Venture Capital in China

Venture Capital in China:Development and Challenges Xiu Zhuang 00986035IntroductionBy definition, venture capital refers to investment entities with pools of capital that invest in unquoted high growth companies that offer prospects of superior returns after a holding period of several years, leading to an investment exit.In the classic model of venture capital,the final goal of venture capitalist is to help the firms IPO,which will bring them magnificent profits.That is also the motivation of VC investment.The venture capital industry in the United States is acknowledged as a powerful tool of entrepreneurship and innovation in the American economy.The same as the U.S,private and foreign investment helped to make the Chinese economy consistently one of the fastest growing in the world since 1979.AbstractionThis article examines the role of venture capital in Chinas economic development,where Chinas venture capital industry has been and where it is likely to go in the future.It also analyse how to deal with the problems we may face in the future.Key Words:venture capital,IPO,china, economy development.History of venture capital in ChinaIn China, the origins of venture capital can be traced back to the Chinese governments focus on high technology development in the mid-1980s.However, initial attempts to create a flourishing high-tech sector were not very fruitful, largely because government officials and early venture capitalists lacked the necessary understanding and expertise and frequently channeled their efforts in the wrong direction. The failure of the China New Technology Start-up Investment Company, a well-known venture capital firm in China that went bankrupt in 1997, serves as a good example. But with continued support from the government and the private sector, Chinas venture capital industry overcame its sluggish growth and started to flourish in 1999 and 2000, a time period characterized by strong stock market performance and investor optimism not only in China but also in the rest of the world.Since then,the VC investment in China has developed quickly and made large contributions in the groom of the Chinas economy. Today, venture capital investments in China are coming from different sources like the government, state-owned enterprises, private firms, public companies, non-banking financial institutions, multinational corporations and foreign venture capital funds. As of 2000, foreign funded venture capital firms account for 8 percent of Chinas venture capital organizations and their presence and market share keeps growing. As a result, domestic investors increasingly compete with multinational corporations and foreign venture capital funds that possess abundant capital and superior project evaluation capabilities, for access to high-quality investments in China, most of them in the fast-growing technology sector.Chinas Potential for Venture Capital It is highly agreed that China will continue to be at least 2rd largest market for VC investment in the next decades. With more than 1.2 billion people, China has long been one of the worlds most sought after markets (Irwin & Kennedy, 2000). As with all developing economies during the past two decades, technology and markets have been driving forces behind economic growth in China. While countries around the world are seeking to maximize technologys impact on economic growth, China, a huge country lacking mature infrastructure, becomes a prime candidate that can benefit from recent technological advances.What challenges are we facing?For foreign VC As analysed above,Given Chinas promising future, Western interest is unlikely to subside any time soon. Yet, entering the Chinese market is not straightforward. However,the disparities between the Western VC markets and the emerging VC market in China remain large. In the West, profit maximization, efficiency, and public information disclosure are important factors for investors. In contrast, personal relationships, networking, and harmony are ranked highly in East Asia.The Chinese culture in particular places a large emphasis on the maintenance of so-called guanxi networks, under which harmony with and within organizations is frequently favored over information disclosure and shareholder rights. While Western business culture emphasizes profit maximization, shareholder rights protection, and transparency, Chinese business culture focuses on networking, harmony, and seniority. In addition, the Chinese culture typically has a high tolerance for information asymmetry between the firms insiders and external investors as well as outside board members.In a word,they have to face the contradiction of the developing system of China and their experience and konwledge under the developed model.For native venture capitalist They understand how the things go in China while they are lack of the experience of IPO overseas.And also their capital is limited in comparison with the foreign venture capital.Possible SolutionsOne of the possible solutions that is working well is to require foreign venture to make active movements to fit in with the current circumstances in China.And for Chinese venture capitalist,the most important thing is to learn form the west and absorb more knowledge in management,foreign regulations and IPO measures.In the meantime,the government shall play the most important role as the law builder and the rule executor.The government should improve the quality of monitoring and make the market circumstances healthier so that China could appeal to more experienced foreign venture capital and also do good to native VC development.Refer