Jake's View

Are Yangpu’s planners throwing 12 billion yuan after bad ideas?

The profit motive has driven commercial enterprises through human history, and now a bunch of Shanghai bureaucrats are upending that by throwing public funds behind startups.

PUBLISHED : Monday, 27 March, 2017, 5:51pm
UPDATED : Monday, 27 March, 2017, 11:14pm

Unlike other hi-tech zones, which offer tax and land concessions to young companies, Yangpu plans to go a step further. Late last year, officials from the district said they would compensate investors in local start-ups if they incurred losses. -- SCMP Business, March 24, 2017

Take note that the only small thing about this initiative is Yangpu itself, one of the 16 districts of the Shanghai municipality and regarded as somewhat of a rustbelt area.

The plan not only calls for Yangpu to inject 12 billion yuan (US$1.74 billion) of public money into high tech start-ups through two separate funds, but also to develop 3 million square meters (32.3 million square feet) of commercial properties to attract all the necessary players in high tech from around the world.

Let’s see now. That much commercial area would only be a smidgin less than the entire private commercial floor area of Hong Kong Island.

And it’s not as if a technology park is a fresh idea for Yangpu. The district already has 20 such parks, we are told. I add the “we are told” because it’s what our reporter was told. I find it an astounding figure frankly.

In all of Hong Kong, we have only two technology parks, Cyberport and Science Park, and both have had to stretch the definition of technology very w-i-i-i-i-de to find enough tenants. We also have three industrial parks. This newspaper is printed in one of them. The printing press was a high tech idea 600 years ago.

Yet Yangpu district of Shanghai alone has 20 technology parks. Try to imagine 20 technology parks in one Hong Kong district, let’s say Shau Kei Wan. It could be done if you call every fair sized commercial building a park of its own and brand all industrial activity as high tech but, yes, doubts otherwise intrude.

We are also told that these Yangpu technology parks are already home to 6,700 start-ups, this in a district with a population of only 1.35 million.

It’s a mighty entrepreneurial population that Yangpu has then, a flowering of intellect and enterprise rarely if ever seen before. Count ‘em, 6,700 start-ups.

I can take a wild guess as to how so many might arise. Shanghai is home to a total of 36, yes, 36 universities and colleges, Take out the conservatory of music, the university of sport and the institute of visual arts, which don’t really count for our purposes, and you still have 33.

And the golden rule applies at these 33 institutes of higher learning. If you want gold in academia then get the state to fund your research on campus and, when you think you have winner, sneak it out as a private venture to test on the market for your personal gain. Tough luck for the public that paid for it all.

Of course there is then still one knotty problem. The going industry ratio is that only one high tech venture in 10 ever turns a profit, leave alone survives as a going company, even with tax holidays and heavily subsidised rent.

The ratio is probably even worse for academics, who are not notable for their commercial savvy but just as unwilling as anyone else to lose money. Starting up always costs a little money. You could lose it.

But what does this matter now? Yangpu proposes to compensate investors in local start-ups if they incur losses. Just watch those 6,700 start-ups grow to 67,000. What an enormous success, a true world beater in high tech innovation.

Until that 12 billion yuan is all gone. Which won’t take very long.

It has to be the loopiest idea I have heard in a long time. Profitability has been the benchmark of commercial viability through all of human history because it’s the best way of determining whether any venture provides for the most people what they most want at prices they can best afford.

It does a superb job of allocating society’s scarce resources to the most useful purposes and has stood the test of time against all those who claim to have devised a better. It’s the perfect tool for rewarding and reinforcing success.

And now a gaggle of Shanghai bureaucrats have come up with the perfect tool for rewarding and reinforcing failure.