Regional and Segmental Development in China

In Schumpeter’s view, the venture capitalist-entrepreneur contributes to economic development by fostering the introduction of new goods, services, processes, markets, or industrial organizations, thus shifting existing socio-technological gate-keeping function helps to cause temporary disturbances in the economic cycle, establishing the context for economic restructuring and renewal (Menger, 1988).

4.1.1 VC and Regional Development

In China, VC institutions mainly focus their investments on first-tier cities and eastern coastal areas, such as Beijing, Guangdong, Shanghai, Jiangsu, and Zhejiang with top provincial regions capturing a significant share of the VC investment. For example, Beijing attracted 38.8 percent of total VC investment in 2011; the top investment regions absorbed 74 percent of the capital, and only contributed half of the GDP in total (Table 4-1). Though Chinese Western Great Development is still a major economic policy of the state, the central government injects resources to develop the western region such as Sichuan Province and Chungqing City, where there is a slight decline in regional concentration of VC activities.

In summary, the venture capitalists in China still prefer to invest in the most developed regions such as the Pearl River Delta, Yangtze River Delta, and Bohai Bay Area, however, they are trying to invest upon Chinese Western Great Development led by the government.

Table 4-1: VC Investment Distribution by Region－2006~2011

Unit: %

2006 2007 2008 2009 2010 2011 GDP as % of China

(2011)

Beijing 37.4 19.1 39.6 27.7 42.7 38.8 2.8

Guangdong 9.5 4.4 n.a. 7.0 8.7 12.7 9.7

Shanghai 27.1 16.1 17.2 13.8 15.6 15.4 3.6

Jiangsu 5.5 3.4 n.a. 5.0 4.2 6.1 8.5

Zhejiang 3.3 1.4 n.a. 3.3 4.6 6.0 5.7

Shandong 1.4 0.6 n.a. 1.8 2.5 3.3 8.1

Hubei 0.8 0.1 n.a. 2.2 2.8 2.6 3.3

Hunan 0.7 0.3 n.a. 1.3 2.1 1.2 3.2

Sichuan 0.5 0.4 n.a. - - 2.5 3.3

Subtotal 86.3 45.8 n.a. 62.2 83.2 88.6 48.1

Notes: The 2008 data were unavailable, the numbers in Beijing and Shanghai were compiled from media news.

Source: Same as Figure 3-2.

Accordingly, from Table 4-2, China’s VC investment mainly focuses on the expansion and later stages. The structure also shows a significant difference with the U. S. style of VC, and is instead more similar to that in Europe, Japan and Singapore. They are more willing to invest in targets turning profitable, rather than start-up companies, with shorter investment duration periods. To be specific, early stage enterprises only grabbed limited share of the total investment.

4.1.2 VC and Industry Development

The Chinese VC market remains almost equal weighted in terms of the industrial sector.

The TMT (Technology, Media, and Telecom) industry, which represents the technology industry, invited above half of the investment amount in the past six years, while the

remaining was invested in non-TMT investment, which were commonly in the traditional industries. The most active sector was that of the internet, information technology, and telecommunications (Table 4-4). The internet sector plays a crucial role in recent Chinese IPOs activities, which we will discuss in Chapter 5.

Table 4-2: VC Investment Distribution by Stage－2009~2011

Unit: %

Stage / Year 2009 2010 2011

Early Stage 2.4 5.9 15.4

Expansion 91.8 90.8 57.2

Later Stage 5.8 3.3 23.2

Source: Same as Figure 3-2

Table 4-5 shows the VC was invested in the regions that have the most national industrial zones in China, which also benefits the TMT industry development among the regions. There are 43.2 percent and 46.2 percent of the respective Hi-tech Industrial Development Zone and Economic & Technological Development Zone concentrated in the top VC investment regions.¹⁷ In addition, according to “Key High-Tech fields supported by the state” issued by the central government in 2008, and the seven strategic emerging industries in the twelfth five-year plan (2011~2015), the target segments supported by the state are mainly in (Table 4-3):

 Energy Saving and Environmental Protection, New Material;

 Biotechnology and Medical Technology; and

 Information Technology.

This is also the main investment target of VC firms (compared with Table 4-4). We therefore can conclude that the VC in China makes investments in the early stage mainly based on government policies.

17 The Hi-tech Industrial Development Zone and Economic & Technological Development Zone are approved

Table 4-3: The High-tech Industries Supported by the State

Policy

Key High-Tech Fields Supported by the State

Seven Strategic Emerging Industries in the Twelfth Five-Year Plan

Item

 Electronic and Information Technology;

 Biotechnology and Medical Technology;

 Aviation and Aerospace Technology;

 New Materials Technology;

 High-Tech Service Industry;

 New Energy and Energy-Saving Technologies;

 Resources and Environmental Technologies, and

 High-Tech Transformation for Traditional Industries.

Source: Ministry of Science and Technology, Ministry of Finance and State Administration of Taxation (2008),

“Administrative Measures for Determination of High and New Tech Enterprises;” and State Council (2010), “Decision of the on Accelerating the Fostering and Development of Strategic Emerging Industries.”

In contrast, the media, energy and material, and medical are the top three sectors in the non-TMT industry. Particularly, the energy and environment protection project is favored by the nation’s policy. Therefore, with the depletion of traditional energy and government’s attention to energy-saving and emission-reduction measures, VC was consequently focused on the energy and environment protection industry. This is mainly because of the juicy profit anticipated in the expansion of domestic demand; with the huge potential in the domestic consumer market, the venture capitalists could hardly remove their eyes from the traditional industries.

Table 4-4: VC Investment Distribution by Industry—2009~2011

Table 4-5: Number of the National Industrial Zones in China－June, 2012

Hi-tech Industrial

Source: Ministry of Science and Technology and Ministry of Commerce PRC.

In the past ten years, the VC investment to GDP in China has climbed significantly.

Compared to the U. S., it shows that China’s VC will be growing continuously. However, the capital invested in the early stage is still low, even though the ratio in 2011 grew much closer to the benchmark in the U. S., and may inadvertently drag down the innovation for industries.

Source: NVCA (2012), NVCA Yearbook 2012 and Zero2IPO (2012), Yearbook 2012.

Figure 4-1: VC-Investment as % of GDP－2001~2011