In recent years, China has achieved record breaking economic development while the state has governed which companies can and cannot operate within the country. In the technology sector, domestic firms like Alibaba, Lenovo, and Tencent have been allowed to flourished, while Google, Facebook, and Twitter have been kept out. Things, however, are starting to change.
China’s economic growth, which has been the envy of the world, has stagnated. Last year, for the first time ever, the Chinese Communist Party (CCP) admitted that it had failed to reach its target GDP growth rate goal. The 7.5% number it reported fell short of the 8% that is considered by many necessary in order to sustain the country’s growing and industrializing population, which will include 8 million new college graduates this upcoming year. Moreover, electricity consumption, considered by many to be an even more accurate illustration of growth because it is harder to tamper with than GDP, increased by only 5.1%.
The Iron Rice Bowl system, where the public sector supports guaranteed job security and benefits until retirement, is moving towards becoming a relic of the past, as the manufacturing base that fueled the country over the last thirty years has become unsustainable. “The current Chinese economy is in serious recession,” says Se Yan, an Associate Professor of Applied Economics at Peking University’s Guanghua School of Management. The Chinese Premier Li Keqiang, meanwhile, opts for the term “new normal.”
Whatever it might be called, China is facing an unfamiliar period of economic turbulence, at least in the modern era. Beijing has responded by emphasizing what has historically been considered a weakness: innovation. Li Keqiang used the word twelve times at the World’s Economic Forum Meeting in Davos this past January, where he described a specific vision for China’s future: “To foster a new engine of growth, we will encourage mass entrepreneurship and innovation…[they are], in our eyes, a ‘gold mine’ that provides constant source of creativity and wealth.”
Se Yan, the Peking University professor, classifies innovation as belonging to one of two types. “Maker innovation” is practiced chiefly in the U.S. “If it changes the way people live, it’s maker innovation,” says Yan, offering the most concise definition possible. Then there is “process innovation,” which perfects existing production processes and has fueled economic growth in Germany and Japan. With a move away from manufacturing, and a rising population of college graduates, Yan believes that innovation of the “maker” kind is needed if China is to realize its full potential.
The Innoway project, located in Beijing’s Haidian district, is one such initiative aimed at making China more technologically innovative. A joint venture between the Zhongguancun Science Park and a privately held asset management group, together they have purchased an alleyway that was previously lined with bookstores and converted the area into incubator space. The goal is to become the center of China’s emerging start-up culture.
According to the most recent data from the China Internet Network Information Report, the country has nearly 650 million internet users. Around 560 million of them connect to the Internet through their smartphones. The opportunity in front of Innoway is clearly rich, but the question of how the group plans to capture it is still being worked out.
Many of the incubators in Innoway have the same model; that is, they are actually coffee shops. Member companies gain access to Wi-Fi, the camaraderie of other start-ups, and advice from the investors and sponsored events that are affiliated with the cafes, all for the price of a cup of coffee. Almost a year old (it opened officially last June), around 20% of the early stage companies that have frequented Innoway’s cafes have gone on to raise funding, according to the incubator’s PR officials.
It remains to be seen whether an organic approach can produce the “unicorn companies” that will fuel new growth within the Chinese economy. But in a place where people must use VPNs to connect to American websites, and euphemisms to search for information related 1989’s Tiananmen Square Incident, perhaps a lack of structure is exactly what the country’s technology sector needs.