Chinese innovation with US characteristics? Maybe China and the West aren’t that far apart, in business at least
Edward Tse says China may not have transformed into a capitalistic democracy, but its entrepreneurial sector, particularly hi-tech businesses, has many similarities to Silicon Valley
The looming trade war between the US and China is front-page news around the world. On the surface, it looks like US President Donald Trump following up on his campaign rhetoric of “America first” and part of his strategy to treat China as a “strategic competitor”.
However, it’s possible to trace the roots of the current impasse to a fundamental mistrust between the West, in particular the US, and China. The cover story on the March 3, 2018 issue of The Economist, “How the West Got China Wrong”, epitomises that point of view. According to this theory, the West was hoping that, by helping China integrate into the global trading system, it would help turn it into a capitalist economy. Or simply, “they would be just like us”.
However, China has not gone the way the West anticipated. Instead, it has found its own development model. It continues to be a one-party state while embracing some aspects of the Western-defined market economy and maintaining a strong government role.
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While the West continues to believe there is one – and only one – proper way to govern, it is fair to say that the path that suits a certain country at a certain stage of development is likely to differ from other countries’, depending on the context. It would be rather egotistical for Western politicians and pundits to expect every country to fully embrace the Western system, given the major disruptive events over the past decade, such as the 2008 financial crisis, the election of Donald Trump as US president, and sluggish economic growth for well over a decade.
On the other hand, Beijing was able to lift China from basic subsistence to a situation where many people now enjoy a reasonable livelihood. Ideology apart, it is difficult to argue that there is only one way to govern, no matter what the context of the country. US historian Francis Fukuyama pointed this out in his 2014 book, Political Order and Political Decay.
However, despite the differences, there are several similarities between China and the West, especially the US.
One of the most impressive developments in China in the past 40 years has been the rise of the private sector. Entrepreneurship wasn’t part of the economy of the People’s Republic until the end of the Cultural Revolution when Deng Xiaoping decided to allow entrepreneurship to return on an experimental basis.
These past four decades have brought immense changes to China. At the end of the 1990s, both the total revenue and total profit of the industrial state sector and the non-state sector in China were about the same whereas, today, the non-state industrial sector is already about four times larger than the state sector in terms of both total revenue and total profit.
According to a study by the Institute of Population and Labour Economics at the Chinese Academy of Social Sciences, China’s new economy – internet-based businesses ranging from e-commerce to car-hailing services – grew twice as quickly as the country’s overall gross domestic product between 2010 and 2016. New economy companies are almost all in the private sector.
Leading private companies such as Alibaba, Tencent, Baidu, JD.com, Xiaomi, and Didi Chuxing are known to be highly innovative. These entrepreneurial tech companies are more like Silicon Valley companies than the hierarchical organisations in the Chinese Communist Party or state-owned enterprises. Both Chinese and US entrepreneurs are risk-taking, willing and able to accept ambiguities and actively looking for financial returns. These companies are young and often model themselves on Silicon Valley companies.
Chinese tech companies are also inclined to build collaborative partnerships through “ecosystems”. When new opportunities emerge in the market, these companies often decide to “jump over” to capture them even if they don’t have all the required capabilities to compete. They often make up the gaps by leveraging their collaborative partners to form ecosystems or “platforms”. From the partnership standpoint, the notion of ecosystems includes openness, inclusiveness, equality and a win-win mindset. These sound familiar, don’t they?
As Chinese tech companies look for new ways to innovate, they will inevitably look to innovation hubs in the West, in particular the US, such as Silicon Valley, the Northwest and the Greater Boston Area, for inspiration. Chinese tech companies and investors have already invested a great deal in the US early-stage tech businesses. According to The New York Times, Chinese investors put in over US$30 billion to US hi-tech industries between 2010 and 2016.
Tencent, in particular, has invested over US$3.5 billion in 41 hi-tech start-ups in Silicon Valley since 2011, and has become the second-largest foreign investor in the US hi-tech industry, according to CB Insights. Meanwhile, US venture funds such as Sequoia Capital and IDG Capital have been investing in Chinese tech companies and many have seen high returns on their investments.
The mindset, mentality and approach of both the US and Chinese tech companies, as well as their investors, are very similar and many mutual benefits have been built over the years. So, while politically perhaps, the West may be disappointed that China has not gone its way, from the business standpoint, China and the West – especially innovative centres in the US – have much in common and have adopted very similar philosophies. In fact, the Chinese and the US tech ecosystems are already quite intertwined and it would be hard to separate the two.
The Chinese saying “qiu tong cun yi” means “seeking similarities while allowing for differences”. The West, and the US in particular, should view China in this light. China is on the verge of a sustained, generational rise and President Xi Jinping has made it clear China would like to play a role in global leadership and governance. By focusing more on the similarities, both global commerce and business will benefit.
Edward Tse is founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. He is also the author of China’s Disruptors