Entrepeneurs-china Next Growth Engine?

8/12/2019 Entrepeneurs-china Next Growth Engine?

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Xiaomi's Lei Jun

Image Credit: REUTERS/Jason Lee

Entrepreneurs: ChinasNext Growth Engine?

With shrinking growth and changingdemographics, China is looking toinnovation instead of cheap labor.

Should China want to remain an

international economic superpower, it will

need to substitute its current growth model

one largely based on abundant, cheap

labor with a different comparative

advantage that can lay the foundation for a

new, more sustainable growth strategy.

Chinese policymakers are hoping now that an emerging entrepreneurship may fit that bill,

with start-ups and family-run enterprises potentially becoming a major driverof

sustainable growth and thus replacing the countrys current economic model. In 2014,

international conferences on private entrepreneurship and innovation were organized allacross China: The China Council for the Promotion of International Trade organized its first

annual Global Innovation Economic Congress, while numerous innovation-related

conferences were held at well-known Chinese universities such as Tsinghua University,

Jilin UniversityandWuhan University.

New Growth Model Needed

Although China still ranks among the fastest growing economies in the world, the countrys

growth rates have decreased notably over the past few years. From the 1990s until the 2008

financial crisis, Chinas GDP growth was consistently in the double digits with only a brief

interruption following the Asian financial crisis of 1997. Despite a relatively quick recovery

after the global financial crisis, declining export rates resulting from the economic distress

of Chinas main trading partners have left their markon the Chinese economy. Todays GDP

growth of 7.8 percent is just half level recorded immediately before the 2008 crisis,

according to the latest data provided by theWorld Bank.

This recent slowdown in Chinas economic growth has naturally been a source of concern

for the government. A continuation of the countrys phenomenal economic growth is

needed to maintain both social stabilityand the Communist Partys legitimacy. Sustainable

By Julia Ebner

August 07, 2014

ntrepreneurs: Chinas Next Growth Engine? | The Diplomat http://thediplomat.com/2014/08/entrepreneurs-chinas-next-gr

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economic growth has thus been identified as one of Chinas key challenges for the coming

decade.

That challenge is complicated by demographic trends, which are set to have a strongly

negative impact on the Chinese economy within the next decade. Researchers anticipate

that as a consequence of the countrys one-child policy, introduced in 1977, China will soon

experience a sharp decline of its working-age population, leading to a substantial labor

forcebottleneck. A labor shortage is likely to mean climbing wages, threatening Chinas

cheap labor edge. The challenge is well described in a recent article published by the

International Monetary Fund.

Replacing the Cheap Labor Strategy

Entrepreneurship is widely recognized as an important engine for economic growth: It

contributes positively to economic development by fuelling job markets through the

creation of new employment opportunities, by stimulating technological change through

increased levels of innovation, and by enhancing the market environment through an

intensification of market competition. Entrepreneurship and innovation have the potentialto halt the contraction in China economic growth and to replace the countrys

unsustainable comparative advantage of cheap labor over the long term. As former Chinese

President Hu Jintao stressedin 2006, if China can transform its current growth strategy

into one based on innovation and entrepreneurship, it could sustain its growth rates and

secure a key role in the international world order.

Indeed, increasing levels of entrepreneurship in the Chinese private sector are likely to lead

to technological innovation and productivity increases. This could prove particularly useful

in offsetting the workforce bottleneck created by demographic trends. Greater innovation

would also make China more competitive and less dependent on the knowledge and

technology of traditional Western trading partners such as the EU and the U.S.

Transition

In fact, China has long been preparing the ground for entrepreneurial revolution. When

Deng Xiaoping became chairman of the CPPCC National Committee in 1978, he ended

Chinas era of economic isolation. The country de-collectivized its agriculture, opened up its

economy to foreign investors, and liberalized its markets. Investment spilled over from

Hong Kong and Macau and pushed the Chinese economy into the international system. The

establishment of Chinas special economic zones (Shenzhen, Zhuhai, Shantou and Xianan)

in 1980 attracted foreign direct investment and encourage private business. There was noshortage of Chinese entrepreneurs willing to take advantage of the new opportunities.

According to the CEOof a copper refinery in Zhejiang Province, the Chinese people really

exceeded the governments expectations.

Starting in the 1980s, the Chinese government actively encouraged entrepreneurship across

the country, by introducing the first patent law, allowing state-owned enterprises (SOEs) to

go bankrupt, and creating a more investor-friendly environment for private entrepreneurs.

Contrary to the popular belief that Chinas miraculous economic growth over the past three


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decades has been exclusively driven by its SOEs, the emerging private sector has played a

major role. Examples of Chinas most successful entrepreneursinclude Jack Ma (Alibaba),

Ma Huateng (Tencent), Robin Li (Baidu), and Lei Jun (Xiaomi smartphones).

Although historically subject to the dictates of the central government, Chinas

entrepreneurs have been grantedincreasing self-determination and independence in recent

years. The government has officially recognizedthe rising importance of entrepreneurship

to Chinas future economic success. Chinese Premier Li Keqiang, for instance, recently

pleaded for entrepreneurship to be encouraged and for start-up businesses to be given

support. More specifically, he calledfor support to be given to entrepreneurial students, a

measure which could play a role in fighting youth unemployment in China. In recent years,

China has also given higher priorityto the development of the R&D and high-tech sector,

investing a larger portion of its budget in R&D, increasing its high-tech output, and

encouraging Chinese students to pursue engineering degrees.

Obstacles

Still, despite these recent steps, theFinancial Timeswritesthat entrepreneurial educationremains a relatively new concept and practice, particularly in Chinas university sector.

More entrepreneurship education is needed and the countrys business schools should

adopt western tactics and have start-up labs. The incompatibility of classical Confucian

values which laid the foundation of the Chinese culture such as obedience, respect for

authority and emotional control with the entrepreneurial spirit constitutes one of the key

challenges in entrepreneurial education.

Moreover, there are still a number of obstacles for entrepreneurs that make private

investments in China riskier than it is in most Western, high-income countries. Because of

the heavily state-based, government-run legal system and the relatively high corruption

levels in the Chinese court system, private entrepreneurs who lack Communist Party

connection are still disadvantaged in many aspects compared to SOEs and politically

well-connected private investors. For example, a survey of court proceedings in China

reveals that small, private enterprises usually lose against large state firms. Also, starting a

business is still relatively bureaucratic and time-consuming. It takes38 daysto complete all

the required procedures in China, compared to an average of 5.7 days in OECD countries.

Another major challenge is the funding shortage in the private entrepreneurial sector.

While the government has sought to give budding entrepreneurs access to funding in order

to support Chinese start-up businesses, financing remains a key bottleneck. As the Beijing

correspondent of Timemagazine pointed outin a report released in 2009, credit standardsare often too high to be met by small business. Moreover, state-owned banks often give

preference to SOEs and partially state-backed companies when it comes to issuing

commercial loans. There is, however, reason for optimism, with recent promises made by

both former premier Wen Jiabao and current president Xi Jinping to facilitate access to

credit for private entrepreneurs and to create a more investor-friendly lending

environment.

In early 2006, Hu Jintao said that China will be built into an innovative nation in about


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fifteen years. Today, about 8.5 years later, China still has a long way to go before it could

be called an innovative nation; its dependence on cheap labor remains critical to its

economic success. Given the recent economic slowdown and expected demographic

changes, the Chinese government is under pressure to accelerate the countrys transition to

an entrepreneurial and innovation powerhouse. With both social stability and the Partys

political legitimacy are at stake, this could prove to be one of the governments most

pressing challenges over the next few years.

Julia Ebner is a postgraduate student in International Affairs at Peking University and

London School of Economics.

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Entrepeneurs-china Next Growth Engine?