Venture Capital in China Part 2


Another area of concern is the lack of appropriate tax incentive policy crucial to encouraging new business investment. Most Chinese based VC type firms pay exorbitant tax rates which discourages their operation thereby limiting new business investment.
            The China economy is structured differently in many ways and they currently do not have the equivalent of a US NASDAQ system. VC backed firms must meet strict requirements in order to function on the current local stock market. Further, there is no way for institutional investors to trade shares in the existing public markets in China.  A domestic exit option for venture-funded companies does not exist which poses a critically difficult challenge for investment vehicles.
            On a less technical note there are cultural differences to be acknowledged as well as accepted norms that are established in western business transactions. It is has been reported that ethical failings or corruption occur in situations where more due diligence should have been performed. Essentially, anyone doing business in unfamiliar territory should take care to guard themselves and take extra precautions to protect against inaccurate representations.
            The next prominent issue at hand is how investors keep what they invest in. This is the intellectual property problem is being faced in China. Currently very weak regulations and enforcement exist in regards to intellectual property in China which raises the risk involved in investment in certain areas. The area of software has yielded very few investments as the regulatory environment does not exist to protect the product. As mentioned previously, the lack of venture capital law further exposes any new I.P. created to immediate piracy and devaluation of investment. Again, China’s economic environment is evolving and efforts are being made to alleviate these shortcomings. In 1994 China formally established the Intellectual Property Executive Conference (IPEC) which delegated committees in all 30 provinces to initiate nationwide action to protect intellectual property rights. While there is a long way for China to go progress is being made.
            Regarding venture capital specifically China poses a problem as the existing government regulations entail bureaucratic hurdles of listing on the Chinese stock exchange as well as constraints of having a Chinese-based venture capital fund. To avoid this issue completely VC firms find it necessary to have foreign-based investment entities that operate in China but are managed elsewhere. This allows them the ability to transfer funding but bypassing the government approval process.
            It is critical to avoid attempting an all inclusive opinion of the reality of China as a venture capital investment target. It is a complex scenario as is any economic environment in the global arena. However, certain basic tenants hold true. Just as the United States VC industry experiences boom and bust dynamics with some periods of equilibrium so will the Chinese market. It is also necessary for China as a free market socialist economy (a hybrid market/government system never attempted before) to be allowed to mature as a larger system before predicting the future of one type of investment vehicle. Undoubtedly the potential for success will continue to outweigh the pitfalls of foreign investment in China. The success of firms will be partially dependent upon creating stable, long-term investment and investment vehicles that would be just successful in more mature economies and should do so in China. Just as in other scenarios investors seeking to extract immediate profits will likely not be accommodated. However, firms who seek legitimate opportunities within proven markets and business models can leverage the size and resource dynamism that China clearly offers.
Bibliography

US Department of State, 2005 INVESTMENT CLIMATE STATEMENT – CHINA, 2005

Ruichin, D, CHINA'S INTELLECTUAL PROPERTY RIGHTS PROTECTION TOWARDS THE 21ST CENTURY, Duke University, 2003, pg 215

John de Yonge, Russ Garland, Brian Gormley, Stephen Harmston, Michelle Jeffers,  The 2006 Venture Capital Industry Report, Ernst & Young, 2006

Forer, G, Renewal and New Frontiers, Global Private Equity: Venture Capital Insights Report 2004–2005, Ernst & Young, 2006

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