In 2001, 88% of global venture capital was invested in U.S firms. By 2019, China accounted for 38% of the worldwide total, while the U.S. accounted for 42%, even though the level of investment in the U.S. increased throughout the period. China’s sharp rise in the industry is unprecedented for a developing country. China’s venture-backed firms have often focused on solving different problems than U.S. firms, such as navigating difficult last mile logistics, adapting to rapidly changing regulatory regimes, or educating millions of consumers to use financial technology. Many of these business problems are also faced by other developing countries. How has the dramatic rise of China’s venture capital industry influenced entrepreneurship in other developing countries? 

The data. The researchers used the Pitchbook database to compile data on over 169,000 venture deals from 2000 to 2019 across 88,267 firms in 152 countries. The data describe each company and information about each financing round. They then compare trends in emerging market entrepreneurialism before and after the sharp rise of China’s domestic venture capital industry in the 2010s. They use machine learning tools to categorize companies into 266 sectors, grouped into 15 broader macro-sectors, such as education technology and financial technology, to assess which sectors drive changes in emerging market entrepreneurialism during this period. Finally, they assess the broader impacts of entrepreneurial growth in emerging markets on local innovation and socioeconomic wellbeing.

Rise of the venture capital industry in China drives entrepreneurship in other emerging markets. The analysis finds that as China’s venture capital industry rose in scale relative to the U.S. throughout the 2010s, emerging market venture deals also increased by between 26% and 42%. This growth in emerging market entrepreneurialism occurred primarily in “China-led” sectors — those sectors where China’s share of global venture investment exceeded that of the U.S. 

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Share of global venture capital investment 

 

Value of global venture capital investment

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Emerging market entrepreneurship occurs in sectors with conditions that mirror those in China. The researchers compiled nearly 1,500 country-level indicators from the World Bank’s World Development Indicators database to create a “suitability index” that measured how closely a developing country sector matched the socioeconomic conditions of its counterpart in China. If a sector closely mirrored its Chinese counterpart, it was classified as better “suited” to emulate China’s business models. Venture capital investment growth in emerging markets occurred most often in these highly suited sectors, like the education technology sector in India. A one standard deviation increase in a sector’s China suitability score corresponded to a 214% increase in venture investment deals among “China-led” sectors. These findings suggest that China’s rise inspired new venture activity in developing country sectors that share similar business challenges to those in China.  

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Average sector similarity to China versus the U.S.

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Emerging market entrepreneurialism driven by local investors following Chinese examples. Only 2.5% of emerging market deals outside China involve a Chinese investor, and just 0.5% are exclusively backed by Chinese investors. Instead, local investors appear to be investing in local firms that learn from and adapt business ideas and models first developed in China. Using Natural Language Processing tools to measure similarity in business descriptions, the researchers show that the growth in emerging market entrepreneurship following China’s rise is accompanied by an increase in textual similarity between the description of new emerging market firms and Chinese firms founded in the same sectors during the preceding five years. For example, the educational technology startup Byju in India shares 80% textual similarity to China’s sector-leading Yuanfudao. This trend appears regardless of whether a sector was strategically prioritized by China’s government or whether a country was aligned with China politically. 

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Venture-backed firms that imitate business models of Chinese firms (by country type)

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Emerging market entrepreneurialism following Chinese examples boosted firm growth and serial entrepreneurialism even beyond China-led sectors. Emerging market venture backed firms in “China-led” sectors with high suitability scores were also more likely to IPO or be acquired. All things equal, the rise of China’s venture industry also increased the number of serial entrepreneurs in emerging markets, and their venture activity later spilled over into sectors not led by China. Researchers also observe that in cities with a higher preexisting share of firms in China-led sectors, there was substantial growth in business formation and patenting activity, including in sectors with few existing Chinese firms. Finally, the researchers offer suggestive evidence that the China-driven rise in emerging market entrepreneurialism in sectors like education, health, and agricultural productivity boosted socioeconomic outcomes in these areas, as measured by World Development Indicators.  

New entrepreneurial hub, wider entrepreneurial diffusion. The unprecedented growth of entrepreneurship in China has spurred business formation in other emerging markets. While earlier efforts emulated U.S. successes of the 2000s, emerging market entrepreneurs have increasingly emulated Chinese companies confronting similar problems and consumer demands. However, few examples of China-inspired emerging market entrepreneurialism involve direct overseas investments by Chinese VCs. Instead, local entrepreneurs and investors learn from and adapt businesses first developed in China. This global rise in investment has had wide-ranging consequences, including more firm IPOs, increased serial entrepreneurship and patenting activity, and gains in economic wellbeing. The results suggest there could be large benefits if emerging innovation hubs (whether in China or elsewhere) shift the focus of technology toward applications overlooked by the U.S.-led system.