Globalization And Rise of China's Economy Part Nine, The Start Up Culture.

The creation of a thousand forests is in one acorn.
                                                         --- Ralph Waldo Emerson

Once upon a time, our economy was mostly agrarian. In 1830 American Fur Company was the largest company in the United States. Later on we came up with trains, automobile, electricity, etc. All these companies were start up once upon a time. Today, fur trading is not even a thing. Looking at it another way, start ups represent the future of our economy.

Long before the current raft of start ups, the Chinese are already adapt at gut wrenching changes. Back in the seventies, the Chinese economy were old and highly inefficient. When China entered WTO in 2001, it was feared that many of the old and inefficient companies would collapse when faced with the onslaught of efficient foreign companies. Instead, they rise up to become the world's manufacturing center. When I was growing up in China, I remember being sent to a sewing machine factory while in high school as part of the "learn from the worker" program. All the workers were sitting around reading news paper waiting for gas for blow torches to arrive. We were told to part a section of the angle iron with a hack saw. When the gas came, we watched as the worker cut these sections out with blow torches. It took us an hour to cut one, and he did it in a minute. That was how backwards the Chinese industries were at the time. Behind changes that transformed their industries must be massive internal displacements as China re-configure its economy to use the latest way to organize and manage their companies.

It is not a big jump for those who are used to changes like these to the chaotic scene of creating start ups. In addition, the Chinese local governments has been competing with each other to create more start ups as that is in the interest of the local governments. Using the Silicon Valley as examples, they have created an environment where many start ups flourished. The picture below, provided by visualcapitalist, shows where the world's 200 largest "unicorns" are located. A unicorn is a startup that has grown to one billion U.S. dollars or higher.

As we can see from the picture, most of the unicorns in the world are located either in the United States or in China. The picture below comes to us from Wall Street Journal. As could be seen, Venture capital investment in China is a relatively recent event. Since the Chinese are late comers in the start up game, I predict that a decade or two from now, they would pass the United States to become the undisputed leader in start ups. In the future, the most powerful companies will either be in United States or in China.

Today, the largest AI start up in the world is SenseTime, a Chinese company that uses AI to do face recognition.

What makes these two countries special? Why do Europe and Japan, both stewards of Western advanced economies, have so few unicorns? Start ups are quite difficult to initiate, even more difficult to grow into a big company like the unicorns we see in the graph. Most failed to grow up. Start ups requires brain power, but that was just a starting point. It requires a visionary with in depth knowledge across many different disciplines. Someone equally comfortable with business and science and engineering. It requires a tenacious and driven team of highly effective executives that will overcome many problems. It requires a driven and diligent work force that are not only smart, but willing to work long hours and driven to get things done. The high risk nature of start ups requires these very special people to also be able to take a great deal of risks and not afraid to fail. The high failure rate of start ups work best in environment in which not only tolerate the disruptive nature of such start ups, it also should have an ecosystem that nurtures these start ups, provide capital and management skills often lacking in the first stages of the start up. Governments that will provide support is also crucial. The United States evolve the start up ecosystem in the Silicon Valley as many start ups formed over the decades. The Silicon Valley also has many visionaries that are willing to take risks. The favorable environment in Silicon Valley also attracted the brightest and most ambitious people world over to come and create their companies. For the Chinese, re-making their old command based economy was one giant start up, so there are many people who are already comfortable in this kinds of environments. The Chinese work force is second to none. Hundreds of millions of people were already making tremendous sacrifices. They migrate to big cities where there is opportunities and working long hours. They only get to return home a couple of weeks a year during Chinese New Years. The Chinese government is also working very hard to nurture start ups, perform many of the functions that angel investors perform in the United States. In contrast, the Europeans have long vacations and short working hours. The Japanese worked pretty hard, especially for a country that is already wealthy. Unfortunately, the big companies such as Toyota sucked out the best and brightest from the universities every year, removing many of the candidates that might succeed in start ups. Another issue that a commentator alerted me to was that Japan was a very hierarchical society. The commentator, who runs a high tech company, opened a branch in Japan. Accustomed to paying high salaries for high tech people, he offered a pretty high salary to some young folks. This is something that would feel very natural in the Silicon Valley. I imagine that the Chinese are equally at home with some young folks earning a lot of money. However, in Japan, he felt that he was operating against social norms. It seems salary in Japan was determined largely by age. Obviously, decision making is also done by this hierarchy. Well, since older folks are in general less comfortable with new things, I imagine that it is unlikely for folks in their fifties to see opportunities for a start up. Both Europe and Japan also do not have the scale that China or the United States have.

The Silicon Valley has provided a model for start ups, but it is one industry. There are many other industries that has potential for breakthroughs. These are emerging technologies that may become the industries of the future. We now see that in these areas, China has pushed her way near the front. In many areas, such as quantum technology, material science, high speed rail and nuclear power technology, China has become the leader. In the area of artificial intelligence, China is a solid number two, not much behind the United States, with the rest of the pack way behind these two. Given the track record of how fast they turn an idea into commerce, there will be many companies that come out of these areas from China in the future.

 

Globalization And Rise of China's Economy Part Eight, A Strong Education System

The function of education is to teach one to think intensively and to think critically. Intelligence plus character - that is the goal of true education.
                                                                                             --- Martin Luther King Jr.

United States values education. It was said back in the days when we open the West, the first three public buildings created for a town are church, town sheriff office and school. To this day, while the media dwell on the fact that United States have fallen to the middle of the pack among OECD countries, like this PISA 2015 result, things look very differently if we break up the scores by race. We found that Whites In the United States score better than most scores of other OECD countries that are mostly white, Asians in the United States do quite well against Asians in other OECD Asian countries like Korea and Japan. What is more, Hispanic Americans did better than the Hispanics in their native countries like Argentina and Mexico. African Americans did better than the only African country that participated, Tunisia. What we failed to do is to elevate the scores of Hispanics Americans and African Americans to the level of White and Asian Americans. In fact, the gap has stayed pretty much the same despite decades of experimentation and billions of resources poured in to try to solve the problem. As the whites and Asians share of the population declined, the combined scores of the United States declined compared to other countries.

A particular strength of the United States in this area mirrors the same American strength in general. America values individual initiative. In the American system, kids from a very young age are encouraged to make their own decisions. The end results speak for themselves. The American Universities are among the best in the world.. Research is an area where independent thinking is highly valued. Often times, the discovery is made when the data does not fit the previously orthodox theories. It requires someone with a independent streak to look at them in a fresh and new way.

Unfortunately, this individualistic value only works for a small subset of the population that is self driven and talented. The majority of population works a different way. Decades of peace and prosperity have stripped many Americans of our drive. Many are not even willing to do the basics like working for a living and not committing crimes. The hollowing out of the American manufacturing sector was often blamed on the greedy corporations and China, but in fact it has as much to do with the decline of American drive and work ethic as well as the rise of China.

The Chinese culture also value education. Their best universities are catching up to the Western levels. Like other Asian countries, the Chinese place a higher emphasis on learning knowledge. Developing a student that will only be able to pursue the answer if someone else pose a question and tells him that there is an answer. These students are less inclined to ask the questions when there is no assurance that there is an answer to be found. At the same time, all this drive to get into the best universities by the tiger moms and dads produce kids that work well under pressure and tight deadlines. They are model workers. The rise of the Chinese industries is in no small part due to the strength of the Chinese workers. Innovation in their work place have lead to a number of world first like 3D printed houses and innovation in ship building.

While the Chinese universities across the board have not not yet reach the level of the United States, they have come a long ways from even a decade ago. They have also produced many brilliant individuals like Ma Weiming. The rise of China, across a broad array of areas, would not have been possible without people like these. These people have acquired individual initiative and created the array of technologies and companies that not only allow the Chinese to catch up to the West, but also have allowed the Chinese to be at the forefront of technologies.

China is an incredible learning machine. In time, I have faith that they will continue to explore and improve their education system to produce better students. I am less sanguine about the future of education for the United States. In our attempt to equalize the results of different racial groups, we have introduced a number of measures like common core and changing the SAT standards. The result is the degradation of education for the good students. Since the good students are the only ones that matter to the future of our economy, this is something we need to fix.