As we continue looking at start-up hubs around the world, we need to start looking beyond the obvious. Until very recently, the Chinese startup community was floundering, but with the AliBaba IPO, it has taken off again. It has always been puzzling how a country as fast-growing as China has never had a booming startup industry, but things are changing, and more and more entrepreneurs are heading to Beijing to setup their next business.
In this article about Beijing, we look at six essential elements of a potential start-up location that must be considered: 1) location, 2) tax incentives, 3) legal incentives, 4) availability of investors, 5) local resources and workforce, and 6) specialization.
If an entrepreneur wanted to design the perfect city for a start-up, they would likely choose characteristics from several different start-up hubs around the world. Perhaps they would select the political and positional power found in Washington, DC. They may be drawn to the financial and urban markets that have become the hallmark of New York City. Cultural and entertainment hotspot Los Angeles would be chosen for the cutting edge of trends that grace the city. Finally, the technical advancements found in Silicon Valley would round out the creation of a perfect start-up city. The entrepreneur could draw on the unique aspects of these cities and build their dream city of a perfect start-up or they could make their way around the world to the city of Beijing, China.
Beijing, one of the largest cities in China, centers the country’s movie industry, finance industry, technology hub and political power. With these markets all converging in one city, Beijing is primed for being one of the leading start-up hubs in the world. A majority of China’s biggest state-owned companies are headquartered there and it is a transportation hub for railways, expressways, high-speed rails and highways, as well as the location of one of the world’s busiest airports.
Cultural attractions as well as religious sites dot the city’s landscape and provide artistic flair to the high-paced, high-powered city. Parks and gardens are considered tourist attractions and are examples of Chinese art that have delighted guests for centuries. People are drawn to the city for a variety of reasons and the start-up entrepreneur who selects Beijing as a headquarters will be in good company among the millions of people who call the city home.
2. TAX INCENTIVES
Despite the industries that have established Beijing as the center of their influence, the cost of living and doing business in Beijing is high when compared to other Chinese cities. With one of the world’s largest populations, rent is by far one of the highest expenses that a business faces. In addition, taxes can be costly with some businesses paying several thousand yuan per month. Recent government initiatives passed a tax reduction plan that allows businesses to reduce their tax burden annually by up to 9,600 yuan (the equivalent to nearly $1,560 US dollars). Qualifying businesses must prove that they were started by someone who has been registered as unemployed for at least six months. There are no restrictions on the industries that are eligible and the process of applying for the tax benefit has been streamlined. Companies that hire someone who has been unemployed for at least a year are also eligible for benefits under the new tax plan, with a deduction of up to 5,200 yuan annually.
In an effort to boost the entrepreneurial enterprises in Beijing, policies have been passed to reduce taxes for start-ups and high-tech innovators. Tax cuts of up to 15% to companies working in creative industries will be made available to start-ups working in the Zhongguancun Science Park. Further bolstering the tech research and development market, personal income tax will be reduced for investors in the high-tech industry.
Companies that produce patented items will benefit from a reduction of enterprise tax rates on patents that are sold for more than 5 million yuans ($820,000) of fifty percent and patents that sell for less than 5 million yuans will have their enterprise tax waived completely. By bolstering the entrepreneurial efforts of the city, tax officials hope that it will encourage and aide more tech start-ups in choosing Beijing as their home.
For the foreigner wishing to begin a start-up in Beijing, however, there are added taxes that can be cost prohibitive. Foreigners are required to pay a ‘social benefits tax’ of fifty percent. To live and work in Beijing, foreigners must acquire a visa that will allow them to start a business in the country. Businesses unfamiliar with the customs, language and policies of Beijing may find themselves being swindled and taken advantage of. It is not impossible to launch a start-up from Beijing as a non-Chinese individual, but it may feel like it is.
3. LEGAL INCENTIVES
With a halt on Chinese IPO’s that came about as a result of a banking scandal several years ago, the start-up scene in China was floundering. Early in 2014, the ban was lifted and the first months of the year saw 11 IPOs. In comparison with the United States for the same time frame, they were neck and neck to the United States’ 12 IPOs. Officials set their expectations for over 400 new IPOs for the year, but the listings have slowed down due to new government regulations. The regulations, designed to encourage start-up growth and opportunity, have only managed to confuse entrepreneurs and halt the IPO race.
Public perceptions of Beijing and China in general have led the world to expect a marketplace that is filled with corruption, theft of intellectual property and social media censorship. The country is working hard to reverse that image and the availability of smart phone technology is quickly changing the face of business in Beijing.
Even though the government of Beijing has begun to establish policies and mandates to encourage the growing start-up market, the legal incentives to establish a business within Beijing are not easily apparent. A confusing maze of paperwork and regulations can slow down the start-up process for anyone not familiar with the customs and procedures of the nation.
Finding office space is a hurdle that many smaller companies have had to face and the government is helping by allowing them to use apartments as workspaces – a winning combination for both parties.
Interview: How Do You Startup In Beijing
4. AVAILABILITY OF INVESTORS
One of the main benefits to launching a start-up from Beijing is the available number of investors with offices located within the city. While it is not a given, it is understandable that a city with a population the size of Beijing would have more investors. It may not be obvious, however, that those investors are venture capitalists, angel investors and growth capital investors who divert the majority of their money into companies run by Chinese.
Venture capital funds are beginning to move in from other nations, but the primary sources of funds within Beijing are from Chinese investors, who prefer to put their money back into their nation. A large number of international funds are looking to invest in China and have established offices within Beijing to allow for easier access to their partners.
The start-up market in Beijing is highly competitive – a situation that creates opportunity for investors to be particular about the company that they choose to invest in. The startup in Beijing may find itself with a dozen potential investors, but no actual investment money. Failure within the Chinese culture is still considered a social stigma, so the investors are hesitant to invest in technology or corporations that they are unsure of. This creates potential for the foreign investors in Beijing to take advantage of the hesitant Chinese venture firms by becoming early investors.
In the first quarter of 2014, investment firms in China raised venture capital worth over $1 billion – more than any other country in Europe. A massive upcoming Beijing IPO is expected to become the largest company in the world. Beijing start-up experts are looking for the IPO to launch at $180 billion and continue to grow for at least five years at 30%. With the eyes of the world on such large numbers, the entire start-up industry of Beijing will benefit from the attention.
5. AVAILABILITY OF LOCAL RESOURCES AND WORKFORCE
Centered in one of the most populated cities in the world, the tech industry of Beijing has an available workforce that is highly educated, highly competitive and actively pursuing wealth.
Foreigners working within the tech market of Beijing may find themselves on the receiving end of a type of discrimination that puzzles them. The nationalism of the Chinese nation shines through in every aspect of life in Beijing. Despite how modern the city may become, at heart it is a Chinese city and it promotes national pride by investing time, energy and jobs to locals. With the surge of Chinese students studying abroad, the availability of nationals for higher paying jobs is growing, narrowing the possibilities of foreign workers being able to land a job. Multinational companies will still need non-Chinese employees, but they typically are not in high-level positions and they are often the first to be replaced when suitable Chinese workers are discovered. In spite of the overwhelming disparity between the number of Chinese workers and foreigners, one of the largest resources available in Beijing is the number of workers.
Another resource that the city offers is the large number of software parks and incubators that have sprung up throughout the city. Specific hub zones have been mapped out by city officials, but a majority of the start-up locations spread through the city has happened almost haphazardly, creating a continuous blanket of start-up and tech zones. These parks and incubators are creative workspaces that help entrepreneurs thrive as they collaborate and generate not only ideas, but solutions to tech problems and scenarios.
Finally, a huge benefit to the Beijing start-up market is the availability of lower wages. Tech positions in Beijing are paid one-fourth of the salary of their Silicon Valley counterpart. Finding highly qualified workers who are willing to work for lower paychecks moves Beijing to the front of the start-up market contest.
Of the 267 companies located in the Haidian district of Beijing (home to the Zhongguancun Science Park), a majority of the companies – nearly 80% – are tech firms. Officials are pushing to shift the focus of start-ups in Beijing away from manufacturing and towards research and development. So far, they seem to be successful. With over 20,000 start-ups located in the district, they are on track to generate over 1.6 trillion yuan (nearly $260 billion US dollars) over the next few years.
A strategic agreement with a German marketplace group is designed to help Chinese companies go public in German stock markets. A growing number of R&D facilities in Beijing operated by large corporations such as Google, Intel and Oracle have helped to push the drive towards tech industries.
With a detailed plan to focus on technology endeavors across industries, Beijing intends to help increase productivity in the country, create jobs and strengthen the nation as they undergo a modern industrial transformation. Beijing is not being boastful with their claim that they are the strongest cluster of high-tech industrial start-ups within China – they earned the title.
IT Startups In Bejing
Specialized tech firms from Beijing include:
Deep Glint. Deep Glint is working to train computers to see the same way humans do. With special cameras and software, the computers are trained to not only record what is around them, but they can interpret what they see. Potential applications for this company’s technology include robotics and automobiles.
DianYue. DianYue is an IT startup that is geared towards the Chinese shopkeepers. By focusing on the rising popularity of online shopping, the start-up works with Taobao – the Chinese version of eBay – and allows stores to post their wares on the internet.
La Miu. La Miu is the largest online source for lingerie in China and is expanding with a global marketplace.
THEM. Several years old, THEM is a tech start-up that deals with search engine optimization and website development. As one of the pioneers in China’s tech industry for SEO work, they have established themselves as a leader in the field. One of the strengths of THEM is their ability to adapt web tools for use in a variety of markets.
Beijing is a city in transit – they are a bustling center of commerce, trying to establish themselves as leaders in a new global economy. They have several major hurdles to overcome – the city needs to take definitive action to make the city inviting to residents, tourists and entrepreneurs by establishing clean air initiatives and other city policies. By continuing to work on their image on the world’s stage, they can overcome the stigma of the past and become a leader among the start-up cities of the world. Beijing holds all the right pieces, it remains to be seen if they can make them work.