Venture Capital Values: How China Can Shape Its Innovation Environment

In the modern era of commerce, Silicon Valley stands as a monument to fast-paced, unrestrained, competitive innovation. According to an article by Grep Ip, many countries have long envied American startup culture, and have sought to compete with Silicon Valley. China is the only country who has come close to succeeding.

China’s influx of venture capitalists in the late 90s and early 2000s helped spawn some of its more transformative industries. This growth sparked brilliant innovation that raised $111 billion last year, brought them close to the same level as the United States, and created products that even the United States had not offered. American venture capitalists clearly saw potential in China’s market, and their foresight was rewarded.

However, their celebration might have been premature. With President Xi and the CCP’s crackdown on many VC backed corporations, venture capitalists find that their rewards are waning. In the past two years, China has strengthened its antitrust laws, tightened regulations over cybersecurity, and induced self-regulation in the video game industry in response to accusations of promoting addiction. This has caused a near $1 trillion drop in market value as well as the pushing out of many high-profile VCs. China promises that this is just a fix for industry-specific issues, but the problem with these claims is that the government goes beyond simple regulation. Beijing is effectively directing innovation to serve the state’s direct interests.

What can we learn from these events? Not that corporate regulation is inherently bad, nor that the current state of near hands-off regulation in the United States is particularly desirable, just that there are tradeoffs to consider. Some of these regulations are desirable for their own targeted effects. Anticompetitive behavior can itself slow innovation by raising barriers to entry and choking out competition. Protecting data security is a good thing too, as investors are more likely to put their money in areas that are less susceptible to leaks or liability. Even limits on video game playing time, as intrusive as a regulation is, potentially has a positive effect on education. However, if we want to seriously regulate, we should expect some levels of dampening innovation. Conversely, if we want to encourage unrestrained innovation and fast-paced market growth, we may need to forego some regulation.

The problem with the regulatory scheme in China is that the government appears to be utilizing its laws to direct industry toward its particular goals. For example, China’s desire to catch up with the United States in the semiconductor industry has allowed semiconductor investors more freedom to operate. This regulatory scheme conflicts with the very nature of venture capital, which depends on freewheeling, entrepreneurial innovation to survive. VC investments make are high risk and often subjected to rigid discipline, which produces transformative ideas and inventions. This investment model cannot survive in an environment of near total state control, where the direction of investment is subject to the interests and goals of the administration. It is also quite self-defeating, as industries often influence and inform each other. Innovations in artificial intelligence may mean innovations in automated processes and commercial software. Innovations in antibiotics may mean growth in both medicine and commercial farming. Shutting off other forms of innovation while narrowing in on one goal shuts it off from the economic boons of tangential industry.

There is a more important lesson to learn, and one that China’s tech industry could learn as well. If China is serious about competing with the United States, it has to take stock of its values and goals. Innovation is desirable not just for economic means, but to serve a variety of state interests. Innovation can lead to growing living standards at home, and an expansion of both soft and hard power abroad. Innovation is beneficial to soft power as a means of opening up new industries and reaching foreign markets that the US can exert influence through. And innovation is also beneficial in developing hard power because these new technologies, including artificial intelligence, can often become tools of war. A country that wants to remain competitive militarily, as well as economically, cannot be indifferent to the benefits of innovation.