Venture Capital in China: Past, Present, and Future

Ruohong Zhao Economic Development in East Asia, Term paper Dr. Yifan Zhang May 1, 2006

Venture Capital in China, Past, Present, and Future

Introduction China’s stifled economy has experienced an unprecedented period of growth since the introduction of new economic policies at the Third Plenum of the 11th Congress of the Chinese Communist Party in 1978. The long-suppressed entrepreneurial zeal of the Chinese people was rekindled with the lifting of restriction on private business ownership. Later, the advent of Western-style venture capital funds provided budding Chinese entrepreneurs with sources of hitherto unavailable capital. Western investments, advice, and discipline, combined with Chinese entrepreneurialism, knowledge, and circumstances, have produced a blossoming venture capital industry that has produced some spectacular results. Both the Chinese government and international investors have focused on the potential of this industry: the former hoping to foster the industry into an steady driver of future economic growth, while the latter eyeing the potential for outsized returns. It would, however, be simplistic to assume that Western venture capital and the Chinese entrepreneurs it funds are the creation of the last two decades. In fact, today’s proliferation of venture capital investments and boom in entrepreneurial drive are similar

in many ways to the economic transformation that took place in China during the early part of the 20th century, when local entrepreneurs and investments in new technologies and manufacturing flourished. This paper seeks to offer a brief examination of the rise, current status, and future potential of the Western-style venture capital industry in China (and the modern entrepreneurs in whom it invests). Part one of the paper will lay out the historical context for the rise of modern entrepreneurialism and venture capital investing in China, focusing on the social, economic, and political environments that led to the

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