China’s entrepreneurial landscape according to Ernst & Young

China’s entrepreneurial landscape is integral to the country’s growth and economic success — 75% of new jobs each year and 68% of exports come from entrepreneurial ventures, says The EY G20 Entrepreneurship Barometer 2013 report.

The in-depth report which surveyed 1500 entrepreneurs in twenty countries worldwide, across both the emerging and developed economies, was released in August 2013 and concludes that not only is China an “export giant” but it is also full of opportunities for local entrepreneurs.

The report benchmarked each country in terms of its “support for entrepreneurs” and China placed in the third quartile, the same as Brazil, but below South Africa.

The export-heavy economy has seen huge improvement in access to funding, encouraging both new business and the expansion of existing businesses and education has improved rapidly, enabling China to be able to shift from the role of “manufacturer” to one of “innovator.”

This shift has seen a huge increase in the number of patents granted in China, with only the US, Germany and Japan ranked ahead of China in the number of patents granted each year and the new-look government has granted the private sector more access, and cut back on bureaucracy.

There are five metrics in the report:

• Access to funding
• Entrepreneurship culture
• Tax and regulation
• Education and training
• Coordinated support

China scored below average in every sphere except for access to funding.

As the domestic market continues to grow and urbanisation quickens, there will be opportunities for entrepreneurs. Currently though, regulation and the dominance of state-owned enterprises which get favourable treatment from the government stifles entrepreneurship.

Below is a summary of the full report on China:

Access to funding (China ranking three of 20)

China’s performance in access to funding for entrepreneurs has been “very good.” Overall it ranks third mostly thanks to the availability of bank credit to the private sector — which is “unusually high for a rapid-growth economy at 120% of GDP.” The flipside of this is that most bank lending goes to state-owned enterprises ahead of smaller ventures.

However, there is strong access to private equity and venture capital, ranked 3.5 — on a scale from 1.0 (impossible) to 7.0 (very easy) — well above the G20 average f 3.0.

When it comes to expansion capital China leads the way in the amount of investment raised in IPOs between 2009 to 2011. This was halted in 2013 though, after the Chinese Securities Regulatory Commission suspended new listings on Chinese exchanges in October 2012.

China’s entrepreneurial scene would benefit hugely if the banks provided more financing to small businesses. Chinese entrepreneurs said that better access to bank funding would “do more to improve long-term growth of entrepreneurship in the country than access to any other credit instrument.”

However there is a push for startup incubators for overseas-educated entrepreneurs. China is specifically building 150 startup incubators for students returning from studying overseas. These incubators will provide startup support services and “facilitate information sharing about human resources, projects, policies and funding. These incubators have worked with around 8 000 enterprises and 20 000 students since 2011.

Entrepreneurship Culture (China ranking 18 of 20)

“Chinese culture holds entrepreneurs in high esteem” — 74% of those surveyed agree that Chinese culture encourages entrepreneurship. This is well above the G20 average of 57%. Conversely, despite China celebrating self-made wealth, there are high penalties (costs) for business failure with China ranking the highest there of the G20, alongside Italy and Saudi Arabia.

Tax and Regulation (China ranking 16 of 20)

While there is still a lot of bureaucracy when setting up (36 days) and running (351 hours spent on tax issues) a new venture, 40% of local entrepreneurs surveyed feel that business regulations have improved in the past three years, almost twice the G20 average of 21%.

Despite the progress made, China is only behind Brazil and Indonesia in the amount of days its takes to start a business. There are also high labour-related costs, such as the cost of laying off a worker, which accounts for 91 weeks worth of wages (fourth highest in the G20), compared to the G20 average of 50 weeks worth of wages. Labour taxes are more than twice the G20 average.

Education and Training (China ranking 18 of 20)

China “scores poorly” on most of the key benchmarks of educational performance but “the situation is improving rapidly.” At a macro level, China faces major educational challenges, but with a 1.3-billion strong population, this is to be expected.

The report suggests that in the short term, entrepreneurship will rely on “smaller pockets of high educational attainment and by efforts to harness the benefits of students returning from overseas”.

In the longer term though, China needs to increase secondary-level participation. 56% of entrepreneurs in China did say that entrepreneurship education programmes at universities are improving.

Coordinated support (China ranking six of 20)

42% of China’s respondents say that access to government startup programmes has improved in the past three years which is considerably higher than the G20 average of 33%.

The barometer is not a measure of the level of support that entrepreneurs can draw on, but it suggests that China is making strong progress at building the kind of support infrastructure that will help entrepreneurs get their businesses off the ground. In terms of coordinated support for entrepreneurs there were three components analysed: mentors, networks and incubators.

Respondents were most positive on the development of business incubators — 52% saying that access to such services had improved in the last three years. Access to informal networks seems to be improving too, such as clubs and associations.

Image via Romain Guy