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up in China:
Chinese technology entrepreneurship and innovation in 2012

Anna Maybank The Haas School of Business, UC Berkeley December 2012

When I was working for the American firm, there was lots of you cant do this, you cant do that. Whereas here its the Wild West its like California back in the day.i

Studying entrepreneurship in China Research focus Research challenges Research approach Key findings An introduction to the Chinese Internet Key characteristics of the Chinese market China is a large and growing market Concentration in the market and barriers to entry are low Competition is fierce The Chinese consumer Key players in Chinese Internet services Trends in Chinese investment and exits The US in China The old guard The young ones The role of government Whos starting up in China? The four paths of Chinese entrepreneurs Fitting in and getting along Western experience isnt always a golden ticket Youth is not necessarily a disadvantage Motivation and ambition New opportunities at home Global ambitions Working practices, ethics and culture Play hard (but not always fair) Trust and reputation Thats the way things are done here Finding the right people for the job A very Chinese job search Wanted: Repeat offenders Chinese innovation The roots of Chinese imitation The current stage of the market Making indigo from blue Education Intellectual Property: the development of law and business in China Investors and Internet companies From imitation to innovation Innovation in localization The innovation process Conclusion Appendix: A brief history of key Internet companies Bibliography 4 5 5 6 6 8 9 9 9 10 10 13 13 15 16 17 18 20 21 22 22 22 23 23 23 24 24 24 25 25 25 26 27 28 28 29 29 31 32 33 33 34 36 37 40

Studying entrepreneurship in China

Jie and I both moved to the Bay Area for the same reason. Jie came from Beijing via Europe and I came from London because if youre interested in cutting-edge technology, California has a reputation as the best place in the world to be. Many people come from all over the world to Silicon Valley and its surrounding cities, attracted by its reputation as a hub for technology and innovation; around 27% of Californias population consists of immigrants 2 and its universities attract more than 95,000 international students a year.3 So it was a surprise to me when Jie, a very highly educated software developer, told me he was considering moving back to Beijing when he graduated to start a company and that other Chinese students he knew were thinking the same thing. The opportunities in the Chinese Internet sector, Jie told me, were increasingly attractive and more of his Western-educated friends were returning home. This conversation with my friend stuck in my mind. In London, the organization I had co-founded was working to improve the entrepreneurial ecosystem in the UK and Europe. Wed also done an increasing amount of work internationally. Id always found learning from other countries incredibly rewarding, but the US was the place we turned to most frequently; its the worlds largest economy, the birthplace of business as an academic discipline and entrepreneurship is ingrained in its culture. Chinas apparent economic resilience in the global downturn has been closed watched by Western media, but it still surprised me that Jie and his peers were beginning to see the opportunities of home as more exciting than staying in the US. Was this just a reflection of the current economic turmoil in the West? Or a sign of a more profound shift? It was from this conversation that the idea for this project was born. China graduates well over a million engineering students each year.4 At the same time, the number of Chinese students choosing to study abroad is increasing. In the 2010-2011 school year, there were 157,558 Chinese students in the US 22% of all international students. In just one year this number had grown by 23% for all Chinese students and 43% for undergraduates.5 The number of students returning to China also seems to be growing; the Chinese Ministry of Education estimates that the number of overseas Chinese who received a foreign education and returned in 2009 reached over 100,000 a more than 50% increase on the previous year. In 2010, that figure had reached an all-time high of 134,800.6 As the quantity and quality of Chinese engineering talent increases, the market opportunity for this labor force at home appears to be growing. The potential scale of the consumer Internet market in China is staggering. There are around 4

477 million7 Internet users in the country to North Americas 272.1 million8. The country has 193 million online shoppers to the USs 170 million.9 Online retail sales hit $121bn in 2011, up 66% from 2010, and the e-commerce market is expected to reach $420bn by 2015, 20% more than the forecast figures for the US.10 This combination of an improving talent base and growing market suggests there could be an environment rich with opportunities for entrepreneurs. I wanted to try to understand the kind of market that the Chinese returnees described by Jie are going back to. What opportunities and challenges lie ahead for them and other hopeful Chinese entrepreneurs? To what extent is there a viable Chinese start-up ecosystem?11 Research focus By start-up, this study focuses on young companies (less than three years old) that are unrelated to a larger entity (not spin-outs), Internet-based, registered as operating in China and aiming for high-growth (IPO, not lifestyle businesses). The study will aim to answer the following questions: 1.) Entrepreneurs and their companies: Who is starting up in China and what kind of companies are they starting? 2.) Challenges and opportunities: In terms of talent, money and infrastructure, what are the key challenges these entrepreneurs face? 3.) Implications for the US: What does this mean for American companies and consumers? Research challenges There are several challenges for a Westerner researching the Internet industry in modern China. Firstly, there is a lack of reliable, meaningful quantitative data. For example, simple measures of the countrys factors of production such as human capital or technical know-how - are not straightforward. Academics collecting statistics on the number of engineering students China graduates each year, for example, found that numbers were not collected by the government centrally and the definition of an engineer varies.12 The most comprehensive attempt to create a quantitative analysis of start-ups in different countries - the Startup Genome - did not include Asian companies, citing lack of available data. 13 Anecdotal evidence also suggests data provided by startups themselves is not always reliable.14 Secondly, change is happening extremely fast. Relevant books and academic papers are based on information a few years old and already largely out of date. There is, however, a very vibrant Chinese blogosphere, examining everything from Chinese business and law, to politics and social media. For anyone seeking to understand China today, these are much more useful sources. The research for

this study was conducted during the summer of 2012. As such, it should be considered a snapshot of that period in time and may not reflect what is happening even six months later. Finally, quantitative data might tell something about what is happening, but it often misses out why. The richest material available is the work of ethnographers writing about their experiences of China and its people directly and attempting to draw insights from these many conversations. These studies focus on the reasons for their subjects actions and beliefs and help us understand why something is as it is, not just what it is. For these reasons, this study is ethnographic in nature and based on interviews with entrepreneurs, investors and other players in the Chinese entrepreneurial ecosystem to try to understand their biases, beliefs and motivations and to draw insights from these conversations that shed new light on how we should think about the Chinese Internet landscape. Research approach The majority of the interviews for this study were conducted during a three- week period in May 2012, in Beijing and Shanghai. 37 interviews were conducted with a range of entrepreneurs, early-stage investors and others providing support to entrepreneurs, employees at large companies and lawyers. Each interview was conducted under the condition of anonymity, so some names of both individuals and companies have either been changed or omitted from the quotes and stories in this report. These interviews have been supplemented with extensive desk-based research.

Key findings
China is the crucible in which the next billion dollar Internet companies are being forged. This report begins with a brief overview of the Chinese Internet industry to provide context for the environment Chinese entrepreneurs are working in. Next, the report seeks to outline some characteristics of the China-based entrepreneur: their motivations, hopes and dreams. Finally, the report will turn to the question of what these entrepreneurs are creating; this looks in detail at how we should understand innovation in the Chinese context. The Chinese Internet industry is in a time of flux; it is growing, consolidation in the market is still low and competition is fierce. The Chinese consumer is also uniquely demanding; there are cultural and economic factors that make building products and services for this market unique. This is part of the reason that US Internet companies have had a fractious relationship with the country, but its not the whole story; foreign entities also contend with censorship and protectionism practiced by the Chinese government. Until 2012, investment dollars were pouring into the market particularly for later-stage, revenue

generating companies which has probably contributed to an inevitable shakeout in 2012. As the market has developed, entrepreneurship in China has been gaining popularity. There is, however, a struggle between the traditionally conservative nature of Chinese culture and a 'fearless frontierism' which has been encouraged through the countrys period of economic reform over the last 30 years. An entrepreneurs experience of the process of starting a company can also be very different depending on where they come from; a natively educated, experienced entrepreneur is very different to a sea turtle a Chinese citizen who has returned from education or work abroad and very different again from foreign- born entrepreneurs. Any advantage Westerners used to experience in Chinese business in the past has been greatly diminished by a better-educated Chinese workforce, which has a greater cultural understanding of the market and business practices. The greatest challenge for entrepreneurs whether Chinese or Western is hiring high-quality, reliable employees from a large pool of potential candidates. Finally, the ecosystem as a whole suffers from a lack of serial entrepreneurs, as role models, mentors and angel investors. To the outside world, Chinas Internet industry suffers from a reputation for copying. Although this practice is used extensively in the country, the causes and significance of this reputation are often misunderstood. Imitating successful products and services is partly the result of the current economic development in the country China is the Wests first follower and has been institutionalized to some extent by Chinas investment community and the dominant Internet companies founded in the countrys first Internet boom. This, however, is beginning to change. Copying is also a cultural phenomenon; you learn by imitation and then you do better than the original. This has been institutionalized by the Chinese education system. Whilst the institutionalization of copying certainly causes problems, there is also value to be found in the practice of imitation. The definition of innovation is context specific and the US, as an advanced post-industrial economy, defines innovative products and services in a way that is meaningful to the American context, but it not particularly useful in understanding the Chinese market. Looking at the ways in which Chinese companies create locally meaningful products and services, there is actually a great deal of innovation to be found in the market. Entrepreneurs and incumbent companies also go about the process of innovation in a unique and apparently highly effective way which involves very fast iterations of products to test ideas with users very quickly. These features put Chinese entrepreneurs in a good position for making the most of the rapidly changing market.

An introduction to the Chinese Internet

Su Di doesnt speak much English, but hes keen to chat. My translator and I had only just settled into our seats when he approached, wanting to know who we were. Su Di runs Garage Caf, a large working space-cum-caf for local startups in Beijing. And hes quick to keep an eye on his clientele. This isnt a place for the idle wanderer seeking a break from the Beijing smog; only those working on starting a company are welcome. Pretty soon weve attracted a small crowd, including a journalist for Chinese-language technology blog 36kr and an angel investor, not wanting to miss out in case we turn out to be working on something with potential. Its quickly established that were more interested in them than they are in us, but Su Dis happy to give us a tour. The walls are decorated with the hand-prints of hopeful entrepreneurs who use the caf as an office, painted gold and waiting for a time in the future when their owners are famous enough for Su Di to tell the story of where it all started. Entrepreneurship is gaining movie-star status in China. Its doubtful that Garage Caf is what the Chinese Academy of Sciences (CAS) had in mind when it created Zhongguancun the part of Beijing in which it is located - as a technology park in 1988. The park was one of 52 high-tech parks established as part of an initiative by the Chinese government to promote science and technology as the driver of economic growth in the 1980s. The story goes that a nuclear fusion physicist from CAS was inspired by a trip to the US and on his return promoted the idea of establishing a Chinese equivalent to Silicon Valley. Zhongguancun has benefited from a range of government initiatives to attract and develop high-tech companies in the area, which is also home to two universities and many research and higher education institutions. It is unsurprising then that Zhongguancun is popularly known as Chinas Silicon Valley.15 It seems this comparison has become a favorite short hand for any government or journalist who wants to describe technology clusters. Theres Silicon Alley in New York, Silicon Roundabout16 in London, Silicon Cape in South Africa and so on and so forth.17 In China, the Internet industry suffers constantly from these kinds of American comparisons: Ren Ren is the Facebook of China; Sina Weibo is the Twitter of China and Baidu is the Google of China. The problem is that these comparisons tend to lead us to either look only for similarities between China and the West or to hold the US version up as a gold standard to be attained. Neither is particularly helpful in understanding a country, region or company that is a product of a very different history and culture. For this reason, to understand something about Chinese entrepreneurship, we need to begin by understanding the Chinese market and consumer; looking for what is unique, rather than what is familiar.

Key characteristics of the Chinese market

Let us begin our search for the unique in China with an overview of some of the key characteristics of the market. China is a large and growing market18 Ask any analyst why China matters and the first answer is simply the size of the market. As a starting point it is helpful to look at a few key statistics about the population that reflect the scale of the Chinese market for Internet goods and services compared with the US: China US Population 1.344 billion 311.6 million GDP per capita $5,445 $48,442 Internet users per 100 38.4 78.2 people Growth of people with 262% 13% online access 2006-2011 Mobile phone 986 million 331 million 19 subscribers Growth of mobile phone 114% 44% subscribers 2006-11 Mobile internet users20 348 million21 98.9 million22 Along with web and mobile users, industry revenue has also been growing. According to analysts IBIS World, in 2012, the Internet services industry is set to maintain growth of about 22.0% to reach $43.38 billion. Over the past five years, industry revenue has been growing at an average annualized rate of 20.2%, driven by increasing domestic demand. And over the next five years, industry revenue is forecast to increase at an average annual rate of 11.1% to $73.3 billion in 2015.23 Concentration in the market and barriers to entry are low Just as start-up costs in the West have plummeted, so Chinas Internet services industry has been similarly affected. However, thats not the only reason that consolidation in the Chinese market is low. There are estimated to be more than 26,000 companies in the industry in 2012 with the top four largest only accounting for around 24.9% of total industry annual revenue.24 Interviewees for this project gave cultural, historical and geographical reasons for this. Culturally, the success of an existing product in the market is seen as a reason to attempt to replicate it and this creates a proliferation of companies apparently offering very similar or identical services. Secondly, the Chinese market is young; businesses in the country have only been operational a few decades at most. Consolidation is a sign of market maturity; over time, companies get better at owning their niche. Finally, regional differences make it 9

possible for the larger cities to have their own version of a service and for it to find a significant enough market locally to sustain itself. Competition is fierce Given that the market has not yet consolidated, its not surprising that competition is fierce. Many of the interviewees for this project listed this as one of the biggest challenges for anyone doing business in China today. In a country of 1.344 billion people thats developing very rapidly, theres always someone who will do what youre doing, faster and cheaper. The social network market is as an illustration of this. There were over 1,000 companies running domestic social networks in 2012, up 30.7% from 2011.25 The result of tough and increasing competition is squeezing industry profit margins.26 The Chinese consumer There are also differences in how Chinese consumers use the Internet, driven by both cultural and structural factors. We shall see later that cultural nuances have a big impact on the ability of entrepreneurs unfamiliar with Chinese norms to succeed in the market, whilst structural differences are producing localized innovations, tailoring products to Chinese tastes. Usage and demographics According to a 2010 survey conducted by the China Internet Network Information Center, the most commonly used internet services include search engines (81.9%), online games (66.5%), instant messaging (77.1%), online shopping (35.1%), e-mail (54.6%) and online banking (30.5%). Usage rates for online banking, blogs, job applications and job recruitment were also increasing. In 2011, the usage of micro-blogging sites (weibo) increased by over 200%. Other services such as group online shopping, instant messaging and online banking continued to grow as well.27 Internet users are predominately younger, without degree-level education and have below-average monthly income: 83.9% are under 40; 59.2% are under 30. 88.1% do not have bachelor degrees; and 59.9% of users have a monthly income under $290.2829 According to the China Internet Network Information Center about 37.8% of Internet users had made purchases online in 2011. However, the amount Chinese consumers are spending online is increasing. The monthly consumption of Internet services of each user averaged $21 in 2006, rising to a forecast $60 in 2012.30


The Chinese aesthetic There is another aspect of the Chinese Internet experience that is worth understanding: aesthetic preferences. To someone unfamiliar with the Chinese language, a webpage can look overwhelming:

Image: NetEase homepage The most striking feature is the quantity of text on the page. Western user experience designers minimize non-essential ink; simplicity is the aim of the game. To Western eyes, the Chinese preference for large quantities of text is overwhelming. Interviewees for this project gave their own reasons for this aesthetic difference. Firstly, one entrepreneur described trying to achieve an aesthetic that reflected the notion of renao literally hot and noisy. The literal translation doesnt capture the richness of the concept, which is about being on a busy street and in the midst of action or a party and is associated with retail settings and consumer behavior.31 With lots of content on the page, you feel like this is a hot site.32 Another entrepreneur saw the tendency to put lots of features on a page as a reflection of the competitive nature of the Chinese market; if your competitor offers something, you must do the same. Other reasons given where that years of control of state media meant consumers were used to reading what was readily provided to them, rather than seeking something out themselves. The second significant influence in Chinese design was a dislike of searching due to the difficulty of typing in Chinese. The Chinese language has several thousand characters33 and the simplest way to type in Chinese is to use pinyin, the official 11

system to transcribe Chinese characters into the Romanized alphabet. Pinyin is now taught in schools, but its imperfect. This language barrier has resulted in a dislike of searching by typing; Chinese netizens prefer to click through instead and many popular domain names include numbers in them. The Chinese language is also difficult to scan; its far easier to pick out the words that are associated with what youre looking for in a Latin script. This is reflected in studies that show American users of search engines are highly goal-oriented, spending 10 seconds on a search results page, whereas Chinese users are happier to scroll and spend 30-60 seconds on a search page, as shown by the eye-tracking maps below:34

Image: Eye tracking maps reflecting US and Chinese Internet users different approaches to reading online35 The challenges of the Chinese language also seem to be driving the development of other kinds of services. Travelling on the Beijing subway, for example, many people talk rather than text brief messages into their phones, presumably using Tencents Weixin, a group messaging service that allows users to dictate messages to one another and which has a reported 200 million plus users.36


Key players in Chinese Internet services

Now that we have some context for understanding the nuances of the Chinese Internet landscape, familiarity with a few key incumbent companies is necessary to help us understand the market place start-ups are entering. According to market research company, IBIS World, the Internet services industry has five major players sharing slightly more than 26% of the market:

Major Player Tencent Holdings Limited, Inc., Inc. Inc. SINA Corporation Other

Market Share Range 12.7% 6.5% 3.3% 2.4% 1.4% 73.7%

Source: IBIS World, Internet Services in China, August 2012 A brief history of these players as well as the dominant e-commerce company, the Alibaba Group, may be found in the appendix of this report. These well-established companies date back to the late 1990s and early 2000s. There are a number of features common to this first round of Chinese Internet companies that are worth noting. Firstly, most of them drew from foreign inspiration in the beginning; their founders often had first-hand experience of Western markets. Secondly, they diversified quickly into a wide range of product offerings, from news portals to online gaming. Finally, in contrast to the business models of their American counterparts, advertising played a less significant role as a source of revenue. In the early days, there was little Chinese language content on the web and payment processes were underdeveloped; Chinas small and medium-sized businesses took a great deal of educating to purchase advertising online.

Trends in Chinese investment and exits

Its notable that the success stories of the late 1990s Chinese Internet boom were often funded by foreign investors. Until very recently, the market was dominated by brand name US funds establishing China-based entities. That has changed in the last few years and there has been a growth in domestic venture capital. 37


Regulations surrounding the venture capital industry in China remain complex, however particularly for foreign investors.38 The industry has had a turbulent year. According to a report by Ernst and Young, 2011 saw record highs for the number and size of investments made in the venture capital industry as a whole in China. The median round size and valuations were rising they more than doubled 2006-2009.39

Ernst and Youngs analysis suggests that this growth was being driven by economic growth in the country at large, a favorable policy climate and a strong IPO market. An IPO is by far the most common exit for venture-backed Chinese companies, accounting for 90% of all such exits. Domestic exchanges play an important role; listing there is the chosen route for 79% of companies making a


public offering. M&A, however, could be a more common exit in future; Ernst and Young and many of the interviewees for this report predict that corporate acquisitions from large technology companies in particular are on the rise.40 At the end of 2011, all of this was pointing to the Chinese investment community comparing very favorably in scale terms with other parts of the world. At the beginning of 2012, Ernst and Young predicted that the country would probably surpass Europe as the second largest venture hub measured by total investment amount by the end of the year.41 However, the first three quarters of 2012 saw a big decline in the VC industry, reflecting the slowing of economic growth in the country as a whole. In Q3, for example, the amount of capital raised through VC investments in Chinese companies dropped 58% on Q3 2011 levels and the number of deals also dropped. Consumer services which are largely driven by consumer Internet companies suffered particularly sharp declines, falling 43% in Q3.42 Even before the downturn in 2012, there were signs that the industry was not yet mature. In 2011, companies with existing revenue accounted for 94% of funding. The majority of investment in private companies occurs in late-stage rounds and, whilst there has been a big increase in individual angel investors and a growth in both government and private institutional incubation support, there is still a gap in early stage venture funding.43 The increased activity in the industry had also pushed up valuations and as with venture capital in other parts of the world, there have been waves of VC interest in different business models; in 2010, flash sales were the investment of choice; in the first part of 2011, group buying took off and more recently social buying has been in vogue.44 Midway through 2012, investors interviewed for this report thought a contraction and consolidation of the investment landscape inevitable as deals made in some of these fads began to look over-priced. Finally, although competition for companies and valuations have risen, deals particularly at the early stages are not necessarily becoming more entrepreneur-friendly. Anecdotally, deal terms and cap tables at early rounds are skewed to the investor one entrepreneur told of being asked for 50-80% of his company in return for angel backing. This seems to be the result of a lack of experience amongst some investors and entrepreneurs.

The US in China
Whilst US investors have been putting money into Chinese companies for some time, US Internet companies have had a notoriously difficult time in the country and an understanding of why this might be gives us another perspective on the market. The reasons for this are partly inherent challenges for foreign organizations in the Chinese environment, but some are also the result of strategic decisions made by the companies themselves.


The old guard Government interference is the first challenge that is typically associated with the Chinese business environment, typically taking the form of a combination of media censorship and protectionism. Google is just one example whose experience is similar to other US-based multinationals that have made a play for the Chinese market. The first way that the Chinese government can make life difficult for foreign companies is simply to block access to their service. From 2002-2005, Google sites were routinely blocked by the government. However by the time Google opened its China office in 2005, the companys market share had already reached 23%.45 Since then, Google has had a fractious relationship with Chinese censors. To begin with, it filtered its search results for information that the Chinese government considered sensitive and so the block was lifted. By the end of 2008, Google had a 30% market share to local competitor Baidus 60%.46 However, the relationship soured again in 2010, when, in response to allegations that the Chinese government had permitted hacking into Gmail accounts to find evidence against human rights activists, Google ended its practice of filtering content and began routing its Chinese traffic through Hong Kong.47 At present, some Google products are completely unavailable in the country and occasionally all of the companys services are blocked for a period of time.48 The second thing the government can do is to make it harder for a foreign entity to comply with various national regulations. This is a form of protectionism where native companies are given preferential rights over foreign corporations. For example, all Internet companies must have an Internet Content Providers License (ICP License) to operate, or partner with a company that does.49 This is typically more difficult for foreign companies to obtain and Googles is reviewed annually. Through its move to Hong Kong in 2010, the company avoided its ICP License being revoked.50 One lawyer interviewed for this report described how this kind of protectionism wasnt just a problem for foreign entities in China, but also for local companies operating in regions of the country from which they did not originate.51 Where protectionism ends and political censorship begins is perhaps a moot point; Googles struggle with the Chinese authorities have certainly helped Baidu a large domestic company maintain a significant market share and the blocking of Facebook in the country, also for censorship reasons, is convenient for Chinese company Ren Ren and other local social networking services. Besides regulatory interference, multinational companies have also struggled to compete against local companies because the latter are able to engage in business practices which are only acceptable in the local environment. For example, when eBay wanted to introduce PayPal to its China service in 2005, they asked permission from the government first, which took time and risked the government saying no outright. A local player would act now and ask legal questions later.52 Baidu is another example; in the early days of the service, the


turning point for the company was when it began offering a music search service which allowed users not only to find music, but to access links from which you could download MP3 files. This practice ultimately landed Baidu in court, but not before the search engine had gained a good deal of much-needed publicity out of the service. This kind of practice would be near impossible for large multinationals, partly because there is a chance they would be held to a different legal standard and partly because such practices would be considered unacceptable by Western shareholders and governments. Although these examples suggest that the Chinese market is not a level playing field for foreign companies, it would be disingenuous to argue that this is the sole reason for their failure in the market; their strategic approach has also been flawed at times. Firstly, there are examples where a local incumbent simply out-maneuvered their foreign rival because they created better products for the local market. Secondly, US companies have been repeatedly criticized for running their China offices from California. Alibabas decimation of eBay in the mid-2000s is a good example of both of these factors. In 2003, eBay purchased a Chinese e-commerce company called EachNet that had an 85% share of the Chinese peer-to-peer e-commerce market.53 eBay began integrating EachNets technology platform into its American operations with the vision of creating a platform for global commerce, where a user in Beijing could sell to someone in New York and vice versa, using the same platform and payments system. The problem with this was that at the time routing traffic from the US to China was painfully slow as well as government-censored and managing eBay Chinas technology centrally precluded China-specific features. On the day of the move, traffic to eBay China dropped by half. Meanwhile, Chinese e-commerce incumbent, The Alibaba Group, had already launched its competitor product, Taobao, and set about including features that were locally relevant; a payment solution which included an escrow holding account that helped address lack of trust between Chinese online shoppers, for example, which was not necessary in the US. Alibaba knew the Chinese consumer better than eBay and they were prepared to create products that were locally meaningful. When coupled with the fact that eBay created a management structure one step removed from China, there was no hope that the company could create as relevant a product offering for the Chinese consumer. The young ones Despite US companies struggles with China, a new generation of startups are following where the likes of Google, Yahoo! and eBay led. In the last year or so there have been a number of US-based Internet companies who are venturing into the market. Some of these such as Instagram are simply integrating Chinese social networking services like Sina Weibo or Ren Ren into their existing products. Others, however, are launching stand-alone services in the market.


Flipboard is one such example. The magazine iPad app already had an established user base in China for its US product. It was popular enough to have attracted a number of clone services54 and in May 2011, the app was blocked by Chinese censors, as it provided access to content on Facebook and Twitter which were both also banned.55 In December 2011, through a partnership with Sina and Ren Ren, Flipboard launched a China-only version of the app. It was the companys first international product and it effectively managed its relationship with government censors because it was republishing the work of government- approved media outlets, not creating its own content.56 Thus far, the company has been bullish about the move. By mid-2012, they were predicting that Chinese downloads would surpass US figures and hinted towards opening a China office. 57 Having consistently claimed that they were solely focused on iOS products in the US, they launched an Android version of the product in June of 2012, catering to Chinas vast Android user base.58 Digital scrapbook startup Evernote is also betting on its service being non- controversial enough to avoid the attention of censors. It launched its Chinese version Yinxiang Biji in May 2012. As with Flipboard, Evernote had already attracted the interest of Chinese clones, yet the American version had more than one million users, making it the companys third largest country user base. The company stated that poor network connectivity between the US and China and the need to better integrate with the rest of the Chinese internet promoted the move.59 Again, Evernote believes that because its products are not a platform for social networking or publishing, it will not be of concern to censors.60 It is also setting itself up to play by Chinese rules; it has data centers in the country61 and its investors include institutional backers familiar with working with the government.62 The success of this new generation of startups in China remains to be seen. However, it seems likely that the number of both Chinese and American companies attempting to play in both markets will increase. There are a number of examples of Chinese companies acquiring or launching American services too. Tencent purchased Riot Games for around $400M in 201163 and has been testing games on Facebook,64 whilst Shanghai-based games company Shanda purchased Mochi Media back in 2010 for $80M. 65 In the e-commerce arena, 360Buy launched its English-language site in October 2012.66

The role of government

The role that the Chinese government plays in the Internet industry - and in entrepreneurship specifically - is too complex to do justice to here but demands a mention. As we have seen, the Chinese Internet industry is highly regulated and analysts predict this will continue to increase into the future.67 Along with restrictions on foreign investment and the need to obtain various licenses to operate, there are regulations governing user information online, for example social networks must register the real names of their users.


However, it is worth noting that the industry is also attracting an increasing amount of government assistance. The degree to which intellectual property and related rights are being enforced is improving and the government has been funding the construction and upgrading of Internet infrastructure, including in rural areas.68 The governments interest in improving the countrys capacity in technology and innovation has long been tied to economic reform more generally and is reflected in the rise of the technical park in the 1980s described earlier. The Chinese government has also embraced the concept of entrepreneurship. Interviewees for this project described benefiting from government incentives to make it easier for Chinese sea turtles to start companies and entrepreneurship is also being supported by local and central government through various incentive schemes and funding, such as agencies providing seed-stage grants to university students to help them start companies.


Whos starting up in China?

As far as entrepreneurial stories can be, Chaofengs was typical. Hed failed to secure a place on the course he wanted at university and had to study mechanical engineering instead of computer science. The Chinese gaokao, or college entrance exam, is notorious for its ruthlessness in ranking students by test score and then assigning them to a hierarchy of subjects for college study. Computer science is at the top of the subject ranking and only the most successful gaokao takers end up studying it at Chinas elite schools. Instead of taking college as an opportunity to enjoy a little extra free time as many Chinese college students do after the rigors of the gaokao, Chaofeng set about teaching himself to code in the evenings. His first taste of working for himself came from running an outsourcing company as a student. Hed been inspired by the dot-com boom in the US; here was a way to change the world using your intelligence, not your social connections. So, armed with his self- taught programming skills, he recruited some friends to work with him and the group began to earn some extra cash doing project work for clients. On graduation he landed a prestigious job at a Western technology firm, but influenced by his earlier experience of running his own company, Chaofeng soon jumped ship and regrouped with old classmates to strike out on their own. Before long, Chaofengs startup company had attracted an impressive user base and investment from one of the premier American venture capital firms operating in China. People like Chaofeng are unusual anywhere in the world. Most people dont take one degree during the day and teach themselves a second at night; most dont shun a highly paid, prestigious, stable career for an uncertain, half-baked plan and of those who do, most dont reach his level of success. Starting a company is a strange thing to do anywhere in the world, but in some ways it holds some unique challenges in China. The country has an interesting relationship with its ancient heritage and culture one that is challenging for a foreigner to fully appreciate. Despite attempts to rewrite much of the countrys history during the twentieth centurys Cultural Revolution, China retains aspects of its heritage, particularly in relation to the importance of the family. In many ways, it is a conservative society; your duty should be to your kin (who may or may not be your close family) and your actions bring glory or shame, not only to you, but your children, siblings and elders, alive or dead. In some ways modernization has only reinforced this conservatism; but now success is measured in your ability to buy electronics, cars and houses. Neither measurement of success is conducive to encouraging risk-taking and new thinking. And yet, theres also something deeply entrepreneurial about modern Chinese culture. Many interviewees for this project talked about the attitude that It cant 20

be that hard: I can do it better, expressing a disregard for authority and the established way of doing things that allowed them to just give something a go. Many of the entrepreneurs whod left big companies to start something embodied this ethic. This is an attitude thats been encouraged through the past 30 years of economic reform: there is a sense in the country that there is new opportunity and the Chinese people are the best in the world at making the most of that kind of situation. It seems that there is a tension between Chinese traditionalism (combined with the healthy dose of modern consumerism it has embraced) and what might be termed a fearless frontierism that several interviewees captured by describing the countrys business environment as the new Wild West. This tension matters because the former stifles entrepreneurialism by not tolerating risk well; the latter, on the other hand, permits people to take risks and do things differently. However this tension ultimately resolves itself, for the time being the Chinese have caught the entrepreneurial bug. Where the West worships the likes of Zuckerberg, Larry and Sergei and Jeff Bezos, the Chinese entrepreneurs idol is Alibaba CEO Jack Ma. Just as the idea of starting a company has entered the mainstream in many Western nations, China is seeing a boom in entrepreneurial activity. There are increasing numbers of homegrown entrepreneurs in the country and they are increasingly ambitious.

The four paths of Chinese entrepreneurs

The experiences of entrepreneurs interviewed for this project were heavily shaped by where they came from. They fit four different types: Born and educated in China, with very limited if Native Chinese any foreign experience. Born in China, but received some part of their Sea turtle (Haigui) education or a significant part of their working experience in the West. Born and educated outside of China to first generation immigrant Chinese parents. They grew First generation returnee up speaking Mandarin and were highly proficient or fluent in the language and familiar with Chinese culture, but only moved to the country as adults. Those who had moved to China, but had no Westerner previous connection to the country or its culture. The experience and attitudes of these groups differed in a number of ways.


Fitting in and getting along

Not so long ago, there were two groups of people you would be certain to meet in Chinese business: employees with long years of experience behind them and white foreigners. But both of these norms are changing. Western experience isnt always a golden ticket Even if you speak Chinese 100% fluently, if you have grown up in the United States and had come back to China, the rate of progress in the past few years has been words cant really even describe it. Its changing day by day. If youre gone for a few years, that leaves a huge gap in terms of your knowledge.69 As Chinas economic development accelerates, the demographics of the Chinese workforce are shifting; being a foreigner is no longer - as one entrepreneur put it - a golden ticket in China. There are several factors contributing to this trend: the quality of Westerners attracted to the country is increasing; the number and quality of sea turtles and returnees is growing; improvements in education mean that native talent is increasingly available and home-grown companies are becoming more attractive to smart, locally educated employees. These demographic changes are compounded by the fact that its tough doing business in China without at least a proficient knowledge of the complex and nuanced language as well as a familiarity with business norms. Youth is not necessarily a disadvantage Some entrepreneurs are extensively educated overseas and figured out a hole here. [i.e. A gap in the market]. Others are straight out of Beijing University. Thats a huge group. The other contingent is the old PhD guys who were making light bulbs. The older guys have a tendency to be more sophisticated. Theyve done it before or are better educated. But the younger guys can be very good.70 Traditionally, Chinese society has been hierarchical and respectful of older generations. But as the interviewee above described them, Chinese entrepreneurs can also be under 30 Internet whizz kids and that represents a significant break from social norms. This is partly for the same reason that Internet companies anywhere are being started by young people; the route to market is accessible to anyone, without the need for established networks or experience. However, it also seems to be the result of adopting much of the language of the entrepreneurial community from


the West that places so much emphasis on the myth of the dorm room entrepreneur.

Motivation and ambition

From time to time in the US I thought about coming back. I happened to be in a very mature field in the US, but completely new in China. I could come back to make a bigger impact for a personal sense of achievement.71 Every year of the last 16 years since Ive been here the market has grown, but as it tapers off Chinese companies will be much more aggressive internationally.72 Whilst the growth of the domestic Chinese market is certainly a facilitator of the rise of an entrepreneurial class in China, it would be a mistake to assume Chinese companies are internally focused. The entrepreneurs interviewed for this report saw their markets as both domestic and global. New opportunities at home The Chinese size and rate of growth particularly in terms of disposable income makes the market an attractive one for any company. However, opportunities for Chinese entrepreneurs are also being created through regulatory changes that are opening up new industries in the country; one of the sea turtle entrepreneurs quoted above had returned from a very lucrative career in financial services in the US to put his knowledge to use at home where financial regulation was beginning to look increasingly similar to that in the West. The opportunity to be part of the beginning of a new market in China was a significant draw for him to return to start his own venture. Global ambitions Regardless of the size of the domestic market, China-based entrepreneurs arent just focused on China or even Asia. Its very tempting to try and simplify the task of understanding Asian business by assuming that all Asian markets look very similar and so the most obvious strategy for a Chinese company would be to target Japan or South Korea next. However, culturally and economically Asian countries are different enough to make Western markets look just as appealing. Many of the entrepreneurs described their plan to expand in the Chinese market first, before going abroad. Equally however, there were entrepreneurs who had realized the product they were building was better suited to the US market in the first place and were aggressively with significant venture capital backing pursuing foreign expansion, prior to building a product for the Chinese market.


Working practices, ethics and culture

Chinese entrepreneurs are incredibly aggressive; they have to be. Contrary to the popular view, for a startup youre not constantly on the phone to government officials. Youre locked in constant battle with other startups.73

There were plenty of stories about specific working practices that can make China a tough place to start up particularly if youre not used to them. Play hard (but not always fair) Chinese entrepreneurs work hard. One sea turtle proclaimed: I used to work on Wall Street and Im working harder here! Whilst the Chinese work ethic is notorious, this is also due to the fiercely competitive nature of a growing market. But competition is not always breeding fair play. Entrepreneurs recounted stories about companies fabricating numbers, domain squatting, spreading rumors about legal proceedings against competitors and many other practices they personally considered to be unethical. Before we look at some of the reasons for this, its worth noting that one of the examples given by an interviewee about unethical practices was in relation to a European-based company targeting a Chinese entity we shouldnt think dubious tactics are uniquely Chinese. Trust and reputation Instances of unethical business practices, however, were too numerous to dismiss as just a factor of human nature, equivalent to malpractice anywhere in the world. The Chinese environment does permit them in ways not typically tolerated in the West. When pushed, interviewees gave two reasons for the proliferation of these kinds of working practices: trust and reputation. People here cant be trusted in the same way as the people in the West, one sea turtle complained. China, they argued, is a low-trust culture. A sociological treatment of the notion of trust in Chinese society is well beyond the scope of this study so we shall avoid speculating on the origins of this perceived lack of trust described by interviewees, but merely note that this is a characteristic of current business practices. The second reason for unethical working practices given was that reputation matters much less in China than a less populous country; wreck your personal standing in one group of associates and move to another part of the country and other social circle where your past matters less.


Thats the way things are done here Perhaps the most important effect of these working practices is that they lead Chinese and Western entrepreneurs to form different opinions of the future of the country. Everyone with any kind of experience working in the West talked at some point about bureaucracy, how much time it took to get things done in China or frustration with unethical competitors or partners. Those with Chinese backgrounds seemed less phased by this; it was what it was and you just worked around it. There was a sense of thats the way things are done here.74 This is significant because it creates a different lens through which entrepreneurs view the market; put crudely, the Westerners see challenges; the Chinese see opportunity.

Finding the right people for the job

Its worth remembering that the vast majority of people just want a job. In China, in order to get a wife, you need a house; in order to get a house, you need a job - you need a high paying job. Thats why Chinese workers switch jobs a lot people will switch jobs frequently to get a bit more money.75 My parents freaked out and refused to see me for about half a year. Even now, I am a poor and unemployed cuckoo to most people I know. As an entrepreneur, I am just one little step closer to mad!76 The single biggest challenge Chinese entrepreneurs spoke of was finding the right people to either invest in or to hire. A very Chinese job search This will be a strikingly familiar challenge to anyone involved in starting a company in the Bay Area; the market for engineering talent is extremely competitive. However, the reasons for the Chinese version of this problem are different. Human capital is Chinas potentially most significant economic asset. One investment firm stated they had a staggering 500,000 people on a list of engineers, technical or product-focused people which they could sift through to help staff their portfolio companies. Quantity, however, does not necessarily translate into quality and its the latter that Chinese startups are struggling with. In her 2008 book Factory Girls, Leslie T Chang describes a highly mobile migrant population working in Chinas factory cities switching between employers at the slightest chance of a better opportunity elsewhere. A better opportunity almost always meant more money. Chang was writing about a completely different workforce and industry but the same phenomenon in the companies interviewed here: some Chinese employees are very comfortable switching jobs quickly in the hope of finding something better, there is little commitment to a company or role


and, as we have already seen, employees worry less about reputation. Coupled with the fact that for conservative and pushy Chinese parents, working for a start-up was not deemed a successful career choice, hiring and retaining good staff is challenging. The second problem with the structure of the Chinese job market is the lack of a useful LinkedIn-style CV and job-posting site. Several entrepreneurs described their frustration with sites such as 51 Jobs and ChineseHR (now owned by These sites allow employees to send automatic emails to every company listing positions they have no idea what they are applying for and the recruiting company often ends up explaining themselves to an applicant, rather than the other way around. Unsurprisingly, interviewees reported more hiring success by tapping into their own networks. Wanted: Repeat offenders No matter what the risk profile of an investor, when presented with a choice between someone whos successfully started and exited a company before and a first time founder, theyll go with the former every time. But for investors looking at the Chinese market, the market is still missing serial entrepreneurs in any significant number. One investor described how his colleagues were attempting to improve what he described as the Chinese ecosystem for entrepreneurship by actively building a network of entrepreneurs to support each other. Serial entrepreneurs arent just important because they are more experienced in starting companies: theyre also an important potential source of early-stage capital for new ventures. This is part of what makes Silicon Valley self-perpetuating; one generation of founders creates the next. In China, the first generation of successful technology entrepreneurs are largely still working at the companies they founded. What they do with their wealth remains to be seen.


Chinese innovation

Shanghais hacker space is a cozy affair, tucked into an office block in Xuhui District, with the obligatory Maker-Bot machine in the corner and trays of electronics stacked high. It has a very Western feel to it compared to other entrepreneur cafes like Garage or 3W in Beijings Zhongguancn and hosts English-speaking events, attracting both locals and ex-pats. As such, it set the perfect scene for a clash of cultures on the evening I visited. It was the groups regular meetup and the evening began with a few presentations about various projects they were working on: a hydroponic window garden still at the concept stage and a solar mobile-phone charger, ready for purchase for those who wanted to buy. Then a Chinese PhD student from a local university took the floor and explained that he wanted to talk about a project idea he had for his final thesis and for which he was looking for collaborators. Without saying more, he screened a five- minute video of Amazons recently purchased distribution warehouse robot made by Kiva Systems. After the film had finished, he announced that his PhD project would be to build the system for Chinese warehouses. Once the presenter had finished, an American in the audience stuck up his hand: You mean you just want to copy what Amazon are doing? No, no, the PhD student replied, You dont understand. This doesnt exist in China. This brief exchange captured how two different cultures think about the concept of innovation. In the US, there is a hierarchy of innovation; some types of new ideas are better than others. Clayton Christensen describes three different types of innovation: Efficiency, sustaining and disruptive. Efficiency innovations are mostly about cost reduction; they take an existing product or service and make it cheaper. Sustaining innovations take old goods and make new versions with incremental improvements, but the underlying product is still the same as it ever was. Disruptive or empowering innovations take complicated products and services available only to a few and make them simpler, cheaper and accessible to the many. In doing so, they produce a paradigm shift in an industry which creates jobs and economic growth.77 According to Christensen, disruptive innovation people doing new things in new markets - are most valuable because they contribute most to economic growth. This story has also become part of the narrative we tell about our society; we create heroes out of the people who can make them possible and an


intellectual property regime to encourage them by making their ideas financially rewarding. For a long time, business in China has been synonymous with outsourced manufacturing and fake handbags. Now, Chinese shanzhai - or imitation products - have moved from physical to digital goods. Sites described as Chinas Twitter may not only function like their American cousins, but also have the same color scheme and user experience. Western notions of innovation lead us to see these Chinese products as inferior at best, criminal at worst. However, by viewing Chinese business through a Western lens, we fail to understand the Chinese market and we miss the opportunities it holds. To the hacker space audience member, what the PhD student proposed wasnt doing anything valuable - only replicating something else. To the PhD student, there was something about the process of transplanting an old idea to a new market that was worthwhile. In this final section of the report, we shall try to pull apart these different perspectives. First, we need to understand where the reputation for Chinese copying has come from. Next, we will look for where innovation lies in imitation and test the hypothesis that Chinese entrepreneurs do innovate, just in different ways. Lastly, we shall ask what this means for the West, reflecting on what it means for Western business, both at home and in Chinese markets in the future.78

The roots of Chinese imitation

There are both cultural and economic reasons for Chinas reputation for copying. These factors have contributed to the development of Chinese institutions that encourage or permit copying in a way that is hard to imagine American universities, investors or consumers tolerating. The current stage of the market You dont have time to not copy. The pace is so fast. Economic growth is happening so fast. If youre not quick enough, someone else will. How do you make it quicker? Innovation or copying?79 For a long time, there was just so much low hanging fruit. If you did do a good imitation of a US company that you could build a $1bn Internet company in China. The Chinese think in terms of what the opportunity is here, not whats new or innovative. Now its not so easy to see the opportunity in copying because everyone is doing it. Being innovative is starting to be the opportunity.80 The American definition of innovation is the product of a post-industrial economy. China is in a different stage of its economic development, but its one that many other countries have been through before and this presents an opportunity for China to be a great first follower. Whilst the concept of being first to do something has been lionized in business culture in the West,


academics have shown that those who are second, copying what has come successfully before them, do at least as well if not better than the trailblazers.81 The Chinese market is evolving rapidly and the Chinese consumer is becoming increasingly sophisticated very quickly. It is therefore unsurprising that China is currently the Wests first follower, borrowing from what seems to have already worked elsewhere. Nor is it the first developing economy to take such an approach: One investor interviewee pointed out that the US copied Europe during the industrial revolution and before Japan became known as a consumer electronics powerhouse in the 1980s, its industry was primarily focused on manufacturing, not innovation. If copying is simply a symptom of Chinas rapid economic development, we should expect to see this decrease as the market matures. As the second quote above suggests, interviewees believed they were starting to see evidence of this: fast followers are starting to do their own thing too. Making indigo from blue Before you can break the rules, you have to understand them. Be able to do it just like I do and then you can become greater. And we have that concept: Its very much part of China and its expressed as the indigo comes from blue. It means that the great teacher produces an even greater student.82 Imitation also has a different cultural meaning for the Chinese: You master something by copying it; then you make it better. Another interviewee described this as an aspect of Chinese individualism: the idea that something cant be that hard, so people are willing to have a go themselves. This attitude was reflected in a number of interviews. There is a general awareness that companies who copy have received bad press and no one said straightforwardly that they would comfortably copy someone else. However, whilst they would not use the word to describe their actions, several interviewees expressed an ambivalent attitude to the idea of copying. On asking where their ideas came from for new products, one larger company replied that they came from California mostly from Dave McClures 500 Startups. Another interviewee explained that it wasnt that copying was easy; smart copying was very good and not a skill that everyone could master. The point here is that where Western norms dictate that the imitation of anothers work is morally questionable, from a Chinese perspective, replication is how you learn and the starting point to becoming better. These cultural attitudes have now been institutionalized in China, especially through the education system. Education


The way were brought up, the teacher tells you what to do. Theres no opportunity to have your own mind or own ideas. Youre like a Peking duck if youre fed, you dont feel hungry. We have been fed. The teacher says: thats the right way.83 A developer is a very different thing here to in the US. Here theres a big focus on having your one marketable skill. So you study php and you can do one thing with php but if youre presented with a problem you didnt study in school youre useless.84

Chinese parents dont let their children fall over, or they wrap them up with such an extra ordinary amount of clothing that if they fall it doesnt matter; they feel no pain. Well, thats not the way to raise innovative people. Youve got to be out there, you have to truly be encouraged to fail.85 You are raised so narrowly, and when you are eight years old or so and your parents are thinking about your best interest and what that means from their perspective is you are going to be a computer engineer. Its not a bad starting point but the problem comes when they go no art. You do not do art.86

Education has a duel effect: not only does it teach students to imitate, but in doing so it stifles other behaviors which are conducive to innovative thinking. The percentage of the Chinese population receiving education has grown significantly in the last thirty years. In 1980, 46% of secondary school aged citizens were in enrolled in education; by 2010, it had reached 81%. Tertiary education has also increased. In 1980 just 1% of the population were enrolled; by 2010, 26% received tertiary schooling.87 Its clear the quantity of education is increasing, but the quality and nature of Chinese schooling is also important. In 2010, high-school children in Shanghai came top for the first time in an OECD international ranking of pupils across reading, mathematics and science. The Program of International Student Assessment (PISA) showed that Chinese students out-performed 65 other countries across all three disciplines, suggesting that an expanded education system in China was also producing better-educated students.88 However, qualitative evidence paints a less rosy picture. The curriculum is math and engineering-heavy and emphasizes a strong work ethic in pupils from an early age. Critics argue that it is overly focused on rote memorization at the expense of problem-solving and creative skills. Pupils are also restricted in their choice of study; the gaokao or college entrance exam has earned an infamous reputation as a grueling high-stakes test that determines both where you go to college and what you study, with a strict hierarchy of institutions and subjects. Success or failure in the gaokao can determine a childs future well beyond high school and Chinese parents and teachers place a great deal of pressure on pupils to prepare.89


As the quotes above reflect, interviewees recounted stories of others and their own education that demonstrated three traits in the Chinese education system: a lack of creative problem solving; an intolerance of failure and an aversion to cross-disciplinary learning. The prioritization of certain subjects over others may not be a problem in itself, but it does preclude students from developing a broad interest across subjects. Innovation happens at the intersection of subjects and in a cross-fertilization of disciplines. The narrow focus of the Chinese education system makes this less likely. It also was striking that a number of the entrepreneurs reported either under- performing in the education system or teaching themselves a skill independently, outside of the classroom. Intellectual Property: the development of law and business in China The legal system is another way that a country institutionalizes cultural norms related to copying and the Chinese law or the lack thereof is often cited as at fault for permitting the practice of shanzhai, as well as other intellectual property thefts. The argument goes that this stifles innovation because there is no way of financially rewarding those who create something novel. This view is erroneous for two reasons; firstly, the role of law in Chinese business is not so straight forwardly lacking as is popularly believed and secondly, it is a matter of debate as to whether intellectual property systems anywhere in the world are doing a good job at fostering innovation. This second question is beyond the scope of this paper, but we can address the first by briefly examining the history of intellectual property law in the country. As political reform kicked in and China began to open up to the rest of the world in the 1970s, the country started to consider the most appropriate legal reform that would support economic development. Since then, law has been one step behind business in the country, but a robust Chinese legal system is a political priority. Modern intellectual property law began to take shape in the 1980s and at present looks similar to IP law elsewhere in the world. However enforcement remains a problem. The Chinese legal system sets general guidelines and relies on a strong judicial system to apply the law in specific situations. To make this kind of legal structure work in practice for intellectual property protection, the judicial system requires specialized knowledge related to IP and the industries it is ruling in relation to. The Chinese system has also lacked the legal principle of precedent; that previous cases brought before the judicial system are law. These factors combine to make consistent implementation of IP law challenging and dependent on where and who is trying a case.90 So whilst it is not the case that China has no interest in developing a healthy intellectual property regime, it remains a work in progress and for the time being, interviewees reported there were other methods, rather than legal


recourse, to deal with another company acting illegally, for example proving to your intended business partner (or the world at large) that you were the original creator of something or providing access to data on your company which you could not have manipulated. Investors and Internet companies Some of the big companies cooperate with each other on how to solve a problem. They sort of agree to exchange ideas. Like, how will we deal with these massive data sets? Do you know? Well lets work together... They know what each other is up to. Which makes it difficult for startups; the big companies already had all the best programmers, now theyre making the best programmers cooperate.91

The third way in which attitudes towards originality and copying have been institutionalized is through technology investors and incumbent Internet companies. Amongst interviewees, investors certainly shouldered a lot of the blame for actively encouraging wholesale copying of Internet services in China. The allegation is that they are risk averse and would rather chase a business model thats proven elsewhere than try something new. When thinking about this issue, its worth bearing in mind that on the whole, investors are not risk seeking. Certainly a percentage of Silicon Valley angels and super angels are funding very early stage, very risky companies in the US and see their role as being to promote innovation. This is not the norm for investors on the whole: they exist to make a return for their fund partners or whoever elses money they are responsible for - and there has traditionally been a lack of risk capital for early stage companies for this reason in many different countries and sectors. Laying the blame for copying culture purely at the feet of investors seems to be mistaking a symptom for the cause. Justified or not, large technology companies also get some of the blame for copying. Many of my interviewees believed Chinas Internet giants would rather copy than acquire startups and the figures certainly suggest that the acquisition market is poorly developed. In Silicon Valley, acquisition by a larger company is a common exit for a startup; during 2011, of the 3209 VC deals92 conducted in the US, 477 venture-backed companies were acquired and 45 went public this means just under 92% of exits were from acquisitions.93 In China in 2011, 90% of all venture-backed exits were IPOs.94 Entrepreneurs also complained that large companies were not easy to partner with, although several interviewees were doing so in a careful way. Others like the software developer quoted above - described the relationships between larger companies making the environment more difficult for new entrants. Whilst the relationship between established and startup companies does seem to have been challenging for the latter in the past, the large Internet companies


interviewed certainly expressed a new appreciation for their role in building a stronger entrepreneurial ecosystem in the country and that included prioritizing acquisitions over copying. Baidus acquisition of travel company Qunar for $306M in 2011 was considered an indication of a turning point in the industry and a sign that incumbents were beginning to see value in acquisitions over replication.95

From imitation to innovation

Now we have looked at some of the reasons for Chinas reputation for copying in the Internet sector, let us return to the assertion at the beginning of this section; that by restricting our understanding of the Chinese Internet to a US copycat, we miss the innovation that can occur through imitation. Internet startups and larger companies are doing things differently through localization. Innovation in localization Foursquare is in California. But in China, check-in is not a good business. Discounts are good though: people are going from poor to rich in China. So the local requirement is very different to the west.96

For the hacker spaces PhD student the concept of being first in China was a desirable one and this was an attitude echoed by interviewees. One innovation department at a large technology company described a product they were building and explained theyd been criticized for replicating a popular US-based startup. But their critics, they said, didnt understand: its first in China. Its rare that a product or service can be taken into China in the exact form it existed elsewhere and be successful indeed, this was part of the reason US companies have struggled in the Chinese market to date. Typically being first in China involves being different. We saw in our introduction to this report how the Chinese market and the Chinese consumer differ for cultural and economic reasons from other countries. For this reason, a site might look the same but its functionality is very different for the Chinese consumer; copying a Western site in China actually requires innovation in form and functionality. Take Chinas answer to Twitter: Sina Weibo. It has the same color scheme and its the same micro blogging concept. Yet 140 characters in the Chinese language can convey a short story. As the service has grown, this has affected the design and usage of the site.97 Another example from the search engine market is how online advertising is sold in China. Baidu quickly worked out that to build a business model from selling advertising to small and medium businesses in the way that Google does would involve a totally different model for the Chinese market. In the US, these customers were relatively technologically savvy and they adapted well to a self- service model. In China, many businesses did not have credit cards and so Baidu set up an extensive network of third-party resellers of advertising to educate and manage their customer base.


Selling products also looks very different. Trust is very important for Chinese consumers. We saw earlier how this influenced the development of escrow payment processes in the e-commerce sector. It also affects their relationship with social media marketing: According to McKinsey, social media has a greater influence on purchasing decisions for consumers in China than for those anywhere else in the world.98 The Chinese netizen is more likely to be influenced by non-professional ordinary social media users who have gained a massive number of followers. These Key Opinion Leaders (KOLs) are cultivated by companies and seen as a more trustworthy source of information for consumers.99 Each of these features may not fit neatly into what we typically think of as a disruptive innovation. They seem incremental rather than ground breaking when looked at through our Western definition of what is innovative. Yet they are each bringing new products to new markets and as such they do represent innovation in the market place. The innovation process Theres this idea of ready, aim, fire in the US. In China, its more like ready, fire and then go out and see what you hit. So its very fast iteration.100 There is still a piece missing in this story. We have seen the ways in which imitation is used to achieve mastery, but once you have mastered something, how do you improve upon it? How do you make indigo once you know how to make blue? The answer to this lies in the process of innovation, summarized by the investor quoted above. A favorite example from interviewees was that whereas the West does risk- taking innovation, Chinas specialism is incremental innovation; small changes that do not seem significant alone but when viewed together or over a period of time, the progress they represent is significant. This comes from the idea that Chinese companies are more comfortable with launching an early product into the market and seeing what the customer response is. This is happening in start- ups and larger organizations alike, where several hundred product teams launch and iterate very quickly, sticking with what works and abandoning what doesnt fast. Its tempting to compare this comfort with trial and error and indeed a number of interviewees did - to the Lean Startup methodology popularized by American business authors Eric Ries and Steve Blank. However, this analogy is not particularly helpful in the Chinese context. Ries and Blanks work has its roots both in the lean manufacturing process developed in Japan and in a long history of management as a skill or art, which has been studied and taught in the US as both a practical and academic activity. The Lean Startup is a methodology that claims to have optimized the process of customer development to start a company in the most efficient manner possible. The concept is based on a series


of feedback loops enabling careful measurement of each iteration of a product or service to see if it works. Management has not been professionalized in China in the way that it has in the US. The process of trial and error described by Chinese companies at the moment seems to have more to do with a combination of the availability of human capital to build iteratively and work extremely hard, the competitive nature of the market and the willingness of companies and customers to try anything once to see if it could work. In most cases, this does not seem to be a wholly data-driven or methodical process. However, this comfort with trial and error remains a unique feature of business culture in the Chinese technology sector that is successfully producing innovative products and services for the local market.



China features prominently in Western media; it seems that everyone has an opinion on what the future geopolitical landscape might look like. Whilst there is a good deal of quality analysis of Chinas rise, there are a striking number of over-simplified half-truths that prevail and which recurred frequently in conversations outside of China about this project: China has no intellectual property system; China only copies it doesnt innovate; China is only about manufacturing; Chinese people are highly risk averse and so on and so forth. The aim of this project has been to take a snapshot of the present and in doing so, add some nuance to our understanding of the Chinese business landscape. To do this, we have seen that it is necessary to look at the country through a Chinese lens. Cultural comparisons lead to misunderstandings. The X of China is often meaningless; there is no equivalent. Gaining a perspective on another country is important for many different reasons that are too often unacknowledged. By understanding another culture, we gain a new understanding of our own, but we are also better placed to predict and respond to opportunities and competition in the future, both at home and abroad. An international perspective needs to be an integral part of any business education to remain relevant in the US today and an aspect of any American company that wishes to remain relevant at home and abroad into the future. Too often, this is not the case. Understanding the Chinese market, consumer and entrepreneurs from a Chinese perspective is only going to becoming increasingly importance in years to come.


Appendix: A brief history of key Internet companies

Tencent Founded by Huateng Ma in 1998, Tencent began as an online chat service QQ before, like many of its competitors, marketing a diverse range of services to its existing user base, including search engine, Soso, auction platform, Paipai, blog hosting, Qzone and most recently group chat service Weixin. Tencents original QQ instant messenger began as a service used by teenagers and factory workers. The idea was taken from AOLs ICQ, originally built by an Israeli company, Mirabilis. The company launched Mobile QQ in 2000 and started charging users a small monthly free for the service.101 In 2011, there were 741.7 million active QQ users and the message service has spread from its teenage fan base to QQ IDs being printed on the business cards of white-collar workers as standard.102 The companys revenue now comes mostly from avatars, virtual pets and online games, with a small portion coming from advertising. Tencents R&D center in Shanghai has also gained a reputation for copying, adopting a fast, iterative, trial and error approach to building new products.103 Baidu Search engine Baidu was founded by engineer Robin Li in 2000. Li studied in the US and had developed search engine algorithms at several American companies, before heading back to China to set up a Chinese-language search product.104 Li began by partnering with major Chinese portals to provide search capabilities, but in 2001 launched as a stand-alone service. At the time, for the Chinese netizen, search was a less popular tool for navigating the web than portal sites, which provided users with a list of human-curated links. Baidu only began to gain in popularity when it launched an MP3 search service aimed at teenagers. It provided hyperlinks to music files that users could directly download to their desktops. The strategy was a success although it attracted significant lawsuits and from there the company developed a wide range of products.105 Baidus business model relies on advertising. Unlike in the US, small and medium sized businesses in China were far less technically sophisticated they didnt have credit cards, for example - and so self-service purchasing of online advertising was ill-suited to the market. The company therefore went about building a large sales force to educate and sell to businesses who purchased advertising from the company. The history of Baidu is not without its controversies; in the early days, the Chinese government redirected traffic from Google to Baidu during politically sensitive news events and the company mixed advertising with search results in such a way that the user was unclear if a link was an advertisement or a genuine result.106 37 Netease is an early Chinese web portal that now makes most of its revenue from online gaming.107 Founded in 1997 by William Ding, who had worked for China Telecom and a Chinese offshoot of American database software company, Sybase, Netease introduced Chinas first dual language free email service. Charles Zhang created the first Chinese-language search engine, Sohu. Zhang had been MITs liaison officer in China and had received investment from two MIT professors to found the company in 1996. By 1999, Sohu was a comprehensive Internet portal.108 The company provides an array of products and services through various web properties and now makes a substantial portion of its revenue from online games.109 SINA Corporation Sina was founded by Wang Zhidong, a computer engineer who had made a name for himself building software that facilitated the use of Chinese characters in typing in the late 1990s. Wang first used the Internet at a conference in the US in 1995. Seeing its potential, he set up an Internet division within the technology company he ran at the time, Stone Group, which ultimately merged with one of the largest Chinese-language websites in North America, Sinanet, to form in 1998. At the time, portals were the gateway for web users to find content and these sites charged other content providers for traffic. Sina realized that there was significant demand for Chinese language news online about Chinese affairs particularly from Chinese who were overseas - but limited supply. Sina therefore built a reputation as a Chinese news source, both at home and abroad, with the help of Sinanets experience in the US and Taiwan. Their business model relied on republishing content from traditional media sites and charging those sites a fee for readers. This also had the advantage of avoiding government regulation of media outlets. Over time however, Sina also started publishing original reporting and built Chinas first online news media firm when the Chinese media was highly regulated and very fragmented it was rare to get news that would be available to or cover the whole country. The news service expanded into search and community products such as forums, message boards and dating sites. 2010 saw the birth of a new service that is set to become an important part of Sinas product portfolio going forward. The company launched a micro-blogging


service, Sina Weibo, which has become the most influential platform of its kind in the country. By mid-2012, Sina Weibo had 36.5 million daily average active users, of 368 million registered users.110 One other e-commerce company is also worth a mention as one of the largest privately held digital technology companies in the world: the Alibaba Group.111 The Alibaba Group The Alibaba Group is currently a privately held company, valued at approximately $40bn and holding 70% of the Chinese e-commerce market.112 Founded in 1999, it is headquartered in Hangzhou and provides services for Internet users of more than 240 countries and regions. In 2011, the group employed 17,000 workers in over 50 cities worldwide.113 In 1995 Jack Ma, an English teacher who had discovered the Internet as an English interpreter, launched a website called China Pages to host sites for small companies. China Pages was bought out by the countrys dominant telecoms provider, China Telecom and Ma went on to found e-commerce company, Alibaba, with 18 friends and ex-colleagues in his Hangzhou apartment. Alibaba began as a way for Chinese suppliers to put their prices and products online and for foreign buyers to read their messages and make contact, for free. Ma received US and Japanese backing for the idea, however the company stumbled through the dot com crash with a growing user base, but no revenue. It was only when the company began selling supplier membership that the future of Alibaba as an e-commerce giant began to improve. Since then, the company has gone on to launch various additional services, including Alipay (a payments mechanism), Tmall (a B2C ecommerce store selling well-established brands) and Taobao (a consumer-to-consumer market place). The latter was introduced in 2003 as a response to eBays move into China and beat its rival to become the largest platform of its kind in China. It recently announced that annual sales volumes on Tmall and Taobao had passed $157bn for the first 11 months of 2012. CEO Ma claimed that Wal-Mart was the only other company to have recorded greater annual transaction volumes.114



Academic papers Carrier, Michael A, Innovation for the 21st Century: Harnessing the power of intellectual property and antitrust law, Oxford University Press Cong Cao, Zhongguancun and China's High-Tech Parks in Transition: Growing Pains or Premature Senility? Asian Survey , Vol. 44, No. 5 (September/October 2004), pp. 647-668. Published by: University of California Press, Article DOI: 10.1525/as.2004.44.5.647, Article Stable URL: Wadhwa, Vivek, Gereffi, Gary, Rissing, Ben A. and Ong, Ryan, Where the Engineers Are, Issues in Science and Technology, Spring 2007. Available at SSRN: Warden, Clyde A., Chen, Judy F., When hot and noisy is good: Chinese values of renao and consumption metaphors, Asia Pacific Journal of Marketing and Logistics, Vol. 21, No. 2, 2009 Wilsdon, James, Keeley, James, China: The next science superpower?: The Atlas of Ideas: Mapping the new geography of science, Demos 2007 Zeng, Feng, Venture Capital Investments in China, Pardee RAND Graduate School, 2004 Industry research Globalizing venture capital: Global venture capital insights and trends report 2011, Ernst and Young Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012 Online Shopping in China: IBIS World Industry Report 6220, IBIS World, June 2012 Social Networking in China: Market Research Report, IBIS World, August 2012 Books Chang, Leslie T., Factory Girls: Voices From the Heart of Modern China, Picador, 2009 So, Sherman, Westland, Christopher, Red Wired: Chinas Internet Revolution, Marshall Cavendish Business, 2010 40

Blogs Film Crocodile in the Yangtze: The story of a Westerner inside Chinas Porter Erisman, Dir. , Taluswood Films, 2012,

Entrepreneur interview

4 Reliable, up to date statistics on this are hard to come by,

but the consensus is that the number of engineering students is significant and growing. See Wadhwa, Vivek, Gereffi, Gary, Rissing, Ben A. and Ong, Ryan, Where the Engineers Are.


7 merce/
10 There have been some attempts at looking at this from a personal standpoint, such as:

11 10

Wadhwa, Vivek, Gereffi, Gary, Rissing, Ben A. and Ong, Ryan, Where the Engineers Are.



Interviewees claimed it was common practice for some start-ups to fabricate information about their user bases Cong Cao, Zhongguancun and China's High-Tech Parks in Transition: Growing Pains or Premature Senility?




Silicon Roundabout was actually intended to be an ironic label originally coined by local companies in East London,

poking fun at exactly this trend. Unfortunately, British politicians dont do irony and it became something of a policy meme.
17 All World Bank 2011 data, unless otherwise noted Mobile cellular telephone subscriptions are subscriptions to a public mobile telephone service using cellular



technology, which provide access to the public switched telephone network. Post-paid and prepaid subscriptions are included

Mobile phone users who access the internet from a mobile browser or an installed application at least once per month 2011 data, Chinas Mobile Market: Tapping Nearly 1 Billion Subscribers, eMarketer, Sept 2012 2011 data, The Global Media Intelligence Report: North America, eMarketer, Sept 2012 Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012 ibid. Social Networking in China: Market Research Report, IBIS World, August 2012 Higher R&D and wage costs also contributed to squeezed margins. Source: IBIS World, Internet Services in China,







August 2012

Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012 ibid This is lower than the average monthly income of $412 See:



Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012 Warden, Clyde A., Chen, Judy F., When hot and noisy is good: Chinese values of renao and consumption metaphors, Entrepreneur interview ibid. Globalizing venture capital: Global venture capital insights and trends report 2011, Ernst and Young A legal overview of investment structures is not relevant to this report, however is a









great source of information on current legal structures used in the industry


These numbers include total VC investment figures which include all industries. IT and clean tech dominate VC activity

in the country and are likely to do so for some time to come thanks to favorable government policies. Globalizing venture capital: Global venture capital insights and trends report 2011, Ernst and Young

ibid ibid. This effect is partly due to a decline in Europe, rather than solely growth in China.





Investor interview and Globalizing venture capital: Global venture capital insights and trends report 2011, Ernst and


Investor interview So, Sherman, Westland, Christopher, Red Wired: Chinas Internet Revolution, Marshall Cavendish Business, 2010 ibid. Complete Google blackouts in China are still occurring, for example:





49 Starting up in China interview Interview with eBay China insider, So, Sherman, Westland, Christopher, Red Wired: Chinas Internet Revolution,




Marshall Cavendish Business, 2010


So, Sherman, Westland, Christopher, Red Wired: Chinas Internet Revolution, Marshall Cavendish Business, 2010,2817,2379503,00.asp Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012 Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012 Investor interview Lawyer interview Entrepreneur interview Entrepreneur interview China analyst interview There are some ways in which the Chinese bureaucracy really does make things more difficult for foreigners. However,






















this did not apply to those interviewed.



Entrepreneur interview Entrepreneur interview Its worth noting that China is by no means the only place where imitation takes place; its just achieved the greatest


77 78

level of notoriety. Rocket Internet is a controversial Germany-based incubator whose business model is to clone US sites in other countries before selling those sites to the US originator.

Entrepreneur interview China analyst interview,




Lawyer interview Entrepreneur interview Entrepreneur interview Lawyer interview Lawyer interview World Bank data









Lawyer interview Entrepreneur interview This data includes all VC deals across multiple sectors. Exit data is not broken down by industry. Globalizing venture capital: Global venture capital insights and trends report 2011, Ernst and Young Corporate interview For an English-language example of weibo usage, the Ministy of Tofu blog translates conversations related to social








justice issues in China:

98 Entrepreneur interview Investor interview So, Sherman, Westland, Christopher, Red Wired: Chinas Internet Revolution, Marshall Cavendish Business, 2010 Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012 So, Sherman, Westland, Christopher, Red Wired: Chinas Internet Revolution, Marshall Cavendish Business, 2010 ibid. See So, Sherman, Westland, Christopher, Red Wired: Chinas Internet Revolution, Marshall Cavendish Business, 2010











Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012 So, Sherman, Westland, Christopher, Red Wired: Chinas Internet Revolution, Marshall Cavendish Business, 2010 Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012 Internet Service in China: IBIS World Industry Report 6020, IBIS World, August 2012