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China Investment

The popularity of venture capital funding for various new technologies and new industries is on the rise all over the world. In the last two decades venture capital funds have increasingly focused on the emerging economies of Asia and Latin America. Among the developing nations, China has been leading in terms of venture capital investments. China investment makes a very attractive proposition for the venture capital investors because of its high economic growth rates and major economic reforms carried out over the last few years. 

Predominance of International VC Funds for China Investment

Till now the majority of VC investments in China have been done by global VC funds. Basically the internal rules and regulations in China regarding raising public money are extremely strict. Many new business ventures and small and mid-sized companies are left with very few options of fund raising in such a strict regulatory domestic environment. As a result, there is sufficient opportunity for global VC funds to make China investments. In the early 1990s a number of global VC funds were established in joint ventures with State Owned Enterprises (SOE) in China. This helped to reduce the transactional costs in the country. However, as the economic reforms progressed and the rules for investment in China were liberalized, the global VC funds were allowed to establish and operated independently in the country. 

Shift in China Investment Strategy of VC Funds

Among the key changes in the venture capital investments in China has been a transition of major VC investors from investing in state owned enterprises to investing in private sector organizations. Till the early 1990s more than 90 percent of international venture capital China investments were in the state owned enterprises. This happened because state owned enterprises have privileged access to resources and support from the Chinese government at every step. This put them at a huge advantage for doing business in China. 

However, within the next few years, towards the turn of the century, the scenario changed drastically, and VCs moved over their China investments to the private sector companies and start-ups. This became possible when the economic reforms in China lifted restrictions from the private sector and allowed the private sector firms to compete freely against the state owned enterprises. 

Typical Profile of China Investments of VC Funds

Until the early 1990s the global VC funds were predominantly focused on low-tech industries that were booming in China. But this situation changed quickly enough with the sudden rise in global demand for information technology related software and services. Therefore, by the turn of the 21st century, nearly 90 percent of the IT and IT enabled services firms were receiving venture capital China investment. 

IT based companies grew dramatically in terms of their valuations on the NASDAQ. It fuelled the interest of the VC funds to provide backing to new start-ups in this industry. At the same time, the government of China began to promote high technology and IT based businesses aggressively. These factors led to the major shift of the investors from low-tech manufacturing industries to IT based service industries. 

Analysis of VC-backed China Investments

In China, the government plays a key role in determining the economic environment for venture capital investments. Despite consistent economic reforms and liberalization in China over the past few decades, the fact remains that the strict investment regulations in the country still continue to hamper the free flow of venture capital China investment. Among the various government imposed limitations on the VC funds, perhaps the most serious is that global VC funds are not allowed to list themselves on the domestic stock exchanges in China. 

However, despite the obvious limitations of operating and investing in the country, the venture capital China investments have continued to grow unabated since the 1990s. These investments have resulted in some hugely profitable opportunities for the VC funds as well as provided support to a large number of new businesses in China. 

The successful experience of venture capitalists with China investments demonstrates that the same success can be replicated in other Asian emerging economies as well.

Government Policies towards Global VC Investments in China

The Chinese government has traditionally not permitted private sector businesses to raise money through other private individuals. VC funds in China that would like to make investments in China are forced to raise their funds from institutional investors abroad. It means, essentially only global VC funds can operate in China that are established abroad and that are able to carry out offshore funding operations. 

New start-up firms and entrepreneurs have a preference for global VC funds to finance their projects compared to raising money from state owned enterprise funds in China. This is due to the reputation of the global VC funds of professional attitude and superior services. At the same time, global VC investors bring along international expertise and management experience that helps the new start-up to streamline its business operations.