Challenges faced by start-up entrepreneurs in China

Regulatory and Legal Hurdles

Assignment Help: Encouraging entrepreneurial activity in China

Founders in China have the additional challenge of making heads or tails of the Country’s complex set of regulations. Regulatory landscape – consists of national and local rules that can change from place to place. Compliance with local laws and regulations: Foreign company owners may encounter challenges when it comes to complying with local laws and regulations, including those related to licensing and certification. The completion of paperwork and the application for many licenses and permits is just the tip of the iceberg when it comes to building a legal organization in China. Increased need for IP protection as a result of concerns over trademark infringement and counterfeiting. (Zhao, 2019).

China presents serious challenges for the success of a startup, from an investment and regulatory/legal standpoint. The regulatory landscape is complex and constantly evolving, with various local, national, and regional laws and regulations governing business registration, licences, intellectual property rights, and data protection. The formation of a legitimate corporation is associated with several complex and time-consuming governmental procedures (Zhang & Wang, 2018). For new enterprises, especially those that are easy to violate trademarks and counterfeit products, implementing the protection of intellectual property rights is still a problem (Yu, 2020).

Since foreign investors and owners are restricted in a number of sectors (Luo, 2018), it is essential to design partnerships and joint ventures well. In China, the Cyber Security Law has put stringent limits on where businesses can store and move data (Cui & Zhang, 2019).

Intense Competition and Market Entry Barriers

China is a highly competitive economy due to the presence of both startups and established businesses. It can be difficult for startups to establish themselves in a competitive market. Foreign business people also have a difficult Time penetrating China’s market. If the market leader has managed to build a significant customer base and brand recognition, it may be challenging for new entrants to make an impact. Didi Chuxing, for instance, has lost out to overwhelming competition from Uber on the ridesharing market, but has come out on top.

Chinese entrepreneurs are challenged in so many ways, including competitive struggle in the Chinese market and the lack of access to this particular market. The above issues may seem overwhelming given the dynamic development of China’s economy and the special features of the Chinese business environment..

Intense Competition:

In China, there are some reasons why businesses are competing so intensely:

Large Market Size:

China has a vast consumer market that foreign and domestic companies are both fighting for.

The rapid progress of technology:

China sees rapid uptake of new technology, and this quickly leads to radical new techniques and methods of doing things, which themselves quickly disrupt entrenched markets.

Consumer Preferences Kept Changing:

Businesses need to be able to adapt to the shifting preferences and needs of their customers.

Local and Global Players:

Due to the prevalence of MNEs at this Time in the economy, local firms often face stiff competition when competing for customers, workers, equipment, and facilities.

Market Entry Barriers:

Again, many startups face multiple obstacles to break into the Chinese market:

Regulatory Hurdles:

Regulatory environment: China’s complex regulatory environment can be time-consuming and resource-intensive for startups, particularly if they’re unfamiliar with local laws and regulations.

Cultural Differences:

Trust and rapport with local customers and partners can only be achieved through a respect for and adherence to cultural standards.

Accordingly, any Intellectual Property Issues:

Intellectual property protection can be challenging: As China’s IP rights regime may require a deep understanding of the local laws, protecting intellectual property rights in China may be challenging.

Local Competition:

As that means there may be a lot of competition in the market from established domestic businesses, startups need to find ways to distinguish themselves.

Access to Funding:

Even as China’s startup ecosystem has matured, access to finance continues to be hard to come by, by-especially for poorly connected, first-time entrants.

Localization:

It can be risky to spend Time and money thinking about customizing a product or service for the Chinese market

Culture Barriers & Language Barriers:

Language barriers and a distinctively different business culture: China has its distinct business culture and language barrier, which can pose challenges for foreign startup entrepreneurs. Electronic and Software Engineering: Building relationships and trust between the local culture and partners, customers, and suppliers requires in-depth knowledge of cultural norms and practices. Language barriers can also make it difficult to communicate, negotiate, and penetrate a market.

Talent sourcing and retaining talent:

Finding and retaining talented talent is a big problem for startup entrepreneurs in China. People: Talent, especially in areas of technology and innovation, can be in short supply. A large number of big companies and top domestic enterprises compete with each other for high-quality talent, which makes it difficult for startups to obtain qualified human resources. This is especially true for startups that are looking for employees who have experience working with the latest advancements in technology, such as artificial intelligence and blockchain. Tencent, Alibaba, and Baidu are known for their competitive compensation packages, which creates additional pressure on startups to offer competitive incentives.

Isenberg Entrepreneurship Ecosystem Model Transferred to China

The theoretical framework of the entrepreneurial ecosystem developed by Isenberg enables a wide-ranging analysis of the various factors influencing the entrepreneurial result on the regional, State, and national levels. The paradigm is based on six key pillars: policy, finance, culture, supporting factors, human capital, and markets. This essay analyzes these areas from a business angle in light of conducting business in China. The concept of the “entrepreneurship ecosystem” helps to highlight the multitude of factors that contribute to the process of developing entrepreneurial activities. Daniel Isenberg’s approach stands out in this regard as the most comprehensive. This is built within six pillars: policy, funding, culture, infrastructure, human resources, and market structures.

Policy

Ever since its economic reforms first started in the 1970s, the Chinese government has made it a priority to foster entrepreneurship. Policies such as decreased regulation and tax incentives for startups have been instituted by governments around the globe at various times to encourage new firm creation. In addition, China has launched the Made in China 2025 plan to further promote the innovation and entrepreneurship spirit in the Country.

However, a number of concerns have been raised about the security of intellectual property, the openness of business practices, and the lack of harmonization for the way in which the law operates from jurisdiction to jurisdiction. Regulatory framework: Foreign company owners and investors may also face challenges due to obstacles in the regulatory framework. (Acs et al,2017)

Finance:

China’s ever-changing economic environment is a blessing to the Country’s youthful entrepreneurs. That is why a large number of other types of investors have rolled out offices there, including private equity firms, angel investors, government-backed investment organizations, and venture capital firms. The new Shanghai STAR Market is a high-tech substitute stock market for traditional stock markets.

However, there is still no economic equality. While the technological giants Alibaba and Tencent are gaining prominence, startups, particularly those outside of major cities, continue to struggle to raise capital. Liquidity issues are not being raised at the moment, but with problems with the shadow banking community and lending that is not audited, there are still risks.

Within the context of the model, finance is defined as access to and availability of financial resources for new and growing enterprises. There are several different kinds of investors and financial institutions under this heading (Isenberg, 2010).

Strengths:

Facilitates Alternative Financing Instruments: The framework can be used for alternative financial instruments. The approach reflects the reality that a firm may receive capital from a variety of sources, such as personal connections, angel investors, venture capital firms, and crowdsourcing efforts. Covers the need to be available (or not), and the Time spent focusing on the need to have access to capital for startups. This is in accord with the model, which predicts that a flourishing environment will have few problems (Isenberg, 2010).

Weaknesses:

An apparent bias in the model for angel investors and venture capitalists, however, these alternative sources of funding are recognised. This is probably not true in economies in which shadow or underground financial networks are important. Cash is available, but knowing how to handle money is another matter. It needs to be reiterated that business owners must have a basic knowledge of finances in order to manage these resources effectively. (Isenberg, 2010)

Culture:

It is well known that Chinese people work hard and take chances. Business failures are coming to be seen as a learning experience. Support Services: Successful platforms, such as Alibaba, offer support services, including incubators and training programs, to help aspiring businesspeople get their ventures off the ground. However, cultures are never in isolation.

Others with a different set of values may find the uncertainty of starting a company rather than working for sure pay a deal-breaker. Even if the young today are more open to founding a new company and can cope with the societal assumption of survival, many would-be entrepreneurs nevertheless experience difficulties with the assumption of longevity. According to the Isenberg model, cultural attitudes (as defined by the prevalence of attitudes that encourage and discourage entrepreneurial activity) are a cultural factor. It involves, amongst others, a propensity for risk-taking, an affinity for taking initiative, and the individual being able to accept the possibility of failure (Stam, 2015).

Strengths:

It has a holistic approach where the learning is not just for commercial achievement, but also for the attitude of people towards society. The reason this is important is that popular culture has extensive implications for the success and growth of organizations, and the value of failure is being acknowledged by society as the sole path to success. Risk-taking and creativity are required aspects of entrepreneurial activity, but are often suppressed in cultures where risk-takers are penalised (Stam, 2015).

Weaknesses:

Moreover, because of its intangibility, organizational culture is notoriously hard to influence or change. It is much more challenging to change people’s mentalities and world views than it is to change policy or economic instruments. This is because culture itself is a diverse and multidimensional process; by restricting cultural processes to a single dimension and assuming these processes are better modeled through a deterministic formula, the Isenberg model may overstate or drift from the actual process. (Stam,2015)

Supports:

In China, there are also plenty of resources available for those looking to start a business, such as incubators, accelerators, university courses, and co-working spaces. The economic and technical giants of Beijing, Shanghai, and Shenzhen are well known, and even parts of the capital city, such as Zhongguancun (known as the Silicon Valley of China), have acquired the same honor. However, the tools are not always available or reliable. Entrepreneurship in smaller towns and rural villages may be disadvantaged when compared with their urban counterparts. (Acs et al,2017)

Human Capital:

Technical skill is not in short supply because there are so many graduates in relevant STEM fields from China. The Chinese diaspora is one channel through which knowledge and contacts from places like Silicon Valley may be returned to China. Others fear, however, that pupils are not acquiring the critical-thinking and creative-skills abilities needed to start up a thriving business due to the school’s rigid curriculum. This is evolving, but there is still a long way to go before there is a complete and compelling curriculum out there for potential business owners. (Stam, 2015).

Markets:

Because of rapid urbanization and a growing middle class, the size of the Chinese market is enormous. WeChat and Alipay are just two of many examples of how the advent of the internet has created new business opportunities. However, it is not always easy to enter a market. It can be challenging for foreign businesses to enter the local market due to language, cultural, and regulatory barriers.

That includes data privacy concerns and the abundance of state-owned corporations. Moreover, thanks to a perfect blend of liberal culture, massive consumer bases, and welcoming government policy, China has emerged as a fantastic place to start a new business. This is reflected in the great success of its most prominent and smallest technological companies. If China’s efforts to foster entrepreneurship are viewed through the framework of Isenberg’s paradigm, they may come into better focus. (Spigel, 2017).

However, in order for any of those opportunities to materialize, several barriers need to be overcome. Hence, to succeed in the long run, the problems need to be worked upon, and the spirit of entrepreneurship needs to be promoted all across the Country. How the Chinese government continues to foster and refashion its startup system for the next few years is something to watch.

Chinese Entrepreneurship Ecosystem: Support programme for International New Ventures (INVs)

China’s rapidly growing economy and focus on innovation account for the success of its entrepreneurial ecosystem. Isenberg’s entrepreneurship ecosystem is presented as one that is healthy and that may be particularly beneficial to international new ventures (INVs). Where does this come from? China’s industrial consumer market, developed infrastructure, and favorable government policies have made this Country a hotbed for entrepreneurship in the past few decades. This environment has worked well for both domestic start-ups and INVs from other countries.

Policy

Opportunity:

For example, governments have tried to make it easier for INVs to set up shop by providing tax rebates, special economic zones, and easy registration processes for companies.

Example:

Tesla’s super factory in Shanghai, China, holds the title of the world’s largest automobile market, and the Country’s encouraging regulations have allowed the electric car giant to carve a niche for itself there quickly.

Finance:

Opportunity:

Funding: With Launchpad and Global Launchpad Ticker, INVs often have access to a variety of funding sources, including private equity, venture capital, and government grants.

Example:

Many of these foreign start-ups have been funded by Chinese VCs. For example, Chinese internet giant Tencent gave seed money to English teaching software VIPKid, and helped it rapidly establish itself and grow into the market.

Culture:

Opportunity:

As the concept of innovation and entrepreneurship becomes more enlightened and as the popularity of products imported from other countries increases, the environment favors INVs.

Example:

Apple is a household brand in China. Because of the iPhone’s successful marketing in China and a widespread respect for Western culture in China, the iPhone has become a status symbol in the nation.

Supports:

Opportunity:

Building a support network: Collaborating with local incubators, accelerators, and other support systems can provide valuable guidance and resources, as well as help you enter the market more quickly.

Example:

To benefit from local innovation clusters, collaborate on research, and leverage the supportive environment to create products specifically for the Asian market, the German enterprise software company SAP launched SAP Labs in Shanghai.

Human Capital:

Opportunity:

Companies that invest in China may benefit from the Country’s large pool of talent, especially in fields of technology and manufacturing.

Example:

Over the course of Time, several global IT companies have set up R&D units in China to benefit from the high technical skills available in this Country. Microsoft’s Beijing Research Lab is one of these places; it’s also where some of the company’s most important technologies are developed.

Markets:

Opportunity:

There are many verticals of China’s huge Consumer market left for INV to tap into.

Example:

In keeping with its founding principles, Starbucks has created new beverages such as the Mooncake Latte in order to gain favor with customers in China. They managed to benefit from their international celebrity while satisfying the local taste, and today they are a ubiquitous sight in urban areas in China.

Inhibition-related issues and ways to overcome them for INVs:

Making Sense of the Regulatory Environment:

Policies can be a blessing, but can sometimes be confusing, and they can change quickly.

Strategy:

Foreign direct investments should work together with local companies or hire local professionals to educate them on local regulations and inform them about how to comply with them.

Competition with Local competitors:

Established local competitors typically create competition for INVs.

Strategy:

That’s why considerable market research is needed, and cooperation should be sought where possible. Joint ventures enable foreign automobile manufacturers to utilize local partners’ expertise in the market and regional infrastructure to sell their products.

Given the favorable business environment in China, there may be a lot of room for INVs to expand there. However, understanding the local area, adaptability, and a desire to work as part of a team are all important to your success. That is, the success of international direct investments (INVs) may contribute to the significant growth of the Middle Kingdom.

Market Scale and Diversity

China has over a billion city and countryside residents who are also consumers. For this reason, the occurrence of INVs is infrequent.

Example:

A business that specializes in low-cost goods can provide access to China’s rising middle class in Tier 2 and Tier 3 cities. In contrast, a company that focuses on luxury goods can give access to China’s wealthy urban middle class.

Infra Connectivity:

China’s physical infrastructure, from transportation to telecommunications, is being brought up to a world-class standard in a way that is unprecedented by any power.

Example:

Logistics and supply chain management: INVs might utilize their extensive logistics and supply chain networks to ensure timely product delivery even in far-flung locations. For example, because of the delivery network in China, Amazon China was able to reach a large number of customers.

Robust Talent Pool:

A new crop of qualified graduates emerges from China’s educational system every year. FDI can help to access this pool of talent and create a team with the perfect mix of local expertise and international experience.

Example:

Before it suddenly cut ties with China, LinkedIn had built a base in China with a team of experts familiar with the Chinese market, whose job it was to sustain LinkedIn’s reputation abroad.

Public Policies & SEAs

To encourage overseas business and investment, the Chinese government has come up with plans such as “Go Global.” Foreign investors who invest in SEZs benefit from reduced administrative procedures and low fiscal tax rates (Zeng et al. 2020).

Example:

The gig factory that Tesla built in Shanghai is a good example of that. The thirty-eight-acre Enterprise was built in one of the special economic zones to benefit from speedier clearances, lower tax rates, and better logistics, which helped accelerate the company’s growth in China.

Local level Partnership solutions:

Partnering with local businesses can help INVs to gain a better understanding of the market, the regulatory landscape, and consumer behavior.

Example:

Starbucks made its way into the Chinese market by teaming up with the Beijing Mei Da Coffee Co., Ltd., which brought local expertise to the brand and provided access to the Chinese market.

Vibrant Digital Ecosystem:

Alibaba, Tencent, and Baidu are only a few of the large companies that have helped to develop China’s increasingly digital economy. Within this framework, INVs can connect with a digital-first audience on many different channels.

Example:

Instead of creating something from scratch, a fintech INV can connect to an existing service like WeChat Pay or Alipay and gain access to hundreds of millions of consumers.

By educating themselves about this ecosystem and by becoming participants in it, while at the same Time being conscious of the local ins and outs, INVs can benefit from these opportunities and therefore be able to grow faster and more sustainably.

China also has several startup incubators and accelerators, such as Chin accelerator and HAX, that provide entrepreneurs with access to mentorship, funding, and industry connections.

Example:

We have seen IoT startups join HAX (the world’s largest hardware accelerator) to gain access to Shenzhen’s manufacturing ecosystem and expert advice as they scale their product up fast.

Access to Capital:

The Chinese venture capital industry is up and running, and most firms are keen to invest in innovative new ventures (INVs). This gives companies the long-term capital they are looking for to grow.

Example:

Despite the indigenous nature of Didi Chuxing, it has attracted vast amounts of investments from investors around the world and domestically. High-growth INVs can claim the same sort of access to this huge fund.

Cultural Adaptability:

As such, international businesses that try to appeal to Chinese tastes often succeed. (Chen et al., 2018).

Example:

McDonald’s appeals to local palates by adding foods to its menu like taro pies and spicy Sichuan burgers alongside its globally loved standards.

Evolving Consumer Behavior:

Chinese consumers are increasingly exposed to global trends and demand a greater range of high-quality goods, which may only be supplied by INVs, given the rise of the middle class in China.

Example:

Apple’s luxury goods are hugely popular in China because of the brand’s aspirational ideals that reflect the values of the Country’s emerging middle class.

With its combination of favorable policies, infrastructure, digital platforms, and access to capital, China’s entrepreneurial ecosystem offers a nurturing space for INVs to thrive. By recognizing this ecosystem and participating in it, while respecting the local context, INVs can benefit from it to grow faster and in a sustainable way.

References:

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World Intellectual Property Organization (WIPO). (2020). China Rises to Second in Global Innovation Ranking. Link

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