Stanford professor explains the secret sauce for successful startups in China
Research by Charles Eesley shows that funding is only one part of the complex entrepreneurial ecosystem, and that an innovative product isn't necessarily enough for success.
From humble beginnings known for its fruit orchards, Silicon Valley has transformed into the heartland of entrepreneurship and innovation in the United States. Each year hundreds of budding entrepreneurs from all over the world descend on Silicon Valley in search of the secret sauce. What makes this environment ripe for creativity and innovation? Can the environment be replicated in another country?
Charles Eesley, an assistant professor in the Department of Management Science and Engineering and at the Stanford Technology Ventures Program, has been studying the implications of institutional change for entrepreneurship in the United States, China and Japan. This week, a study by Eesley and collaborators Delin Yang, a professor at Tsinghua University, and Jian Bai “Jamber” Li, a doctoral student at Stanford, was published in Organization Science that analyzes the successes and failures of one of China’s primary efforts to encourage innovation.
The work looks specifically at Project 985, an educational reform program funded and implemented by the government of the People’s Republic of China and launched in 1998. It sought to foster a belief in the importance of innovation among students of 39 partner universities, with Tsinghua University and Peking University each receiving a current value of nearly $276 million. This funding provided new classes and programs on innovation and commercialization, recruitment of accomplished researchers from overseas institutions and corporations to teaching positions, construction of new facilities and acquisition of new equipment needed for advanced research. Following is a Q&A with Eesley about his research:
What did your research reveal about innovation funding and outcomes in China?
Government funding provided additional resources both in classrooms and in the lab, and students graduating from the Project 985 universities were significantly more likely to create innovative, high-tech firms. However, when they commercialize their technologies in a startup, they find that innovating in a manner advocated by Project 985 negatively impacts firm financial performance.
How does Project 985 negatively impact firm performance?
It turns out that political networking results in better firm performance in the Chinese context. This is a counterintuitive result. From a U.S. perspective, you would expect the additional funding for research and development would lead to more innovative products that would result in better firm performance. The other institutions in the U.S. that are implemented to support startups, such as intellectual property and antitrust laws, are lacking in their enforcement in China. Also, state-owned enterprises are often favored and it often becomes difficult for a startup to compete against a state-owned enterprise no matter how innovative the product.
We found that those students influenced by Project 985 reform were less likely to engage in political networking and more likely to spend time and invest in research and development activities. They thought that the great technology that they developed was enough to succeed and they were actually spending time on activities not linked to better firm performance.
How would you compare entrepreneurship in China to Japan and the United States?
A big part of my research is that environment shapes the type of entrepreneurship for a specific region. China, the U.S. and Japan all have very different cultural and institutional environments. The forms of entrepreneurship that you see are a reflection of the policies at each place.
Each of these markets is at a different stage of their development. In the Chinese market over the past decade, they have been going through a boom in manufacturing that the U.S. and Japan went through a couple of decades ago. The U.S. economy has moved more fully into services and the type of entrepreneurship that you see is focused on e-commerce, health care, financial services – and less about agriculture and manufacturing. The Japanese economy is also advanced. With their aging economy, low-end manufacturing is becoming more commoditized and moving into robotics and high-end manufacturing.
Some of the market struggles that we are seeing in the Chinese economy are a reflection of transitions taking place. The services industry is one of the fastest growing in China and manufacturing is slowing down.
The million-dollar question: Is there a formula for boosting innovation and entrepreneurship that can be replicated?
It is complicated and there are a lot of factors. There are institutional policies and culture, both of which take time. What we learn from this study is that sometimes changing just one policy in isolation is not effective and we need other complementary policies to be enforced as well.
For instance, Taiwan mimics U.S. policies. However there is something about the education system in the U.S. that allows students to be creative and think outside the box and do something different. To purely compete on efficiency and low cost is very difficult over time and you don’t gain the higher profit margin from offering a differentiated product or service.
You have to consider both the policies, and their correct implementation, and the cultural environment. Educational institutions have an important role to play as well both in technical education as well as in entrepreneurship education and informing policymakers. In the end, it’s a bit of copy and adapt depending on the local environment.