China has leading tech ecosystems, but it needs to be more global

The topic of startups in the Asia-Pacific region attracts a lot of speculation. Though many countries in the region are producing interesting startups, China’s rise is the main contributor to speculation about shifting regional influence in the tech industry. Over time, though, it’s become apparent that Silicon Valley’s centrality to the industry is unlikely to change soon.

Though restrictions to the Chinese market have made it somewhat more secluded than it would otherwise be, it is emerging as a powerful player in the fastest growing sub-sectors of the tech industry. The latest Global Startup Ecosystem Report from Startup Genome identifies four top sectors: advanced manufacturing and robotics; agtech and new food; blockchain; and artificial intelligence, big data and analytics.

China’s “one country, two systems” also means it has a window to the global market through Hong Kong, which is quickly become a hotspot for fintech and healthtech startups.

One of China’s biggest weaknesses until recently had been venture capital. Over the few years, however, investment in the country has skyrocketed. The Asia-Pacific region accounted 42 percent of funding in 2017, reaching parity with the U.S. for the first time. Most of that growth unsurprisingly came from China. Funding isn’t shrinking, either. In 2017, VC investments hit $140 billion, a decade high.

(Source: Global Startup Ecosystem Report 2018/Startup Genome)

(Source: Global Startup Ecosystem Report 2018/Startup Genome)

One area the Asia-Pacific still lags significantly is by exit value. The U.S. still commands the most exit value for startups with Europe as a distant second. Over the last couple years, though, the Asia-Pacific has seen a sharp uptick in exit values, likely driven by Chinese IPOs. More large IPOs are expected out of China this year. Xiaomi recently filed to go public in Hong Kong and there are rumors that Didi Chuxing may go public this year, as well.

China is also rapidly growing its research and development spending. Shenzhen has the country’s highest R&D spending as a proportion of GDP at 4 percent. Much of this spending is related to advanced manufacturing and robotics, a sector for which Shenzhen has become known.

China is now producing more patents related to AI and blockchain than any other country, as well. Quality of patents matters significantly in the global marketplace, of course, but the sheer number of patents being filed in China shows immense interest and competition within the country in these sectors. Beijing is now a major player in the blockchain startup ecosystem.

Blockchain technology is also of interest to fintech companies. Shanghai and Hong Kong are both significant markets for fintech. Hong Kong alone now has more than 200 fintech companies.

The biggest challenge for China as a global innovation hub going forward might be its ability to integrate with the global ecosystem. Startup Genome uses Stockholm and Chicago as an example of how global connectedness can impact a startup market.

Stockholm has a smaller ecosystem than Chicago, but it produces scaleup firms at a higher rate. The report attributes this to the Swedish city’s closer ties to the top startup ecosystems around the world. Though Beijing and Shanghai both rank among the top ecosystems, they rank relatively low in global connectedness.

(Source: Global Startup Ecosystem Report 2018/Startup Genome)

Among all startup ecosystems, Tel Aviv beats out all others in both global market reach and global connectedness. Silicon Valley is second. Although the Valley is a much larger market with more resources, Israel has become an incredibly important and innovative startup market because of its connection to other global ecosystems.

This is why Hong Kong is such an important market for China. Hong Kong is able to attract international talent and capital in ways that the rest of China currently doesn’t allow. With a specialty in fintech, healthtech and consumer electronics, the city-state’s relatively small startup community could be poised for dramatic growth.

It’s already been growing for years. From 2009 to 2016, entrepreneurial activity among Hong Kong adults grew 206 percent, according to a Global Entrepreneurship Monitor report from the Chinese University of Hong Kong. Growth rates for entrepreneurial activity and investment is higher in Shenzhen, but the Mainland China city had a lot more catching up to do. Today, Shenzhen is China’s most advanced hardware market, and it’s easily accessible through its neighbor Hong Kong.

China will continue to play a large and growing role in the global startup ecosystem. Understanding what’s happening in China is crucial for any entrepreneur in 2018. Idiosyncrasies in the China market still make Hong Kong an important window to that world, but it’s now becoming a global player in its own right. It also has one advantage Mainland China markets will eventually need more of: global access.

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