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    China’s Venture Capital Market: Current Legal Problems and Prospective Reforms
    China’s Venture Capital Market: Current Legal Problems and Prospective Reforms
    China’s Venture Capital Market: Current Legal Problems and Prospective Reforms
    Ebook190 pages2 hours

    China’s Venture Capital Market: Current Legal Problems and Prospective Reforms

    By Lin Zhang

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    About this ebook

    The venture capital market in China has been developing for over twenty years. Over this period, the legal frameworks surrounding China’s venture capital have evolved significantly. China’s Venture Capital Market addresses this important topic and argues for further improvements in legal frameworks for venture capital in China. The book consists of five chapters, each covering an aspect of venture capital in China. The first chapter profiles the venture capital market. The second, third and fourth chapters consider the legal problems and suggest reform measures for fundraising in, operation of and exit from Chinese venture capital. The book concludes by asking how long it will take for reform measures to take place in China.

    • Fills a gap in the market by weighing up the pros and cons of the legal system under which venture capital operates in China
    • Contains primary source material, including interviews with Chinese venture capitalists
    • Gives new case studies of Chinese venture capital
    LanguageEnglish
    PublisherElsevier Science
    Release dateDec 1, 2014
    ISBN9780857094513
    China’s Venture Capital Market: Current Legal Problems and Prospective Reforms
    Author

    Lin Zhang

    Lin Zhang is Assistant Professor at Korea University Law School, South Korea. Formerly Lecturer in Law at College of Humanities and Law of Shandong University of Science and Technology, China. In the past five years he has published 9 papers in peer-reviewed journals. He has written a book about the adaptive efficiency of the corporate governance of Chinese state-controlled listed companies, published in 2011. Lin holds a PhD in Law from Hong Kong University.

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      Book preview

      China’s Venture Capital Market - Lin Zhang

      SOEs

      1

      A profile of China’s venture capital market

      This chapter first analyzes the role of venture capital in promoting a country’s innovative ability, a consideration which provided the impetus to drive the CPC towards engineering China’s venture capital market in the first place. Following this, it provides an overview of the historical stages in the development of China’s venture capital market and, utilizing empirical evidence, describes its current profile. Taken together, the historical overview and the current profile reveal the problems currently suffered by China’s venture capital market. They constitute the context for the remaining chapters of the book and the search for the underlying legal causes of these problems.

      Keywords

      Venture Capital; Innovation; Historical Overview; Current Profile; Law

      In 1946, with the generous support of Ralph Flanders and MIT President Karl Compton, General Georges Doriot, then a professor of industrial management at Harvard Business School, established the first modern venture capital firm in the United States of America. Named American Research Development Corporation (ARDC), the mission of the new firm was simple but far-reaching: ‘…aid in the development of new or existing businesses into companies of stature and importance.’ During its 26-year existence, ARDC’s most notable success resulted from its decision to put up $70,000 to support Kenneth Olsen and Harlan Anderson in founding Digital Equipment Corporation (DEC). In its first year, DEC recorded a small profit by producing Digital Laboratory Modules, but the real harvest occurred dozens of years later. In 1968, in the wake of DEC’s successful initial public offering, the value of ARDC’s stake quickly grew to $355 million.¹

      ARDC was only the beginning of the success story of American venture capital. In 1978, the US Labor Department undid some of the restrictions of the Employee Retirement Income Security Act (ERISA), known as the ‘prudent man rule’, thus allowing pension funds to inject a tremendous amount of money into American venture capital firms. Following that decision, the American venture capital industry entered a ‘golden age’ lasting until the year 2000.² During its boom period, American venture capital incubated many companies which have become household names, such as Microsoft, Apple, and Lotus, and paved the way for America to become the unparalleled leader in the global high-technology market.³ Even though the bursting of the Internet bubble tainted its image in 2000, American venture capital continues to be considered the ‘jewel in the crown’ of the American economy, and the engine which continues to push it forward.⁴

      The legend of American venture capital has inspired the ambitions of other major economic powers, as well as emerging economies throughout the world, to engineer their own vibrant venture capital markets. The past several decades have witnessed such efforts in Europe, the Middle East, and Asia.⁵ Some of these endeavors have turned out rather successfully, while others have ended in failure.⁶ Regardless of results in individual countries, however, the trend represented by these attempts as a whole indicates that a consensus on the significance of a vibrant venture capital market has been reached by countries all over the world.

      Relative to its American counterpart, the growth of China’s venture capital market has been through many more hardships. Soon after the inception of the People’s Republic of China in 1949, the Communist Party of China (CPC) launched a movement to nationalize privately-held enterprises.⁷ By the end of 1956, this movement led to the establishment of a state-owned economy in China, which was characterized by the pervasiveness of state-owned enterprises (SOEs).⁸ In addition, consistent with the dominance of a state-owned economy, the CPC replicated the centrally-planned approach of the former Soviet Union to manage production and allocate resources in the country.⁹ The existence of the centrally-planned system completely suppressed the appearance of any substantive elements of the market-oriented economy. Consequently, venture capital was excluded from China’s economy for a long period of

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