Increasingly, incumbent firms seek to harness innovative ventures through a practice known as corporate venture capital (CVC).
Corporate venturing has expanded well beyond the US setting. While CVC investments in North America accounted for more than 60% of global CVC deals in 2013, by 2018 the proportion had declined to 41%, and is now on par with CVC activity in Asia, according to 2019 Global CVC Report by CB Insights. Our integrated dataset covers 3,298 public firms in 286 industries; of which 173 firms in 70 industries disbursed 3,571 CVC investments between 2013 and 2017.
China’s CVC objectives
Cross-industry analyses of CVC patterns in China underscore a novel objective by making equity investments in entrepreneurial ventures; one that is predominantly associated with harnessing growth through market expansion rather than the prevailing view of CVC as a window on technology.
“We believe that the education industry will have a great development in the future. There are many opportunities in the industry. We intend to grasp these opportunities, but it’s not suitable for us to develop some of them internally. Therefore, we use our capital, business, and resources to support the external ventures,” according to Bangxin Zhang, chairman and CEO of TAL Group at its 2016 Annual Conference.
Joseph Tsai, vice-president of Alibaba, a year later said: “When evaluating the potential target, we consider: (1) whether the firm can help us acquire more users and improve their engagement, (2) whether the firm can help us improve customer’s experience, (3) whether the firm can help us expand our products and services.”
While CVC activities in developed countries are usually driven by technological ferment and a strong corporate research and development (R&D) base, we find only partial support for such factors in China. Specifically, technological advance can be an important inducement for CVC activities, but its effects do not rely on the R&D bases within a particular industry. In China, industries that provide firms with resources and opportunities to expand (namely, munificent industries) exhibit a substantial level of CVC activity.
This is supported by responses from 50 CVCs, such as Tencent, Baidu, and Alibaba, which reveal that, contrary to peers in the West, their focus is not on assimilating new technologies and capabilities. Rather, they are focused on profiting by deploying their existing resources in rapidly growing settings, and building relationships with partners in their industry.
The respondents provided information about the CVC’s main objectives. Each objective was rated on a 5-item Likert scale where the values 1 and 5 designate ‘Least Important’ and ‘Highly Important,’ respectively.
National directive
Given the command-and-control nature of the Chinese context, we advance a third government-based argument, whereby CVC is most salient in industries of national strategic priority.
Through a set of directives and policies, the government emphasized the advantages of entrepreneurship. A big push towards that end took place during the mid-2010s, as reflected in the words of Premier Li’s speech at the 2014 summer Davos meeting: “Just imagine how big a force it could be when the 800 or 900 million laborers among the 1.3 billion population are engaged in entrepreneurship, innovation and creation. I believe the key to realizing that is to further liberate our mind, further liberate and develop the creativity of society, further energize businesses and the market, and remove all institutional obstacles to development so that everyone interested in starting a business is given more space for entrepreneurship and the blood of innovation could flow unhampered.”
For example, in our research setting the Chinese government put forward the “strategic emerging industry” plan in 2010 to prioritize the development of specific industries. In those industries, technological innovation is regarded as a key impetus to development, and national and local governments direct and support entrepreneurship and venture capital activities within them.
The plan was formally outlined in the 13th National Five-Year Plan in 2016 (chapter 23). The latest strategic industry index consists of nine general categories: new-generation IT industry, high-end equipment manufacturing industry, new-materials industry, biological industry, new-energy automobile industry, new-energy industry, energy-saving industry, digital creative industry, and related services industry.
Established firms may follow an explicit directive and engage in CVC investment. Alternatively, the increase in CVC may simply reflect that supportive government policies stimulate entrepreneurial activity in those industries and thus create many attractive investment opportunities for corporations.
Notably, however, the cross-industry CVC patterns do not map onto industries designated by the government as sectors of national priority.
Conclusion
Taken together, the findings suggest that Chinese CVC activity predominantly follows a ‘harness industry growth’ rationale and, to a lesser extent, exhibits a ‘window on technology’ objective.
The findings likely reflect structural differences between the US and Chinese economies. However, the scholarly focus on the ‘window on technology’ explanation began from the early 2000s, and was partially a reflection of underlying business activity in the semiconductor and telecommunication industries as incumbent firms formed CVC units to pursue innovative startups.
But, at the same time, the narrow focus is also an artifact of academic practices. In the early 2000s, patent data became readily available and scholars exploited the data to demonstrate that incumbent firms’ innovation output is positively associated with their CVC activity.
Notably, the findings underscore the different roles of CVC (in particular) and incumbent-startup collaboration (more generally) in unlocking corporate growth. We believe the Chinese setting can offer insights into different evolutionary paths for CVCs among countries.
The findings mirror the features of the Chinese setting, where entrepreneurs profit from the dramatic expansion in economic activity and serve as a vehicle to leverage the global innovation frontier.