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Can emerging economies match-up to China's entrepreneurial might?

An analysis of what sets China apart from other emerging economies

· miscellaneous

{{{Kushal Sagar Prakash}}}

When Uber entered China in 2013, it had little idea on what it was going to face in the next few years. DiDi, China’s homegrown ride-hailing start-up, neither had the exposure to global markets nor the technological expertise to give Uber a tough fight. Fast forward to 2018 we see that DiDi not only holds about 80% of China’s ride-sharing market, but also started deploying cutting-edge technologies to help governments in several countries to ease their urban traffic congestion. The rise of DiDi is broadly reflective of the rise of Chinese start-ups and the ecosystem that supports entrepreneurship in the country.

But is the Chinese entrepreneurship story consistent with the stories of other emerging economies? Are countries like India, South Africa, Indonesia, Brazil, etc. able to compete with China in nurturing and promoting their startups? Under scrutiny, we find that the scenario is far from ideal in other emerging economies. Flipkart, the poster-child for entrepreneurship in India, an e-commerce giant and India’s first unicorn, was recently acquired by Walmart for $21 billion. This amount is considered paltry by many experts who think that given the right support, the company would have emerged as significant as some of its Chinese counterparts like Tencent and Alibaba that have valuations in the range of 200 to 400 billion USD. Sadly, the Flipkart story captures the dream of Indian entrepreneurs, of getting acquired by global players, in contrast to the Chinese dream of becoming one themselves.

The entrepreneurship ecosystems of other emerging economies are in the same or even more disadvantaged positions than India. The table below illustrates the rankings and scores of top emerging countries on two of the most significant indices for entrepreneurship—the VC & PE attractiveness Index and the Global Innovation Index.

Global rankings of emerging economies

Brazil –the largest market in Latin America—has difficult taxation regimes and a low tendency to realize deal opportunities. Poor corporate governance in the Philippines combined with low investor protection and entrepreneurial culture makes it a difficult market. Mexico, Russia, Indonesia and South Africa are unable to realize their potential due to their sub-optimal institutional quality (impacted by factors like corruption, crime, shadow economy and bureaucratic delay). India still needs to cut down on the administrative burden that startups face, along with improving labour regulations.

China, on the other hand, outperforms all these economies in all of the above drivers by a huge margin. This has made China the most attractive emerging market economy for investors around the world. It’s not surprising to see the country having the second highest number of unicorns (private companies with a valuation of over USD 1 billion) in the world. Other emerging countries lag far behind, as can be seen in the exhibit below. Notably, China is also the only emerging economy that ranks under 20 in the Global Innovation Index 2018.

Unicorns in emerging countries

So how does all of this play out on the ground? If we do a reality check, we find that India—a market that is the closest to China in its entrepreneurship potential—has a long way to go. China has started talking about the next phase of retail e-commerce and a broader convergence of online and offline retailing; India’s retail e-commerce share still remains below 3% of the total retail. While the number of bike-sharing companies in China has already topped 60 with about 20 million bikes on Chinese streets, successful start-ups like Ofo still find it difficult to crack the Indian market. Ofo entered India in January of 2018, only to shut down its operations after less than 6 months. And while China has managed to pull itself even ahead of the US in the mobile payments industry, India is still to majorly encourage its usage in locations beyond the metro cities. If one takes into consideration the spread of unicorns across industries in the last 8 years, the Chinese billion dollar firms prevail in more than 40 different sectors, as compared to only about 10 in case of Indian unicorns. If the Indian entrepreneurial ecosystem seems so immature in relative terms, it is only reasonable to assume that the other emerging economies have way more catching up to do.

Looking at the scenario, it is safe to deduce that the Chinese entrepreneurial ecosystem is at least half a decade ahead of its emerging market peers. In fact, Chinese startups are seen eloquently fueling startup ecosystems in other markets by investing heavily in them—it is highly unlikely to not find Chinese corporations supporting every significant startup in every emerging economy presently. Furthermore, with rapid advancements in technologies like Artificial Intelligence, Big Data, Blockchain, 3D printing, Nanotech and Biotech, etc., there is a general consensus in Beijing that China is soon going to overtake even the United States in development and deployment of new innovations.

The way China has galvanized entrepreneurship can provide significant lessons to other emerging economies. When it comes to matching up its might, even the advanced economies are feeling the heat.

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