China & Innovation - Part 1: How it got here and why it matters

FOREWORD

Taipei, October 2026

This article is republished as it first appeared on LinkedIn on 3 August 2018, written from Beijing, where I was then leading the Swedish Chamber of Commerce in China. It has been lightly copyedited for typos; the text is otherwise unchanged.

Beijing, 03 Aug. 2018

With temperatures hovering around 40°C, the Chinese summer is a good metaphor for how red-hot the innovation scene in the country has been for the past couple of years. Over the last decade or so, China has been very purposely transforming itself, from the proverbial factory floor of the world into one of the international innovation generators. Despite recent reports of a tightening of venture capital flows, the underlying changes towards a more technology-driven economy are deeply rooted and, all things being equal, are pulling the world's innovative center of gravity strongly towards Asia.

Yet, it is not a place that comes to mind when many startups think about international expansion. Right or wrong, it is of course a decision best left to the management teams and investors. But in discussions with many of them, it has become evident that the supporting information often is either outdated or incomplete. The purpose of this article is therefore not to serve as a recommendation. Rather, it should be considered an overview, along with some personal reflections, to fuel further discussion.

In the first part of this article, we will start by having a look at how China got here, and a general outline of the current situation. The second and third parts of the article will focus on some of the opportunities and challenges, along with a deeper dive into the different ecosystems of Beijing, Shanghai, Shenzhen and Hong Kong.

Did you say innovation scene?

Before we delve any further, let us rewind the tape a notch. For most of the first three decades after the "Reform and Opening-Up" began in 1978, the production model has, very simplistically, been the following: Foreign companies compete between themselves for the high-end market; R&D is done at home and production in China. Chinese companies imitate, and compete with other local companies for the lower- and mid-market segments.

Enter, in no particular order: the mass privatization of State-Owned Enterprises of the late 1990's, pushing 40.3 million people out of state-sector jobs between 1995 and 2002 alone (1); the simultaneous rise, and subsequent burst, of the dot-com bubble; wider access to the internet, and broader global exposure; the accession to the WTO in 2001, and associated liberalization of the service sector, as well as increased access to foreign capital (2). These factors, among others, provided fertile ground for the growth of the earliest tech giants, with Tencent founded in 1998 and Alibaba founded in 1999.

Today, these two are among the top ten most valuable companies in the world (and, arguably, the most valuable companies most people have never heard of). Along with others like JD.com (1998) and Baidu (2000), they laid the foundation of the country's nascent technology scene. This, in turn, had multiple consequences for the economy and job market, notably a need for these growing companies to invest their capital further, the need for them to surround themselves with a supporting ecosystem, and an increasingly tech-savvy workforce ready to move on to their own challenges.

It should at this point be noted that these companies - and they are not alone - certainly did benefit from an explicit policy of promoting National Champions in key strategic industries, as outlined in China's 10th (2001) and 11th (2006) Five-Year Plans. The subsequent barriers to entry faced by Foreign-Invested Enterprises gave domestic competition more room to develop, and gain from technology transfers (3,4,5).

This can roughly be seen as the first stage of development for technological innovation in China, in which the domestic market witnessed the rise of many local equivalents to internationally better known products and services, like Xiaomi (2010) and Didi (2012). Innovation during that phase was incremental, but not yet globally disruptive.

However, with the early technology giants now solidly established as investors (Alibaba Capital Partners in 2008, etc.), a public policy shift towards the service sector and higher value-added industries (such as the "Made in China 2025" policy), the rise of the tech-educated middle class, and the experience gathered in the previous phase, the stage was soon set for the next big step: home-grown innovation.

So where are we now?

During the past five years or so, the innovation scene in China has figuratively exploded. From current buzzword industries like e-Commerce, Artificial Intelligence and Blockchain, to FinTech, HealthTech, BioTech, and lately Automotive, China-based unicorns (pre-exit startups with a market capitalization exceeding USD 1 billion) went from representing 14% of the global count to 35% while the USA tumbled from 61% to 41%.

Crucially, innovation is no longer confined to copycats-with-a-China-twist. DJI is leading the world's market for commercial and recreational drones. Bike-sharing companies like Mobike and Ofo are poster children for this indigenous wave of new business models, having deeply affected how mobility is conceived in multi-million people cities. And the list goes on.

For better or worse, they also illustrate the willingness by the authorities to try new ideas first and think of improvements later, in a sort of lean manufacturing process at near-continental level. The same approach can be seen across a number of industries from autonomous vehicles to AI and others (this will be further discussed in pt. 2).

An important factor of medium term implications has been the strong commitment to the ecosystem by the largest players, Alibaba, Tencent, Baidu, etc. through Corporate VC, with a sizable participation in financing rounds across Asia. During Q2 2018, they were reported to have participated in more than 30% of fundings. Alongside them, of course, is a flurry of VC and Private Equity firms, Angel Investors, etc. both foreign and domestic, all together totaling USD 40 billion in investments over the course of 2017 (25% of the world total).

During the fourth quarter of 2017, China accounted for 5 of the 10 largest Venture Capital financings worldwide. During Q2 2018, startups in the country attracted 47% of the world's VC investments by value, surpassing North America (35%) for the first time in history, and including a gargantuan USD 14 billion round for Alibaba-affiliated Ant Financial. The single largest VC investment round ever.

Of course, valuations are not everything. In fact, there are signs that startups in China may well be overvalued at the moment (more on that later in part 2), and the importance of Initial Coin Offerings is at the time of writing still difficult to predict. But, more interesting than possible short-term fluctuations, are the long-term trends and implications.

The human capital formed in this ecosystem, for example, is unlikely to disappear, should a potential bubble burst, just like the innovative trend overall survived the dot-com burst 20 years ago. The industry has also boosted development across the wider Asian region, somewhat hedging local short-term variations and giving more momentum to the claim above: the world's innovative center of gravity is decidedly being pulled eastwards. And that is worth considering...

To part 2 for opportunities and challenges.