Featured faculty: Ma Xufei
Written by Pan Jingyi

Cross-border capital flows are no longer just about money. When multinational companies build factories or expand operations overseas, they bring along technology, management know-how, supply-chain connections, and access to international markets. In this case, inward foreign direct investment is often viewed as an engine for local growth and competitiveness.

However, many also view foreign investment cautiously, citing concerns about potential harm to domestic industries. Policymakers around the world have issued regulations to limit foreign investment, such as national security screenings, sector-specific prohibitions, capital requirements, and the like, to safeguard local interests.

For China, foreign investment is paramount. The Ministry of Commerce reported that 70,392 new foreign-invested firms were established last year, a 19 per cent year-on-year increase, while pledging more policy support. Meanwhile, Chinese companies are actively expanding abroad and venturing into advanced technologies. There is clear evidence that foreign capital can boost local businesses, but to what extent?

“Over the past two decades, provinces in China that attracted significant foreign direct investments have experienced a rapid increase in the establishment of local firms, while less foreign-invested regions continue to struggle,” says Ma Xufei, Professor of the Department of Management at the Chinese University of Hong Kong (CUHK) Business School. “Hence, we take a detailed approach to explore how foreign firms influence local entrepreneurs.”

Professor Ma’s new study, Beyond direct impact: Exploring inward FDI’s multifaceted effects on new venture creation, takes a close look at the conundrum. In collaboration with Luo Lingli and Lei Linan of Zhejiang University, as well as Yamanoi Junichi of Waseda University, Professor Ma finds that foreign investment brings opportunities for local startups, within certain limits.

The 48 per cent threshold

The team analyses data covering all Chinese-registered firms from 2013 to 2023, and discovers that more foreign investment isn’t always better. The effect depends on whether foreign firms and new local enterprises or startups operate in the same industry and region.

When foreign companies operate in the same industry and province as local firms, the benefits to local counterparts increase up to a point, and become detrimental as they move further, forming an inverted U-shaped trajectory. Such benefits peak when foreign firms account for 48 per cent of all the sales in a specific industry and province.

Below this threshold, local firms can learn technologies, managerial expertise and marketing insights from their foreign counterparts through knowledge transfer, or Professor Ma calls it spillover. “At this level, foreign firms still struggle to adapt to local markets, providing local entrepreneurs with novel opportunities to capitalise on,” he says.

“Supportive environments often have clearer rules, which make it easier and cheaper to do business, helping local entrepreneurs create and scale up their new ventures.”

Professor Ma Xufei

The pattern changes once foreign presence becomes too strong. As foreign investment rises, competition intensifies, and the space for new entrants narrows. At this stage, foreign firms’ domination drives up costs and attracts local talent with higher pay and benefits. “As a result, the influx of foreign competitors can discourage local startups and make it harder for them to survive,” he adds.

The gravity of local ecosystems

Entrepreneurial environments also shape the extent to which foreign investment helps or harms local businesses. Specifically, the study indicates that the more developed a region’s non-state economy, or how much a region is driven by private businesses and market forces rather than government control, the more it enhances the positive spillover effects.

A stronger non-state economy encourages cooperation between local and foreign firms and facilitates positive spillover. “Such supportive environments often have clearer rules, which make it easier and cheaper to do business, helping local entrepreneurs create and scale up their new ventures,” Professor Ma says.

However, there’s a caveat. Supportive non-state economy also allows foreign firms to expand more effectively and compete more aggressively, even dominating key resources such as top suppliers and skilled talent, thereby helping them surpass the 48 per cent threshold. If this happens, local startups may find it harder to survive.

Looking for a safe haven for local growth

So, how can local entrepreneurs make the best of inward foreign direct investment? The study finds that instead of competing head-to-head, local entrepreneurs can learn from foreign friends and apply the know-how to related industries or other regions with similar customers, products, or operational requirements.

For instance, if foreign automakers invest heavily in a region, local startups in related industries, such as auto parts manufacturing or electric vehicle batteries, can benefit by supplying these firms or adopting their production techniques. In regions with significant foreign investment in the technology sector, startups in software development or IT services may leverage the knowledge and customer base built by foreign firms.

“Local entrepreneurs can identify the related industries by analysing value chains and looking for suppliers, distributors and customers of foreign-invested industries. After that, they shall identify industries that share labour pools, technologies, or customer bases,” Professor Ma adds.

“By redirecting their target markets to related industries or neighbouring regions, local entrepreneurs can use what they learned with less direct competition from foreign firms.”

What can policymakers do?

While foreign investment can be a powerful engine for learning and growth, its benefits to local communities are not guaranteed. Therefore, Professor Ma suggests that local regulators implement targeted investment promotion, balanced competition policies, cluster development, and regular monitoring.

Attracting foreign firms in industries with high growth potential can be achieved by offering tax incentives, subsidies, or streamlined regulations. Regulators should also support local firms through subsidies, training, or access to financing to ensure they can coexist with foreign firms.

To facilitate spillover further, industrial clusters where foreign and local firms can collaborate would provide infrastructure and networking platforms. “The regulator should also continuously monitor foreign direct investment levels to ensure they do not exceed the threshold where competitive pressures outweigh learning opportunities, and adjust the policies accordingly,” he adds.

The findings can also be partially generalised to other countries, especially emerging markets, but with caution. Countries with diverse regions and significant economic disparities may experience dynamics similar to those of China, but countries with a weak non-state economy may observe different effects.

“The type of industries also matters,” says Professor Ma. “The presence of multinationals in industries like technology or manufacturing may generate effects comparable to those observed in China, but other sectors like agriculture or resource extraction might behave differently.”

Finally, heightened geopolitical tensions and restrictions imposed by certain countries on investment in China have hindered spillovers from foreign firms. In this regard, Professor Ma suggests that the government take proactive steps, such as encouraging local enterprises to fill the knowledge-transfer gap by providing research and development grants and innovation subsidies.

More investment in infrastructure, workforce skills, and industrial clusters would also help spread advanced technology more widely within the country.

“Local firms must also invest in building their own capabilities, for example, through training programmes or partnerships with domestic universities, and develop alliances with other domestic firms to compensate for the loss of foreign expertise and networks,” he adds. “They could also look for investment opportunities in neighbouring countries.”

The post How foreign investment shapes Chinese startups first appeared on China Business Knowledge.

The unprecedented socio-economic changes brought on by the COVID-19 pandemic have changed the business landscape around the world and in China. At the same time, pandemic-related challenges spurred the emergence of new technologies. Entrepreneurs actively responded to the rapid economic changes by coming up with innovative solutions and adaptations. For instance, robots delivering food to students’ dorms have been commercialized, and the check-out process is run by Artificial intelligence (A.I.). Additionally, A.I. can also be used to write stories and even computer programmes. These innovations facilitated contactless transactions and logistics, making life easier during and after the lockdowns.

It was also during 2022 when Generation Z (Gen Z), better known as “Post-’00s” in China, came of age and was ready to enter the workforce. Despite the record number of unemployment among the youth due to the economic turbulence, the Gen-Z also showed an unprecedented level of interest in starting their own business from scratch.

On Bilibili, a video platform popular among Gen-Z Chinese, entrepreneurship-related content racked up 830 million views in 2021, up 77% over the previous year. The majority of the viewers expressed enthusiasm for pursuing non-traditional careers or seeking alternatives to full-time employment.

In addition, continuous rural migrations to China’s urban centres over the years further fueled the rise of the startup culture, where risk-takers contributed to the rapid development of innovations in the marketplace.

With such drastic transformations in society, work and business landscape, the driving forces behind entrepreneurship have taken on a much different nature than those shaping entrepreneurship in the previous generations.

In this CUHK Business School Research White Paper, we will examine some of the questions surrounding the rise of a new brand of entrepreneurial culture in China. First of all, in light of the propensity of the Gen-Z to found startups without any prior experience working and while holding full-time jobs, what can they do to increase the chances of keeping their startups afloat and ensuring long-term success?

Once a startup company is established, what should entrepreneurs focus on to get it off the ground and expand its market reach and profitability? In view of the shifting political landscape and institutional changes in China over the years, entrepreneurs may need to adjust their strategies according to the current stage of institutional changes.

One of the most drastic transformations in Chinese society as a result of institutional change is the migration of the rural population to the country’s sprawling cities. Along with the migration came the rise of entrepreneurism in urban centres. A fascinating phenomenon emerged: Those who came from rural areas turned out to be among the most successful entrepreneurs in China’s history. What are the factors contributing to this? How can we leverage those factors to continue nurturing successful entrepreneurs?

Lastly, for the younger generation who grew up in business families found by first-generation entrepreneurs, what impact does the changing socio-economic landscape have on their career choices? As they tend to forge their own paths, family businesses can no longer expect the heirs to continue their legacy with certainty and must nurture them differently.

These are some of the aspects of entrepreneurship that we will seek to explore.

To find out more about a specific topic, click on the links below to navigate to the relevant chapter:

INTRODUCTION – A Handbook for the Modern Entrepreneur

PART I – Leveraging Multi-faceted Experience for Entrepreneurial Success

PART II – Entrepreneurs Picking the Right Strategy for Different Stages of Marketisation

PART III – How Urban Migration Helped Drive Entrepreneurship in China

PART IV – Entrepreneurial Career Paths of New Generations in Family-Owned Enterprises

CONCLUSION – Entrepreneurship in 2023 and Beyond

Show More White Papers

The post A handbook for the modern entrepreneur first appeared on China Business Knowledge.

By Lisa Kennedy

Andrew Grove, the CEO who built Intel into the world’s largest semi-conductor chip manufacturer by revenue, summed up his strategy for success succinctly: “There are two options: adapt or die.” A more nuanced version of such traditional business wisdom is provided by a study of the relationship between entrepreneurial strategy and institutional change in China that identifies appropriate strategies for success at different stages of a country’s transition from a planned economy to a market one.

The ground-breaking study examines the interactions between entrepreneurial strategy and institutional change in China over the decade from 1997 to 2007, and finds that relationship-based strategies – focused on building links with government – promote company growth in the early stage, while innovation-based approaches are more successful in the late stage.
It also sheds new light on the neglected intermediate stage of the economic transition, which is characterised by turbulence and uncertainty, and finds that university research and science parks can play a critical role in “cocooning” fledgling companies during this phase.

“At different stages of the marketisation process, entrepreneurs should adopt different strategies that fit the changing institutional environment.”

Prof. Willow Wu You

“We propose that entrepreneurs may temporarily leverage ‘cocoon institutions’ to buffer uncertainty in the broader institutional environment during this transitional stage,” says, Willow Wu You, Assistant Professor in the Department of Management at The Chinese University of Hong Kong (CUHK) Business School, and one of the authors of a new paper titled Entrepreneurial Strategies During Institutional Changes: Evidence from China’s Economic Transition.

Hallmarks of Marketisation

To test their theories, the research team, which also included Prof. Charles Eesley from Stanford University and Prof. Yang Delin from Tsinghua University, conducted a survey of thousands of alumni from Tsinghua University who graduated between 1947 and 2007. The alumni were asked if they had taken part in founding a new company or privatising a state-owned enterprise. A total of 254 qualifying companies were identified through the survey, which had an 11 percent response rate, with 2,966 replies. Survey information on the size of the companies was combined with data from China’s National Economic Research Institute (NERI) marketisation index to conduct a statistical analysis of the interaction between three entrepreneurial strategies and three institutional settings.

“Marketisation is characterised by the establishment of capital market structures, greater protection for intellectual property rights and other legal support for business, and less government intervention in the economy,” says Prof. Wu. “At different stages of the marketisation process, entrepreneurs should adopt different strategies that fit the changing institutional environment, because different environments require different core competencies to outperform competitors.”

Navigating Institutional Transition

The researchers argue that in the early stage of transition from a planned economy, the core competency for entrepreneurs is to build connections with government officials, which results in preferential treatment, such as prioritised resource allocation and early access to information. In this context, companies with relationship-based strategies tend to perform better. In the late stage, when more market-based institutional arrangements prevail, the core competency required of entrepreneurs is to innovate, so that they can differentiate their company from competitors. Such innovation confers competitive advantage and facilitates private investment.

“However, during the transition between these two stages, the rules become murkier and it is unclear whether companies should follow the old rules of the planned economy or the new ones of the market economy,” says Prof. Wu. “In this stage, the core competency becomes ambidexterity, which confers the ability to simultaneously experiment with new rules and follow old rules.”

While firms would ideally build dual competencies in both government relationships and innovation, in practice it is not possible to build core competencies in both areas, because their requirements are completely different in areas such as organisational structure, choice of products and technologies, and hiring and training employees.

The researchers propose that firms adopt a “cocoon-based” strategy during this intermediate stage to enable experimentation with the new rules – conducting innovation – while also obeying the old rules – building relationships with government. They define “cocoon institutions” as local institutions that anticipate the broader institutional change process by adding new arrangements of their own.

Quantitative Analysis

Drawing on this three-stage marketisation model, the study tested three distinct hypotheses: They theorised that in institutional environments characterised by a low level of marketisation, the ability of entrepreneurs to scale up their businesses would be related to the level of government ties they are able to forge. On the other hand, in institutional environments characterised by a high level of marketisation, this ability to scale up becomes tied to the businesses’ ability to innovate.

Finally, in institutional environments between these two stages of development, the researchers theorised that firm size would be related to their location in research or science parks, which are typically established to bridge the gap between private-sector technology with public-sector resources and help to “cocoon” or shield entrepreneurial firms from institutional uncertainty that can result from market transitions.

The study measured company size by looking at the number of employees in the latest fiscal year of operation, with revenue also used as a reference to ensure the results are robust. Companies were matched against the NERI index, which rates annual marketisation progress in all Chinese provinces, municipalities and autonomous regions between 1997 and 2007. The sample of 254 companies was split into three levels of marketisation – low, medium and high based on this.

Three indicators stood in for the distinct entrepreneurial strategies. For relationship-based strategies, the researchers looked at the level of government ties; for cocoon-based strategies, they looked at whether the company was located in a science park; and for innovation-based strategies, the number of patents held by a company when it was founded.

A Tapestry of Interactions

To illustrate the impact of the institutional environment on the effectiveness of entrepreneurial strategies, they graphed the variation in company size between the three strategy groups. They went on to split the sample using the three indicators to test the effects of the diverse strategies on company size in the different institutional environments. Statistical analysis showed that the results supported all three hypotheses. In early stage marketisation, one unit of increase in the level of government ties is associated with company size increasing by a factor of 1.283; in medium-stage marketisation, locating in a science park is associated with company size increasing by a factor of 6.938; and in late-stage marketisation, one additional patent is associated with company size increasing by a factor of 1.097. Further analysis that was conducted to examine the moderating effect of the changing institutional environment also supported all three hypotheses.

RELATED ARTICLE

Entrepreneurship and the Great Chinese Urban Migration

The researchers note that the study is among the first to empirically test the theory that, as the transition to a market economy progresses, the effect of government relations will decrease, while the effect of market-based capabilities will increase. Its novel concept that cocoon institutions such as science parks can provide protection from the uncertainty and turbulence of a country’s intermediate stage of market development also helps to resolve conflicting findings among previous studies on the effectiveness of science parks in promoting company growth. The study shows that the effect of science parks is contingent on the wider institutional environment.

Finally, the study raises the intriguing question of why entrepreneurs do not always take the strategy that is best adapted to the institutional environment and call for further empirical research in this area to build entrepreneurial capability. “It is actually difficult for entrepreneurs to make sense of the changing landscape,” says Prof. Wu. “And it is even more challenging to adopt an appropriate strategy that can leverage the opportunities created by institutional changes.”

The post How entrepreneurs can pick the right strategy first appeared on China Business Knowledge.

By Jaymee Ng, Principal Writer, China Business Knowledge@CUHK

Missing the Forest for the Trees

Her study “Missing the Forest for the Trees: Prior Entrepreneurial Experience, Role Identity, and Entrepreneurial Creativity” was co-conducted with Prof. Siran Zhan at the University of New South Wales College and Prof. Marilyn Ang Uy at Nanyang Technological University. Some existing research literature on entrepreneurship focus on the journey or personal qualities of successful entrepreneurs, while others studied the mindset and behaviours of these entrepreneurs. Prof. Hong and her co-authors combined the two factors and tackled the topic from a “person-by-situation” interaction approach.

This approach assumes entrepreneurs take on different roles, such as that of an inventor or businessperson, and these are triggered by different situations. For example, an entrepreneur would play the role of a salesman during a pitch meeting, but the same person would wear the inventor hat when dealing with product design in the lab. When the entrepreneur plays the role of a salesperson, their attention would be more focused on the profitability of the product and less on the product design, and vice versa. When too much attention is given to the tasks related to one role, entrepreneurs might overlook other equally important aspects, creating the so-called “missing the forest for the trees” effect.

“Experienced entrepreneurs tend to be capable of processing a greater amount of information in a given instance and see the big picture, which novices tend to neglect.”

Prof. Hong Ying-yi

“We expect experienced entrepreneurs to have developed a more holistic knowledge structure in which their inventor and businessperson roles are integrated. In contrast, novice entrepreneurs who lack prior entrepreneurial experience may see their two role identities as separate and disjointed,” Prof. Hong comments. “Thus, experienced entrepreneurs tend to be capable of processing a greater amount of information in a given instance and see the big picture, which novices tend to neglect.”

To test their theory, the researchers recruited 108 entrepreneurs who were in the process of starting a new venture to participate in an experiment. Among the participants, 40 were experienced entrepreneurs who had started businesses before. The participants were first asked to recall and write about their experience as an inventor or a businessperson. They were then told to submit ideas for a product or service to sell to university students. Their ideas were then evaluated in terms of how novel or commercially viable they were by experts with substantial experience in entrepreneurship.

The study found that entrepreneurs with less experience tend to produce fewer ideas that were deemed novel when asked to assume the role of a businessperson, whereas experienced entrepreneurs were able to maintain their ability to generate creative ideas even when they were in salesman mode. On the other hand, inexperienced entrepreneurs produced fewer ideas that were deemed by experts to be commercially viable when they assume the role of an inventor while experienced entrepreneurs did not display any reduction in performance.

The effect is even more pronounced when the entrepreneur is forced by circumstances to take up a specific role. For example, an entrepreneur under pressure to raise funds for their project must fulfil the role of a businessperson and put their inventor self aside. Prof. Hong says such a tension-ridden situation would likely to result in reducing creativity, especially among inexperienced entrepreneurs. The study results confirmed this conjecture, with the business ideas of experienced entrepreneurs being 12.7 percent more creative and 7.7 percent more profitable than inexperienced entrepreneurs when they were placed in that situation.

Interestingly, experienced entrepreneurs were 9.4 percent less innovative than inexperienced entrepreneurs when there was no tension between the two roles. The study explained that new entrepreneurs might be better at learning at being an inventor and thus were able to produce more innovative ideas. However, overall experienced entrepreneurs were able to perform more consistently regardless of the situation.

The post How does experience matter for entrepreneurs? first appeared on China Business Knowledge.