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Will Entrepreneurship Be China’s Next Growth Engine?

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Should China want to remain an international economic superpower, it will need to substitute its current growth model – one largely based on abundant, cheap labor – with a different comparative advantage that can lay the foundation for a new, more sustainable growth strategy.

Chinese policymakers are hoping now that an emerging entrepreneurship may fit that bill, with start-ups and family-run enterprises potentially becoming a major driver of sustainable growth and thus replacing the country’s current economic model. In 2014, international conferences on private entrepreneurship and innovation were organized all across China: The China Council for the Promotion of International Trade organized its first annual Global Innovation Economic Congress, while numerous innovation-related conferences were held at well-known Chinese universities such as Tsinghua University, Jilin University andWuhan University.

New Growth Model Needed

Although China still ranks among the fastest growing economies in the world, the country’s growth rates have decreased notably over the past few years. From the 1990s until the 2008 financial crisis, China’s GDP growth was consistently in the double digits with only a brief interruption following the Asian financial crisis of 1997. Despite a relatively quick recovery after the global financial crisis, declining export rates resulting from the economic distress of China’s main trading partners have left their mark on the Chinese economy. Today’s GDP growth of 7.8 percent is just half level recorded immediately before the 2008 crisis, according to the latest data provided by the World Bank.

This recent slowdown in China’s economic growth has naturally been a source of concern for the government. A continuation of the country’s phenomenal economic growth is needed to maintain both social stability and the Communist Party’s legitimacy. Sustainable economic growth has thus been identified as one of China’s key challenges for the coming decade.

That challenge is complicated by demographic trends, which are set to have a strongly negative impact on the Chinese economy within the next decade. Researchers anticipate that as a consequence of the country’s one-child policy, introduced in 1977, China will soon experience a sharp decline of its working-age population, leading to a substantial labor force bottleneck. A labor shortage is likely to mean climbing wages, threatening China’s cheap labor edge. The challenge is well described in a recent article published by the International Monetary Fund.

Replacing the Cheap Labor Strategy

Entrepreneurship is widely recognized as an important engine for economic growth: It contributes positively to economic development by fuelling job markets through the creation of new employment opportunities, by stimulating technological change through increased levels of innovation, and by enhancing the market environment through an intensification of market competition. Entrepreneurship and innovation have the potential to halt the contraction in China’ economic growth and to replace the country’s unsustainable comparative advantage of cheap labor over the long term. As former Chinese President Hu Jintao stressed in 2006, if China can transform its current growth strategy into one based on innovation and entrepreneurship, it could sustain its growth rates and secure a key role in the international world order.

Indeed, increasing levels of entrepreneurship in the Chinese private sector are likely to lead to technological innovation and productivity increases. This could prove particularly useful in offsetting the workforce bottleneck created by demographic trends. Greater innovation would also make China more competitive and less dependent on the knowledge and technology of traditional Western trading partners such as the EU and the U.S.

Transition

In fact, China has long been preparing the ground for entrepreneurial revolution. When Deng Xiaoping became chairman of the CPPCC National Committee in 1978, he ended China’s era of economic isolation. The country de-collectivized its agriculture, opened up its economy to foreign investors, and liberalized its markets. Investment spilled over from Hong Kong and Macau and pushed the Chinese economy into the international system. The establishment of China’s special economic zones (Shenzhen, Zhuhai, Shantou and Xianan) in 1980 attracted foreign direct investment and encourage private business. There was no shortage of Chinese entrepreneurs willing to take advantage of the new opportunities. According to the CEO of a copper refinery in Zhejiang Province, “the Chinese people really exceeded the government’s expectations.”

Starting in the 1980s, the Chinese government actively encouraged entrepreneurship across the country, by introducing the first patent law, allowing state-owned enterprises (SOEs) to go bankrupt, and creating a more investor-friendly environment for private entrepreneurs. Contrary to the popular belief that China’s miraculous economic growth over the past three decades has been exclusively driven by its SOEs, the emerging private sector has played a major role. Examples of China’s most successful entrepreneurs include Jack Ma (Alibaba), Ma Huateng (Tencent), Robin Li (Baidu), and Lei Jun (Xiaomi smartphones).

Although historically subject to the dictates of the central government, China’s entrepreneurs have been grantedincreasing self-determination and independence in recent years. The government has officially recognized the rising importance of entrepreneurship to China’s future economic success. Chinese Premier Li Keqiang, for instance, recently pleaded for entrepreneurship to be encouraged and for start-up businesses to be given support. More specifically, he called for support to be given to entrepreneurial students, a measure which could play a role in fighting youth unemployment in China. In recent years, China has also given higher priority to the development of the R&D and high-tech sector, investing a larger portion of its budget in R&D, increasing its high-tech output, and encouraging Chinese students to pursue engineering degrees.

Obstacles

Still, despite these recent steps, the Financial Times writes that “entrepreneurial education remains a relatively new concept and practice, particularly in China’s university sector.” More “entrepreneurship education is needed” and “the country’s business schools should adopt western tactics and have start-up labs.” The incompatibility of classical Confucian values which laid the foundation of the Chinese culture such as “obedience,” “respect for authority” and “emotional control” with the entrepreneurial spirit constitutes one of the key challenges in entrepreneurial education.

Moreover, there are still a number of obstacles for entrepreneurs that make private investments in China riskier than it is in most Western, high-income countries. Because of the “heavily state-based, government-run legal system” and the relatively high corruption levels in the Chinese court system, private entrepreneurs who lack Communist Party connection are still disadvantaged in many aspects compared to SOEs and politically well-connected private investors. For example, a survey of court proceedings in China reveals that small, private enterprises usually lose against large state firms. Also, starting a business is still relatively bureaucratic and time-consuming. It takes 38 days to complete all the required procedures in China, compared to an average of 5.7 days in OECD countries.

Another major challenge is the funding shortage in the private entrepreneurial sector. While the government has sought to give budding entrepreneurs access to funding in order to support Chinese start-up businesses, financing remains a key bottleneck. As the Beijing correspondent of Time magazine pointed out in a report released in 2009, credit standards are often too high to be met by small business. Moreover, state-owned banks often give preference to SOEs and partially state-backed companies when it comes to issuing commercial loans. There is, however, reason for optimism, with recent promises made by both former premier Wen Jiabao and current president Xi Jinping to facilitate access to credit for private entrepreneurs and to create a more investor-friendly lending environment.

In early 2006, Hu Jintao said that “China will be built into an innovative nation in about fifteen years.” Today, about 8.5 years later, China still has a long way to go before it could be called an innovative nation; its dependence on cheap labor remains critical to its economic success. Given the recent economic slowdown and expected demographic changes, the Chinese government is under pressure to accelerate the country’s transition to an entrepreneurial and innovation powerhouse. With both social stability and the Party’s political legitimacy are at stake, this could prove to be one of the government’s most pressing challenges over the next few years.

by Julia Ebner, a postgraduate student at Peking University and London School of Economics. Julia has previously written for The Diplomat.

Callum Connects

Benjamin Kwan, Co-Founder of TravelClef

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Making music to create a life for his family, Benjamin Kwan, started an online tuition portal and his music business grew from there.

What’s your story?
I am Benjamin and I’m the Co-Founder of TravelClef Group Pte Ltd, a travelling music school that conducts music classes in companies as well as team building with music programmes. We also run an online educational platform which matches private students to freelance music teachers. We also manufacture our own instruments. I started this company in 2011 when I was still a freshman at NUS, majoring in Mechanical Engineering.

I was born to a lower income family, my father drove a taxi and was the sole breadwinner to a family of 7. I have always dreamed of becoming rich so that I could lessen the burden placed on my father and give my family a good life.

After working really hard in my first semester at NUS, my results didn’t reflect the hard work and effort I put in. At the same time, I was left with just $42 in my bank account and it suddenly dawned on me that if I were to graduate with mediocre results, I would probably end up with a mediocre salary as well. I knew I had to do something to gain control of my future.

During that summer break, I read a book “Internet Riches” by Scott Fox and I knew that the only way I could ever start my own business with my last $42 would be to start an online business. That was how our online tuition portal started and after taking 4 days to learn Photoshop and website building on my own, I started the business.

What excites you most about your industry?
Music itself is a constant form of excitement to me as I have always been an avid lover of music. As one of the world’s first travelling music schools, we are always very eager and excited to find innovative ways to a very traditional business model of a music teaching.

What’s your connection to Asia?
I was born and raised in Singapore and I love the fact that despite our diversity in culture, there’s always a common language that we share, music.

Favourite city in Asia for business and why?
Hands down, SINGAPORE! Although we are currently in talks to expand to other regions within Asia, Singapore is the best place for business. I have had friends asking me if they should consider venturing into entrepreneurship in Singapore, my answer is always a big fat YES! There’s a low barrier of entry, and most importantly, the government is very supportive of entrepreneurship.

What’s the best piece of advice you ever received?
I have been blessed by many people and mentors who constantly give me great advice but right now, I would say the best piece of advice that I received would be from Dr Patrick Liew who said, “Work on the business, not in it.” This advice is constantly ringing in my head as I work towards scaling the business.

Who inspires you?
My dad. My dad has always been my inspiration in life, for the amount of sacrifices that he has made for the family and the love he has for us. He was the umbrella for all the storms that my family faced and we were always safe in his shelter. Although my dad passed away after a brief fight with colorectal cancer, the lessons that he imparted to me were very valuable as I build my own family and business.

What have you just learnt recently that blew you away?
You can not buy time, but you can spend money to save time! With this realisation, I was willing to allow myself to spend some money, in order to save more time. Like taking Grab/Uber to shuttle around instead of spending time travelling on public transport. While I spend more money on travelling, I save a lot more time! This doesn’t mean that I spend lavishly and extravagantly, I am still generally prudent with my money.

If you had your time again, what would you do differently?
I would have taken more time to spend with my family and especially my father. While it is important to focus our time to build our businesses, we should always try our best to allocate family time. Because as an entrepreneur, there is no such thing as “after I finish my work,” because our work is never finished. If our work finishes, the business is also finished. But our time with our family is always limited and no matter how much money and how many successes we achieve, we can never use it to trade back the time we have with our family.

How do you unwind?
I am a very simple man. I enjoy TV time with my wife and a simple dinner with my family and friends.

Favourite Asian destination for relaxation? Why?
Batam, it’s close to Singapore and there’s really nothing much to do except for massages and a relaxing resort life. If I travel to other countries for shopping or sightseeing, I am constantly thinking of business and how I can possibly expand to the country I am visiting. But while relaxing at the beach or at a massage, I tend to allow myself to drift into emptiness and just clear my mind of any thoughts.

Everyone in business should read this book:
Work The System, by Sam Carpenter. This book teaches entrepreneurs the importance of creating systems and how to leverage on systems to improve productivity and create more time.

Shameless plug for your business:
If you are looking for a team building programme that your colleagues will enjoy and your bosses will be happy with, you have to consider our programmes at TravelClef! While our programmes are guaranteed fun and engaging, it is also equipped with many team building deliverables and organizational skills.

How can people connect with you?
My email is [email protected] and I am very active on Facebook as well!
https://www.facebook.com/benjamin.christian.kwan

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Entrepreneurship

Before you enter a Startup or before you choose your founding team or new hires read, “Entering Startupland” by Jeff Bussgang

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Before you enter a Startup or before you choose your founding team or new hires read “Entering Startupland” by Jeff Bussgang.

Jeff knows how to spot and groom good culture, as the book session was held in Zestfinance a company he invested in and now, “The Best Workplaces for Women” and for “The Best Workplaces for Tech”, by Fortune.

These are the questions during the Book Launch.

How to know if a hire including the founder is Startup material?
Jeff says to watch for these qualities.

First, do the hires think like an owner?
Second, do the hires test the limits, to see how things can it be done better?
Are they problem solvers and are biased toward action?
Do they like managing uncertainty and being comfortable with uncertainty? And comfortable with rapid decision-making?
Are they comfortable with flexible enough to take in a series of undefined roles and task?

How do we know if we are simply too corporate to be startup?

Corporate mindsets more interested in going deep into a particular functional area? These corporate beings are more comfortable with clear and distinct lines of responsibility, control, and communication? They are more hesitant or unable to put in the extra effort because “it’s not my job”.

If you do still want to enter a startup despite the very small gains at the onset, Jeff offers a few key considerations on how to pick a right one.

He suggests you pick a city as each city has a different ecosystems stakeholders and funding sources and market strengths. You have to invest in the ecosystem and this is your due diligence. Understand it so you can find the best match when it arises.
Next, to pick a domain, research and solidify your understanding with every informational interview and discussion you begin. Then, pick a stage you are willing to enter at. They are usually 1)in the Jungle, 2) the Dirt Road or 3) the Highway. The Jungle has 1-50 staff and no clear path with distractions everywhere and very tough conditions. The Dirt Road gets clearer but is definitely bumpy and windy. Well the Highway speaks for itself, doesn’t it?

Finally Please – Pick a winner!

Ask people on the inside – the Venture Capitalists, the lawyers, the recruiters and evaluate the team quality like any venture capitalists would. Would you want to work for the team again and again? And is the startup working in a massive market? Is there a clear recurring business model?

After you have picked a winning team and product, how would you get in through the door?

You need to know that warm introductions have to be done. That’s the way to get their attention. Startups value relationships and people as they need social capital to grow. If you have little experience or seemingly irrelevant experience, go bearing a gift. Jeff shared a story of a young ambitious and bright candidate with no tech experience who went and did a thorough customer survey of the users of the startup she intended to work with. She came with point-of-view and presented her findings, and they found in her, what they needed at that stage. She became their Director of Growth. Go in with the philosophy of adding value-add you can get any job you want.

And as any true advisor would do, Jeff did not mince his words, when he reminded the audience that, “If you can’t get introduced you may not be resourceful enough to be in startup.”

Startupland is not a Traditional Career or Learning Cycles

Remember to see your career stage as a runs of 5 years, 8 or 10 – it is not a life long career. In Startup land consider each startup as a single career for you.

Douglas Merrill, founder of Zestfinance added from his hard-earned experience that retention is a challenge. Startup Leaders to keep your people, do help them with the quick learning cycles. Essentially from Jungle to Dirt road, the transition can be rapid and so each communication model that starts and exists, gets changed quickly. Every twelve months, the communication model will have no choice but to break down and you have to reinvent the communication model. Be ready as a founder and be ready as a member of the startup.

Another suggestion was to have no titles for first two years. So that everyone was hands-on and also able to move as one entity.

Effective Startupland Leaders paint a Vision of the Future yet unseen.

What I really enjoyed and resonated with as a coach and psychologist was how Douglas at the 10th hire thought very carefully what he was promising each of his new team member. He was reminded that startups die at their 10th and their 100th hires. He took some mindful down time and reflected. He then wrote a story for each person in his own team and literally wrote out what the company would look like and their individual part in it. In He writing each of the team members’ stories into his vision and giving each person this story, it was a powerful communication piece. He definitely increased the touch points and communication here is the effective startup’s leverage.

Douglas and Jeff both suggested transparency from the onset.

If you think like an owner and if you think of your founding team as problem solvers. Then getting transparent about financials with your team is probably a good idea. As a member of a startup, you should insist on knowing these things
Such skills and domain knowledge will be valuable. There is now historical evidence of people leaving startups and being a successful founder themselves because they were in the financial trenches in their initial startup. Think Paypal and Facebook Mafia.

What drives people to enter a startup?

The whole nature of work is changing. Many are ready to pay to learn. Daniel Pink’s book Drive showed how people are motivated by certain qualities like Mastery, Autonomy and Where your work fits into big picture. Startups do that naturally. There is a huge amount of passion and the quality of team today and as it grows then the quality of company changes.

The Progress principle is in place, why people love their startup jobs is not money rather are my contributions being valued? Do I see a path of progress and do I have autonomy over work and am I treated well?

Find out more about StartupLand on Amazon

And learn from Zestfinance

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