Entrepreneurship and China:History of Policy Reforms and Institutional Development Charles E.Eesley 7-10-2009 "The storm center of the world has shifted...to China,whoever understands that mighty Empire...has a key to world politics for the next five hundred years." -U.S.Secretary of State John Hay,1899 China is like a sleeping giant.And when she awakes,she shall astonish the world. --Napoleon Bonaparte,1803 One of the greatest untold secrets of history is that the 'modern world'in which we live is a unique synthesis of Chinese and Western ingredients.Possibly more than half of the basic inventions and discoveries upon which the'modern world'rests come from China. And yet few people know this.Why? -Robert Temple-The Genius of China:3.000 Years of Science.Discover Invention,1986 en we couldn't even read,the Chinese knew all the --Voltaire:The Philosophical Dictionary,1764 Introduction Why is it that we see one country create numerous R&D intensive companies and start-ups while another remains full of farmers,and a third is full of small proprietors cottage industries,and retail firms?Why do countries follow such divergent development paths and how do individuals'occupational choices interact with government policies and institutional reform?These are large questions which will likely occupy sociologists,economists,political scientists,and politicians for decades to come This paper has a more modest goal of tracing the evolution of China's transition from planned to market economy by examining the institutional and policy reforms believed to have had an impact on private business over the years.Rather than the traditional route of first discussing theories and then the empirical results attempting to adjudicate among
Entrepreneurship and China: History of Policy Reforms and Institutional Development Charles E. Eesley 7-10-2009 "The storm center of the world has shifted . . . to China, whoever understands that mighty Empire . . . has a key to world politics for the next five hundred years." --U.S. Secretary of State John Hay, 1899 China is like a sleeping giant. And when she awakes, she shall astonish the world. --Napoleon Bonaparte, 1803 One of the greatest untold secrets of history is that the 'modern world' in which we live is a unique synthesis of Chinese and Western ingredients. Possibly more than half of the basic inventions and discoveries upon which the 'modern world' rests come from China. And yet few people know this. Why? --Robert Temple - The Genius of China: 3,000 Years of Science, Discovery and Invention, 1986 Four thousand years ago, when we couldn't even read, the Chinese knew all the absolutely useful things we boast about today. --Voltaire: The Philosophical Dictionary, 1764 Introduction Why is it that we see one country create numerous R&D intensive companies and start-ups while another remains full of farmers, and a third is full of small proprietors, cottage industries, and retail firms? Why do countries follow such divergent development paths and how do individuals’ occupational choices interact with government policies and institutional reform? These are large questions which will likely occupy sociologists, economists, political scientists, and politicians for decades to come. This paper has a more modest goal of tracing the evolution of China’s transition from planned to market economy by examining the institutional and policy reforms believed to have had an impact on private business over the years. Rather than the traditional route of first discussing theories and then the empirical results attempting to adjudicate among
them,I first lay out the history and more recent changes in China related to innovation and entrepreneurship in particular.Then I focus more on theoretical frameworks which can help guide our thinking about explaining the forces in the environment impacting Chinese private entrepreneurship over time.At this point there is relatively little empirical work in China,but where I can locate empirical tests of the theories,I incorporate them into this section Historical Policy Changes and the Impact on Entrepreneurship Entrepreneurship was all but eliminated after Mao Zedong and the Chinese Communist Party won the Chinese Civil War and founded the People's Republic of China in 1949(Whyte and Parish,1984).New opportunities have opened up as China has undertaken the(quickly progressing,but as yet incomplete)shift from redistributive bureaucracy to open markets(Nee,1996).Entrepreneurs have played a strong role, beyond what reformers may have initially expected,in building the market economy from breaking state monopolies to supplying new jobs(MeMillan&Woodruff,2002) From 1989 to 2004 the compound annual growth in the number of newly registered private sector businesses in China has been 29%vs.1%in the United States(State Statistics Bureau).From 1978 to 2004 the number of people employed in private business went up by 300 times in China. Insert Figure 1 here Clearly,policies and institutions have been changing rapidly,but relatively little analysis has been done on the impact on entrepreneurship and firm strategy in China to
them, I first lay out the history and more recent changes in China related to innovation and entrepreneurship in particular. Then I focus more on theoretical frameworks which can help guide our thinking about explaining the forces in the environment impacting Chinese private entrepreneurship over time. At this point there is relatively little empirical work in China, but where I can locate empirical tests of the theories, I incorporate them into this section. Historical Policy Changes and the Impact on Entrepreneurship Entrepreneurship was all but eliminated after Mao Zedong and the Chinese Communist Party won the Chinese Civil War and founded the People’s Republic of China in 1949 (Whyte and Parish, 1984). New opportunities have opened up as China has undertaken the (quickly progressing, but as yet incomplete) shift from redistributive bureaucracy to open markets (Nee, 1996). Entrepreneurs have played a strong role, beyond what reformers may have initially expected, in building the market economy, from breaking state monopolies to supplying new jobs (McMillan & Woodruff, 2002). From 1989 to 2004 the compound annual growth in the number of newly registered private sector businesses in China has been 29% vs. 1% in the United States (State Statistics Bureau). From 1978 to 2004 the number of people employed in private business went up by 300 times in China. --------------------------- Insert Figure 1 here --------------------------- Clearly, policies and institutions have been changing rapidly, but relatively little analysis has been done on the impact on entrepreneurship and firm strategy in China to
determine whether China is likely to upgrade to more R&D intensive entrepreneurial activity (Cull Xu,2006;Nee,1998;1992;1996;Peng&Heath,1996;Steinfeld,2007). Two general features of China's reform have been gradual,local and sectoral experimentation along with partial reforms or what has been referred to as a dual-track approach(Gregory,Tenev,&Wagle,2000).The Chinese economy was organized regionally (as opposed to centrally like the Soviet Union)since about 1958.Due to the regional nature of China's political system and reforms,institutional change and economic development has not been uniform across China(Nee,1996).Since 1980 promotions and tax revenue were tied to local economic development("eating from separate kitchens",or fenochf),government officials at the local level had strong incentives to bend the rules and become creative with local policy towards private firms Thus,a reform may be tried out in one province and years later be copied in other provinces or adopted centrally.Certain geographic areas,such as Zhejiang and Jiangsu provinces have a long history of private enterprise and as discussed below,certain areas were targeted for early experiments in market reforms.The details varied by province. but one example of a revenue sharing agreement with the central government that provided incentives for experimentation in local policy was that after Guangdong province paid a fixed amount(perhaps 1 billion yuan)to the central government,it could keep the rest,making local governments residual claimants on any local economic development.Contracts of this form became widespread after 1988 and were expanded to sub-provincial governments as well (Qian,1999).While this set-up led to incentives for local government officials to experiment and to bend the rules,it also fragmented the Chinese market for firms by largely preventing trade and economic ties between regions
determine whether China is likely to upgrade to more R&D intensive entrepreneurial activity (Cull & Xu, 2006; Nee, 1998; 1992; 1996; Peng & Heath, 1996; Steinfeld, 2007). Two general features of China’s reform have been gradual, local and sectoral experimentation along with partial reforms or what has been referred to as a dual-track approach (Gregory, Tenev, & Wagle, 2000). The Chinese economy was organized regionally (as opposed to centrally like the Soviet Union) since about 1958. Due to the regional nature of China’s political system and reforms, institutional change and economic development has not been uniform across China (Nee, 1996). Since 1980, promotions and tax revenue were tied to local economic development (“eating from separate kitchens”, or fenzao chifan), government officials at the local level had strong incentives to bend the rules and become creative with local policy towards private firms. Thus, a reform may be tried out in one province and years later be copied in other provinces or adopted centrally. Certain geographic areas, such as Zhejiang and Jiangsu provinces have a long history of private enterprise and as discussed below, certain areas were targeted for early experiments in market reforms. The details varied by province, but one example of a revenue sharing agreement with the central government that provided incentives for experimentation in local policy was that after Guangdong province paid a fixed amount (perhaps 1 billion yuan) to the central government, it could keep the rest, making local governments residual claimants on any local economic development. Contracts of this form became widespread after 1988 and were expanded to sub-provincial governments as well (Qian, 1999). While this set-up led to incentives for local government officials to experiment and to bend the rules, it also fragmented the Chinese market for firms by largely preventing trade and economic ties between regions
Local governments had apparent incentives to keep all business and suppliers local rather than cooperating with other regions. The dual-track approach began inn the rural reas with wo-tier priinIt has since been extended to other sectors through various forms as a reflection of the early belief that private business served as a complement to state-ownership as a way to deal with unemployment.The dual-track policies also satisfied the central government's concern that development proceed in a way so that protests would not endanger its political survival.The view of politicians was to develop in a way that would"leave no one worse off than before"(Shirk 1993,pp.130,137,334;Laffont and Qian 1999;Lau, Qian,and Roland 1997).However,this approach may have also stunted the growth and development of the private sector by continuing to protect the interests of state-owned enterprises.Thus,the transition from a planned economy to a more open market economy has been gradual with certain punctuated periods of significant progress Deng Xiaoping issued a reform report in 1975.In 1978,Deng launched the Four Modernizations'reform program to deal with the economic crisis after the Cultural Revolution by stimulating economic growth.Market oriented reforms in China began in earnest in December of 1978 with the Third Plenum of the Chinese Communist Party's 11Central Committee(Gregory,Tenev,&Wagle,2000).In July of 1979,commune and brigade enterprises were allowed to enter non-agricultural industries.The State Council permitted these activities under the"Regulation on Some Questions Concerning the Development of Enterprises Run by People's Communes and Production Brigades," which also granted provinces the right to give 2-3 year tax holidays for new commune
Local governments had apparent incentives to keep all business and suppliers local rather than cooperating with other regions. The dual-track approach began in 1979 in the rural areas with two-tier pricing. It has since been extended to other sectors through various forms as a reflection of the early belief that private business served as a complement to state-ownership as a way to deal with unemployment. The dual-track policies also satisfied the central government’s concern that development proceed in a way so that protests would not endanger its political survival. The view of politicians was to develop in a way that would “leave no one worse off than before” (Shirk 1993, pp. 130, 137, 334; Laffont and Qian 1999; Lau, Qian, and Roland 1997). However, this approach may have also stunted the growth and development of the private sector by continuing to protect the interests of state-owned enterprises. Thus, the transition from a planned economy to a more open market economy has been gradual with certain punctuated periods of significant progress. Deng Xiaoping issued a reform report in 1975. In 1978, Deng launched the ‘Four Modernizations’ reform program to deal with the economic crisis after the Cultural Revolution by stimulating economic growth.1 Market oriented reforms in China began in earnest in December of 1978 with the Third Plenum of the Chinese Communist Party’s 11th Central Committee (Gregory, Tenev, & Wagle, 2000). In July of 1979, commune and brigade enterprises were allowed to enter non-agricultural industries. The State Council permitted these activities under the “Regulation on Some Questions Concerning the Development of Enterprises Run by People’s Communes and Production Brigades,” which also granted provinces the right to give 2-3 year tax holidays for new commune 1 See Young (Young, 1995) for a comprehensive background on private business and economic reform in China from 1978 to the mid-1990s
and brigade enterprises.As a result,light industry grew extremely rapidly from 1979 up through 1984(Wong,1988).Private entrepreneurship began to re-emerge in China with the legitimation of township and village enterprises(TVEs)to de-collectivize agriculture. The vast majority of TVEs were completely private.2 These enterprises were sometimes collectively owned by local governments but primarily had entrepreneurial incentives for their managers who were free to react to prices and choose product lines.Commune and brigade enterprises had long existed prior to this time period in the rural areas and were renamed in March of 1984 as TVEs.By 1988,total rural enterprise output had increased by five times compared to 1983.By 1990,TVEs accounted for 20 percent of China's gross output(Liao and Sohman,2001). From 1978 to 1988,the Chinese government began to allow the entry of foreign invested firms along with opening to foreign trade and investment.One stream of literature has examined the institutional drivers of FDI and some of its unintended economic consequences within China(Huang.2003;Huang,2004a;Huang.2004b; Huang.2006).Some scholars argue that financial integration and particularly foreign direct investment(FDI)is another mechanism that contributes to economic growth in developing countries(Alfaro&Charlton,2007).Investment by "co-ethnic networks" appear to have been particularly large over the years,with 59%of the entire stock of FDI between 1978 and 1999 being supplied by three ethnically Chinese economies-Hong Kong,Macao,and Taiwan(Huang,Jin,Qian,2008).Besides providing capital,these ethnic ties can also perform institutional functions which would otherwise be performed by a government in a more developed country,but are typically lacking in developing Confusion has arisen since the Chinese definition of TVEs is as rural firms,whereas Western academics assume the term refers to ownership(Huang,2008)
and brigade enterprises. As a result, light industry grew extremely rapidly from 1979 up through 1984 (Wong, 1988). Private entrepreneurship began to re-emerge in China with the legitimation of township and village enterprises (TVEs) to de-collectivize agriculture. The vast majority of TVEs were completely private.2 These enterprises were sometimes collectively owned by local governments but primarily had entrepreneurial incentives for their managers who were free to react to prices and choose product lines. Commune and brigade enterprises had long existed prior to this time period in the rural areas and were renamed in March of 1984 as TVEs. By 1988, total rural enterprise output had increased by five times compared to 1983. By 1990, TVEs accounted for 20 percent of China’s gross output (Liao and Sohman, 2001). From 1978 to 1988, the Chinese government began to allow the entry of foreign invested firms along with opening to foreign trade and investment. One stream of literature has examined the institutional drivers of FDI and some of its unintended economic consequences within China (Huang, 2003; Huang, 2004a; Huang, 2004b; Huang, 2006). Some scholars argue that financial integration and particularly foreign direct investment (FDI) is another mechanism that contributes to economic growth in developing countries (Alfaro & Charlton, 2007). Investment by “co-ethnic networks” appear to have been particularly large over the years, with 59% of the entire stock of FDI between 1978 and 1999 being supplied by three ethnically Chinese economies – Hong Kong, Macao, and Taiwan (Huang, Jin, Qian, 2008). Besides providing capital, these ethnic ties can also perform institutional functions which would otherwise be performed by a government in a more developed country, but are typically lacking in developing 2 Confusion has arisen since the Chinese definition of TVEs is as rural firms, whereas Western academics assume the term refers to ownership (Huang, 2008)
economies.These institutional functions include contract enforcement and dispute resolution(Huang.200;Tong,2005). Despite this opening of the economy to foreign trade and investment,domestic private enterprises were still subject to ideological biases which largely limited them to rural areas only(Qian,2000).For many years that focus on FDI led to a consequent discrimination against domestic private firms.which increasingly were allowed to exist but whose growth was stifled by various practices.Initially,the private sector in China almost solely consisted of individual businesses,employing seven people or fewer(the same as in the European Communist countries).referred to in Chinese as gerihu,which were unregulated.On April 12,1988,entrepreneurship became legal again in China. The First Plenary of the Seventh People's Congress approved Article 11 of the 1988 amendment to the Constitution of the People's Republic of China,which"permits the private sector of the economy to exist and develop within the limits prescribed by law." Three additional regulations were issued by the State Council providing protection for the private sector and specifying rights and obligations(Zhang and Ming,2000).In June of 1988,the government issued the Tentative Stipulations on Private Enterprise(TSPE) stating that a unit with privately owned assets that hired more than eight employees was regarded as a private enterprise (saving qiye).This document officially permitted entrepreneurs to hire more than eight employees.The cutoff of eight employees is said to have come from Marx who theorized that a business at that size could support an owner who can begin to exploit labor(Whiting,2001 Power and Wealth in Rural China).Large private firms had existed as early as 1981,however it was impossible for the party leadership to officially recognize them at that time(Young.1995).After June of 1988
economies. These institutional functions include contract enforcement and dispute resolution (Huang, 2008; Tong, 2005). Despite this opening of the economy to foreign trade and investment, domestic private enterprises were still subject to ideological biases which largely limited them to rural areas only (Qian, 2000). For many years that focus on FDI led to a consequent discrimination against domestic private firms, which increasingly were allowed to exist, but whose growth was stifled by various practices. Initially, the private sector in China almost solely consisted of individual businesses, employing seven people or fewer (the same as in the European Communist countries), referred to in Chinese as getihu, which were unregulated. On April 12, 1988, entrepreneurship became legal again in China. The First Plenary of the Seventh People’s Congress approved Article 11 of the 1988 amendment to the Constitution of the People’s Republic of China, which “permits the private sector of the economy to exist and develop within the limits prescribed by law.” Three additional regulations were issued by the State Council providing protection for the private sector and specifying rights and obligations (Zhang and Ming, 2000). In June of 1988, the government issued the Tentative Stipulations on Private Enterprise (TSPE) stating that a unit with privately owned assets that hired more than eight employees was regarded as a private enterprise (saying qiye). This document officially permitted entrepreneurs to hire more than eight employees. The cutoff of eight employees is said to have come from Marx who theorized that a business at that size could support an owner who can begin to exploit labor (Whiting, 2001 Power and Wealth in Rural China). Large private firms had existed as early as 1981, however it was impossible for the party leadership to officially recognize them at that time (Young, 1995). After June of 1988
firms could either register as getil,and be given permission to employ more than eight people,or they could pay an administration fee and obtain a collective license to a state or collective unit.The latter category were called"red hat"firms since to avoid harassment,they put on a hat of collective ownership,even though they were essentially privately owned(Gregory,Tenev,&Wagle,2000).Red hat firms continue to exist to this day in China,making interpretation of government issued statistics difficult.Using a sample of300 villages surveyed,it's estimated that there were 500.000 gerh,or private firms at the end of 1988(Zhang&Liu,1995) Economic reform was put on hold in 1989,however.Inflation and corruption as well as the political uproar from the Tiananmen Square incident allowed conservatives to gain more power and to implement from 1989-1990 an"austerity program"throughout much of the country.Credit was sharply cut to rural enterprises and total employment in TVEs fell by 3 million between 1988 and 1990(People's Daily,March 23,1990).There was relicensing of private operators and a major tax collection drive among private enterprises.There was even discussion of recollectivizing agriculture and recentralizing financial power and investment away from the provinces and local governments.Debate within the country grew as jealousy and outrage emerged over the high incomes of business owners and the exploitation of workers(Young,1995).The new boom period of private sector development in China began after Deng Xiaoping's"South Touring Talk"in early 1992.Motivated by the economic slowdown(4.4%and 3.9%GDP growth in 1989 and 1990)and the gridlock within the central government,Deng Xiaoping made stops in several special economic zones,which would be sympathetic to his views in the Southern part of the country,to give speeches about further economic reforms.It worked
firms could either register as getihu, and be given permission to employ more than eight people, or they could pay an administration fee and obtain a collective license to a state or collective unit. The latter category were called “red hat” firms since to avoid harassment, they put on a hat of collective ownership, even though they were essentially privately owned (Gregory, Tenev, & Wagle, 2000). Red hat firms continue to exist to this day in China, making interpretation of government issued statistics difficult. Using a sample of 300 villages surveyed, it’s estimated that there were 500,000 getihu, or private firms at the end of 1988 (Zhang & Liu, 1995). Economic reform was put on hold in 1989, however. Inflation and corruption as well as the political uproar from the Tiananmen Square incident allowed conservatives to gain more power and to implement from 1989-1990 an “austerity program” throughout much of the country. Credit was sharply cut to rural enterprises and total employment in TVEs fell by 3 million between 1988 and 1990 (People’s Daily, March 23, 1990). There was relicensing of private operators and a major tax collection drive among private enterprises. There was even discussion of recollectivizing agriculture and recentralizing financial power and investment away from the provinces and local governments. Debate within the country grew as jealousy and outrage emerged over the high incomes of business owners and the exploitation of workers (Young, 1995). The new boom period of private sector development in China began after Deng Xiaoping’s “South Touring Talk” in early 1992. Motivated by the economic slowdown (4.4% and 3.9% GDP growth in 1989 and 1990) and the gridlock within the central government, Deng Xiaoping made stops in several special economic zones, which would be sympathetic to his views in the Southern part of the country, to give speeches about further economic reforms. It worked
and economic reforms were re-started beginning with the removal of price caps on the Shanghai Stock Exchange in May of 1992.Interviews suggested that many were inspired after these talks that as Deng reportedly said,"it is glorious to be rich"and decided to try to get rich quick through entrepreneurship.Other sources deny that the"glorious to be rich"part of the speech was ever actually made.Up to this time,economic activity between businesses and with the government was done primarily by"particularistic contracting"on a one-off fashion.The government had largely failed to establish a rule based market system,and up to now had not addressed ownership and property rights issues(Qian,1999). After Deng Xiaoping's speeches,the Fourteenth Party Congress in September of 1992 indicated that the goal of economic reforms in China was a socialist market economy.While to Westerners,this may sound insignificant,for China it was a bold statement about the relationship between the state and private sectors.Next,the Third Plenum of the Fourteenth Central Committee issued the"Decision of Issues Concerning the Establishment of a Socialist Market Economic Structure"in November of 1993.The state and privately owned businesses.It also showed the intention to turn large state enterprises into more independently run companies and to sell off the smaller ones, known as grasping the large and releasing the small(zhuada fangxiao)(Young,1995). Finally,this decision emphasized the importance of coordination among reforms to create more of a rule-based system and less particularistic contracting(Qian,1999).Following this important decision,a series of reforms were passed covering foreign exchange,taxes
and economic reforms were re-started beginning with the removal of price caps on the Shanghai Stock Exchange in May of 1992. Interviews suggested that many were inspired after these talks that as Deng reportedly said, “it is glorious to be rich” and decided to try to get rich quick through entrepreneurship. Other sources deny that the “glorious to be rich” part of the speech was ever actually made. Up to this time, economic activity between businesses and with the government was done primarily by “particularistic contracting” on a one-off fashion. The government had largely failed to establish a rulebased market system, and up to now had not addressed ownership and property rights issues (Qian, 1999). After Deng Xiaoping’s speeches, the Fourteenth Party Congress in September of 1992 indicated that the goal of economic reforms in China was a socialist market economy. While to Westerners, this may sound insignificant, for China it was a bold statement about the relationship between the state and private sectors. Next, the Third Plenum of the Fourteenth Central Committee issued the “Decision of Issues Concerning the Establishment of a Socialist Market Economic Structure” in November of 1993. The decision moved the country towards a reduction in ownership discrimination between state and privately owned businesses. It also showed the intention to turn large state enterprises into more independently run companies and to sell off the smaller ones, known as grasping the large and releasing the small (zhuada fangxiao) (Young, 1995). Finally, this decision emphasized the importance of coordination among reforms to create more of a rule-based system and less particularistic contracting (Qian, 1999). Following this important decision, a series of reforms were passed covering foreign exchange, taxes
the monetary system,the financial system more broadly,and a streamlining of government bureaucracy (Qian,1999). While the intention was announced much earlier,the privatization of state-owned enterprises began on a large scale in 1995.3 By the end of 1996,11.5 million workers were laid off and 50-70 percent of SOEs had been privatized(Qian,1999).In September of 1997,the Fifteenth Party Congress made a large rhetoric shift in referring to private ownership as an important component of the economy and state ownership as a pillar of the economy.They also indicated that public ownership could be realized through joint stock corporations with many owners investing.Through a twist of careful wording.they were essentially condoning the private ownership of corporations The Chinese Academy of Sciences(CAS),like the U.S.National Academy of Science,is the country's most prestigious research institution.The objective of the Knowledge Innovation Program(KIP)program was to re-create the CAS by redirecting resources towards creating 30 internationally recognized research institutes by 2010.The long term goal was to have five of those research institutes become recognized as world leaders.The Knowledge Innovation Program was passed in 1998 and in order to re. direct resources to create a handful of world-class institutes,between 1998 and 2005 the number of Chinese Academy of Sciences research institutes was scaled back from 120 to 89(Ma,Dali 2006).While the research institutes were being reformed,changes were also occurring to build venture capital as a financial intermediary.Much of this occurred due to the influential role of Deng Nan,the daughter of Deng Xiaoping,who was the number two official in the CAS.Her visits to the U.S.and to MIT in particular,exposed Transformation of ownership()or"restructuring of ownership"()are used in China in place of the term"privatization"(Qian,1999)
the monetary system, the financial system more broadly, and a streamlining of government bureaucracy (Qian, 1999). While the intention was announced much earlier, the privatization of state-owned enterprises began on a large scale in 1995.3 By the end of 1996, 11.5 million workers were laid off and 50-70 percent of SOEs had been privatized (Qian, 1999). In September of 1997, the Fifteenth Party Congress made a large rhetoric shift in referring to private ownership as an important component of the economy and state ownership as a pillar of the economy. They also indicated that public ownership could be realized through joint stock corporations with many owners investing. Through a twist of careful wording, they were essentially condoning the private ownership of corporations. The Chinese Academy of Sciences (CAS), like the U.S. National Academy of Science, is the country’s most prestigious research institution. The objective of the Knowledge Innovation Program (KIP) program was to re-create the CAS by redirecting resources towards creating 30 internationally recognized research institutes by 2010. The long term goal was to have five of those research institutes become recognized as world leaders. The Knowledge Innovation Program was passed in 1998 and in order to redirect resources to create a handful of world-class institutes, between 1998 and 2005 the number of Chinese Academy of Sciences research institutes was scaled back from 120 to 89 (Ma, Dali 2006). While the research institutes were being reformed, changes were also occurring to build venture capital as a financial intermediary. Much of this occurred due to the influential role of Deng Nan, the daughter of Deng Xiaoping, who was the number two official in the CAS. Her visits to the U.S. and to MIT in particular, exposed 3 Transformation of ownership (zhuanzhi) or “restructuring of ownership” (suoyouzhi gaizao) are used in China in place of the term “privatization” (Qian, 1999)
her to high levels of institutionally encouraged technological entrepreneurship,which she hoped to emulate in China(Roberts,2009). The development of venture capital in China is discussed in further detail in the section on reforms in the financial system.Without repeating that section,it isworth noting that also in1998 reforms were passed promoting venture capital and private equity investment.The State Council approved a government document,Several Opinions on Establishing a Venture Investment Mechanism,released November 16,1999 jointly by the Ministry of Science and Technology and the State Development and Planning Commission.The document offers guidelines for venture capital regulation in China and states that:"A healthy venture capital investment system is important to propel the establishment of a country's technology innovation system,promote national economy and comprehensive national capacity,and realize leapfrog development for China." Since 1998,the Chinese government has invested more than$16 billion of its funds in state-owned venture capital funds.The local governments in Shenzhen and Guangzhou,have passed regulations granting favorable conditions for venture capita The Ministry of Foreign Trade and Economic Cooperation has also eased the entry of international venture capital firms. Building on the statements issued in 1997 redefining the relationship between the state sector and the private sector,on March 15,1999,the Second Plenary of the Ninth People's Congress approved an amendment to the Constitution.The Amendment put the private sector on the same legal footing as the public sector for the first time.It was In February of Sohu.com launched the first interet search company in China.It is also n.wik A n for ted in several of my interviews
her to high levels of institutionally encouraged technological entrepreneurship, which she hoped to emulate in China (Roberts, 2009). The development of venture capital in China is discussed in further detail in the section on reforms in the financial system. Without repeating that section, it is worth noting that also in 1998 reforms were passed promoting venture capital and private equity investment. The State Council approved a government document, Several Opinions on Establishing a Venture Investment Mechanism, released November 16, 1999 jointly by the Ministry of Science and Technology and the State Development and Planning Commission. The document offers guidelines for venture capital regulation in China and states that: “A healthy venture capital investment system is important to propel the establishment of a country’s technology innovation system, promote national economy and comprehensive national capacity, and realize leapfrog development for China.” Since 1998, the Chinese government has invested more than $16 billion of its funds in state-owned venture capital funds. The local governments in Shenzhen and Guangzhou, have passed regulations granting favorable conditions for venture capital. The Ministry of Foreign Trade and Economic Cooperation has also eased the entry of international venture capital firms.4 Building on the statements issued in 1997 redefining the relationship between the state sector and the private sector, on March 15, 1999, the Second Plenary of the Ninth People’s Congress approved an amendment to the Constitution. The Amendment put the private sector on the same legal footing as the public sector for the first time. It was 4 In February of 1996, Sohu.com launched the first internet search company in China. It is also reported to have been the first internet company funded by venture capital (http://en.wikipedia.org/wiki/Charles_Zhang accessed 4/17/2009). The rise of Sohu and its listing on the NASDAQ along with the U.S. dotcom boom was noted in several of my interviews with entrepreneurs as a source of inspiration for their own ventures
