Think You Know China? Myth Busting Time: Entrepreneurship in China by Becky DeStigter @IntlEntreprenr

Part 1 of 5

(Series to run Monday, May 16 - Friday, May 20)

Introduction

世上无难事，只怕有心人 (pinyin: shì shàng wú nán shì zhǐ pà yǒu xīn rén)

On this world there exists no such impossible tasks; they fear only those with perseverance.

(Where there's a will, there's a way.)

Entrepreneurs have been changing the landscape of the Chinese economy and society. In 1978, China had almost no private businesses apart from street stall owners, virtually no gross domestic product or exports. By 2006, there were almost 40 million small and medium-sized Chinese enterprises. The Chinese government now acknowledges that there is an important role for entrepreneurs in China. But the government also distrusts entrepreneurs as they are the embodiment of capitalism, which is fundamentally opposed to Communist ideals. Most entrepreneurial ventures operate outside of the official business community.

Entrepreneurs are largely unknown and often misunderstood by the government and also by Westerners. Who are these entrepreneurs? Are they similar to their entrepreneurial counterparts around the world or unique to the Chinese business environment? What advantages and disadvantages do they have compared to Western entrepreneurs? What opportunities and challenges to they face in the Chinese economy and around the world? The purpose of this paper is to combine primary anecdotal research with secondary information available to better understand the complex nature and environment of Chinese entrepreneurship.

Definitions:

In this paper, any person or group of people who start a business and intend to grow it, official or otherwise, are considered entrepreneurs. This includes alternative energy entrepreneurs who may be financed by foreign capital and/or government grants and employing scientists. It also includes someone who owns several market stalls in the Shanghai Antique Market.

There are several categories of entrepreneurship that need to be defined. First, the term Sea Turtles refers to Chinese nationals who left China to study and work abroad, then returned to China later to start businesses. Some Chinese provincial governments have offered incentives and build technology business incubators in order to specifically recruit Sea Turtles home from abroad to start businesses.

In developed countries, there is often a significant difference between those entrepreneurs whose businesses are capitalized versus non-capitalized businesses. In China, this definition is less important because of the comparative lack of available capital. A more important distinction is that of the informal economy compared to the formal economy. The informal economy is all economic activity that is not regulated by the government. Often the informal economy is broken down into the black market and gray market. This analysis focuses on the gray market, which are legal goods and services that remain unregulated and unregistered by the government. In contrast, the black market deals in illegal products and services such as drugs and prostitution.

The formal economy is comprised of registered business entities, which in China includes mainly state-owned enterprises, formerly state-owned enterprises, foreign subsidiaries and sea turtle start-up companies.

Another key set of definitions is between those entrepreneurs who start businesses because there are few employment options open to them. To economically survive, these entrepreneurs are called survival-based entrepreneurs. The other category of entrepreneurs often has other employment options in China, including possibly professional jobs in government or the private sector. Instead, they start businesses for many of the same reasons as entrepreneurs in other countries: greater opportunities for wealth, greater prestige, and control over their careers. These entrepreneurs are called self-actualization-based entrepreneurs. The focus of this research is on entrepreneurs who start companies to experience self-actualization.

Historical Factors Leading to the Rise of Chinese Entrepreneurship:

China is experiencing arguably some of the most profound and rapid economic changes ever seen in the history of our planet. The Cultural Revolution virtually erased all capitalism from Chinese society for an entire generation. At the time of Chairman Mao’s death in 1978, China had almost no economy, no exports, and not enough food to feed its own people. In 1978 when reforms began, 90% of the economy was accounted for by state-owned enterprises, which included life-time employment (commonly referred to as the “iron rice bowl”).

Privatization of State-Owned Entities:

For the past generation, China has seen ten percent annual economic growth. Today, less than half of China’s GDP is derived from state-owned enterprises. It is now common for the Chinese government to break up state-owned companies in order for its parts to become more competitive as private companies. Restrictions on capitalism and foreign direct investment have been loosened. China’s exports are second to size only to Germany.

Although the decline of inefficient state-owned enterprises China has been positive, there are several negative affects too. As state-owned companies went out of business, they also laid off large numbers of employees. Many of these employees had never worked at any other company and had few skills for finding another job. Some turned to entrepreneurship out of necessity and became survival-based entrepreneurs. The divide between rich and poor widened to more of what one sees in other developing countries with capitalism systems. The cradle-to-grave healthcare system that was a benefit of the “iron rice bowl” became too expensive for the government to maintain. The government now looks to private employers to help pick up the cost of healthcare.

Changes to Allow More Private Ownership:

Government regulations loosened on small business and there were initially limited types of businesses that could grow. As incomes began to gradually rise, people had a little more discretionary income to spend. Entrepreneurs started some businesses to serve the growing numbers of consumers with discretionary income. By the 1980’s foreign companies began arriving in China to take advantage of low production costs. Chinese started to find niches in the business-to-business space, as well as ways to copy the foreign products and compete against the new arrivals.

Early Success by Chinese Entrepreneurs:

Chinese people began hearing of some early entrepreneurs succeeding greatly in business. Sometimes these business people started from very humble beginnings, like Huang Guangyu of GOME Electrical Appliances. Mr. Huang started with a roadside stall in Beijing selling radios and other small electronics. Today, Mr. Huang has a personal net worth of about $2.5 billion and owns 560 electronics store branches in China. The richest self-made woman in the world is Zhang Yin, who is the founder and chairwoman of Nine Dragons Paper Industries. She went to Hong Kong in 1985 and started her waste paper training career with ¥30,000.

About The Author:

Ms. DeStigter is passionate about helping companies become more globally competitive.

She has always been interested in other places, cultures, people & languages. Five years ago sheI took the plunge to take her career as an entrepreneur and strategist into international markets. She just graduated with an MBA and MS in International Business, she wants to share what she has learned in school and in consulting with a host of companies: Entrepreneurs can go international as soon as they are willing and able.

Ms. DeStigter works primarily with software and professional services companies because this has been the majority of her experience.

Visit her website: http://the-international-entrepreneur.com

View her videos on the subject of international entrepreneurship at: ECO Advisor - Becky DeStigter - International Entrepreneur