As mentioned in my last post, I was in Asia just a few weeks ago, and one (favorite) destination was Beijing. One key reason for being there was to participate in a seminar on “Promoting Innovation for Development” with the Ministry of Science and Technology. This seminar covered a range of topics related to innovation, including China’s strategies for innovation, strengthening the capacities of small- and medium-sized enterprises to innovate, and the financing of innovation. The seminar was well-attended by a range of participants, including the financial regulatory agencies, and the seminar served as a platform to launch a new book the World Bank published entitled, “Promoting Enterprise-Led Innovation in China.” Please take a look!
I attended the seminar to discuss strengthening the ecosystem for domestic venture capital in China (a pdf of my presentation can be downloaded after the jump). This presentation covered the basics of the venture capital (VC) industry, what is happening in China, the challenges and recommendations for improvement of the ecosystem for VC in China and the areas for further research.
We found that VC has an outsized impact on innovation, employment growth and other key development areas largely because it is more than just money – the VC investors are true business partners with the investee company. This is one reason governments often spend a lot of time trying to promote the venture industry. In China, the VC industry has grown rapidly and although the industry got its start in the mid-1980s from Government initiation, foreign VC firms now account for a substantial portion of the market today. Despite this growth, the ecosystem for the domestic VC industry does have weaknesses.
We looked at four elements:
- the ability to structure a VC fund;
- finding sources of funding;
- finding and managing investee companies;
- and exiting and realizing investments.
The main barriers we found were that the new laws that allow for the most common structural form of a VC fund have not yet been tested. Second, the regulatory restrictions on investment in VC funding by institutions (i.e., pension funds, banks, insurance companies, investment funds, etc.) limit the flow of appropriate sources of capital for VC funds. Third, given the newness of the VC industry, there still is a lack of seasoned domestic VC investors. And although there is no shortage of investment opportunity in China, the exercise of control over investee companies makes it difficult for VC firms to manage the companies. Finally, the ability to buy and sell companies is still constrained in China, which makes it difficult to realize a VC investment.
The World Bank makes recommendations in each area and then takes a view toward the future. The big question now is what is the appropriate role of the Government in promoting the development of the domestic VC industry in China today. A lot has been done already, but little assessment has been done and worldwide, the record is mixed on direct government intervention in the VC industry. This is an exciting area and one that will be increasingly important as the Government pursues its policy of shifting toward an innovation-based economic model.