Chinese entrepreneurship: the mutualism of capital markets and strong IP

Last week’s Economist cover story challenged the conventional wisdom that state-run capitalism is responsible for China’s economic growth over the last decade and a half. Only 30% of China’s GDP, as it turns out, is attributable to majority state-owned enterprises (SOEs). Meanwhile, approximately 38 million private enterprises, operating largely outside the official rule of law, are generating average returns on equity several times greater than SOEs. So-called “bamboo capitalism” is arguably responsible for much of China’s recent economic growth.

This poses an interesting conundrum for China: how can it bring its economic system “up to code,” in terms of legal protection of IP and other standards required for international competitiveness, while preserving the vitality of these bamboo-capitalist businesses? How much of China’s continued economic development will rely on its nascent private sector, and how can they be integrated into the investment and development of new technologies—cleantech in particular?

Currently, the black-market nature of investment in Chinese enterprises leaves little room for long-term product or brand development (see the Economist's analysis "Let a thousand flowers bloom"), leaving China with a weak foundation for spurring clean-tech innovation within its private sector. Highly liquid, short-term capital markets enable entrepreneurs to access capital for at most a two-year period, restricting entrepreneurship to the export and basic manufacturing sectors for which China is so well known. But longer-term growth and development plans for entrepreneurs require access to more patient financing.

Meanwhile, recent efforts to strengthen IP laws and enforcement may incentivize Chinese entrepreneurs to emigrate, while simultaneously giving a competitive edge to foreign entities. According to Albert Hu at National University of Singapore, there has been a recent surge in patent filing from foreign sources at the China’s State Intellectual Property Office (SIPO), and these patents are largely pre-emptive strikes against potential competitors, which could increase the barriers to technology diffusion and deployment in China.

Taken together, these findings indicate that China has a strong incentive to invest in early-stage research, alongside its efforts to reform IP protection—lest its strengthened IP enforcement turns out to be mostly to benefit foreign entities. But how to do that when its research and development (R&D) lags behind that of developed nations? A possible solution: invest in research at US universities, in a way that gives the Chinese investor some form of ownership of the IP. Through this process, China also could bolster its understanding of the merits of continuous IP creation and enforcement infrastructure, which will inform the development of its domestic research centers. Someday, the tables could even be turned, with venture capital in the West scouring for innovations coming out of China’s labs and universities. If the US has developed strategic partnerships with China through its universities, China may prefer to license its technology in countries with an existing bond of trust.