Entrepreneurship in China is Different

Imagine visiting a company's towering headquarters only to discover from a top-floor window that about half the city's rooftops are distinctly painted blue. Before you can even ask why, the company tour guide answers, "the blue makes it easy for us to visualize company property."

Having seen such first-hand while in China and knowing that it was the well-deserved achievement of a Chinese entrepreneur who at one point had nothing, I find it irritating how often I come across articles written by foreigners in China claiming that entrepreneurship on the Mainland is broken. There is no doubt that these critics have been doing business in China with mismatched expectations, likely stemming from the fact they have only seen China from the ground up. And on the ground, if you've got no sense of the color of the rooftops, China may look like a country well on its way toward becoming a capitalist nation. Here I am to make it clear that it's not, and moreover to help you understand that the role of a entrepreneur in China is genuinely different.

Problem is, to understand China's economy you have to at least have some general sense of its politics. This is a barrier for many then, as Chinese politics are undeniably obtuse. Still, it's almost comical when you see an English reporter interview a Chinese person on an economic issue and the response starts off as a statement on the importance of Jiang Zeming's Three Represents only to translate to "We have to remember Chinese policy". That said, I'm about to present to you the most distilled version of modern Chinese politics as it relates to its economy as possible.

A Brief History Lesson

Long before the founding of the PRC, Mao Zedong became a strong leader of the Communist Party of China. For our purposes, the most important way he achieved this was by distinguishing himself from his Soviet-trained peers with an essay, "On Practice". This essay, later on, became the cornerstone of Mao Zedong Thought through its clear critique of dogmatism and call to action for a realistic approach to social, economic, and scientific development. Furthermore, it attributes the earlier failures of the Communist Party of China to unrealistic leftism.

We are also opposed to "Left" phrase-mongering. The thinking of "Leftists" outstrips a given stage of development of the objective process; some regard their fantasies as truth, while others strain to realize in the present an ideal which can only be realized in the future. They alienate themselves from the current practice of the majority of the people and from the realities of the day, and show themselves adventurist in their actions.

From Mao's "On Practice"

After the revolution, the PRC adopted an iterative economic development schedule. While the first five-year plan went exceedingly well, the second five-year plan, became disastrous when Mao, diverging from his own practical philosophy, launched the Great Leap Forward, a movement that he hoped would help the Chinese economy surpass that of its Western counterparts. This movement's unrealistic plan resulted in widespread famine and left the Chinese economy enormously off kilter. A slow recovery that involved the loosening of economy control led to a multi-pronged and decade-long political movement known as the Cultural Revolution. Both the Great Leap Forward and the Cultural Revolution have since been declared by the Communist Party of China as leftist errors that were inconsistent with Marxist-Leninism and Mao Zedong Thought.

After the death of Mao in the late 1970s, his immediate successor put out a policy known as the Two Whatevers, claiming that the Chinese government should follow whatever policies and whatever instructions Mao had made. The founding revolutionary Deng Xiaoping quickly noted how inconsistently dogmatic such a system would be and in doing so rose to power himself. While in power, Deng gave new life to the pragmatic principles of Mao Zedong Thought, leading the nation through numerous economic reforms. Many of these married the efficiencies of the self-incentivized free market with those of a centrally planned economy. Deng also initiated the opening up of the Chinese economy to foreign markets and investors. From the perspective of foreigners, these changes have often been interpreted as an end to true Chinese socialism, but to Deng and China these reforms were exactly what socialism grounded in reality entailed:

What is socialism and what is Marxism? We were not quite clear about this in the past. Marxism attaches utmost importance to developing the productive forces. We have said that socialism is the primary stage of communism and that at the advanced stage the principle of "from each according to his ability and to each according to his needs" will be applied. This calls for highly developed productive forces and an overwhelming abundance of material wealth. Therefore, the fundamental task for the socialist stage is to develop the productive forces. The superiority of the socialist system is demonstrated, in the final analysis, by faster and greater development of those forces than under the capitalist system. As they develop, the people's material and cultural life will constantly improve. One of our shortcomings after the founding of the People's Republic was that we didn't pay enough attention to developing the productive forces. Socialism means eliminating poverty. Pauperism is not socialism, still less communism.

From a speech by Deng in 1984

Back to Business

Since Deng's time in power, China's five-year plans have faired well, often surpassing their goals. In the process, several state owned enterprises have been phased out and entrepreneurs have come to serve an increasing larger role. Still, the rules of engagement are quite different for Chinese entrepreneurs. Social impact and alignment with the current five-year objectives often trump pure profit motive. In my experience, I have seen this play out in a number of ways.

My first example comes from personally pitching business plans to Chinese investors. In my experience, if you've pitched something attractive, you will likely get a response that includes praise with regard to the business's relevance to the current local or national objectives. You are also likely to get some talk about how important your project may be to local development and employment. Such points obviously indicate a far more holistic approach to business than that found among nations guided more strictly by the invisible hand. As a take away, remember that if your are pitching a business in China with either significant capital requirements or lofty expectations on returns, you should first review any relevant social objectives. If you're not willing or interested in doing that, trust me, you will not succeed.

My second example comes from the structuring of equity in China. At the negotiation stage, you'll find that startups in China have to give up far more equity. Sometimes this is a legal requirement (especially in the case of foreign enterprises in particular sectors). Other times, it's because of tight regulations around valuations. Finally, sometimes that's just how it goes, because the underlying principles of entrepreneurship in China are so different. Being an entrepreneur there isn't strictly cramming thirty years of work into five so that you become financially free: it's about wanting to manage a business and assume the responsibility of its social impact. Again, if that's not your cup of tea, I recommend staying away.

More examples have come to me from observing the differences between analogous US and Chinese companies. In one case, while surveying the companies of a Chinese incubator, I visited a mobile startup that had a near perfect US equivalent. The internal differences, however, could not have been more stark. In the US, it was a couple of co-founders working from home off of seed funding. In China, it was one innovative guy leading a twenty-five person team of programmers and designers. Both at the same stage of the game, a bit passed minimum viable product, with neither ramen positive. Overall, I know this doesn't sound right to many Western entrepreneurs, but you have to understand that in China a funded startup may be serving technological or social objectives beyond a pure profit motive. In other words, the employment of such a large team may have been, among other things, a way to consolidate talent around the incubator, even if only to make them accessible to later startups.

Then there's the operating principles of China's most success entrepreneurs. Of those I've met (including some demonized in Western media), the importance of social objectives have been top priority. A notable pride has been taken in how many workers they employ, in how much of an impact their technology makes on living standards, or really anything that's the current benchmark everyone is working on. To be clear, I'm not saying every successful entrepreneur in China has a heart of gold, but that among the most successful that I've met, they've all emphasized a balance of social objectives with profit motive.

Hold on

But wait, you say, what about all the inanely flashy cars, rampant consumerism, and the growing gap between the wealthy and the poor? Well, it looks like those problems aren't strictly unique to a top-down laissez-faire economy, because even in a indirect command economy such as China's market socialism, income differences, financial cheats, and spoiled kids happen. Since all of these are fairly new problems, we'll have to wait and see how China deals with them. Either way, just remember that what you see from the ground doesn't tell the whole story.