Where startups should start in China

It has been 38 years since China began its reform and opening-up with the launch of Special Economic Zones (SEZs) and the promise of giving more room for foreign companies to grow. The economic policies system which made a fishing village such as Shenzhen into an innovation mega-hub is still in place and constantly evolving.

According to Rafael Jimenez Buendia, Business Development Advisor at the EU SME Center, this is because SEZs are actually working. He noted that there is a rise in EU companies seeking to establish themselves in SEZs, especially in the tourism sector.

Buendia spoke along with 11 other business experts at the EU Sino Round Table discussion co-organized by BenCham, the EU SME Center, ICI – Beijing B&R, and EU Sino Business Consulting, recently held in Beijing. However, according to VP of Galaxy Internet Capital Karen Guo who spoke with TechNode after the panel, foreign entrepreneurs should not take the market for granted.

“It is a huge, fast-growing, dynamic market, meanwhile also complicated with policies, different market practices,” said Guo.

When it comes to choosing where to settle in China, startups and SMEs do not consider only SEZs. Large, international cities such as Beijing, Shanghai, and Guangzhou, are still the top destinations for most foreign companies. They provide talent, English-speaking staff, and ecosystems for business growth, said Guo. One of China’s main hubs for entrepreneurship, Beijing’s Zhongguancun, has become increasingly competitive since companies there are surrounded by incubators, VCs, and big companies looking to buy out startups.

Yalin Chen, Managing Director for China at China Inroads noted that SEZs are specializing by choosing to support certain industries over others. Many SEZs are eager to welcome companies focusing on cutting-edge technologies. Another trend is that smaller cities in China are offering more incentives to attract startups and SMEs.

“Foreign entrepreneurs tend to be overwhelmed by the hospitality from the development zones and tech parks, especially those newly built and located in 2nd-tier or 3rd-tier cities,” Ho told TechNode after the panel. “One of the main reasons for the development zones to attract startups is due to the overall picture of China’s current economic re-structuring, with policies and incentives leaning towards encouraging innovation and entrepreneurship. International startups are certainly welcomed by nearly all the development zones.”

However, as some panelists have noted, sometimes these generous promises don’t last. In China, city, county, and provincial-level officials often get promotions after finishing certain projects. Unfortunately, for companies, this sometimes means that deals have to be renegotiated once the leadership has changed.

Not every area is suited for every business. Certain zones may offer good conditions in terms of subsidies or tax breaks but fail to provide the necessary ecosystem for the company to thrive.

“Specifically which city to choose, that depends on which area the startups are,” said Ho. “If they are working on software, internet, I would suggest Beijing, given most of the internet companies are here in Beijing. If the startups is about hardware, then for sure Shenzhen is the best choice, as the ecosystem, as well as supply chains, are all there.”

Most panelists agreed that talent attraction is one of the biggest challenges. And in attracting people, it’s not just the money that plays a role. Daniel Albrecht, Managing Counsel at Starke law firm, shared an anecdote from a trip to one Special Economic Zone.

“I asked my translator does she like working here and she said ‘No, it’s boring,’” said Albrecht adding that to attract workers, areas need to build up a business environment but also an environment that’s attractive for people.