Remarks by Franklin L. Lavin
Under Secretary of Commerce for International Trade
Opening Remarks US-China Venture Capital and Entrepreneurial Forum
January 23, 2007
I would like to welcome all our participants here today, with a special welcome to Madame Ou (Xinqian, Vice Chair, National Development and Reform Commission) and the delegation from China for coming to Washington for this, the second meeting of the U.S.-China Venture Capital Forum. A lot has changed since the last forum took place in 2004. The challenges and rewards of investing in China have grown as China’s economy has expanded and its needs have become more complex.
Today we will hear from venture capitalists, entrepreneurs, government officials and academics about the utility and challenges of using venture capital.
Let me use my time with you this morning to pose two questions. First, where do good business ideas come from? And second, why do some good ideas work, while others do not?
Relationship of VC to Economic Dynamism
The first question is: where do good ideas come from?
This gets to the heart of what venture capitalism is all about. The fundamental logic of VC is that good ideas can- and do- come from anywhere. They can come from the research laboratories at IBM and Lenovo, or they can happen in a garage or a kitchen, just as it was for Bill Hewlett and Dave Packard who started HP in their garage in Palo Alto, California, or for Henry Ford who tinkered with engines at his home in Detroit.
These are historical examples, but versions of these stories can be told today by thousands of inventors and entrepreneurs who started their businesses with nothing but an idea and a passion. Risk capital continues today to help entrepreneurs, such as Sergy Brin, the founder of Google, or someone like Tien Wong, the founder of CyberRep and Opus8, who you will hear from later.
Both China and the U.S. are nations of inventors and innovators. Some good business ideas come from government research laboratories. But some come from high school students, housewives, and accidental experimentation.
Good ideas can come from any place, and the value of venture capital to the economy is that it finds these ideas and creates the financial support that they need to thrive.
Now to the second question: why do some ideas work and some do not?
There are many answers to this question, but I think they can be sorted into business issues and policy issues. Like a farmer planting crops, new ideas need the right environment to become successful businesses. Even the best idea will not work if the business management is weak, if there are problems in marketing, or if the product is not priced right for the market.
But I’d like to talk for a minute about the important policy issues that can help create the proper business environment for ideas to succeed.
This principle holds for the U.S., China, and all nations. Indeed, yesterday’s newspapers told us of a study by McKinsey that suggested New York’s leadership in financial markets was potentially at risk because of over-regulation and weaker legal predictability than Britain, for example. And since we are here to discuss China, let me comment for a minute to focus on a few policy issues in China.
Any fair-minded observer will conclude that China has successfully grappled with its most important policy challenge: creating economic growth. Indeed, in many respects the economy of China has been the best performing economy in the world for a number of years. This is a clear sign that Chinese leadership is serious about sound economic management, and it should provide strong encouragement to people who are thinking about starting or funding a venture in China.
But in some other areas of policy, I regret to report that the news is not as good.
There are still significant problems in China with regard to intellectual property protection, a cornerstone of VC development. Without the ability of inventors and entrepreneurs to protect their creations, innovation is stifled and markets will not be able to assess the risks and benefits from their investments in emerging technologies and businesses. China is a nation full of good ideas, but unless inventors and entrepreneurs can protect their ideas, they are unlikely to find the investment they seek.
Second, the free flow of international investment is sometimes limited. Business people would like to be able to seek funds from as many sources as possible. Investors would like to pursue projects in as many markets as possible. This means that in the best environment, foreign investors in China will be able to enter and exit projects easily, and investment decisions will be made by the parties involved. Unfortunately in China today there are many restrictions on investments and it is not always easy to enter or to exit a project. This hurts China’s economy and hurts venture capital in China.
Finally, international financial service firms cannot fully participate in China’s economy. Venture capital works best when it works alongside conventional finance. Young companies need access to bank loans, equipment finance, and eventually to bond and stock markets. Right now, U.S. participation in these areas is restricted. American financial services companies want to bring the transparency, technology and services to market that consumers in China want and that businesses need.
So the good news is that China enjoys high rates of economic growth. And the bad news in China is that in many respects it is a challenging market in which to do business. The World Bank study on the Ease of Doing Business ranks China at 93rd out of 175 countries measured. This is up from 108 th – so it is a positive trend. Compare this to the U.S. at number three and other countries like Korea (23), or Mexico (43, up from 62 last year). Creating regulations that allow global capital in, protecting those who participate, and enforcing intellectual property rights will no doubt help China be listed among the top rank of nations in the eyes of investors.
I’m optimistic about opportunities for venture capital in China. I believe the business environment in China will continue to improve, because China has been improving for more than 25 years. China now has the challenge of performing in the very top ranks of the world’s economy. In my view, China will rise to this challenge, which will spread prosperity throughout China, and allow our two nations to enhance our economic ties.
I would like to thank you again for your participation, and I look forward to exploring the issues involving venture capital over these next two days.