Is Chinese Push for Innovation Just a New Economic Bubble?

The Chinese government has put a heavy focus on innovation as a means of driving its economy and improving its recent, flagging performance. Local governments have heard the call and have rushed to erect new infrastructure and buildings designed to support this movement.

Unfortunately, there appears to be a big problem with this plan as an economic driver: businesses are not on board and nobody is making use of these newly built spaces and services.

The Chinese government has put a heavy focus on innovation as a means of driving its economy and improving its recent, flagging performance. Local governments have heard the call and have rushed to erect new infrastructure and buildings designed to support this movement.

Unfortunately, there appears to be a big problem with this plan as an economic driver: businesses are not on board and nobody is making use of these newly built spaces and services.

China has been notorious for its over-adjustments and excessive push in promising new directions. It is a uniquely Chinese tendency to flock behind programs suggested by senior leadership with a fanatical zeal that usually results in wild production swings, short-term gains, and long-term problems. Previous examples of such programs that resulted in such bubbles over the last several years have included housing, steel, and theme parks, to name but a few.

According to Shi Jiqiang, a Partner at Leilai Management, a startup management firm near Beijing, “The risk of a bubble is extremely large…This is both a test for [the] government and for the managers of startup spaces…there aren’t enough entrepreneurs.”

For its part, the Chinese government in Beijing does not see prior bubbles as failures at all. In fact, it considers each a great success for its time, and plans to pursue a similar approach with innovation. It has encouraged students and migrant workers to create their own technology-based startups in an effort to shift the economy’s focus away from production and into the potentially much more profitable technology and services sectors.

Nearly 80% of the capital for the infrastructure and building projects designed to support this push has come from the government, however. This has raised a number of red flags for outside analysts, who are concerned this could create a huge drag on China’s financial resources.

“In any sort of market, you want the experts making the decisions, not some technocrat or bureaucrat,” according to William Bao Bean, Investment Partner at venture capital fund SOSV, a firm specialized in startup investments. “You don’t tend to see too many successful companies come out of a government-based decision-making process.”

The sentiment seems to be mirrored by people on the street, as well. “I wouldn’t consider becoming an entrepreneur. You need money to do that. No, for someone like me, I don’t really have many options,” said Liu Haiyang. Haiyang runs a shop selling bathroom fittings in a space next to one of the recently constructed “innovation centers” created by the government.

Most venture capitalists agree that startups tend to gravitate toward, and experience the greatest success, in locations where successful innovation centers already exist. Simply creating locations dubbed “innovation centers” by the government fails to produce the requisite mix of talent, expertise, market, and culture necessary to prompt success in this sort of venture.

Moreover, cultural influences, like social pressure to find “dependable” work has caused many to shun the idea of moving into the uncertain realm of technology startups.

As a result, many analysts fear that China is simply pushing for growth too hard in a direction it is not yet prepared to go. Until deeper roots have grown for this sort of economic transformation, many fear it will simply lead to yet another bubble, which, when it pops, could have negative implications for the economies dependent on China.