A Tsinghua University student studying. The telecommunication age offers myriad career possibilities for a generation entering the job market of a “new economy.” PHOTO BY JOAN LEBOLD COHEN.
Since the late 1990s and especially since the start of the new millennium, China has surged forward in terms of economic development. It has also made significant advances in the high-technology sector, especially in the fast-growing Internet and mobile phone fields.
The Internet moved into the public domain in China in 1997 and exploded after 1999, when China’s Internet users reached a critical mass. At that point, many Internet companies were created, the largest of which were financed by venture capital (VC) from the United States. A new group of entrepreneurs emerged in Zhongguancun (ZGC), a district in Beijing that has come to be known as China’s Silicon Valley. These new entrepreneurs were returned from abroad with extensive contacts or experience overseas.
Though the Internet is a service industry requiring little manufacturing for export, the commercial strategies of Chinese entrepreneurs have been strikingly similar to those of the successful PC manufacturing companies, learning from the foreign companies while building on their own technical expertise and focusing on the domestic market. Neither the uncertainty of state regulation nor the initial hesitation of foreign investment has disturbed their focus. They have been heartened by the growth of China’s Internet market, which since the late 1990s has become the world’s second largest. In 2008, the number of China’s Internet users exceeds the United States to be the largest in the world. However, unlike in other high-tech sectors where foreign brands are the most prominent China’s Internet landscape is dominated by local firms.
The Development of China’s Technology Market
According to China’s Ministry of Information Industry, during the 1990s, China’s information and communications technologies (ICT) market experienced growth rates that varied between 20 and 40 percent annually. By 2000, China’s ICT market was one of the most significant in the world. The booming Internet and mobile-phone industries, in particular, fueled this spectacular growth. The personal computer had been seen as a necessary tool for offices in the 1980s and early 1990s; the advent of the Internet brought the PC into the home as a source of mainstream media and home entertainment, vastly enlarging its appeal and consumer base. Rising incomes among urban households and ever-declining PC prices also contributed to the market’s growth.
The watershed year for China’s Internet industry was 1997. Before then, the country’s Internet development was mostly limited to infrastructure building among research institutes, universities, and state organizations. Only after 1997 did the Internet become widely available to the public. China’s first Internet café opened in Beijing in November 1996.
The first Internet user survey in China, which wasconducted in October 1997, showed there were 620,000 Internet users nationwide and less than 300,000 computers able to connect to the Internet, minuscule in a country of (then) 1.24 billion people. In comparison, in the same year, the United States had 54.6 million Internet users, and Japan had 8 million.
Since 1997, however, the number of Internet users has soared. Since 1999, there has also been a sharp rise in the number of Internet service providers. After 2001, China felt the chilling effects of the dot-com bubble bursting and the NASDAQ crash, and the number of domains stagnated for about two years. In late 2002, however, domain-name registration started to take off again. According to CNNIC, China official site for Internet statistics, China had 200 million Internet users by the end of 2007; by January 2009, with China’s population at 1.33 billion, the number of Internet users had risen to 298 million, ranking China first in both counts. Beijing has remained the home of China’s main Internet service providers, accounting for about 19.1 percent of Internet domain registrations in China at the end of 2006. In contrast, Shanghai, with the highest GDP per capita in China, had 9.2 percent of the country’s domains, and Guangdong province (China’s most developed province) had 15.6 percent. Beijing’s predominance has largely to do with its concentration of educational and research institutions and its status as the national capital. Most national and international organizations and media are also located there. Access to information, regulators, and policy makers has also boosted Beijing’s central position in the Internet age.
Another important force in the development of China’s technology industry has been the rapid surge in mobile phone use. In the 1980s, mobile phones were a status symbol for newly rich businessmen or important officials who carried the expensive and bulky gadgets around. But the technology progressed, yielding ever more portable devices and lower prices. As prices declined and the network infrastructure improved, the number of subscribers skyrocketed. The lack of coverage of land phone lines and the expense of installation in China also made mobiles a logical option. By 2002, China had become the world’s largest mobile phone market. The rise of the mobile phone, in turn, has led to increased demand for a variety of telecommunication technologies and services—equipment, software, integrated-circuit designs for phones, as well as text messaging services, all of which have become converging points for the ICT sector.
As with Internet provision, Beijing is the center of China’s telecommunication industry and services. Unlike Internet services, which are dominated by non-state firms, the telecommunication sector is heavily regulated by the state and dominated by giant state-owned carriers. To be a part of the telecommunication industry, one has to win approval or favor from (or at least have good access to) the decision makers in Beijing, which makes the city a favorable location for this industry too. Ironically, while Beijing’s industrial power has long been diluted and surpassed by the booming southeast coast, thetelecommunication age seems to be restoring its predominance as an industrial-communications center in the “new economy.”
The New Entrepreneurs
To understand the new high-tech environment in China, it is instructive to look at the entrepreneurs who were active in the late 1990s and early 2000s. Consider the story of three of the better-known of these entrepreneurs: Wang Zhidong 王志东 and Zhang Caoyang (张朝阳, Charles Zhang in English), and Robin Li 李宏彦, each is the founders of a key Internet company located in ZGC, and each represents a different characteristics of the sector development.
Wang Zhidong was a legendary figure in ZGC and a longtime spiritual leader of China’s Internet industry. In the 1990s Wang was a software genius. Starting in his junior year at Peking University in the 1980s, Wang held part-time jobs at different ZGC companies, doing sales, software, and other work on the then-thriving “Electronic Street.” After he graduated from Peking University in computer science, he started to work on Windows-compatible Chinese-language word-processing software. His first original program, Chinese Star 中文之星, could cleverly convert Windows into a Chinese environment while maintaining its functions. Prior to Microsoft’s creation of a Chinese version of Windows, Wang’s program was the gold standard for Chinese word processing; most computers in China probably had it installed. But despite Chinese Star’s popularity, Wang did not become China’s Bill Gates: the company he founded to sell Chinese Star made little money due to the program’s high piracy rate.
In 1993, Wang left the company and founded another one, Stone Rich Site 四通利方, where he developed his more sophisticated Richwin software, and integrated Chinese into the emerging Internet environment. In 1995, Wang received a $7 million venture investment from a venture capitalist in California and he later merged his company with a Taiwan Internet portal, changed the name to Sina.com, and raised a more substantial sum of capital. Sina was approved to list its stock on the NASDAQ in 2000 and it is now China’s largest Internet portal.
Wang’s experience exemplifies the importance of ZGC as the cradle of China’s high-tech industry. Not only was there technological continuity in his move from his Chinese-language Windows platform to a Chinese Internet platform, but his fame from Chinese Star and Richwin—popularized through his work in ZGC companies—was the key in attracting the attention of foreign venture capital.
Zhang Caoyang, a graduate of China’s prestigious Tsinghua University, followed up his experience with graduate work at MIT, earning a PhD in physics. He was lured by the Internet boom in the United States in the mid-1990s and joined an Internet start-up created by a friend from Harvard. That job took him back to China in 1995, where he supplied the start-up with Chinese information online. Having no roots in China’s own high-tech industry, Zhang nevertheless understood its potential, and he decided to start his own Internet company. Unlike Wang, he did not even try to obtain state sponsorship but directed his capital search toward VC firms in the United States from the start. He received limited capital support at first from his friends and professors and was later able to win substantial VC investment.
Although Zhang’s Internet site, Sohu.com, initially was not as well known in China as Wang’s Sina.com, Zhang was much more accessible to people in the United States. He was listed as one of the fifty “digital heroes” of the world by Time magazine in 1998, and the fact that Zhang made the list increased his name recognition and the fame of his company enormously. He became an instant celebrity both in China and in Chinese student communities overseas. Sohu.com and Sina.com are the two most well-known Chinese Internet portals.
The story of Sohu.com thus had implications entirely different from that of Sina.com. Zhang’s success was due in large part to U.S. expertise and U.S. capital. It was a powerful enticement for many Chinese youth who were either studying or working in technology-related fields in the United States: They started to see that there couldbe riches and fame in their future if they brought their technological and business expertise and U.S. connections back to China.
One of the people inspired by Zhang’s example is Robin Li (Hongyan 李宏彦). Li graduated from Peking University, much later than Wang, in 1991. As did Zhang, he headed to the United States for graduate education in the computer sciences. Before he finished his PhD through State University of New York, Buffalo, he landed a string of internship or jobs at a number of Japanese and American corporations in the United States. Li made a breakthrough in Internet search-engine technology during his work, and he was recruited into Infoseek— the once leading Internet company—to be responsible for its search engine development. In the white-hot Internet bubble of the late 1990s, Li decided to start his own company and was able to raise US$1.2 million venture investment (Barboza 2006). He went back to Beijing in 1999, rented a space in a hotel next to his alma mater and named his company Baidu.com. The name came from a famous phrase in a classic Song dynasty poem, describing the desperate search for a beauty in the crowd, only to find her under a light when you suddenly turn around. Baidu struggled in China for a few years due to the immature Internet industry, but was able to climb steadily to the most favored search site after 2003. It achieved international fame in August 2005 when it issued an initial public offering on NASDAQ. Known as “Chinese Google,” the share price of Baidu more than quadrupled on the first day, setting a record for first-day performance among foreign firms ever listed on the U.S. stock market, and among all firms in the previous five years.
These three examples show how dynamic China’s Internet development has been at the turn of the century. All three persons show strong linkages with U.S. in capital and business models, but specialize in different areas.The new entrepreneurs emulated the Western business model and Western professionalism, which were rather alien to the first generation of Chinese entrepreneurs. In fact, they are so familiar with U.S. entrepreneurs that they are often accused of simply being copycats who transplanted U.S. models to Chinese soil, only to find out later that Chinese soil is quite different.
Online retail companies had to sell to a public that seldom use credit cards, and there was no giant Western-style, reliable delivery system in place; information providers had to work around the state monopoly on information and censorship; and software makers had to live with the high rate of piracy, to name just a few obstacles. Given all these difficulties, it is no wonder that foreign Internet giants were not interested in China before 2002. Only the local firms had the perseverance, skills, and connections to survive during the cold spell.
Yet being local also brings other benefits. The Internet is highly consumer driven, so local knowledge, access, and expertise offer tremendous advantage. Take the example of Internet search engines. Google is the undisputed global leader, with over half of the global market share, but it only ranks third in the Chinese market, after Baidu.com (the leading Chinese search engine) and a more localized Chinese Yahoo. Many in the West blame the result on Chinese government censorship, which reduces Google’s speed in China. But a large number of Chinese do use Google, so the speed must have been tolerable. Other factors might be more influential. The marketing director of Baidu suggests that Baidu’s knowledge of thehabits and preference of Chinese users, the resources it dedicates to Chinese language searches, and its efforts to build Chinese online communities are among its main advantages over Google. Baidu is not alone; in China’s Internet industry, local firms are the market leaders in virtually all fields, and by high margins. This cannot be an accident. Nor can it be attributed solely to the manipulation of the Chinese government, as similar patterns of local firm dominance on the Internet are also found in Japan and South Korea.
Those local firms who survived the early 2000s eventually experienced another boost from 2003 to 2005, when the share prices of China’s dot-coms surged again on the NASDAQ due to profits in text messaging services and online games, both of which seem to enjoy a level of popularity in China unmatched in the United States. Other large international dot-coms such as eBay, Amazon, and Monster rushed to purchase local dot-coms as a way to enter the Chinese market, but by then Chinese firms were already well established China, which made competing with them more difficult and costly for the multinationals.
Broader Growth in High-Tech Sectors
The development of the Internet led to broader growth in the high-tech sectors. For example, the subsequent development of e-business and e-government led to a sharp increase in demand for enterprise-level management software, where piracy is much less likely than consumer-oriented software. Combining their computer hardware trading experience and software expertise, many ZGC firms created thriving businesses providing organizations with systems integration, network solutions, and applied software. Unlike the software industry in India, which is primarily oriented toward outsourcing in the United States and European markets, China’s software industry is domestically oriented, so it is the domestic demand that defines the industry.
Take the example of China’s largest private software company, UFIDA 用友. In 2005 it claimed to have the largest market share of enterprise software in China. It first got started because differences in the accounting systems of China and the Western world made imported accounting software hard to use in China. Enterprise management software of foreign origin also suffered a very high failure rate in its application in Chinese enterprises—over 80 or 90 percent—and imported software was far too expensive for all but the largest Chinese enterprises. UFIDA focused its attention on small and medium-sized firms. It and its “twin,” Kingdee Software 金碟 in Shenzhen, dominate China’s small-firm market for enterprise management software.
Even though the Internet bubble burst in the spring of 2000 in NASDAQ, the returning flow of Chinese students to Beijing after that year actually intensified the industry. The Chinese central government and local governments became increasingly active in recruiting overseas talents through organized publicity tours in the United States, and by giving tours in high-tech regions in China, and in others areas. Some local governments, such as the administrative committee of Beijing’s ZGC Science Park, also set up permanent offices in Silicon Valley, California, and a few other locations in order to recruit high-tech professionals for entrepreneurial ventures in Beijing. Limited grants and various programs of capital assistance for enterprises gradually became available, attracting returnees to high-tech zones across China. All these efforts, adding fuel to China’s sustained economic growth since 1980, finally created a growing flow of returnees in 2002. Although salaries in mainland China for highly-skilled professionals are still low in comparison to their U.S. counterparts, the much lower cost of living in China affords these professionals a comfortable, luxurious lifestyle that they could not afford in developed countries.
According to the Yearbook of the Ministry of Education, the number of mainland Chinese returnees has increased significantly since 2002. Overall, about a quarter of students who went abroad beginning in 1978 have returned to China at mid 2000s. Major science parks in large Chinese metropolitan areas such as Beijing, Shanghai and Shenzhen have attracted the lion’s share of returnee entrepreneurs in the high-tech sectors. The vast majority of these enterprises are very small and undercapitalized at the moment. Together, however, they constitute an indispensable force in the internationalization of the ZGC business environment and in the creation of an industrial ecosystem that allows larger and more technologically sophisticated companies to emerge or survive. The returneefirms are particularly active in the highly sophisticated technological or capital sector such as Internet, semiconductor design, software outsourcing, cell phone development, and venture capital fund.
Learning the Power of Capital
The Internet boom opened Chinese businessmen’s eyes to the concept of venture capital and stock market options and prompted many to consider the various capital tools available to overcome their inherited disadvantage in the state-owned financial sector. Looking at the NASDAQ model, many small and medium-size non-state companies hoped to gain the opportunity to use the stock market option without having to go through the cumbersome procedures that came with overt state involvement. A proposal was made in 2000 to establish China’s own NASDAQ to focus on smaller and high-tech companies. The so-called Chinese NASDAQ, which was established in 2004 in Shenzhen, focuses on small and medium-size companies, but without a high-tech focus. Raising capital on the stock market is still not a viable option for most small Chinese firms. The door is opening wider, however, and more and more private companies are taking advantage of the stock markets in China, Hong Kong, and the United States. According to the statistics of the ZGC administrative committee, by 2006, 85 ZGC firms were listed on stock markets, mostly in Hong Kong and China, though thirty-six were listed abroard.
In order to trade publicly, ZGC firms had to adopt a more formal, Western business model, which led, after 2000, to a flurry of restructuring schemes in Chinese firms and to quite an array of mergers and acquisitions. Managers with foreign business backgrounds—the so-called astronauts—were hired and fired at a rapid pace to accomplish that restructuring.
The Chinese Market, the Internet, and Beyond
From 1983 to the first decade of the twenty-first century, China’s ICT industry shifted decisively away from the insular socialist model toward a market-driven model open to international involvement. As the size and diversity of China’s market grew, more opportunities arose for both domestic and foreign enterprises. State regulation, market demands, technical capacity, and infrastructure are changing fast in China. Such changes require much keener understanding of the situation and a high dose of tolerance for uncertainty, which means that domestic firms have ended up doing better than large multinationals.
China’s ICT market is now one of the largest in the world. The Internet and wireless communication booms have diversified the ZGC’s industrial structure and provided platforms for an array of software firms, other service companies, and hardware firms. Nonstate high-tech enterprises have been legitimized and become the mainstay of China’s ICT industry. A new generation of entrepreneurs with a strong global orientation has emerged. Multinational corporations are increasing their investments and local involvement. The state, after years of standing off to the side, has designated ZGC as a center of innovation.
The returnee enterprises, in particular, are a rising force in many of China’s high-tech areas. They are significant because of their transnational experiences, their connections to overseas business, and their local links to universities and domestic enterprises. They occupy a uniquely favorable position in the innovation system in China. Like foreign multinational corporations, they maintain ongoing technological, capital, and market connections with the global technology centers, but unlike large foreign companies, they are well integrated into the research and business communities in China. Their access to overseas resources and markets gives them distinct advantages over homegrown firms in accumulating technology and raising capital, though they must make considerable cultural and business adjustments, and not all of them will fulfill their ambitions. While the number of returnee-founded enterprises has grown rapidly since 2000, as a whole they are still small and vulnerable. The capability of the Chinese market to absorb advanced products is limited, and the returnee enterprises constantly face capital shortages due to China’s undeveloped capital market for private businesses.
The Chinese government has been encouraging the returnees by granting them limited political and financial support. But the perceived favorable treatment for returnees may also backfire if they generate resentmentand jealousy among homegrown entrepreneurs. For the returnees to truly perform their services, China must have an infrastructure conducive to fostering productive links with the local business culture, such as information transparency and highly developed professional services. In the end, public policies that increase the flow of information, provide a fair and transparent legal structure, and strengthen the capital market and business services are critical for all enterprises in China. But they may be more important for returnee-founded enterprises, as these enterprises are more sensitive to the commercial infrastructure of the region.
Since 2003, the Chinese government has put increasing emphasis on indigenous innovation. Attracting overseas returnees is one way to promote it. China is also pursuing technological standards that would be alternatives to the established ones of the West. Establishing a technology standard is the ultimate prize, one that will encourage future technology innovation. Those companies responsible for establishing the mainstream global standards enjoy significant commercial rewards from the market. China’s effort for defining its own technical standards is controversial both internationally and nationally, since some observers see it as a proof of China’s pursuit of ethno-nationalism policies.
Overall, China’s institutional structure still need further reform for entrepreneurial ventures to succeed in a significant ways. China still lacks a stable financial infrastructure that supports innovation, so most start-ups have gone overseas in their search for capital. More important, as the Chinese market grows increasingly sophisticated, far more coordination and collaboration is necessary among firms in such diverse areas as design, consulting, research and development, software, services, and manufacturing. In other words, a few vertically integrated companies are no longer sufficient for the ICT industry; close networking between many different types of companies is necessary. It will be worth watching to see how the industry—and ZGC—will develop in the years to come.
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Source: Zhou, Yu. (2009). High-Technology Sector. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 10221029. Great Barrington, MA: Berkshire Publishing.
Visitors at the Shanghai Industrial Exhibit. PHOTO BY JOAN LEBOLD COHEN.
The 2008 Taipei Game Show launch of a digital content talent initiative. This contest, officially called “Digital Content Talent Development in Taiwan” was co-sponsored by Sony Computer Entertainment Taiwan Limited and Ministry of Economic Affairs of the Republic of China. PHOTO BY RICO SHEN