Venture capital (VC) investment provides a unique mechanism for gauging the technological and entrepreneurial sophistication of a national economy. It is no surprise, then, that the two giants of Asia—China and India—have rapidly become important destinations for VC investment. The latest data available from Ernst & Young reveals an astonishing development: China received more VC investment than any nation except the United States. India, though lagging behind China, still received $862 million. To compare, over $30 billion in VC money was invested in the United States in 2007; $823 million was invested in Canada. Clearly, China and India are becoming nodes for the global VC practice. Many of the largest and most prestigious Silicon Valley VC firms have established significant presences in both nations.

China and India differ in many ways, but with respect to the development of VC they share important characteristics. Until late 2008, both nations had rapidly growing consumer economies. The Chinese and Indian governments and populations both agree that education—and particularly engineering—is critical to their future. Both China and India are leaders in sending their graduate students abroad, which has created a pool of well-trained nationals overseas who can advise their peers at home, or even return home themselves to set up new ventures. Many of these Chinese and Indian nationals have worked in U.S. sciences and engineering-based firms. Such professional experience, especially during the last two decades, has laid the basis for successful technology-based entrepreneurship, and the growth in VC that accompanies it.

When VC investing is viewed globally, U.S. dominance is unquestioned. In the United States, 30–35 percent of all VC-financed firms are located in the San Francisco Bay area. Another 10–12 percent are located in the Boston and New York areas, respectively. In India and China, VC investments are similarly concentrated, and generally occur in locations with the greatest concentrations of highly educated persons. As Table 1 indicates, the investment concentration is remarkable. Forty percent of all the VC-funded firms are located in Beijing, 26 percent are in Shanghai, and the Southern Chinese triangle of Shenzhen, Guangzhou, and Hong Kong accounts for another 14 percent. VC investment in China is even more concentrated than in the United States.

Table 1 VC Investments in China and India by City, 2004–2007
(more than 5 investments per city)

Chinese City    Number of Firms    Percent    Indian City    Number of Firms    Percent
Beijing                   213                  40          Bangalore           55                    38
Shanghai               137                  26          Mumbai              31                    21
Shenzhen                36                    7          Chennai             21                     14
Hong Kong              19                    4          New Delhi           16                    11
Guangzhou             16                    3           Hyderabad          11                     8
Hangzhou               13                    2           Pune                   8                      5
Nanjing                  11                    2             n/a       
Suzhou                    9                    2             n/a       
Wuhan                     7                    1             n/a       
Others                   66                   13           Others                4                      3
Unknown                  1                    0          Unknown             0                       0
Total                      528               100            Total                146                  100
Binational                9                    2          Binational             45                    31


VC-backed startups in India, though more diffuse in terms of the top six, are more concentrated overall. Three city regions—Bangalore (38 percent), Mumbai (21 percent), and Chennai (14 percent)—attract the largest investment. However, when including Delhi (11 percent), Hyderabad (8 percent), and Pune (5 percent), these six cities account for an even greater percentage of overall VC investment. The most technology-oriented cities in both nations, Beijing and Bangalore, have received approximately 40 percent of all VC investment. The second largest recipients are Shanghai and Mumbai, which are also the financial capitals.

In China, an enormous economy growing at nearly 10 percent per year even as it emerges from a socialist past, there are significant opportunities in infrastructure development and in supplying the burgeoning underserved consumer market. In a recent Ernst & Young report, Fan Zhang, one of the founding managing partners of Sequoia Capital China, was quoted as saying that “one of the factors that attracted Sequoia Capital to China is the country’s booming consumer market that provides an opportunity to create companies to define certain sectors and fill the need for strong brands, not only in technology but also tech-related consumer services and more traditional industries.”

Zhang is correct—VC investing in China does not directly compete with U.S. firms seeking VC investment. Table 2 shows the fields that VC firms are targeting in China. The table is divided into two binary categories—whether the firm receiving the investment targets the domestic or the global market across a variety of industries, and whether a given firm is in a high technology or non-high technology sector. Chinese firms, even those in technology-based fields, overwhelmingly target the domestic market (87 percent). The Internet has given rise to the largest number of VC startups, nearly all of which are focused on the Sinophone market. Two other key areas—software (10 percent) and mobile phone applications (10 percent)—also cater almost exclusively to the Chinese market. This domestic focus suggests that it will be quite some time before VC-backed Chinese firms threaten counterpart firms in the United States. A possible exception may be semiconductor design, where there are some Chinese startups. Though few Chinese VC-financed firms are likely to be directly competitive with U.S. firms in global markets, many of these Chinese firms compete ferociously against U.S. multinationals trying to make their own inroads into the Chinese domestic market.

Table 2 VC Investments in China and India by Sector and Market, 2004–2007

                                         India                               China
Sector                      Domestic*    Global         Domestic **    Global

Semiconductors               0               7                  22                20
Internet                        16               3                144                  2
Software                         2             14                  55                  4
Communications              1               4                  23                  9
Services                          4             53                  28                  9
Mobile phone                   7              5                   51                  1
Media                             2              0                    35                 0
Healthcare                      1               4                   26                 4
Retail                             1               1                   19                  0
Miscellaneous                  2               0                  20                  2
Components                    0               0                   2                   1
Energy                            0               0                   6                   8
Environment                    0               0                   5                   1
Manufacturing                  0               0                 25                  6
Total                              34             91                461                67

* Domestic firms are identified as those that made no apparent attempt to serve overseas markets.

The profile of Indian firms differs from those in China. First, Indian firms are internationally oriented (73 percent); only 27 percent focus on the domestic market. With respect to sector concentration, VC investing in India favors the services sector (46 percent) and software (13 percent). This is not surprising, given India’s well-known comparative advantage in these arenas. Unlike most VC-backed companies in China, many Indian firms may well create competition for U.S. service firms, despite the less developed nature of the Indian economy as a whole.

China and India continue to attract significant VC investment, albeit in different sectors. Today, China is second only to the United States in terms of VC investing, and this is unlikely to change. In China, the preponderance of VC investment is geared to the rapidly growing internal market. The size and unique nature of this market offers entrepreneurs lucrative opportunities to provide “knock-off” U.S. Internet sites for the Chinese market. There are Chinese interpretations of Yahoo!, Google, eBay, Facebook, and Monster.com that service Chinese customers. These firms are self-limited by the language; as such, they do not threaten companies overseas. Moreover, these Chinese companies do not own unique or global class technology that could challenge larger multinational players. It is unclear whether this situation will change over time.

Indian firms differ from Chinese firms in their strong outward orientation. In percentage terms, more Indian than Chinese firms operate in hard-core technology fields. Thus, while China currently enjoys greater VC investment, it is possible that Indian firms may ultimately play a bigger role in the global economy.

The Asia Health Policy Program at the Walter H. Shorenstein Asia-Pacific Research Center is pleased to announce that Brian K. Chen has been awarded the %fellowship1% for 2009-2010.  Brian is currently completing his Ph.D. in Business Administration in the Business and Public Policy Group at the Haas School of Business, University of California at Berkeley.  He received a Juris Doctor from Stanford Law School in 1997, and graduated summa cum laude from Harvard College in 1992. 

As an applied economist, Brian’s research focuses on the impact of incentives in health care organizations on provider and patient behavior.  For his dissertation, Brian empirically examined how vertical integration and prohibition against self-referrals affected physician prescribing behavior.  His job market paper has been selected for presentation at the American Law and Economics Association’s Annual Meeting in 2009.

Brian comes to the Shorenstein Asia-Pacific Research Center not only with a multidisciplinary law and economics background, but also with an international perspective from having lived and worked in Taiwan, Japan, and France.  He has a particularly intimate knowledge of the Taiwanese health care system from his experience as an assistant to the hospital administrator at a medical college in Taiwan.

During his residence as a postdoctoral fellow with the Asia Health Policy Program, Brian plans to conduct empirical research on cost containment policies in Taiwan and Japan and how those policies impacted provider behavior. His work will also contribute to the program’s research activities on comparative health systems and health service delivery in the Asia-Pacific, a theme that encompasses the historical evolution of health policies; the role of the private sector and public-private partnerships; payment incentives and their impact on patients and providers; organizational innovation, contracting, and soft budget constraints; and chronic disease management and service coordination for aging populations.

Since 2005, research teams comprised of participants from across East Asia have been working on a collaborative survey project known as the East Asian Social Survey (EASS).¹  The participating research teams include the Chinese General Social Survey (CGSS) from Hong Kong University of Science and Technology and Renmin University in China; Osaka University of Commerce in Japan (JGSS); SungKyunKwan University in Korea (KGSS); and the Taiwan Social Change Survey (TSCS) at the Academia Sinica, Taiwan. The plan of the project is to conduct a survey with different topics for every two years. The first EASS survey, which focused on Family, was conducted in 2006. KGSS had now integrated the data that the four research teams compiled by the end of 2008. This data set is now ready for research use, both by members of the teams and by other interested parties. The topic for the 2008 survey is Globalization and Culture.

During the past two decades, the export-oriented economies of Japan, Korea, and Taiwan experienced strong economic growth and rising income levels. More women entered the labor markets and obtained better-paid jobs. However, in the regions surveyed, men and women often do not equally share in economic prosperity and there still exists a sex gap in earnings. A paper recently co-written by this author and Paula England,²  using the 2006 EASS data, may be the first attempt to explore the size of the sex gap, the factors that explain the gap, and the variations among Japan, Korea, and Taiwan.³

To explain the disparity between the pay of men and women in the survey nations, we used regression analysis to predict the hourly wage from various characteristics, using separate regressions for men and women in each nation. Then we assessed how much human capital factors may contribute to the sex gap in pay. For each factor, there are two estimates of how much it explains, reflecting whether we use male or female slopes, or rates of return. The table below summarizes some of the paper’s preliminary findings. The last row of the table shows that the sex wage gap is highest in Korea, with Japan coming in second place. In Taiwan, women earned about 82 percent of what men earned. For comparison, in the United States in 2003, the comparable wage ratio of female-over-male was 79.4 percent.

What factors might explain the sex gap in earnings? In Japan, the table shows (20 percent for the make slope and 34 percent for the female slope) that education is a key factor—notably, women are less likely to be college graduates. Another key factor is that women are more likely to work in contingent or temporary jobs than in permanent, full-time employment. In the Korea case, the difference between the male or female slopes is small, and 37 percent (male) to 32 percent (female) of the gap is explained, again, by education, as fewer Korean women have completed college than men. In Taiwan, a much lower share (6 percent for men and to 0 percent for women) is explained, mainly due to potential work experience, followed by employment status. In Taiwan, women actually have more education than men, as more women than men have completed college. This education imbalance supports our finding that the sex gap is largest in Korea, where women are less educated than men, and smallest in Taiwan, where the reverse is true.

Human capital factors (education and potential work experiences) seem to explain smaller proportions in the societies with a smaller gap. On the one hand, if we were to attribute all the elements of the gap not explained by mean differences in our supply-side measures to be sex discrimination, this would imply that a higher portion of Taiwan’s (albeit smaller) gap can explained by pay discrimination. On the other hand, women in Japan and Korea are disadvantaged, both in their educational achievements and their opportunities for regular employment. The contingent or part-time jobs that these women do pay less per hour than do the permanent or full-time jobs in which their male counterparts are employed. The EASS survey indicates, thus far, that economic prosperity and advancement in human capital factors may not naturally bring about sex equality in earnings.

Notes

¹  More information on the EASS can be found at http://www.eass.info.

²  Chin-fen Chang and Paula England "Gender Inequality in Earnings in Industrialized East Asia," to be presented at the Beijing RC28 Meeting, Renmin University, Beijing, China, May 14-16, 2009.

³  In this paper, we excluded Chinese data because the other three societies are more comparable to one another in terms of their economic development.