Here’s Why Chinese Local Governments Might Be the World’s Largest Tech Incubators

(and the false equivalence of Chinese tech giants to Communists)

Journalist: Teresa Wang | Editor: April Cho

The Wall Street Journal published an article “disclosing” a tie between Alibaba CEO Jack Ma and the Communist Party. The article boasts a sensationalistic title: “It’s Official, China’s E-Commerce King is a Communist.” According to the article, this news “took many by surprise.” However, the title is sensationalistic at most and reductive at best. Here’s why.

Whether in the US or in China, no tech company is apolitical. Company operations are reflective of the company’s underlying philosophical ideologies. (Here’s looking at you Facebook and Google). The key difference between China and America is the extent to which and methods by which these companies interact with the government.

This article tries to explain — in simple terms — the muddy nature of the relationship between tech companies and Chinese governments (and perhaps even debunk the false equivalence of public-private cooperations through red scare journalistic tactics).

Functionally, Chinese local governments are arguably the country’s largest “tech incubators” and VCs

Chinese governments serve a very different function in the entrepreneurial ecosystem. Local governments are primarily driven by the need to raise local financing. To match this need, local governments set up industrial zones that attract companies by providing resources such as capital, land and labor. In return, the companies provide job opportunities, tax revenue and spur economic growth.

For example, the Beijing government pushes IT initiatives and is home to Zong Guan Cun, the government-sponsored, Chinese Silicon Valley. Zong Guan Cun bred almost 50% of Chinese tech “unicorns,” including Meituan and DiDi.

Image Source: https://www.weforum.org/agenda/2017/10/map-tech-titans-unicorns-china-united-states/

Local governments and corporations, much like clownfish and sea anemones, have developed a co-dependent relationship

Chinese local governments take a more proactive role in supporting their companies by leading the direction of R&D research as well as by providing ample resources to their affiliate corporations. This is contrary to the U.S. government’s (relatively more) laissez-faire strategy which protects bottom-lines for business and encourages competition among firms by creating a better regulatory ecosystem.

The success of a Chinese tech corporation is contingent upon the resources provided by the local government. Due to this uniquely codependent relationship, the success of the local industry is directly tied to and reflects the “success” of the local government.

However, before deciding which firms and industries to support, local governments allow promising industry trends to emerge on their own in a dynamic market. First, grassroots startups compete against each other. Then the Chinese government forms regulations that support a promising new trend. Finally, a few companies are backed by the government, and these companies carry the whole industry forward.

Take the blockchain industry for example. Despite tightening regulations on cryptocurrency by the end of 2017, the underlying blockchain technology continues to be supported by the Chinese government. Case in point, the Beijing City government and multiple local governments set up fintech and blockchain industrial parks to funnel funds and resources into specific, high-performance blockchain companies.

This sort of selective resource allocation and favorable regulatory environment for projects at the local level are directed by a national agenda doing the same on a grander scale.

China’s central bank, the People’s Bank of China, is one of the world’s largest patent holders in blockchain technology. The government is also actively collaborating with tech giant Alibaba on its various blockchain applications.This method of development exemplifies the connection between the Chinese national government, local governments and corporations. In short, the central government proposes a general framework, while local governments implement the framework by setting up industrial parks, providing funding and resources for select companies.

This idea of closely monitored and allocated resources should not be confused with the artificial elimination of competition. Local governments compete against each other to source the most profitable company by dishing out subsidies, lands and tax benefits. On the other hand, firms also compete in the market to be profitable and to acquire prized resources from the government

Strong government support incites fierce competition not only among local governments to demonstrate successful policy, but also among tech firms scrambling for this money.The Chinese local government’s direct investment of resources, capital and land result in a partnership where it is difficult to draw the line between state-owned companies and privately-owned enterprises. The Chinese government at the national and local levels have strong direct levers to incentivize corporate behavior without owning them directly.

While in America these regulatory frameworks are more reactive to the organic development of key industries, the Chinese government takes a proactive approach in setting and pushing forward key industrial agendas.

In light of these considerations, whether the Chinese government has equity ownership in Huawei or whether Jack Ma is a member in the Communist Party is not the key question. It is easy to blur the bigger picture when focusing on one small part. In sum, the Chinese government is a complex combination of rule maker, research institute, incubator and investor, and monolithically tying “Communism” to “China’s e-commerce king” reduces this complexity to little more than clickbait.

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