Don’t underestimate China’s entrepreneurs—steal them

The US prides itself on innovation, but China is catching up

Credit: Lincoln Agnew

Waverly Deutsch

Waverly Deutsch | Aug 12, 2019

Former US vice president and Democratic presidential hopeful Joe Biden has dismissed the idea that China, the world’s second-largest economy, poses much of a threat to the United States. “China is going to eat our lunch? Come on, man,” he said at a campaign stop in May. “China isn’t in competition with us. . . . They can’t figure out how they’re going to deal with the corruption that exists within the system. They’re not bad folks, folks. Guess what—they’re not competition for us.” 

But Biden’s view of China certainly does not match what I observed on a recent trip to Hong Kong and Shenzhen, at least when it comes to entrepreneurship and innovation.

Shenzhen in particular astounded me. In 1979, just 40 years ago, Silicon Valley was already home to Apple and Oracle, and was busy populating its famous Sand Hill Road with the likes of Kleiner-Perkins, Sequoia Capital, and other VC companies. Shenzhen, meanwhile, across the Pacific Ocean, was a small city dominated by the fishing industry, with just a few factories making cement, tractor parts, and fertilizer. Today, Shenzhen is China’s eighth-largest city, with 12 million inhabitants. It has the country’s third-largest GDP, behind only Shanghai and Beijing, and is in the top 20 cities worldwide for venture investment. 

Technology and innovation have fueled this expansion. Home to Huawei, the world’s largest telecom-equipment maker, Shenzhen is known for electronics manufacturing—but it’s home to more than that. Shenzhen-based Tencent, one of the 10 largest tech companies in the world, is at the cutting edge of artificial-intelligence software. While visiting Shenzhen, I saw astounding evidence of innovation in facial recognition software, big-data analytics, and electric-automobile production.

Shenzhen is just one example of the expansion that has been happening in China over the past several decades. If we use patent filings as a proxy for innovation, Chinese innovators’ share of patent filings seeking broad international intellectual-property protection under the Patent Cooperation Treaty (PCT) of 1970 was a mere 4 percent in 2000, according to data from the World Intellectual Property Organization (WIPO). By 2018, their share was almost equal to that of innovators from the US and Japan, with residents of each country filing roughly one-fifth of all PCT applications. Domestic filings in China, patents for protection specifically in the Chinese market, soared over the same period, from about 200,000 to over 1.3 million. And, while US inventors still file the most patents for IP protection in one or more specific non-US countries, Chinese inventors are increasingly looking at markets abroad. China’s number of patent filings in other countries grew by 15 percent, compared with only 2 percent growth each for the US and Japan.

China’s inventors are getting the capital they need to commercialize their innovations. In 2008, nearly 60 percent of VC investments were made in the US and only 8 percent in China—but by 2018, China’s 39 percent share of the world venture pie nearly matched the US’s 42 percent, according to data from PwC, and data providers Statista and Preqin. China is now home to three of the top five cities for venture capital, reports the Center for American Entrepreneurship. VC investment in Beijing alone was nearly $73 billion in 2018, and experts expect it will surpass San Francisco as the No. 1 city for venture in 2019 or 2020.

In 2013, when the term unicorn was coined to refer to privately held companies with valuations of more than $1 billion, China had one such company, Alibaba. A mere six years later, more than a quarter of unicorn companies are founded in China, according to TechCrunch’s unicorn leaderboard. 

Competing with the largest nation on earth

Other data points tell a similar story. Back in 2008, the Global Innovation Index (GII), created by Cornell University, INSEAD, and WIPO, ranked the US as the most innovative country on earth—and that was the last time the US held the No. 1 position. After the financial crash that year, the US plummeted to the 11th position, gradually working its way back to the third spot in 2019. Meanwhile, China steadily climbed from the 37th most innovative country to the 14th. 

What does this index measure? According to the GII website: 

Five input pillars capture elements of the national economy that enable innovative activities: (1) Institutions, (2) Human capital and research, (3) Infrastructure, (4) Market sophistication, and (5) Business sophistication. Two output pillars capture actual evidence of innovation outputs: (6) Knowledge and technology outputs and (7) Creative outputs. 

The US ranks in the top 25 countries across all seven pillars and No. 1 in market sophistication. Notably, within the subcategories of the pillars, the US is also No. 1 in global research-and-development companies, VC deals, revenue generated by intellectual property as a percentage of its total trade, and entertainment-and-media market. 

But China is tops in knowledge workers, patents by origin, high-tech net exports, and creative-goods exports, plus has the largest domestic market. And it’s close to overtaking the US in VC deals. 

So it would behoove candidate Biden to take another look at China. The US has long considered innovation to be its primary market advantage, but China is a key competitor. 

International talent creates US-based jobs

Beyond continuing to lead the world in R&D spending, the US should capitalize on one area in which China cannot compete: its appeal to the world’s top talent. Immigration is the US’s secret weapon in the innovation battle. Wellesley’s Sari Pekkala Kerr, Harvard’s William Kerr, the World Bank’s Çağlar Özden, and University of Western Australia’s Christopher Parsons looked at the flow of talent worldwide. Their data indicate that the US draws nearly eight times the number of immigrants holding patents as its nearest rival, Germany. Between 2000 and 2010, more than 194,000 patent owners immigrated to the US. Who loses the most patent holders to emigration? That’s right . . . China.

Immigrants make up 38 percent of US-based scientists and 27 percent of physicians. Immigrants are twice as likely to become entrepreneurs as native-born Americans, according to the Kauffman Foundation’s 2016 Startup Activity Index. In 1996, 13 percent of new entrepreneurs in the US were immigrants. By 2015, that had more than doubled to 27 percent. This is no secret in Silicon Valley, where in 2016, over half of US-based unicorn companies had one or more immigrant founders, and more than 70 percent relied on immigrants as key members of their management and/or product development teams, according to Cato Institute’s Stuart Anderson. These unicorns excel at job creation and are responsible for tens of thousands of sustainable, well-paying new jobs. How sustainable are these jobs? Nearly half of Fortune 500 companies were founded by either first- or second-generation immigrants—among them Jeff Bezos, the son of Cuban immigrants, who employs over half a billion people at Amazon; Sergey Brin, from Russia, who cofounded Google, which now has more than 80,000 employees; and Kumar Mahadeva, from Sri Lanka, founder of Cognizant Technology Solutions, which has a quarter of a million employees, according to Kleiner Perkins’s Internet Trends Report 2018.

Innovation rankings: US vs. China
Select highlights from the GII, 2019
  US China
Institutions 11 60
Political environment 16 47
Regulatory environment 9 100
Business environment 2 48
Human capital and research 12 25
Education 45 13
Research and development 3 17
Gross expenditure on R&D as a percentage of GDP 9 15
Infrastructure 23 26
Information and communication technologies 8 46
General infrastructure 19 2
Ecological sustainability 64 67
Market sophistication 1 21
Credit 1 43
Investment 7 64
Trade, competition, and market scale 1 2
Business sophistication 7 14
Knowledge workers 4 1
University/industry research collaboration 1 27
Knowledge absorption 7 13
Knowledge and technology outputs 4 5
Patents by origin 6 1
High-tech exports as a percentage of total trade 27 1
Intellectual property receipts as a percentage of total trade 1 56
Creative outputs 15 12
Intangible assets 32 1
Entertainment-and-media market 1 42
Creative-goods export as a percentage of total trade 17 1

Cornell University, INSEAD, and WIPO, 2019

Many of these entrepreneurs enter the country on student visas. More than 5 percent of US college enrollment is made up of international students, who numbered over 1 million in the 2016–17 academic year. International students disproportionally choose STEM fields, accounting for 35 percent of medical residents and 70 percent of electrical-engineering, 63 percent of computer-science, and 55 percent of economics students. Often, they want to stay in the US to work for a corporate employer or to start their own businesses.

Dhiraj Rajaram is a prime example. Born in Chennai, India, Rajaram came to the US and gained a master’s degree in electrical engineering at Wayne State University followed by an MBA at Chicago Booth. He landed a job at PwC, which sponsored him for an H-1B work visa. Even with two advanced degrees and a sponsoring employer, Rajaram had just 40 percent odds of getting one of the 85,000 H-1B visas in a lottery, as the H-1B program is oversubscribed. After working for two large companies, Rajaram quit to build his startup, Mu Sigma, the world’s largest pure-play data-analytics firm. With dual headquarters in Northbrook, Illinois, and Bengaluru, India, the company is estimated to employ over 3,500 people. 

There are many more potential Dhiraj Rajarams out there who are not able to contribute those well-paying jobs to the US economy, however. Over my years at Chicago Booth, I have worked with many great international entrepreneurs who struggle to launch their innovative companies in the US. Recently, two founders from Israel, with brilliant technology for the online-video-gaming market, had to take jobs that would give them a chance at qualifying for an H-1B visa, thus putting their company on hold and taking jobs rather than creating them. In another case, a Lebanese e-commerce entrepreneur relied on the common Optional Practical Training (OPT) extension to his student visa to gain another year in the US to work on his company, only to have the extension denied under new criteria imposed by the Trump administration. He is now in London, trying to get back to the US. These are innovative job creators the US should be courting, not rejecting.

Encourage, don’t discourage, immigrant entrepreneurs

The US immigration system is incredibly complex, with 185 different types of visas, each saddled with reams of arcane policies and regulations that are holding back entrepreneurs. 

Take the OPT extension. According to Nitin Pachisia, one of the founding partners of Unshackled Ventures, a VC firm dedicated to helping immigrant entrepreneurs legally stay in the US, most of the job creators who enter the US use either a student or an employment class of visa. Unshackled has been able to help founders from 19 countries, using 11 kinds of visas and green cards, launch more than 30 companies that have collectively created hundreds of jobs in the past five years. But Pachisia has seen increased scrutiny of the OPT extension—and is concerned that some immigration policies are tilted in favor of larger companies. 

For instance, H-1B visas, which allow companies to temporarily hire professional workers, are being gobbled up by the large tech giants and consulting companies, which can file thousands of applications, clog the lottery system, and make it harder for entrepreneurs to get an H-1B. This increases the odds that a critical cofounder might not be able to stay with her company. In April 2018, President Trump signed the Buy American and Hire American Executive Order, which added more hurdles for companies wanting to sponsor foreign workers, and reserved H-1B visas for only the most skilled foreigners. Denials of these visas have reportedly increased, while applicants and employers are subjected to more requests for information, according to a policy brief from the National Foundation for American Policy. Many small companies can’t afford the expense of sponsoring exceptional talent, even though companies with fewer than 30 employees create four times as many jobs when they sponsor a worker on an H-1B visa than large companies do.

Employment-based (EB) visas, created by the Immigration Act of 1990, could theoretically help—but often don’t. Unlike the nonimmigration H-1B visas, which are for temporary workers, EB visas were initially created to encourage people with special skills to stay in the US, and can lead to green cards. EB-1, or preference category 1, visas are granted to “persons of extraordinary ability,” who are typically scientists, artists, researchers, athletes, or senior executives of multinational companies. Three additional classes of preference include people holding advanced degrees, religious workers, translators, and employees of US foreign-service posts. The EB-5, or investor, category authorized 10,000 visas for immigrants able to invest $1 million in a new business that would create 10 or more jobs (or $500,000 if deployed in an economic development zone). Entrepreneurs in high tech and life sciences can rarely meet the pricey pre-immigration investment hurdle, and given the high-risk nature of these ventures, often can’t guarantee 10 jobs. Additionally, entrepreneurs often can’t handle the complex reporting requirements. As a result, 75 percent of EB-5 visas go to people who can invest in real-estate projects that immediately create construction jobs and can be audited for compliance.

The US should follow the example of Canada, Australia, and the United Kingdom and create a visa specifically for entrepreneurs, one that would allow people to start a company if they can raise the needed funding. In Australia and the UK, such visas require an entrepreneur to create two jobs within two years. Canada, for its part, has no job requirements. Part of the bipartisan-sponsored senate bill of the 116th Congress, S.328, known as the Startup Act, would offer 75,000 immigrants the chance to launch companies that employ two or more people full time. 

This one step would help the US foster job creation, as it could create at least 150,000 jobs. It is a step that would help the US continue to be the top destination for the world’s best talent. And that is what is required for the US to stay competitive with China.

Waverly Deutsch is clinical professor and academic director of university-wide entrepreneurship at Chicago Booth.