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Startup Capitalism: New Approaches to Innovation Strategies in East Asia: Notes

Startup Capitalism: New Approaches to Innovation Strategies in East Asia
Notes

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Notes

table of contents
  1. Cover
  2. Title Page
  3. Contents
  4. Acknowledgments
  5. Abbreviations
  6. Introduction
  7. Chapter 1. Analytical Framework
  8. Chapter 2. Japan
  9. Chapter 3. Korea
  10. Chapter 4. Taiwan
  11. Chapter 5. China
  12. Conclusion
  13. Appendix: East Asian Startup Policies
  14. Notes
  15. References
  16. Index
  17. Copyright

Notes

Introduction

  1. 1. The attributes of the developmental state have been debated. We note that before the developmental state concept was articulated, neoclassical economists provided the dominant interpretation of East Asian economic success on the theme incentivized exports and getting the prices right (e.g., Balassa 1985). From the 1990s, “counter-revisionists” argued that accounts of the role of industrial policy making were overstated. These scholars asserted that ineffective policy leadership, a lack of cohesion, and the rise of politicization appeared by (at least) the 1980s (Friedman 1988; Kitschelt 1991; Callon 1995; Noble 1998; Cumings 1999; Keller and Samuels 2003). Scholars have also challenged the consistency of the model, noting that small firms were also driving technology-centric upgrading in some cases (Tsai 1999) and playing an important role, even in models led by large firms (e.g., Japan’s keiretsu or Korea’s chaebol) (Ibata-Arens 2005; Breznitz 2007; Greene 2008).
  2. 2. Unicorn is the widely used term to describe startups with valuations of US$1 billion or more. The term was coined in the context of high-growth startups—rather than mythical stories—in a 2013 TechCrunch article by venture capitalist Aileen Lee (see Lee 2013).
  3. 3. For a sample of the VoC literature, see Crouch (2005), Becker (2009), Carney et al. (2009), Carney (2016), Coates (2005), Hancke et al. (2007), and Hancke (2009).
  4. 4. Patient capital refers to long-term capital with societal aims and less emphasis on achieving a timely return. See Richard Deeg, Iain Hardie, and Sylvia Maxfield (2016) for a conceptualization of patient capital that takes engagement and time horizon into account; see also Albert O. Hirschman (1970) for essential framing of the choice of whether to exit (in the context of finance, to sell), use voice (actively engage management), and remain loyal (maintain investment position).
  5. 5. A cognate strand of this research delineates varieties of state capitalism, conceptualizing different roles of state-led development and governance modes (Kang 2010; Chen 2015; Naughton and Tsai 2015).
  6. 6. There has long been diversity in terms of the size of firms supported by the state. Notably, in Taiwan, it was SMEs rather than conglomerates that were to drive technology-centric upgrading (Breznitz 2007; Greene 2008). In the Chinese context, a combination of smaller “gladiatorial entrepreneurs” (Lee 2018) and bigger state-backed firms were essential to driving advances.
  7. 7. Astro Teller, “The Unexpected Benefit of Celebrating Failure,” TED talk, May 9, 2016, YouTube video, 15:32, https://www.youtube.com/watch?v=2t13Rq4oc7A.
  8. 8. Mission-oriented or transformative policies are those that target a clearly articulated and society-wide outcome (Schot and Steinmueller 2018).
  9. 9. See literature on the instruments used in startup policy (Brown et al. 2013; Klingler-Vidra 2014; Blackburn and Schaper 2016).
  10. 10. This is not at the hand of creative destruction, though; big businesses have been challenged through regulatory crackdowns. The Chinese government has not threatened the position of other large companies, such as Tencent and ByteDance, which also operate platform business models (Rahman and Thelen 2019; Jia and Kenney 2022; McKnight et al. 2023).

1. Analytical Framework

  1. 1. In addition to the LME and CME types, scholars debate the extent to which there are regional variations. Given this book’s focus on East Asia, we note that some have depicted an Asian model of capitalism (see Hundt and Uttam 2017; Storz et al. 2013; Amable 2003). More state-specific depictions have been conceptualized across national innovation system (NIS) and East Asian business system literature (Chen and Hamilton 1996; Whitley 1999, 2007; Beeson and Liew 2002; Aoki et al. 2007; Globerman et al. 2011; Walter and Zhang 2012; Witt and Redding 2013; Lee et al. 2016; Chen 20019). In this book, we strive to contribute further to this line of work that distinguishes variation within the region.
  2. 2. Some scholars also point to a cultural element, noting Confucian traditions (Hofstede and Bond 1988; Kim and Park 2003).
  3. 3. In addition to studying how much change has occurred, research also explains why the change is happening. Some point to crises, such as the EAFC, as potential critical junctures capable of ushering in change (Capoccia 2015; Collier and Munck 2022).
  4. 4. The mechanisms by which large firms may engage governments, and vice versa, are not the focus of this book. According to recent research, incumbent firms exercising their political connections lobby for self-serving policies (Bombardini et al. 2023) and related means of asserting their power to impose barriers to creative destruction (Baslandze 2023). We do not strive to observe backroom dealings that may shape how, and why, incumbent firms enter startup initiatives. What we do strive to systematically observe is whether and how large firms appear in startup policies. We can then analyze how big company and startup interactions are expected to deliver socioeconomic value.
  5. 5. In China, the state has a mixed approach, sometimes watching “gladiatorial entrepreneurs” fight in nascent markets before offering access to state largess for those who emerge as winners (Lee 2018). In other cases, state-owned enterprises lead in developing a critical technology, such as the partially state-owned SMIC and its attempts to lead China’s semiconductor abilities since it was established in 2000.
  6. 6. There is growing evidence that entrepreneurship tax incentives can be unproductive forms of government initiatives (IMF 2016, 40). Zoltan Acs and coauthors (2016) conclude that tax incentives are ineffective in boosting innovative startups, instead propping up lifestyle entrepreneurs who do not go on to employ others and do not advance innovative products.
  7. 7. Accelerators and incubators differ in their expectation of participants’ business ideas, their length, and their selection process. Accelerators can be highly selective in striving to identify individuals or teams with concrete business ideas and then run as cohort-based programs over the course of months, whereas incubators tend to be more open to would-be entrepreneurs at the idea generation stage (Bone et al. 2017, 12–13).
  8. 8. Patient capital is defined as finance from providers that “aim to capture benefits (both financial and otherwise) specific to long-term investments and who do not exit their investment or loan if non-financial company (NFC) managers do not respond to short-term market pressures” (Klingler-Vidra 2016, 692; Deeg et al. 2016).
  9. 9. One of the central challenges around the advance of startup-friendly stock exchanges is the balance of governance (prudent listing requirements) and accessibility (ease of listing) with public protection concerns (e.g., potential for fraud and excessive risk).
  10. 10. What is considered radical innovation changes over time. To give an example, in the evolution of the semiconductor industry, the 1950s and 1960s were periods of radical innovation in which the technology was being defined; then, from the 1970s and especially the 1980s, advances in manufacturing became ever more important to the industry’s commercialization (Miller 2022).
  11. 11. Input legitimacy has to do with the substance or the process, whereas output legitimacy refers to the initiative’s impact or performance (see Scharpf 1999).

2. Japan

  1. 1. Scholars have contested the validity of the keiretsu-centric developmental state for different reasons; for instance, Ibata-Arens (2005) argues that all along it was small firms that powered national innovation prowess, not the keiretsu themselves. Bob Johnstone (1999) similarly points to the long-standing presence of Japan’s entrepreneurs, even in the developmental state era. Steven K. Vogel (2018, 107) details government assistance for small businesses, beginning with MITI’s provision of subsidized loans in the 1960s. David Friedman asserts in The Misunderstood Miracle that the mainstream account of the Japanese postwar model overlooked what he argues is the fundamental role that SME manufacturers played (1988, 2). There are three primary types of Japanese conglomerates (keiretsu): horizontal keiretsu have large firms in different industries and receive finance from a major city bank, or “main bank”; vertical keiretsu refer to subcontracting relationships between large industrial firms and SMEs; and distribution keiretsu guarantee sales and marketing channels. Japan’s “big six” horizontal keiretsu are Fuyo, Sanwa, Sumitomo, Mitsubishi, Mitsui, and DKB Group. DKB was delisted in 2000, and then the combined Mizuho Holdings was formed (also combining Fuji and the Industrial Bank of Japan). The vertical keiretsu are Toyota, Toshiba, and Nissan.
  2. 2. In a contemporary setting, the three Japanese mega banks are Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group.
  3. 3. Japan’s reforms in 2006 saw the creation of the Government Pension Investment Fund (GPIF), which is the world’s largest pension fund at the time of writing. The GPIF, because of this twenty-first-century restructuring, only enters the analytical lens later in the story.
  4. 4. For more details on the J-Startup Initiative, see J-Startup, accessed June 13, 2024, https://www.j-startup.go.jp/en/about/docs/J-Startup_EN_181009.pdf.
  5. 5. This move was hoped to enhance labor mobility, but labor market flexibility did not proliferate quickly.
  6. 6. The keiretsu still offered welfare programs that were more generous than the National Pension offering. In this sense, the incentive to stay and grow with a firm remained—though you could move from one keiretsu to another.
  7. 7. For an example of SoftBank announcements of stock option issuance in this period, see SoftBank Group, accessed June 13, 2024, https://group.softbank/en/news/press/20040527.
  8. 8. In 1982, the first VC fund was launched in Japan, with the Japan Associated Finance Co. Ltd. (JAFCO) partnering with Nomura Securities, Sanwa Bank, and Nippon Life Insurance Company to establish a VC fund structured as a limited liability company (Hata et al. 2007, 158).
  9. 9. The program aims to “promote corporate investments in startups” by allowing “existing companies to deduct from their taxable income 25% of the value of their investments in startups” (Japan Times 2021).
  10. 10. Corporate VC–backed deals accounted for 24 percent of all global VC transactions in 2019 (and also 2020), which was up from an average of 20 percent a few years before (CB Insights 2021).
  11. 11. Son has made waves in Europe and Silicon Valley, where he has been said to have “massively disrupted” startup investments as he has deployed the world’s largest VC fund (de Leon 2019). SoftBank made headlines in Europe in 2016 in the context of the acquisition of Arm, a leading semiconductor design firm based in the United Kingdom, as Arm was seen as a critical asset for British technology (Farrell and Kollewe 2016). SoftBank’s investment in Arm was again a big news story in 2023 (Nikkei Staff Writers 2023c). Son’s big-ticket VC model has been questioned, given a decline in tech company valuations (Pesek 2023). In that context, Son’s 2018 remark that SoftBank’s Vision Fund was not “just recklessly making investments” has been retrospectively criticized as having “little to show,” as the massive fund seemed to miss out on the big winners in artificial intelligence—their core theme (Brown 2023).
  12. 12. While these American-styled policies were employed, some evidence suggests that they have had lackluster results (Mowery and Sampat 2004; Vogel 2018).
  13. 13. The Bank of Japan drove interest rate hikes in 1989 to counter the pressures but ultimately failed, and the bubble burst in 1991. The recession caused corporate bankruptcies, bank failures, and a relatively large increase in unemployment. Beyond the immediate causes of the recession, its fallout was worsened due to its coinciding with a generational shift and an industrial hollowing out (Ibata-Arens 2005, 63).
  14. 14. Scholars note that Japan did not wholly succumb to pressures to converge on an American system (Amyx 2004). Jonathan Zeitlin and Gary Herrigel (2000) conceive the shifts in technology and management as selectively adopted and modified elements of the US system. Leonard J. Schoppa (2006) argues that pressure for reform (Hirschman’s concept of “voice”) to Japan’s system of “convoy capitalism” did not fully materialize in the 1990s due, in part, to the low costs incurred by large firms in moving operations and financial transactions offshore (“exit”). Kent E. Calder (2017, 43–44) asserts that while some American initiatives and practices have been adopted into the Japanese context, there remains “deep resistance to Anglo-American-style market practices.” Fumihito Gotoh and Timothy J. Sinclair (2017) detail limits to adopting American practices in the Japanese financial system. Ulrike Schaede (2020) speaks of Japan’s business reinvention but notes the persistence of its large firms.
  15. 15. SoftBank’s Masayoshi Son had become a household name, synonymous with a new breed of brash technology entrepreneurs in Japan. Son was challenging Japan Inc. after bringing Yahoo to Japan in 1996.
  16. 16. While these policies aimed to boost rates of women active in entrepreneurship, we note that by the end of his term, Abe’s “Womenomics” push (which ran from 2013 to 2020) fell short of its targets (Crawford 2021).

3. Korea

  1. 1. Some of Korea’s new chaebol—Coupang, Kakao, and Naver, for instance—are among the world’s most active corporate VC investors. Some long-established chaebol, especially Samsung, are prolific actors in startup accelerators and VC activities in Korea and across world regions. However, we acknowledge varying levels of startup engagement among the approximately seventy companies identified by the Korean Foreign Trade Commission as chaebol each year.
  2. 2. Revisionists to the Korean developmental state model assert that SMEs played a role as well as the chaebol. Chang-Yong Sung and colleagues (2016) explain that SMEs had long been nurtured by the government. Others note that the chaebol were, after all, fledgling entrepreneurial firms at earlier historical eras (Hemmert and Kim 2021).
  3. 3. We note that the government passed the Support for Small and Medium Enterprises Establishment Act and launched twelve VC firms in 1986. The act and these early VC firms provided the first infrastructure for US-style VC to exist. By 1995, there were forty-nine VC firms (Ko and Shin 1999). Also, at the tail end of the antecedent period (1996), the state established KOSDAQ to promote access to equity financing for high-growth firms (Sung et al. 2016). However, these early VC activities were marginal relative to the thrust of the bank-based system.
  4. 4. Park was involved in a scandal in which Samsung and other chaebol were accused of providing donations to a close confidant of the president in exchange for political favors, further eroding the image of large corporations (Chung 2018). Ultimately, this culminated in Park’s impeachment and subsequent prison sentence (Chung 2018).
  5. 5. Yoon Suk-yeol, New Year address to nation, January 1, 2023.
  6. 6. A KRW25 billion FoF for Industrial Technology Commercialization was created in 2013 to promote the commercialization of technologies by startups with little experience in this area. This was followed shortly after by a Foreign VC Investment Fund. Also launched in 2013, this KRW135.4 billion fund focused on enabling the entry of startups in foreign markets. A second such fund, worth KRW170.7 billion, was launched in 2016 (KVIC 2024c). Furthermore, a KRW41.6 billion Angel FoF was created in 2015 to invest in private investment associations making investments in early-stage startups (KVIC 2024a).
  7. 7. The first venture boom was said to have taken place in the late 1990s and early 2000s.
  8. 8. Korea liberalized capital controls (Chinn and Ito 2006; Gallagher 2015), which led to short-term foreign borrowing by the chaebol ballooning to 67 percent of all foreign debt and 300 percent of foreign reserves by mid-1997 (Wang 2007, 1093). Korea’s inability to service this debt was the immediate cause of the EAFC hitting the country.
  9. 9. However, only a few months after taking office, he faced large protests due to his decision to reverse a ban, in place since 2003, on US beef imports, as Korea and the United States negotiated the KORUS trade agreement. The so-called US beef protests made Lee take a more cautious and less laissez-faire approach (Moon 2009).
  10. 10. Lee Myung-bak, New Year’s message to the nation, January 3, 2012.
  11. 11. Park Geun-hye, “Opening a New Era of Hope,” February 25, 2013.
  12. 12. Government of the Republic of Korea, “The Park Geun-hye Administration’s Creative Economy Blueprint: Creative Economy Action Plan and Measures to Establish a Creative Economic Ecosystem,” June 5, 2013.
  13. 13. Moon Jae-in, congratulatory remarks by President Moon Jae-in at the second annual meeting of the Board of Governors of the Asian Infrastructure Investment Bank, June 16, 2017.

4. Taiwan

  1. 1. Like revisionist work on other developmental states, there is debate as to whether the state was the central protagonist in the story of Taiwan’s economic miracle. Some argue that the Taiwanese state was not as instrumental as has been construed, nor as coherent as portrayed (Chu 1989, 2007; Haggard and Zheng 2013). Instead, they argue that outperformance should be primarily attributed to the “strategies and abilities of entrepreneurs, engineers and managers” (Hobday 1995, 98). Others emphasize the relative decline in the role of the state, especially from the 1980s (Yeung 2016; Fuller 2020), while still others point to sectoral variability in the state’s performance (Fuller 2013b).
  2. 2. We note that state-led import substitution industrialization, which prioritized large public firms, was pursued in Taiwan from 1952 to 1958. Major corporations (e.g., Tai-yuen Textile and Far Eastern Textile) and even conglomerates (e.g., Formosa Plastics) emanate from the early years, when large firms played a crucial role. In terms of the motivations for entrepreneurial support, scholars such as Richard Whitley (1992) note that the KMT leadership (who had fled from mainland China) desired to limit the power of ethnic Taiwanese in particular, rather than all private-sector actors.
  3. 3. Taiwan’s democratization advanced following the death of Chiang Kai-shek in 1975. Political parties were legalized later, in 1987, along with the end of Martial Law.
  4. 4. The Nineteen-Point Program liberalized the market by establishing “permanent economic institutions like the central banking system and capital market; and it provided preferential treatment to private business” (Tsai 1999, 73). The SEI introduced the provision of tax rebates on products that were exported and simplified investment licensing procedures. It provided for a five-year tax holiday as well as a tax deduction for annual export proceeds (Kuo 1982, 301) and delineated “encouraged enterprises” as types of companies on a list of categories, which was under constant revision (Haggard 1990, 96).
  5. 5. Policy “sought to maximize the benefits from FDI [foreign direct investment] for local firms by promoting local sourcing and subcontracting” (Lall 1996, 73), which helped facilitate significant technology transfer to Taiwan’s small suppliers.
  6. 6. Taiwan Startup Stadium, “Our Story,” accessed June 16, 2024, https://www.startupstadium.tw/ourstory.
  7. 7. The two universities are National Chiao-Tung University and National Tsing-Hua University.
  8. 8. Martin Kenney and colleagues (2013) debate this centrality of returnees to the Taiwanese technology industry around Hsinchu. They detail the transnational experience of the founders of the first cohort of very successful companies, showing that the first cohort primarily drew from local education and experience. It was a later group of returnees that boosted what was an already exciting technology cluster.
  9. 9. To do this, global links have been sought to build the capacity of domestic startups to expand to world markets. For instance, the MoST announced the launch of the Taiwan Innovation and Entrepreneurship Center in 2015, which provides high-growth startups with grants of up to US$20,000 as well as mentorship while based at the center to boost their scaling up. The National Science Council was reorganized as the MoST in 2014 and given the responsibility of delivering on the Executive Yuan’s Innovation and Entrepreneur initiative.
  10. 10. For more on the Taiwan Accelerator Plus and its different programs, see https://taccplus.com/en/accelerator-2/. (Accessed July 26, 2024).
  11. 11. Two of the industry leaders were Dr. Ta-Lin Hsu and Morris Chang. Hsu was a senior manager at IBM and a VC investor in California who is said to have brought Silicon Valley–style venture capital to Taiwan by setting up H&Q in Taiwan and by initially educating policy makers—especially K. T. Li and the Executive Yuan—about VC (Klingler-Vidra 2018). Morris Chang, who worked in the United States, including at Texas Instruments, for more than twenty-five years, was recruited to Taiwan by Li to be the head of ITRI. In 1987, he founded Taiwan Semiconductor Manufacturing Company at the behest of Li (Saxenian 2006).
  12. 12. According to the Taiwan Venture Capital Association, the tax credit had been essential in boosting the number of VC funds as well as the money under management. The number of VC funds grew from 1996 to 2000 alone, and there was an increase from 47 to 170 VC managers, with the assets under management growing from US$820 million to US$4 billion (Fulco 2015).
  13. 13. Taiwania Capital, “About Us,” accessed June 16, 2024, https://en.taiwaniacapital.com/#.
  14. 14. TSMC was founded in a similar way to how UMC had been. The Taiwanese state organized a group of investors to establish the privatization of the very large scale integration (VLSI) fabrication facility segment of ERSO in 1986. Initial investors included Philips and China Development Corporation.
  15. 15. We note that while ITRI and state support for the hardware sector is widely seen as effective, policy to boost innovation capacity in the software industry, with the Institute for Information Industry (III) as its primary promoter, is viewed as a relative failure (Fuller 2002). The explanation given for the divergent experiences of hardware and software has centered around ITRI’s role in conducting R&D that enabled “world-leading capabilities” for hardware firms, while III was effectively competing with software firms (Breznitz 2007, 100).
  16. 16. Biotechnology was on the science and technology agenda as early as the 1980s. However, Joseph Wong (2005, 173) notes that it was only in 1995 that resources began flowing toward the area with the creation of the Promotion Program for Biotechnology and the 1996 Biotechnology and Pharmaceutical Industries Promotion Office (BPIPO) within the jurisdiction of the Industrial Development Bureau.
  17. 17. In 1979, the United States and the PRC established formal diplomatic relations. While the Taiwan Relations Act in March 1979, afforded implicit support, the explicit security alliance, via the US-ROC Mutual Defense Treaty, expired in January 1980.
  18. 18. Taiwan did pursue an Import Substitution Industrialization strategy until 1958.

5. China

  1. 1. Daniel Zhang stepped down as CEO in September 2023 in a planned leadership transition as the company continued its spin-off efforts (Qu and Cao 2023).
  2. 2. Debate persists on whether the state is a driver or inhibitor of the country’s ability to escape the middle-income trap (Huang 2008; Ang 2016). For some, there is the counterintuitively positive role of weak institutions in enabling China’s development (Ang 2020), while others emphasize the inability of innovation to continue to thrive given this institutional environment (Fuller 2016). Still others emphasize the role of local governments, such as those in Shanghai and Shenzhen, rather than a monolithic central government (Breznitz and Murphree 2011).
  3. 3. The Torch Program strove to boost Silicon Valley–like activities, in terms of technology incubators, science parks, and equity funding. Zhongguancun Science Park, for many, is the first science and industrial park in China, given its importance to the ecosystem and the extent to which it has acted as the model for startup-centric innovation clusters in China (Blank 2013). Zhongguancun quickly came to be known as “China’s Silicon Valley” (Segal 2003, 57–59). Indeed, some of its biggest technology firms, including search portal Baidu, TikTok owner ByteDance, ride-hailing app DiDi Chuxing, e-commerce platform JD.com, IT firm Lenovo, or food delivery app Meituan-Dianping, were all set up in this cluster (Jing 2018).
  4. 4. We note the vibrant scholarship (such as Tsai 2002) that argues that these early interventions were not largely (or even peripherally) responsible for the performance of startups in this era. Yasheng Huang (2008, ix) asserts that “as late as 1998 much of the Chinese officialdom held private entrepreneurship in utter contempt.”
  5. 5. The 1985 CPC Central Committee Decision on the Reform of the Science and Technology System allowed for the establishment of VC investment.
  6. 6. While the China Venturetech Investment Corporation has been referred to as a VC firm, it was more of an investment vehicle that allowed the central government to invest in a variety of assets, such as real estate and financial securities. After that initial use of the term VC, more than twenty provincial governments eventually designed, funded, and ran VC funds (Wang and Wang 2011).
  7. 7. The 863 Program listed seven key technological fields: biotechnology, space, IT, laser technology, automation, energy, and new materials; telecommunications and marine technology would be added to the list in 1992 and 1996, respectively.
  8. 8. There was not widespread agreement on this direction among the leading coalition (Shih 2022). Instead, key figures like Deng and Zhu Rongji advocated for the reduction of the planned economy. Chen Yun, who was the head of the national Economic and Financial Commission from 1979 and then the chairman of the Central Advisory Commission for Deng’s government from 1981 until 1987, had advocated for a “bird cage economy” in which the plan is the cage and the economy (the bird) can fly freely within that. Chen opposed more liberal openings, particularly as advocated by Deng, throughout the 1980s and is said to have slowed China’s shift to a market economy (Tyler 1995).
  9. 9. The mass entrepreneurship and innovation initiative targeted the public, but two groups were singled out. The first was the migrant worker population. In general, rural migrants moving to the cities have higher entrepreneurship rates than urban and rural residents, in sectors such as wholesale, retail, or food (Liu et al. 2019, 681). The initiative sought to tap into their entrepreneurial mindset to boost employment.
  10. 10. At this point in time, two types of VC firms coexisted, according to Douglas Fuller (2010, 452–453). The first type included foreign firms invested in technology-light deals, such as internet startups. These firms leveraged the Chinese government’s decision to largely exclude foreign firms such as Google, Yahoo!, Facebook, and Twitter from its market, providing the market space for equivalents such as Baidu, Sina, Tencent, 51jobs, and so on. The second type invested in more technology-intensive deals, such as semiconductor design firms.
  11. 11. While startup financing increased, following protests in 1994, state direction of credit had also recentralized (Su et al. 2018). These two trends—fiscal centralization and increased startup funding—continued to advance concomitantly in the early 2000s.
  12. 12. We note that research has shown that access to Innofund is dependent on other factors, such as political connections (Wang et al. 2017). As a result, there is an ongoing debate about the extent to which Innofund has offered widespread support for startup prowess (Chen and Xu 2020).
  13. 13. There were differences between Chinese VC professionals who did and did not have overseas experience. On the individual level, Manhong Mannie Liu (2015, 117) explains that, historically, there were “two tracks” of domestic VC firms in China: “ground beetles” and “sea turtles.” Ground beetles referred to Chinese VCs with little overseas experience and most often referred to private VCs who had prior government experience and were new to VC. These ground beetles became active in 1999, when regulations were changed so that nongovernmental venture capitalists were allowed to operate (Kenney et al. 2002). Sea turtles, on the other hand, are Chinese professionals who returned from living overseas, often gleaning experience in VC firms while abroad.
  14. 14. Liu Xinlian, “A New Gold Rush,” Beijing Review, August 15, 2011.
  15. 15. While a welcome development, government approval for firms to be listed in ChiNext was considered opaque in the first few years after the stock exchange’s launch (Zhang et al. 2017, 400). Indeed, larger Chinese tech firms are said to have preferred to list in Nasdaq or the New York Stock Exchange (Gucbilmez 2014, 180).
  16. 16. The State Council issued the “Notice on the Plan for Deepening the Reform of Management of Centrally Financed S&T Projects.” Under the new system, the Inter-Ministerial Joint Council was introduced to coordinate priorities and budgeting while preventing overlap across and within ministries. MoST was put in charge of the council.
  17. 17. The Technology Innovation Guiding Fund(s) was divided into three funds: the Venture Capital Guidance Fund for Emerging Industries, launched in 2015; the National Fund for Technology Transfer and Commercialization, which had been established in 2011 but became more active from 2015; and the National Fund for SME Development, also launched in 2015. By the end of 2017, these three funds oversaw sixty-five funds of funds managing RMB114.1 billion, with plans to eventually reach RMB300 billion. Therefore, government funding disbursement was decentralized. The funds had to adhere to the priorities outlined by the Xi government, but once in operation, they were free to decide which startups to support and how to manage their own programs. Furthermore, the central government provided funds along with local governments, SOEs, banks, and other actors (China Innovation Funding 2020b).
  18. 18. The government wanted to support startups that were finding it more difficult to be listed in the United States. Furthermore, more established (former) startups, such as Alibaba, JD.com, or Xiaomi, were opting to list in Hong Kong as an insurance policy in case they were asked to leave US stock exchanges (Lockett 2020).
  19. 19. We note that scholars like Huang (2008) contest the gradualist reform narrative and instead depict the 1980s as an era of radical reforms and the 1990s as a reversal of those efforts. The share of China’s SOEs over time is a fraught measurement, as one needs to count their numerous subsidiaries (Pettis 2013). According to the Economist’s (2013) measurements, in 2001, Chinese SOEs still accounted for around 65 percent of assets and 50 percent of profits and sales; by 2008, the figures were down to around 45 percent of assets and 30 percent of profits and sales. Meanwhile, the number of private firms, especially in the technology sector, continued to grow exponentially throughout this period. The SOEs were largely in sectors such as petroleum (Sinopec or China National Petroleum), utilities (State Grid Corporation), banking (Industrial and Commercial Bank of China, or Bank of China), telecommunications (China Mobile), or chemicals (Sinochem) (Fortune 2020).
  20. 20. The local governments did not, though, get to retain the corporate taxes paid by startups in HIDZs (Su et al. 2018). Revenue for local government coffers came through the broader activity—consumption, land development, and more—that the clusters represented.

Conclusion

  1. 1. We do note that, outside of startup policy, there are government efforts to ensure sufficient talent and infrastructure to aid the ongoing competitiveness of the Silicon Shield.
  2. 2. We say that “the story goes” because this account of the origin of the phrase is contested. See Gautam Mukunda (2020), who details that what Wilson said was the opposite—that what was good for the country was good for General Motors.

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