Venture capital: The new growth driver

Promise abounds, but China's local and central governments need to make policies that are more science-based and detailed

Since China adopted its reform and opening-up policy in the 1970s, the incentive provided by the emancipation of minds and deepening reform has generated waves of entrepreneurs. Startups have sprouted through individual creativity, intelligence and knowledge, helping the country navigate a gloomy economy and steer back to boom times.

China's economy now is characterized as "the new normal", which means the country must cope with downward pressure on the economy, optimize its economic structure and change the economic growth drivers. Mass entrepreneurship and innovation has helped.

However, unlike previous waves of entrepreneurs, the new round comes with greater importance attached to combating and integrating entrepreneurship and innovation - which can mutually benefit and boost each other. The intelligent and innovative talent released by the strategy will transform China's innovative mechanisms and culture.

Chinese governments have made efforts to facilitate mass innovation and entrepreneurship and have put forward a series of promotional and supporting policies, including simplifying of administrative measures and tax exemptions.

The positive attitude toward venture capital investment is an important point in the series of policies.

In 2015, Premier Li Keqiang announced the launch of National Venture Capital Guide Fund for Emerging Industries, a government venture capital fund worth 40 billion yuan ($5.8 billion; 5.5 billion euros; 4.7 billion) to support startups in emerging industries.

Like the VC fund Yozma, which the Israeli government launched in 1993 and which led to a thriving VC industry in that country, the Chinese fund is set up with 60 percent of its money coming from central and local governments and the rest from the public. The fund uses public tenders to invite highly professional asset managers, with returns giving priority to private investors. It focuses on startups in the new emerging and high-tech industries.

In July 2016, the fund received approval from the State Council, and similar funds are being set up at the provincial and city levels.

Furthermore, some local governments started to offer compensation to cover the losses of venture capital funds. For example, the Shanghai municipal government in early 2016 rolled out a rule about how to compensate the losses of angel investors.

According to the Interim Measures on Administration of Risk Compensation for Angel Investment in Shanghai, angel investors will get a maximum compensation of 3 million yuan in an investment project. The annual compensation per investor is limited to 6 million yuan. The local governments in Beijing and Jiangsu province also have similar compensation measures.

There have been discussions and controversies about the measures. Some fear these will decrease investment efficiency and provoke financial fraud.

The book Boulevard of Broken Dreams by Josh Lerner of the Harvard Business School suggests that governments should balance their positions as catalysts with an awareness of their limited ability to stimulate the entrepreneurial sector, and policymakers should design, implement and continuously intensify investment evaluation systems.

Above all, China's local and central governments need to make policies more science-based and detailed.

The development of venture capital investments and the rapid growth of mass innovation and entrepreneurship have yielded great results. Venture capital investment in China rose 19 percent to account for about a quarter of the global total of $127 billion last year, according to KPMG's quarterly report on global VC trends. Some 5.5 million market entities registered in China in 2016, a 24.5 percent increase over last year, with 15,100 market entities registered each day. There are more than 4,000 mass innovation spaces and labs in China.

The high-tech leading moguls in the country, such as Tencent and Alibaba, have been serving as incubators for many innovation startups.

The sharing economy has been booming in China, with shared bicycles a hit in 2016. Strong performance is expected to continue and become a new driving power for China's economic growth.

As Premier Li said at the closing meeting of this year's China's National People's Congress, mass entrepreneurship and innovation appear to be pushing China's economic development forward, despite barriers and difficulties in the process.

The author is a research fellow and deputy director-general with Innovation Research Department of DRC of the State Council. The views do not necessarily reflect those of China Daily.