (xiaoban enterprises) dating back to the ‘qingong jianxue’ philosophy in the 1950s that called for studying while working … Then, in the 1980s, following the government’s launch of reform policy, a number of university-affiliated enterprises began to sprout. Facing dire fiscal straits, universities wanted to pull themselves away from budgetary difficulties and improve the poor living conditions of professors and university staff by commercialising research and development achievements."
By 2000, 364 universities – dominated by Peking and Tsinghua around the capital Beijing – operated 2,097 high-tech enterprises to earn three-quarters of their total revenues, employing 230,000 employees and with a further 780,000 students engaged in research activities in those enterprises, Sunami said.
A decade later at least 40 university-owned enterprises were listed in China from a pool of more than 5,000 profi-able businesses backed by the institutions, according to the China Papers series.
As well as supporting entrepreneurs from among their students and faculty, China-based universities are creating venture funds to profitmore directly from their expected success.
In March, CEIBS launched a fund in collaboration with HGI Finaves to provide seed funding as well as series A investments of up to RMB300m in the first phase of a project’s development.
While most of the attention from delegates at the CEIBS conference was on incubating ideas within the company or backing domestic entrepreneurs – primarily for financial returns as most deals were for revenue-generating and often profitable businesses – there was considerable interest in how to invest or expand abroad.
China’s government has set a goal of creating global champions, with Huawei, Tencent and ZTE among the firms to have invested abroad. Hugo Shong, managing partner of Beijing-based corporate venturing unit IDG Capital Partners, said depreciation of the US dollar and strong cash balances in Chinese corporations and its government would encourage further investment overseas.
Much of their attention has been on developed economies, such as the US and Korea, but Cetim’s Haemmig said emerging market to emerging market corporate venturing would be an increasingly important trend.
This follows the success of South Africa-based media group Naspers’ successful strategy of investing in Tencent, which has subsequently created a $1.5bn Industrial Collaboration corporate venturing fund, and in companies in other developing nations.
Haemmig’s reading of VC trends shows local corporate venturing units in emerging markets appearing on a large scale. Global Corporate Venturing has reported computer maker Legend’s commitment to Israel-based VC firm Vertex (see top 10 table below).
Fact box: China
Population: 1,354.1 million
GDP: US$5,878.3
GDP per capita: $4,382
GDP as share of world total: 13.61%
Source: World Economic Forum Global Competitiveness Report 2011-2012
Top 10 China-based corporations’ venturing units by influence
1 Legend
2 Tencent
3 Alibaba
4 Baidu
5 TCL
6 Huawei
7 Haier
8 ZTE
9 Hisense
10 Geely
Source: Global Corporate Venturing
Five rules for success in corporate innovation
Mark Radcliffe, partner at law firm DLA Piper, and Martin Haemmig, professor at Cetim, have identified the five essentials for success as a business innovator.
1 Companies need to engage and enlarge with the start-up community as the latter outperforms large corporations in creativity and speed.
2 Collaboration with other companies is essential to develop new markets and technologies as time to market and reaching out to underserved geographies earlier in a business life is important.
3 Companies need to understand and effectively manage and exploit exter-nal assets as pure in-house research and development is too costly, inef-fective and inefficient.
4 An open culture is critical to success in the new collaboration environments rather than a not-invented-here syndrome.
5 The use of creating and co-developing intellectual property is the way to go, while respecting and protecting that property.