We have witnessed the rise of many successful entrepreneurs in Asia over the past few decades. One criticism of their success, however, has been that their businesses often were developed through “copying” or learning from Western businesses. It is true that their businesses have not been as revolutionary as some Western businesses have been. There is nothing inherently wrong with this, nor should it be surprising at Asia’s current stage of economic development. But we do not believe this model will always be the case.

Many policymakers in Asia have made innovation a national, strategic priority. In the past two decades, they have narrowed the gap in research and development (R&D) with their Western peers through rising R&D spending in academia and increasing technology transfer by attracting knowledge-intensive foreign direct investments (FDI), which taps a pool of more highly educated workers. The effort has given rise to numerous research hubs equipped with good infrastructure and skilled workers. Driven by the explosion in Internet penetration and rising personal income, private sectors have become more active and funding for start-ups is increasing as more angel and venture capital communities develop.

R&D Funding

Since the early 1990s, greater emphasis on science and engineering has significantly improved the overall quality and quantity of such professionals in Asia. Much of the increase is a result of government policies aimed to spur growth in these fields in both business and academia. This effort increased Asia’s share of global R&D expenditure to 32% in 2009, up from 24% in 1999.

This increase was supported by both growing GDP and increased spending for R&D, with results most evident in China and South Korea. South Korea has been trying to develop its biotech industry through greater biological and medical sciences research, and has significantly increased its R&D expenditure as a percentage of GDP as well as its number of researchers. In China, R&D spending as a percentage of GDP more than doubled in the decade following an initiative by then Chinese President Jiang Zemin to promote the country’s higher education system. The 985 project, announced in 1998, sought to improve funding for China’s universities, raise their reputations globally, build new research centers, host international conferences and attract visiting scholars.

The rising amount of funding going into the sciences, predominantly in China, Taiwan and South Korea, has led to more students pursuing related higher education degrees. The number of science and engineering degrees earned in China and Taiwan more than doubled between 2000 and 2008, and accordingly, the increase in such graduates has raised Asia’s labor supply of scientists.

Industrial Policies

Whereas the role of industrial policy in, and its overall contribution to, Asia's development is controversial, there seems little doubt that some industries have benefited from government support. And governmental development policy has generally built up good infrastructure and created an educated and knowledgeable labor force. Taiwan, South Korea and Singapore have had success after their respective governments focused on developing specific sectors like semiconductors, automotives and airlines. In the past decade, less mature Asian economies have utilized methods like public procurements and technology funds to implement their industrial policies aimed at boosting local innovation. Increasingly, they are also using FDI to achieve their objective by increasing technology transfer. In 2012, Asia was the largest FDI destination with about a 32% share in global FDI projects. Out of the top 20 cities by jobs created through greenfield FDI projects (i.e. new ventures from the ground up), five are from India and three from China. The world’s top destinations for design, testing and R&D are Bangalore, Hyderabad and Pune in India, followed by Singapore and Shanghai.

However, traditionally, instead of developing a network of local suppliers, foreign companies have sourced from the same suppliers due to a lack of scale or due to trust and quality. As a result, governments have increasingly offered various financial incentives for foreign multinational corporations to conduct R&D in Asia’s science parks. Today, according to the United Nations Educational, Scientific, and Cultural Organization (UNESCO), there are over 400 science parks worldwide. While the U.S. and Japan top the list with more than 110 centers each, China—which did not start developing science parks until the mid-1980s—already has approximately 100.

As a result, U.S. multinational corporations are increasingly allocating R&D projects to their foreign affiliates in Asia Pacific ex-Japan, whose R&D project value grew more than seven-fold from 1997 to 2010. These activities are driving the rise of hubs equipped with technology infrastructure and well-educated labor pools across Asia, which is a precondition of start-ups' creation and expansion.

Ease of Doing Business

Several factors have contributed to the trend of Asia’s emerging innovation hot spots. Knowledge-intensive FDIs have laid the initial foundation by creating a supply of skilled labor. The development of the Information and Communication Technology (ICT) sector has provided necessary upgrades in infrastructure, making start-ups a feasible business option in developing economies. In fact, start-ups often develop in ICT-related sectors because of the existing infrastructure and asset-light business model. The growth in disposable income and the explosion of Internet penetration in Asia has continued to be a strong incentive for first-time entrepreneurs to capture opportunities that larger conglomerates may be responding to too slowly.

Singapore, in particular, has been more aggressive in building a start-up ecosystem with its government backing a number of incubator and accelerator programs and making direct investments into companies. Encouragingly, start-up activities have been on the rise locally in other countries as the environment for new business owners in Asia has improved in terms of both the time it takes to start a business as well as credit accessibility via expanding angel investor networks and incubators. In China, 3,600 start-ups were founded in 2012, and many Silicon Valley incubators have been casting their eyes on Asia for new partnerships.

Doing business in Asia, however, can still pose difficulties. While the World Bank has ranked Singapore and Hong Kong as the top two easiest places to do business in the world, only four other countries in the top 20 are in Asia. Asian countries with large populations like China (ranked 96), India (ranked 134) and Indonesia (ranked 120) are low on the list due in part to bureaucracy. In Singapore, applying to start a business takes just three days versus over a month in Indonesia and China. The more serious issue is a lack of access to credit, particularly in emerging countries. Limited capital and resources keep entrepreneurs away from capital-intensive projects and push them toward asset-light, services-oriented businesses. Yet, a lack of fixed assets and thus collateral means local banks are unwilling to take risks. In Asia, unfortunately, an entrepreneur with a great idea could be bogged down by an unfriendly business environment.

Mentorship

A lack of mentorship has been another common complaint among entrepreneurs and has become a significant obstacle for Asia’s entrepreneurs. Fortunately, we are seeing more seasoned and sophisticated investor communities developing in the region. In China, for instance, the angel investor community has been predominantly composed of "super angels" who leverage the network they have built since China’s initial Internet ventures started in the 1990s. Interestingly, in the last two years, a different group of angel investors has evolved in China. They include early employees at ventures started by super angels and founders of the second wave of Internet-related companies that began a decade ago. These investors have a more diversified background than their predecessors with experiences in multiple sub-segments within Internet services like e-commerce and online video and industry-specific knowledge from operating various vertical businesses like travel and automotives. Across South and Southeast Asia, there were few if any angel investor clubs a few years ago but now there are several in Bangalore, Hyderabad, Chennai, Kuala Lumpur, Bangkok and Jakarta, with a diversified investor base encompassing angel networks, seed funds, U.S. venture capitalists and Asian venture capitalists.

The qualities and experiences of entrepreneurs are also improving. At a recent panel held at Stanford University in California, a partner at a multi-billion dollar cross-border venture capital fund noted that just a few years ago, nine out of the 10 entrepreneurs they worked with in China were first-time entrepreneurs unfamiliar with the venture capital process, but today, half of them are serial entrepreneurs. Learning from mistakes and failures is a vital part of becoming a successful entrepreneur. As the breadth and depth of entrepreneurs in Asia expand, there should be more supply of experienced entrepreneurs providing mentorship for newcomers.

Using Silicon Valley as a yardstick to measure the success of Asia’s entrepreneurs is an interesting exercise. But it offers little insight into the development of innovation in Asia. In fact, Asia’s entrepreneurs have been innovative in adapting their business models to local needs in novel ways. In addition, compared to a decade ago, the progresses made in improving university R&D, expanding local skilled labor pools and increasing the availability of funding have been extremely impressive. The issue with a lack of mentorship is being dealt with as current entrepreneurs build experiences and become mentors for future entrepreneurs. As the development of innovation gains traction, the next stage in Asia’s entrepreneurship is likely to move beyond “simply copying” to developing business models and ideas that are homegrown and inventive.

There are challenges that Asia could face during this transition. For instance, entrepreneurs’ willingness to take risk is related to the macro-environment where they conduct their businesses. So governments need to strengthen the financial health of their countries to minimize disruptions brought by macro events. More importantly, state-owned enterprises (SOEs) still play a big role in many Asian economies. Governments should allow so-called disruptive business models to thrive in local economies even when it threatens their vested interests in SOEs. There will be bumps in the road but we are still optimistic about the development of Asia’s entrepreneurship.

There are different ways for equity investors to participate in this trend. IPOs remain a popular exit strategy among entrepreneurs in Asia with China having the most venture capital-backed IPOs in Asia (second globally to the U.S.). We have also witnessed an increase in mergers and acquisition activity in the Internet sector over the past year. Investors can gain exposure by investing in listed companies that make sensible acquisitions. Its nascence, dynamism and potential make entrepreneurship in Asia an exciting trend to follow for decades to come.

Jerry Shih, CFA

Research Analyst

Matthews Asia

The views and information discussed in this article are as of the date of publication, are subject to change and may not reflect the writers' current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein.

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information.

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