Connections win over innovation

Entrepreneurialism is a concept dearly beloved of Western, especially American, economists and business gurus.

Entrepreneurs, often outsiders from non-elite backgrounds, are comfortable with levels of risk and uncertainty unacceptable to most people.

They often specialise in introducing new ideas, be it a new business model, a new product, a new customer base or even a "new look" or design.

Observers have increasingly realised that entrepreneurs play an important role in increasing innovation, efficiency and competition in the overall economy.

As China migrates from an economy dominated by the state sector to an economy where the private sector is gradually more powerful, many Western observers have watched the emergence of Chinese entrepreneurs with a great deal of anticipation and curiosity.

Ironically, most Chinese view private firms with distrust and their founders as not being team players, and as being purely motivated by wealth and greed.

In a country where millions of people work for the civil service or the commercial arm of the civil service, entrepreneurs are considered "unsound" and unpopular, as potentially more effective rivals who could lead to the closing down of state firms.

The most frequently asked question about entrepreneurs in the mid-1990s, when they first began to emerge, was "how did they make their first million?" The general view was that the money had not come about honestly.

This was not prejudice. It was based on the simple fact that many of the millionaires who emerged slowly in the 1980s were from the "prison generation". So named because many of them were men whose lives had been destroyed by the Cultural Revolution, which sent millions of young people down to the countryside, or to prison, for ideological failings.

When this generation re-emerged, with no prospects, no job skills and no education, they had nothing to lose - and threw themselves headlong into the possibilities of private enterprise that Deng Xiaoping, Chairman Mao's successor, encouraged from 1979 onwards.

Many of this early generation are now dead or in prison. But the wealth and glamour they achieved before their demise had a galvanising effect on many others, especially the youth. These days, entrepreneurialism in China is a strange, mutant creature. Many young engineers from the top universities, in particular, have started their own companies. The creative content, though, was hard to see in the early days as much of it was ripped off business models and ideas first dreamt up in the US.

And the entrepreneurs involved often benefited from the connections of their universities. Universities are a crucial and highly supervised part of the government apparatus in China.

Finally, these young men were hardly "outsiders". On the contrary, as graduates from China's top universities they benefit from very high status.

The high-tech sector is nevertheless evolving and many modern Chinese tech companies, like Nasdaq-listed Linktone and Tomonline, provide internet and mobile phone services which are unique to China.

These tech experts have an advantage. Because the field of high tech is so new, they have moved rapidly into an area where the Chinese Government doesn't have a strong existing presence, except the important area of infrastructure.

The Chinese Government's decision to pay for the roll-out of the biggest mobile phone network in the world has been the foundation of the success of many of these entrepreneurs.

However, in many other areas, one can observe an incestuous union between the state sector and the private sector. One entrepreneur I spoke to in Shanghai had attended the local cadre school, a type of training normally reserved for Communist Party members and Government high flyers.

He used the occasion to garner contacts and support before bailing out of Government service to set up his own company.

Setting up on his own might look like an entrepreneurial move but, in fact, his previous existence means he will be buttressed by Government connections and resources rather than risk-taking, brains and innovation.

Should a more genuine type of entrepreneur stand in his way, who doesn't have his connections among the city government, it's very likely he will be hounded out of business.

In more traditional areas, such as taxi companies, hotels, real estate and catering, the trend towards an unholy union between entrepreneurs and civil servants seems to be accelerating.

That is especially due to the civil servants having access to the state-owned banks, sitting on enormous deposits, who can provide vital cash.

It's the difficulties of obtaining financing (banks are highly risk averse) by entrepreneurs which encourages co-operation with crooked civil servants.

Chinese migrants have long been recognised as being among the most entrepreneurial in the world. But the process going on in China reflects the shortcomings involved in using Western terminology.

Universities setting up their own companies, civil servants producing fridges - these activities challenge Western theories and their outcome will be followed with interest.

Strange fruit

Chinese entrepreneurialism is a strange, mutant creature.

Entrepreneurs are generally considered to be "unsound".

The entrepreneurs involved often benefit from the connections of their universities. Universities are a crucial and highly supervised part of the government apparatus in China.

In many other areas, there is an incestuous union between the state sector and the private sector.

* The writer remains anonymous to protect his position in China.