Last month, I hosted our Global Engineering Leadership (GEL) module in Hong Kong, which offered a fascinating perspective on innovation and entrepreneurial policies across Asia, in particular East Asia’s main economies of Korea, Japan and China. One of Asia’s main business differences relates to the intertwining of family- owned and state-owned business. And as most people know, cultural aspects such as the concept of “saving face” and “making decisions as a group” are fundamental characteristics. Having said this, Korea, Japan and China have very different and uniquely designed industrial policies.
South Korea Perspective:
This is an amazing success story. The county rebuilt from almost zero after the Korean War, which ended in 1953. Under the leadership of Park Chung-hee (1961-1979) the Korean economy experienced immense growth, mainly from family-controlled small and medium enterprises, known as chaebols. Park encouraged their success with favorable tax incentives and put in place an economic policy that has been carried forward for 40+ years. Many of these small Korean enterprises grew to become today’s global multinationals including Samsung, LG, Hyundai, and POSCO. As explained by Professor Wonjoon Kim of KAIST (Korean Advanced Institute of Science and Technology), the government’s long-term policy has been a key driver of economic success.
Government regulations literally forced markets to focus externally. Korea’s current leader, and the country’s first female president, Park Guen-hye (Park Chung-hee’s daughter) appears interested in continuing this focus. She began her term in February 2013 and has been quite open about plans for promoting technology and entrepreneurship. She has proposed using tax incentives, introducing a new stock market (Korea New Exchange) for raising technology capital and has held fact-finding meetings with US entrepreneurs such Bill Gates (Microsoft Founder), Larry Page of Google and most recently Mark Zuckerberg of Facebook.
Meanwhile, the owner-driven Korean growth strategy has been a combination of fast-follower for product design and innovation and leader in process, materials, and manufacturing. Mass import of global talent has also played a key role.
What’s next for Korea? According to Professor Kim, heavy investments in capital emerging intensive businesses such as biotech.
Japan rebuilt its industry after WWII with market-friendly policies and twenty-five years ago, was where Korea is now. More recently, Japan has suffered from a lack of sustained leadership with an adverse impact on its economic growth agenda. Today, there is a lot of optimism around proposed economic policies of current Japanese Prime Minister Shinzo Abe. His LDP recently increased their power base, winning additional seats. “Polls showed Sunday’s win was largely over the economic policy dubbed “Abenomics” that Mr. Abe has engineered since taking power last December and due to a surge of optimism among voters for a recovery of Japan’s economy, which has struggled for two decades and has lost competitiveness against rivals such as China.” .
Economic policies may not be enough in Japan, as it faces a maturing population, the effects of zero population growth and very little immigration. There is a literally shortage of a young, risk-taking workforce. While the current government policy supports entrepreneurship as a way forward, anecdotes of government incubators are not reassuring. It seems executives, close to retirement with no past entrepreneurial experience, often run them. So their primary objective is to simply not let anything “blow-up” before the retirement.
According to serial entrepreneur and GEL instructor, Jeff Char, Japan is also a potential economic time bomb that would make Greece seem insignificant. He states that “in 2012, Japan’s debt service was 23% of GDP, with interest rates at 1%, and Japan’s gross public debt is projected to hit 230% of GDP by 2014. If [yields] rise from 1% to just 2-3%, Japan’s debt service will literally explode. And likely, a vicious cycle of higher yields, bigger fiscal deficits, and inflation will occur.” Modest interest rate increases could simply break the country’s financial model.
What’s next for Japan? There have been a number of high profile entrepreneurial successes, such as the Line messaging mobile application, globally popular with 180M users, and developed in response the telecom outages from the last Tsunami. However, available investment dollars for new ventures continue to be low, risk aversion is high, immigration policy is unfavorable, and a number of social barriers still exist. Japan could apparently benefit from policy intervention. “Abenomics” and sustained leadership may provide the needed boost.
China policy, in contrast is very much driven by a need to serve its 1.3B people and the number two global economy. The scale of the country and the solutions are incredible. Over 5M people in China graduate college every year, which is as many people as there are in Chicago or Hong Kong proper. The Chinese government feels the pressure of serving its growing population. China must create 5M jobs every year just to support newly graduated students every year. The consequence of not creating at least 5M jobs annually is a very unhappy population. This is why the target growth rate needs to be 8%.
The second main driver of economic development policy is the large population in the west of China that has not yet benefitted from China’s industrialization. Accordingly, the party based government is currently organized into two main subgroups: one for the growth needs of eastern China and the other for the industrialization of western China. As explained by Prof Jian Gao of Tsinghua, China’s economics tell two stories. On one hand, China’s GDP is over $7T which is approx ½ of the US economy (i.e. wealth creation and very large scale), and on the other hand a per capita GDP of only $6,000 (i.e. large numbers of people without sufficient means).
Due to growth needs, pains, and challenges, China policy is fueling entrepreneurship at a massive scale and with intense competition. According to James Tan, GEL speaker and Managing Partner of QuestVC, Beijing’s Zhongguancun area next to Tsinghua, is the home of 4,000 start- ups. Throughout China, there are 10 LinkedIn competitors and large numbers of Groupon comparables. Creating jobs is the number one goal from the government’s perspective.
What’s next for China? Policy considerations in China are different from Korea and Japan. Since there is a large young population, immigration is not a bottleneck issue. Degrees of openness to culture infusion are as yet hard to measure. The good news is that there is very large domestic market and it will be an increasing focus of China policy.
From an innovation policy perspective, there are some fairly common levers that can be used to guide the system, whether direct or indirect. These levers include access to capital, skills development, tax credits/incentives, economic policy, immigration policy, enterprise governance controls, and even the effects of democracy on policy. It is interesting to see how in each of the Asia cases, the policies have been selected to match the specific needs of each local situation.