How Chinese Cities are Spurring Innovation

Mike Peña, Stanford University January 10, 2017

Cities around the world with emerging tech hubs are asking what’s in Silicon Valley’s so-called “secret sauce,” and how they can emulate the famed region’s success.

In order to demystify that secret, Stanford Assistant Professor Chuck Eesley and Daniel Armanios, an assistant professor at Carnegie Mellon University, sometimes visit places far away from Silicon Valley – where entrepreneurial ecosystems are still in their infancy.

They research environmental influences that lead to high-tech ventures, and that are therefore critical for aspiring entrepreneurs. For a recently published study, the two spent time in Beijing’s bustling Haidian district – home to some of China’s most prominent universities and technology companies.

What the district doesn’t have, however, is a critical mass of startup investors like the venture-capital community in Silicon Valley.

Eesley: In my travels in emerging economies, I noticed that there weren’t very many private, early-stage investors. A lot of the resources were still controlled by the government, due to under-developed institutions for antitrust regulations, IP protection and the like. Early-stage entrepreneurs were really struggling to raise funding.

In China, the government’s budget and domestic loans account for over half of the total annual domestic investment, and state-owned banks administer three out of four domestic loans. Overall, about 46 percent of domestic financing in China is controlled by the public sector, whereas private-equity funding represents just 5 percent of that total.

Armanios: The prevailing view is that to access these public resources you need to know someone in the government. What we find is that even without political connections, you can still make yourself competitive for such financing by working through a locally reputable organization like a science park, incubator or accelerator.

China’s science parks were developed to bridge the gap between private-sector entrepreneurs and the public resources they need. As part of their admission process, science parks also assess the potential of the various entrepreneurs who come through the door – in other words, reducing perceived investment risks while at the same time increasing access to startup money.

The researchers found that, in particular, entrepreneurs with business experience gained elsewhere, but with no local ties, benefited from a science park’s ability to lend credibility. The other group in the study that gained the most from science parks were highly educated locals who had strong technical skills but needed additional business training and mentoring.

China’s first science parks were established in the late 1980s, when the government began to embrace entrepreneurship as a profession and play catch-up with other advanced industrialized nations. They typically provide various services in a shared space and essentially serve as business incubators for technology ventures that spin out of nearby research institutions.

This intermediary role is essential for China’s emerging entrepreneurial ecosystem: The state is “ill-equipped” to pick entrepreneurs with the most potential and connect them with the capacity-building training and capital they need.

Armanios: How entrepreneurs acquire public financing depends on their prior experiences, capabilities and network connections. Returning entrepreneurs, or those entrepreneurs who spent time abroad and are now coming back to their home country, have tremendous amounts of technical experience and global business know-how.

However, they’re trying to get financing from local government officials who don’t have business expertise, so the officials have trouble credibly assessing those kinds of skills. What “returnees” do is apply for admission into science parks because those parks are reputable local institutions that are known for credibly-vetting such skills.

“Local elites” on the other hand, who are entrepreneurs educated at prestigious institutions in China – such as Tsinghua University, Peking University, or institutions under the Chinese Academy of Sciences – have tremendous amounts of technical experience but do not have much business experience. They enter science parks to help build up those skills, like business-model development, management training, as well as to learn about marketing and advertising.

The experience in China mirrors those of other countries that are striving to incubate entrepreneurial ecosystems of their own. For instance, Start-Up Chile is a key institutional intermediary linking government funds to support about 1,000 Chilean ventures. And more recently, the Malaysian Global Innovation & Creativity Centre has been launched to support and foster strong communities where entrepreneurs are able to easily connect and share their ideas and solutions with each other.

Eesley: As a scholar of entrepreneurship, I’d love to see the field do more research on how we can help these entrepreneurs who aren’t well-connected and who may not typically have the resources to enable them to be successful in entrepreneurship. What are the most time- and cost-efficient ways to help train them or to help provide resources or services to enable them to create successful ventures?

Armanios: By looking at how science parks in their day-to-day activities actually help support existing government programs – and how that subsequently helps entrepreneurs acquire resources from these programs – really fascinated me. In leveraging intermediaries like science parks, entrepreneurs can improve their access to resources from existing public-policy programs, rather than having to wait or lobby for the creation of new programs.

In the end, understanding what mechanisms must be in place to support entrepreneurs in emerging economies will help governments, institutions and entire nations bring more innovation into the world.

Armanios: Even in the United States, those early-stage ventures that are trying to commercialize basic science also need government financing.

This study, “How entrepreneurs leverage institutional intermediaries in emerging economies to acquire public resources,” was published in the Strategic Management Journal. In addition to Armanios and Eesley, their co-authors include Jizhen Li, an associate professor in Tsinghua University’s Department of Innovation, Entrepreneurship and Strategy, and Kathleen Eisenhardt, a professor of management science and engineering at Stanford and faculty co-director at STVP.