- April 26, 2022 Economy, Technology
Are Private Firms Aligned with Beijing on Technology Goals?
Beijing has made no secret of its ambition to make China a global technology leader, and it has the plans and white papers to back it. While many have fixated on high-profile plans like “Made in China 2025,”at the end of the day, those plans have to be put into practice.
Yet those on the frontlines of implementation likely do not share the same ideas as Beijing. This is because much of the implementation will have to be led by private businesses and entrepreneurs, whose interests appear misaligned with the long-term vision of mandarins in Beijing.
A short analysis of the backgrounds and pedigrees of private tech firm owners reveals notable divergences in how they might think about technology development and where they might want to take their companies.
Focusing on the 417 firms listed on the Science and Technology Innovation Board (STAR), 85% of which are privately owned, can yield some insights on where the cleavages are in Beijing’s technology pursuits.
That’s because the STAR board was established in 2019 mainly as a response to the intensification of US-China tech competition. Beijing has made it clear that only firms that fit its industrial policy objectives and have demonstrated research and development achievements and technological capabilities can be listed on this relatively exclusive board.
Although far from comprehensive, this short study of STAR firm owners reveals that as a cohort, they are more apolitical than other private firm owners and they are not well trained in technical areas but are basically profit-driven entrepreneurs. This implies that they neither have the political capital nor the patience and expertise to realize Beijing’s espoused goal of advancing the technological frontier.
STAR Firm Owners: Less Political and Not Technologists
Since Beijing seems to have high hopes for STAR firms to succeed, it is perhaps somewhat surprising that STAR firm owners’ political connections are relatively weak. (Political connection is defined here as meeting at least one of the following criterion: participation in the National People’s Congress, Party membership, current or past government affiliation, and participation in various state-level talent programs.)
Only a quarter of STAR firm owners have such political connections, lower than the 32% average for non-STAR listed private firms. Other than participation in talent programs, STAR owners underperform in all three categories relative to other private firms (see Figure 1).
Figure 1. STAR Firm Owners Have Lower Levels of Political ConnectionsSource: Wind and MacroPolo.
As for their education pedigree, STAR firm owners are certainly highly educated, with two-thirds having obtained a graduate degree. Except most of these degrees have nothing to do with technology. Less than one-third of STAR firm owners have both graduate degrees and R&D experience in a relevant high-tech sector (see Figure 2). Some of the owners were property moguls who entered the tech sector via acquiring STAR firms. In other words, many of these owners are businesspeople rather than technologists
Figure 2. Only 1/3 of STAR Firm Owners Are Technically TechnologistsSource: Wind and MacroPolo.
Entrepreneurs vs. Mandarins
These attributes suggest that the typical STAR firm owner is someone more inclined toward chasing short-term profits than chasing the technological frontier. And this misalignment of goals will likely pose problems for a Beijing that’s gunning for moonshots.
This is because Beijing’s technology goals require long-term investments and tolerating uncertain risks at the expense of immediate returns. Take semiconductors as an example. Knowing that its chip industry is generations behind the global frontier and now cut off from access to US technology, Beijing has poured much capital behind developing chips in a bid to catch-up.
Yet the Semiconductor Manufacturing International Corporation (SMIC), China’s most advanced chip fabrication company, currently earns almost 100% of its revenue from the so-called “mature process” segment—that is, chips that are a few generations behind a global leader like TSMC. The company is finding it difficult to simply forfeit its most profitable business in pursuit of advanced chips that require multi-year investments, which, in fact, will need to be subsidized by the very profits it earns from the existing chip business.
If this struggle to balance the here and now with meeting Beijing’s mandates exists in a state-owned firm like SMIC, similar tensions surely exist in private STAR firms that are working with much less financial and political capital.
It would appear that STAR firms may not be the silver bullet that will score all of Beijing’s technology goals. At a minimum, commercial considerations of these firms will complicate Beijing’s pursuit, and “catching up” will not happen according to its aggressive timelines.
The Chinese government will certainly do what it can to accelerate the timeline and support these firms, including giving STAR firm owners more political capital. It will be difficult, however, to get private firms to value national security more than profits as an end goal. The fundamental tension between industrial policy and profit stands, and without the latter, the former is a pipe dream.
Houze Song is a fellow at MacroPolo. You can find his work on the economy, local finance, and other topics here.
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