A comparison of the entrepreneurial ecosystems : China and Taiwan

A Comparison of the Entrepreneurial Ecosystems:

China and Taiwan

Yung-Yung, Chang (5754267)

MSc program (Entrepreneurship)

Vrije Universiteit Amsterdam and Universiteit van Amsterdam (VU and UvA)

Thesis Supervisor: dhr. dr. G.T. (Tsvi) Vinig Second Reader: dhr. drs. R.C.W. van der Voort Application date: 1 of July, 2017

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Content

Abstract ... 1

Introduction ... 2

Literature review ... 5

Entrepreneurial ecosystems defined... 5

Power methods of an entrepreneurial ecosystem ... 6

What is a successful entrepreneurial ecosystem? ... 9

Comparative analysis ... 13

Entrepreneurship and macroeconomic performance in China and in Taiwan ... 19

Formal institutions ... 23 Culture ... 28 Physical Infrastructure ... 32 Demand ... 37 Discussion ... 42 Conclusion ... 43 Literature ... 45

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Tables and Figures

Table 1: The synthesis of indicators from different resources ... 15

Figure 1: Labor productivity (per hour), 1950-2015... 20

Figure 2: Unemployment rate, 2007-2017 ... 20

Figure 3: Total early-stage Entrepreneurial Activity (TEA), 2001-2016 ... 22

Figure 4: Innovation level, 2011-2016 ... 22

Figure 5: Business services sector, 2010-2016 ... 23

Figure 6: The ranking of innovation, 2006-2016 ... 23

Figure 7: The Ranking of Institutions, 2006-2016 ... 24

Figure 8: The Ranking of Government Efficiency, 2012-2016 ... 24

Figure 9: The Score of Taxes and bureaucracy (GEM) ... 25

Figure 10: The Score of Governmental support and policies, 2010-2016 ... 25

Figure 11: The Score of Cultural and social norms, 2010-2016 ... 29

Figure 12: The Index of Cultural Support, 2013-2017 ... 29

Figure 13: The extent of High Status to Successful Entrepreneurs,2010-2016 ... 30

Figure 14: Entrepreneurship as a Good Career Choice, 2010-2016 ... 31

Figure 15: The Ranking of Diversion of public funds, 2010-2016 ... 31

Figure 16: The Ranking of Irregular payments and bribes, 2010-2016 ... 31

Figure 17: The Ranking of Public trust in politicians, 2010-2016 ... 32

Figure 18: The Ranking of Infrastructure, 2012-2016 ... 33

Figure 19: The Ranking of Infrastructure, 2006-2016 ... 33

Figure 20: The Score of Physical and services infrastructure, 2010-2016 ... 33

Figure 21: The Ranking of Market Size: GDP (PPP$ Billions), 2006-2016 ... 38

Figure 22: The Ranking of Market Size, 2006-2016 ... 39

Figure 23: The Ranking of Market Size: Domestic, 2006-2016 ... 39

Figure 24: The Ranking of Market Size: Foreign, 2006-2016 ... 39

Figure 25: The Score of Internal market dynamics, 2010-2016 ... 40

Figure 26: The Score of Internal market openness, 2010-2016 ... 41

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Abstract

This study presents an analysis of the two entrepreneurial ecosystems of Taiwan and China by comparing four framework conditions (formal institutions, culture, physical infrastructure, and demand). These framework conditions capture the contextual characteristics of the holistic socioeconomic, institutional environment. In order to compare the two countries with clear mechanisms, this study untangles and synthesizes a list of parameters from different reports and official data by using the commonality between them. The overall performance of four framework conditions of Taiwan is better than China. However, the progress of the entrepreneurial ecosystem in Taiwan has stagnated, whereas Chinese opening-up policy has apparently stimulated the entrepreneurial ecosystem. Consequently, these phenomena suggest that Taiwan’s government should advance with time and increase the efficiency.

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Introduction

There has been a shift of entrepreneurship studies from individual personality research to a broader perspective that also discusses the role of context in entrepreneurship (Drakopoulou & Anderson, 2007). The entrepreneurial environment plays an important role in the industrial structure where the venture operates (Tsai, MacMillan, & Low, 1991). Entrepreneurship literature explains how an entrepreneurial environment influences regional economic (Bahrami & Evans, 1995; Dubini, 1989). The research development stimulates an emerging entrepreneurship ecosystem approach as a response. Some academics state that various elements constitute an entrepreneurial ecosystem.

For instance, Feld (2012) proposes the nine attributes of a successful start-up community. There are five types of players including entrepreneurial individuals who have strong leadership, intermediaries as mentors or advisors, an enabling government, talents, and large established companies. In addition to important players, Feld (2012) emphasizes the interaction between the players in the ecosystem. This interaction contains high network density, several connecting events, and established large companies collaborating with local ventures and acquirements of relevant resources (talents, service, and capital). Mason and Brown (2014) distinguish features of a successful ecosystem: the heart of large established businesses that have strong leadership; entrepreneurial recycling which means that successful entrepreneurs reinvest their time, money and expertise in supporting new entrepreneurial activity; and an abundant and accessible information environment. Other aspects as culture, the availability of finance, universities, and service providers are also regarded as relevant factors. Isenberg (2011) identifies six domains of a successful ecosystem: (1) a beneficial culture, (2) enabling policies and leadership, (3) appropriate financial capital, (4) quality human capital, (5) friendly markets, and (6) a range of institutional

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and infrastructural supports. These six aspects largely overlap with the aforementioned attributes as well as the eight pillars recognized by Foster et al. (2013). These eight pillars also contain the presence of key resources such as human capital, government and regulatory framework, funding and finance, education and training, supportive services, accessible markets, and a culture toward entrepreneurship.

However, it is unclear what fundamental causes serve as framework conditions for the success of an entrepreneurial ecosystem (Stam, 2014). An entrepreneurial ecosystem is an interdependent set of actors that is governed in such a way that it enables entrepreneurial action (Stam, 2014). Entrepreneurs are regarded as the leaders of an entrepreneurial ecosystem, while governments or service providers are deemed to be feeders (Feld, 2012). The onus is on the government to obtain the right of framework conditions such as education, employment protection regulations, and taxation (Stam, 2014). If these national framework conditions are not facilitating initiatives at the local level, the effects of local initiatives are likely to be insignificant (Bosma & Stam, 2012).

The purpose of this study is to explore what power methods could be the criteria for the existence of a successful ecosystem, and the differences as well as the similarities of entrepreneurial systems in China and Taiwan. These two countries were selected for the following reason. The Chinese Civil War caused the political and economic separation between China and Taiwan in 1949. Since then, the two countries have pursued thoroughly different ideologies for over 50 years. Taiwan embraced western style capitalism and implemented a free market economy, while China pursued a communist ideology and implemented a planned, centralized economy. Such differences in economic and political systems have resulted in the diverse entrepreneurial ecosystems and their economic performance. Chinese status has soared from tenth economy to the second largest economy worldwide and China

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has become the world’s leading international trade country since 1978 (WTO, 2016). In contrast, although Taiwan’s economic performance surpassed that of China between 1950s and 1980s, it has stagnated in recent years (Chang & Shih, 2004). From 1980s to 2000s, Taiwanese enterprises experienced economic liberalization that induced the change of industrial structure from traditional manufacturing to the IT industry and the service sector, during which time the rise in labor wages, the appreciation of the new Taiwan dollars (NTD), and the accession to the WTO (Wu & Huang, 2003). Although the Taiwanese government has promulgated a series of assistances to overcome challenges, there is still the gap between the need of entrepreneurship and the support of the government (Wu & Huang, 2003).

The same focus of governmental intervention, that in the last three decades created entrepreneurship development in China and in Taiwan, has intrigued the recent research (Tzeng, Beamish, & Chen, 2010). The importance of economic development and the growth of entrepreneurial firms have been well discussed in most entrepreneurship research (Chang & Shih, 2004; Wu & Huang, 2003; Zhang, Cooper, Deng, Parker, & Ruefli, 2010). However, there are few studies integrating and comparing current entrepreneurial ecosystems in China and in Taiwan. Furthermore, given the similarity of the language, culture, ethnicity, and geography, the study aims to explore which ecosystem is better based on power methods serving as national framework conditions.

This study discusses which power methods could be the framework conditions which function as the key attributes by explaining the successful case of Silicon Valley. The next section provides how the economic performance and entrepreneurship of the two countries have evolved. In doing so, the relationship between the economic outputs, economic outcomes, and key attributes of an entrepreneurial ecosystem might become clear. Next, this study verifies which

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ecosystem is stronger, based on the framework conditions so as to discuss advantages and disadvantages of the two entrepreneurial ecosystems.

Literature review

The concept of an entrepreneurial ecosystem has been prevalent amongst entrepreneurial leaders and policy makers in recent years since a regional community and culture play an important role in the entrepreneurship process (Feld, 2012; Isenberg, 2010; Spigel & Stam, 2016). The definition of entrepreneurial ecosystems is composed of entrepreneurial and ecosystem components. Entrepreneurial refers to entrepreneurship. The first component is entrepreneurship. According to Shane and Venkataraman (2000), it is a process that individuals pursue opportunities to create innovative goods and services that are discovered, evaluated, and exploited. Innovation involving radical innovation, towards exploitations, refining existing opportunities creates new value in society (Lester & Piore, 2009). Literature of entrepreneurial ecosystems often narrows this entrepreneurship down to “high-growth firms”, contending that entrepreneurship drives productivity growth, creates new employment and increases innovation (Mason & Brown, 2014; OECD, 2013). It can be seen that the entrepreneurial ecosystem approach does not include the traditional statistical measurements such as “self-employment” or “small business”, but more proper indicators of entrepreneurship such as innovative and growth-oriented entrepreneurship focused by entrepreneurship academics (Mason & Brown, 2014; Shane, 2009; Stam et al., 2012).

The second component is ecosystem. The biological and literal meaning is the interaction of living organisms with their physical environment. The entrepreneurial ecosystem approach emphasizes the role of the context in enabling entrepreneurship,

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aiming to construct the innovation system approach (Á cs, Autio, & Szerb, 2014). It places (entrepreneurial) individuals at the center rather than firms as well as highlights the importance of context. Especially, the entrepreneurial ecosystem approach concentrates on not only how a comprehensive set of factors including resources and actors play an important role in entrepreneurial activity but also the factors of the cultures, institutions, and networks developing in a geographical region over time (Stam, 2014).

Power methods of an entrepreneurial ecosystem

The recent entrepreneurial ecosystem literature and the publication of the rankings of the global entrepreneurial ecosystem construct a number of models of entrepreneurial ecosystems and list several components of entrepreneurial ecosystems. Those components affect different types of entrepreneurial activity, which in turn accumulates more welfare as a final consequence (Stam, 2014; Wong, Ho, & Autio, 2005). To clarify which power methods could be the criteria as a prerequisite for the existence of an ecosystem, this study outlines the power methods as follows:

First, networks enable the smooth mobility of labor, and access to information and capital within the entrepreneurial ecosystems (Stam, 2014). Entrepreneurs can utilize their social networks of business associates and former employees to access the entrepreneurial knowledge, and human capital which help them to recognize entrepreneurial opportunities, acquire resources, and obtain legitimacy (Elfring & Hulsink, 2003). Feld (2012) highlights the interaction between the players in the ecosystem. This interaction contains intensive networks, several connecting events, and established large companies collaborating with local ventures and acquirements of relevant resources (talents, service, and capital).

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entrepreneurial ecosystem (Foster et al., 2013; Isenberg, 2011; Mason & Brown, 2014; Stam, 2014). It is the most recognized object of entrepreneurial policy, and insufficient finance is regularly viewed by potential and current entrepreneurs as a barrier to starting a business (Choo & Wong, 2006). A strong community of support actors, namely business angels, venture capital firms, seed investors, and cashed-out and current entrepreneurs, is important for investments in innovative projects with a long term pay-off (Stam, 2014).

Third, the presence of human capital thrives in the entrepreneurial ecosystems (Feld, 2012; Foster et al., 2013; Isenberg, 2011). Talent is vital for ventures that are highly entrepreneurial and required an educated, experienced, and healthy workforce to grow (Szerb, Aidis, & Acs, 2013). Generally, universities, research institutes, industry R&D, and established high-tech industry create a knowledge base. For instance, in the 1970s and 1980s, the ecosystem in Israel unexpectedly evolved the quality of talent as a result of spillover from military technology, academic research, industry R&D (Vinig, Blocq, Braafhart, & Laufer, 1998).

Fourth, support services provided by lawyers, accountants, recruitment agencies and business consultants who master the demand of entrepreneurial businesses and are willing to assist start-ups in lowering the entry barriers for start-ups, and might accelerate the time that innovations take to reach the market (Feld, 2012; Mason & Brown, 2014; Stam, 2014).

Fifth, governments that are capable of reforming legal, bureaucratic, and regulatory frameworks is the focal point of an efficient ecosystem (Isenberg, 2010; Stam, 2014) since they have the exclusive right to regulate framework conditions such as education, taxation, employment protection legislation (Stam, 2014). Governments attract innovative start-ups through programmes such as green business plan competitions, competitions regarding innovations, and supporting the

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introduction of innovative techniques. A strong and efficient government support facilitates entrepreneurial entry in the entrepreneurial ecosystem (Audretsch & Belitski, 2016). The components of an entrepreneurial ecosystem measured by the GEM report, the WEF report, the IMD report, and the Start-up Genome report are most commonly taken into account the government efficiency.

Sixth, Isenberg (2011) and Cohen (2006) indicate that positive social norm and attitudes towards entrepreneurship have served as a key element of entrepreneurial ecosystems. The entrepreneurial aspirations will be stifled if the societal status of entrepreneurs is low, and failure is regarded negatively (Mason & Brown, 2014). Perceptions of entrepreneurial orientation that are measured in the GEM report, the GEDI report are fairly stable over time. The famous ecosystem of Silicon Valley owns an exceptional culture that encourages collaborative, tolerates failures, and widely shares knowledge experience and expertise.

Seventh, it is well documented that physical infrastructure generally is linked to economic growth (Aschauer, 1989) The amenities and infrastructure attract its high human capital residents (Glaeser, Kolko, & Saiz, 2001), physical infrastructure contains infrastructure and amenities, as well as transport links between the agents of the entrepreneurial ecosystem (Audretsch & Belitski, 2016). Infrastructure can strengthen connectivity and linkages that promote the recognition of entrepreneurial opportunity and the realization of those opportunities (Audretsch, Heger, & Veith, 2015).

Eighth, demand for new value is addressed by Stam (2014). The regional demand and supply is associated with population growth and density, which in turn certainly affect the number of entrepreneurs (Reynolds, Storey, & Westhead, 1994). The larger market potential and agglomeration economies facilitate higher externalities and diffusion, which in turn incentivize innovation and growth

9 (Audretsch, Keilbach, & Lehmann, 2006).

The rationale for the success of an entrepreneurial ecosystem is that start-ups are thought to drive productivity growth, create new employment, increase innovation and promote business internationalization (Brown et al., 2014; OECD, 2013) Those components of entrepreneurial ecosystems provide useful principles for public policy, while the fundamental factors of the entrepreneurial ecosystems are still unclear (Acemoglu, Johnson, & Robinson, 2005). Some studies only list relevant components (Foster et al., 2013; Genome, 2017; Isenberg, 2011; Mason & Brown, 2014) without an explicit analysis and causation of what the fundamental factors are as a prerequisite for a successful ecosystem. To clarify what fundamental factors should be considered, the example of Silicon Valley, the well-known ecosystem, is explained and this study explores what power methods could be the criteria in the next section.

What is a successful entrepreneurial ecosystem?

The success of Silicon Valley’s ecosystem has inspired some entrepreneurship academics (Adams, 2011; Cohen, 2006; Leslie, 2000; Saxenian, 1996). According to the latest publication of the Start-up Genome (2017), Silicon Valley tops the ranking of the global start-up ecosystem and has consecutively dominated the global ecosystem. It boosts 12,700-15,600 active start-ups and two million tech workers. In 2016, Silicon Valley created nearly 46,000 new jobs, with a year-over-year growth rate of three percent. This report states that large-scale exits more than a third of the global value creation are captured in Silicon Valley, leading to a startling growth. Along these lines, over a quarter of the world’s unicorns are located in Silicon Valley, and nearly a third of the global investments into Early Stage start-ups are captured by Silicon Valley companies. Silicon Valley’s ecosystem became known as an overwhelming high-tech region during 1940 through 1965 (Adams, 2011). Why is the

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success of Silicon Valley’s ecosystem sustainable over a long period, successfully adapting to shifts of technological paradigm? This study analyzes power methods to outline what power methods could be the criteria.

From the perspective of formal institutions, government funding and university research led to development in computing as well as semiconductor during the 1940s and 1950s. Stanford University built up the supportive relationships with industry, and a cycle of spin-off. The Dean of Engineering at Stanford University, Frederick Terman, encouraged the formation of electronic firms and the location of corporate research labs in the Palo Alto area to build a Bay Area industry. The federal government plays an important role of “angle” investor spending nearly $40 million on new plants and defense contracts in Silicon Valley’s early growth (Adams, 2011; Mason & Brown, 2014; Saxenian, 1994).

With regard to physical infrastructure, Saxenian (1990, 1994) states that the local public sector focused on the physical infrastructure for the evolution of Silicon Valley. The author emphasizes that the dense entrepreneurial activity in Silicon Valley is attributed to the decentralized and fluid environment that encourages the spillovers of intangible technological knowledge.

In addition to the governmental support and sufficient infrastructure, the culture in Silicon Valley is particularly conducive to the development of the entrepreneurial ecosystem. In 1957, since eight brilliant young scientists and engineers disagreed with Shockley’s ineffective management, the eight resigned from the Shockley’s laboratory to form Fairchild Semiconductor owned by Sherman Fairchild. Fairchild has two critical contributions for Silicon Valley. The first is that the semiconductor equipment and material firms were influential for the actualization of Moor’s Law and the rapid progress of the semiconductor industry. Second, the success of Fairchild’s spin-offs (Intel, Advanced Micro Devices, National Semiconductor, LSO Logic and their own

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spin-offs) created numerous capital gains for their cofounders as the managers and engineers from Fairchild had become independently wealthy and re-invested to support other start-ups. The open California culture, learning-path-dependent evolution replete with learning by doing, most especially by failure, and a culture of cooperation, encourage innovation and entrepreneurship (Saxenian, 1996).

As mentioned before, the regional demand and supply is often associated with population growth and density which affect the number of entrepreneurs (Reynolds et al., 1994). Entrepreneurs are attracted by larger market potential and agglomeration economics, which in turn enable higher externalities and spillovers (Audretsch et al., 2006). Although Silicon Valley did not own a large amount of population in the early stage, there has been great knowledge-based demand for high-tech industry. During World WarⅡ, this region’s high-tech industry only had fewer than 100 engineers and scientists. During the period of ending in 1965, the agglomeration and the high-tech cluster (semiconductors, computers, aerospace, and electronics) benefit knowledge spillovers, access to capital, and proximity to customers, supplier, and labors (Adams, 2011). The region’s subsequent growth boosted 100,000 high-tech employees. A further effect of spillovers is that they create the critical mass of high-tech talent which stimulates the emergence of an entrepreneurial support network (Kenney & Patton, 2005). It sustains and nurtures the growth of entrepreneurial businesses.

Last but not least, the result of success of Silicon Valley’s ecosystem is not only the prosperous economic outputs but also the fact that its ecosystem is competent to transform and re-create itself time and again by developing not only innovative start-ups but also new industries and sectors (such as serial entrepreneurs, investors in new companies, mentors to new entrepreneurs and institution builders) (Mason & Harrison, 2006). In other words, the growth in entrepreneurial activity occurs through entrepreneurial recycling (Mason & Harrison, 2006). First, successful businesses

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provide the role model and legitimate further entrepreneurial activity (Mason & Brown, 2014). Numerous successful stories in Silicon Valley seem less mysterious and frustrating to those entrepreneurs who possesses their dreams and new ideas. Successful entrepreneurs re-invest their time, money, expertise in supporting new entrepreneurial start-ups, which in turn create a process of regional collective learning (Mason & Brown, 2014). Second, the effect of diffusion further creates the critical mass which facilitates the emergence of an entrepreneurial support network such as business angels and venture capitals, lawyers, accountants, mentors (Mason & Brown, 2014).

Undeniably, Silicon Valley owns exceptional power methods such as intensive networks, accessible finance, a great pool of talent, sufficient support services, support government, diverse culture, advanced physical infrastructure, and high demand for new value. Some scholars conclude that accessible markets, human capital and funding are the most important factors enabling the growth of entrepreneurial companies (Feld, 2012; Foster et al., 2013; Isenberg, 2011). the spin-off process, which drives the growth of the ecosystem, is facilitated by particular environmental attributes, notably a critical mass of talent, networks, the presence of role models and the availability of advice, mentoring and resources to support entrepreneurial activity (Mason & Brown, 2014). However, those factors are likely to be proximate causes rather than the underlying causes of the success of an entrepreneurial ecosystem (Stam, 2014). The presence of venture capital funding, arguably, is not essential as it can be imported (Mason & Brown, 2014). The example of the Yozma Fund founded by the Israeli government illustrates this point. The project brought investment expertise and venture capitals mainly from the United States (Lerner, 2009). Furthermore, the presence of entrepreneurial finance in the later-stage is unlikely to have substantial impact if the basic institutional

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preconditions toward entrepreneurship are missing (Szerb et al., 2013). It is clear that there are fundamental causes for the emergence of Silicon Valley’s ecosystem (the federal government and Stanford University’s supportive relationship with industry, the open California culture, high-tech infrastructure, demand for new value) which imply the successful ecosystem cannot be planned. Silicon Valley considered that a successful ecosystem is never designed since it just emerges (Isenberg, 2010). One of the key lessons of the entrepreneurial ecosystem approach is to never start from duplicating good practices from other contexts (Isenberg, 2010) as this context sensitivity is a strength of the entrepreneurial ecosystem approach (Stam, 2014).

The dominant purpose of an entrepreneurial ecosystem is to create the spillover of entrepreneurial activity by recognizing and exploiting entrepreneurial opportunities, creating institutions, and the building capacity. It finally promotes regional economic development (Feldman, 2014). As a result, this study describes four domains as the fundamental causes of a successful ecosystem including (1) the formal institutions, (2)

culture, and (3) the physical infrastructure enabling or constraining human

interaction, and (4) demand for new value and drops the proximate causes called systemic conditions (networks, , accessibility to finance, talent, and support services) (Audretsch & Belitski, 2016; Stam, 2014). The framework conditions are mediated by systemic conditions. In regard to consequences, there are two layers that can be discussed: how the entrepreneurial ecosystem performs concerning entrepreneurial activity as a proximate consequence (output) and more value creation as an ultimate consequence (outcome).

Comparative analysis

The empirical material for this study is collected by using archival research: articles, reports (e.g. the report of the Global Entrepreneurship Monitor (GEM), the

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Global Competitiveness Report of the World Economic Forum (WEF), the Global Entrepreneurship Development Index (GEDI) of the Global Entrepreneurship and Development Institute (GEDI), the IMD World Competitiveness Yearbook (WCY) of the IMD World Competitiveness Center, and the Global Start-up Ecosystem Report of the Start-up Genome), WWW resources, and news. Some powerful institutions offer an index composed of economic outcomes and outputs, framework conditions, and systemic conditions to prove how a successful entrepreneurial ecosystem ranks amongst participating countries. This study emphasizes the parameters of the framework conditions as those are the essentials for an entrepreneurial ecosystem (Stam, 2014). This study synthesizes those parameters by using the commonality between them. The benchmarks and the descriptions are summarized in Table 1.

15 Table 1: The synthesis of indicators from different resources

Framework conditions

Resources Publisher Indicators Descriptions

Formal Institutions Global Entrepreneurship Monitor (GEM) Global Entrepreneurship Monitor (GEM)

Government Policy The extent to which public policies support entrepreneurship. This includes two components:

a. Entrepreneurship is prioritized in government policy and; b. Taxes or regulations encourage new and SMEs.

Government Entrepreneurship Programs

The presence and quality of direct programs to assist new and growing firms at all levels of government (national, regional, municipal). Global Competitiveness Report World Economic Forum (WEF)

Institutions The efficiency and the quality of the public institutions while interacting with individuals and firms.

World Competitiveness IMD World Competitiveness Government Efficiency

The extent to which government policies are conducive to competitiveness:

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Yearbook (WCY) Center (IMD) Public Finance, Fiscal Policy, Institutional Framework, Business Legislation and Societal Framework.

Culture GEM GEM Cultural and Social

Norms

The extent to which social and cultural norms encourage or allow actions leading to new business methods or activities that can potentially increase personal wealth and income. Global Entrepreneurship and Development Index (GEDI) The Global Entrepreneurship and Development Institute (GEDI)

Cultural Support The extent to which how positively a given country’s inhabitants view entrepreneurs in terms of status and career choice and how the level of corruption in that country affects this view.

Physical Conditions

GEM GEM Physical Infrastructure Ease of access to physical resources, including

communication, utilities, transportation, land or space, at a price that does not discriminate against SMEs.

GCI WEF Infrastructure The efficiency of transport, electricity supplies, and telecommunications network.

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WCY IMD Infrastructure Extent to which basic, technological, scientific and human resources meet the needs of business: Basic Infrastructure, Technological Infrastructure, Scientific Infrastructure, Health and Environment and Education.

Demand GEM GEM Entry Regulation This contains two components:

a. Market Dynamics: the level of change in markets from year to year, and

b. Market Openness: the extent to which new firms are free to enter existing markets.

Goods Market Efficiency

The right mix of products and services given their particular supply-and-demand conditions, as well as to ensure that these goods can be most effectively traded in the economy.

18 Global Start-up

Ecosystem Report

Start-up Genome Market Reach The extent to which start-ups have access to customers allowing them to scale and “Go-Global” from the onset

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Outstanding entrepreneurial outputs and economic outcomes are the consequences of the quality framework conditions (fundamental causes) mediated by systematic conditions (proximate causes) in the entrepreneurial ecosystems (Audretsch & Belitski, 2016; Stam, 2014). Entrepreneurial outputs and economic outcomes are positively associated with the framework conditions (Audretsch & Belitski, 2016). Therefore, by referencing the instruction of Stam (2014) as well as some report’s parameters, the macroeconomic performance (economic outcomes) is measured by labor productivity and employment. Entrepreneurship (entrepreneurial outputs) is measured by the number of start-ups, the Total Early-stage Entrepreneurial Activity (TEA) rate, the level of innovation, and the percentage of professional service. Next to this, four key factors including (1) the formal institutions, (2) culture,

(3) the physical infrastructure, and (4) demand for new value are analyzed against

the world’s leading ecosystem. This section strives to go further into the identification of the relative strengths and weaknesses of the China’s and Taiwan’s start-up ecosystem from a global competitiveness perspective.

Entrepreneurship and macroeconomic performance in China and in Taiwan This study compares the two ecosystems between China and Taiwan and analyzes which ecosystem is stronger according to four necessary conditions. Particularly, governmental intervention plays a focal role in China’s emerging economy (Li, Shi, Wu, Wu, & Zheng, 2016). China’s economy has transformed from a planned economy to a market-oriented economy under government control. With regard to the macroeconomic performance, the labor productivity of Taiwan is higher than that of China stemming from the political reform, the economic reform, and the

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industrial infrastructure during the period between 1950s and 2000s (Figure 1). Compared to Taiwan, the low labor productivity in China might be a competitive advantage for manufacturing industry. Taiwan’s economic development performance is mainly contingent on the global economic performance.

Figure 1: Labor productivity (per hour), 1950-2015

Source: The Conference Board Total Economy Database

Figure 2: Unemployment rate, 2007-2017

Source: IMF 0 5 10 15 20 25 30 35 40 45 50 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 L ab or p rod u ct ivi ty p er h ou r China Taiwan 0 1 2 3 4 5 6 7 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Unem p loym en t rat e ( p er ce n t of t ot al labor f or ce ) Taiwan China

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The unemployment rate of Taiwan had reached its peak of around 5.9 percent in 2010 as a result of the financial crisis (Figure 2). Since the financial crisis, the level of the unemployment rate has returned to the similar rate as ten years ago. China’s unemployment rate is rather stable with 4 percent. However, entrepreneurship of the Chinese entrepreneurial ecosystem has been more prevalent when it comes to entrepreneurial activity. According to State Administration for Industry and Commerce of the People’s Republic of China, during the period between 2000 and 2015, the number of private enterprises has soared from 1.7 million to 19.1 million, a nearly twentyfold increase, and the number of individual enterprises has also increased from 25.7 million to 54.1 million. On the contrary, the cumulative number of SMEs in Taiwan has slightly increased from 1 million to 1.4 million between 2000 and 2015 according to Taiwan’s tax registration track records (Ministry of Economic Affairs, 2000, 2016).

Combined with the TEA rate, it also displays that the TEA rate of Taiwan has been much lower than that of China (Figure 3). The percentage of entrepreneurship participating in service industry in China has continuously risen. By 2014, the number of Chinese SMEs in the business sector had been 13 million, accounting for 73 percent of SMEs, while that of Taiwanese SMEs had been 1 million, standing at 80 percent. Figure 4 to Figure 6 reveal that the degree of innovation and the percentage of engaging in services businesses in Taiwan have decreased since 2013, as opposed to China. It is noticeable that the entrepreneurial activity in China has shifted to the innovative business services sector, while the Taiwanese business environment has stagnated. For instance, in 2015, there were approximate 100 thousand start-ups in Taiwan, a growth rate of 4 percent year on year. New enterprises undertaking businesses in the wholesaling, retailing, and restaurant sectors of the service industry accounted for 60 percent, whereas 3 percent of them embarked on professional

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science and technology services which can enhance competitiveness and economic development (Ministry of Economic Affairs, 2016). On the other hand, in 2014, there were 3.6 million new ventures in China, a rise of 45 percent. Although wholesale and retail trades also accounted for the majority of Chinese entrepreneurship, the number of high-tech entrepreneurship such as information transmission, software, and information technology plunged by 146.7 thousand in 2014, an increase in 97.87 percent (Li & Liu, 2016).

Figure 3: Total early-stage Entrepreneurial Activity (TEA), 2001-2016

Source: GEM

Figure 4: Innovation level, 2011-2016

Source: GEM 0 5 10 15 20 25 30 p er ce n tage China Taiwan 0 5 10 15 20 25 30 35 2011 2012 2013 2014 2015 2016 China Taiwan

23 Figure 5:Business services sector, 2010-2016

Source: GEM

Figure 6: The ranking of innovation, 2006-2016

Source: WEF

Formal institutions

Both of the governments play a leading role in the entrepreneurial activity. The overall quality of the public institutions in Taiwan is better than in China, while the Taiwanese government’s efficiency has fallen since 2012 (Figure 7and Figure 8). The overall government efficiency in China still needs to be improved. After China’s reform and opening up, forces of the free market economy continued to improve, while the Chinese government continued to dominate entrepreneurship (Zhang, 2017).

0 5 10 15 20 25 2010 2011 2012 2013 2014 2015 2016 China Taiwan 0 5 10 15 20 25 30 35 40 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 China Taiwan

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The Chinese authority has the power of distributing resources, like the right to the use of land and the right to gain funding and support. In this environment, entrepreneurs have to maintain the beneficial relationship with the officials (Shah, Gao, & Mittal, 2014). Entrepreneurs spent time on catering to the favors of the local officials in some places rather than on pursuing innovative technology. Therefore, the resources were allocated inefficiently to the most efficient enterprises so as to assure their survival (Liu, 2008).

Figure 7: The Ranking of Institutions, 2006-2016

Source: WEF

Figure 8: The Ranking of Government Efficiency, 2012-2016

Source: IMD 0 10 20 30 40 50 60 70 80 90 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 China Taiwan 0 10 20 30 40 50 60 2012 2013 2014 2015 2016 China Taiwan

25 Figure 9:The Score of Taxes and bureaucracy

Source: GEM

Figure 10: The Score of Governmental support and policies, 2010-2016

Source: GEM

The GEM report classifies the government policy into governmental support as well as taxes and bureaucracy (Figure 9 and Figure 10). The rating of two indicators which encourage new and growing firms in China has gradually improved in recent years, while the Taiwanese rating has decreased. The focal policy of Mass Entrepreneurship and Innovation was launched in November of 2014, and it is

0 0.5 1 1.5 2 2.5 3 3.5 2010 2011 2012 2013 2014 2015 2016 China Taiwan 0 0.5 1 1.5 2 2.5 3 3.5 4 2010 2011 2012 2013 2014 2015 2016 China Taiwan

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emphasized in the 13th Five-Year Plan (Genome, 2017; Herrington, 2017). It represents the evolution of the Chinese entrepreneurial ecosystem that China has started to pay attention to the development of entrepreneurship and innovation of SMEs (Ministry of Economic Affairs, 2016). There are four objectives of Mass Entrepreneurship and Innovation: (1) lowering entry barriers, (2) reinforcing public services, (3) encouraging university students, scientists, and engineers to start innovative ventures, and (4) a focus of strategic emerging industries (new-generation information technology, biology, energy conservation and environmental protection, new energy, new material technology, high-end equipment, and new energy vehicles). First, in October of 2015 (the latter half of the 12th Five-Year Plan), the Chinese authorities implemented “Three in One” Registration System Reform and “One Code for One License” to register companies easier and more efficiently. They also offer start-ups tax breaks (US$10 billion in 2014) and increased the turnover threshold at which business must pay tax to incentivized entrepreneurship. The number of new business registration reached its peak of 460 thousand in November and 512 thousand in December. Second, government-backed venture capital funds raised about 1.5 trillion yuan in 2015. The total number of 4,875 tech-based incubators and hacker spaces has been created to support start-ups and China has become the country of the largest number of incubators in the world by 2015 (Herrington, 2017; Xie, 2016). The number of incubated start-ups had increased from 39,652 to 74,838 between 2011 and 2015(Xie, 2016). Third, 558,000 university students started their own business in 2015, a rise of 17 percent on the previous year (Herrington, 2017). Fourth, the added value of strategic emerging industries accounted for eight percent of GDP by the end of 20151. The 13th Five-Year Plan expects that the cumulative value of the strategic

1

The State Council, the People's Republic of China

27

emerging industries accounts for 15 percent of total GDP by 2020 (KPMG, 2016). Since Mass Entrepreneurship and Innovation has significantly impacted on entrepreneurial activity, the Chinese government formulates further with this project in the 13thFive-Year Plan: (1) expanding tax credits on R&D by tax exemptions for new technology and products and tax deduction for R&D-related costs, (2) eliminating tech bottlenecks by a revision of the Law on Transformation of Scientific and Technological Achievements, (3) turning science into productivity by implementation of the relating law, (4) boosting makerspaces, (5) boosting scientific and technological innovation by building scientific and technological innovation centers, (6) building innovation demonstration bases, (7) transforming offline retail sector by adjusting commercial structure and innovating its development mode, (8) building big data in health and medical sectors, and (9) internet covering over 80 percent of basic public services in two years2.

Taiwan’s Small and Medium Enterprise Administration (SMEA) has also launched a series of programmes aimed at nurturing entrepreneurial start-ups in recent years (Herrington, 2017), while start-ups are depressed because of the cumbersome process of applications and documents (Wun, Hsieh, & Chen, 2013). The entrepreneurial environment in Taiwan for start-ups and investors is relatively unfriendly, as Taiwan has faced political isolation (Lin & Ho, 2009). China has Free Trade Agreements (FTA) with 23 countries3, while Taiwan has FTA with only five developing countries4 as of 2016. Therefore, the strength of Taiwan’s tariff preference has been decreasing compared to that of China’s tariff preference.

2

The State Council, the People's Republic of China

( http://english.gov.cn/premier/news/2017/01/27/content_281475552844391.htm ) 3

China FTA Network (http://fta.mofcom.gov.cn/english/index.shtml)

28 Culture

The degree of the cultural and social norms toward entrepreneurship in Taiwan has been relatively weakened compared to China since 2015 based on the GEM data (Figure 11). It is noticeable that the rating of Taiwan has declined gradually from 3.89 to 3.11, while that of China has slightly risen from 3.35 to 3.47 for the past seven years (2010-2016). Confucianism of a Chinese cultural heritage that stretches back over millennia significantly influences the core values of Chinese and Taiwanese society (Shah et al., 2014). Moreover, Chinese culture owns the features which are not conducive to the ideal entrepreneurial culture. For example, comparatively higher power distance and bureaucracy, more collectivism and uncertainty avoidance, stronger reluctance to openness, and acceptance of change exist in the Chinese society.

However, the two countries have pursued completely different ideologies for over 50 years (McGrath, MacMillan, Yang, & Tsai, 1992). Taiwan embraced western style capitalism opposite to China pursuing a communist ideology. Taiwanese society has largely moved away from the traditional Chinese acceptance of higher power distance as well as away from higher uncertainty avoidance to a mindset of more modern “Confucian dynamism”. However, in comparison with the GEM reports, it seems that the Chinese and Taiwanese society have changed somewhat over the last few years. One possible explanation for the shift is that Confucianism in China has weakened over the past 50 years (Lin & Ho, 2009). The external environment brings the communist China into conflict with retaining Chinese traditions. Another possible explanation is that the Chinese society has high power distance. The hierarchy leads to a strong difference among various members of society and organizations (Shah et al., 2014). People tend to interact with the people at a “higher” level carefully and cautiously (Shah et al., 2014). The study of Hayton and Cacciotti (2013) highlights

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that Chinese entrepreneurs emphasized money as the primary motive to start a business as a result of the social status inequity. Since Mass Entrepreneurship and Innovation was launched in 2014, the government encourages everyone to start their business. The society needs to increase the tolerance of fear of failure and decrease risk aversion. All of them represent the ideological emancipation. On the contrary, Taiwan’s parents tend to discourage their children to start a business. Instead, they encourage their children to obtain a stable job such as civil servant or working in a big company (Wun et al., 2013).

Figure 11: The Score of Cultural and social norms, 2010-2016

Source: GEM

Figure 12: The Index of Cultural Support, 2013-2017

Source: GEDI 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 2010 2011 2012 2013 2014 2015 2016 China Taiwan 0.0 0.2 0.4 0.6 0.8 1.0 2013 2014 2015 2016 2017 Taiwan China

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Without strong cultural support, the best and brightest individuals will not choose to become entrepreneurs (Guiso, Sapienza, & Zingales, 2006). The Global Entrepreneurship and Development Index (GEDI) combines the average of the GEM’s two variables (High Status to Successful Entrepreneurs and Entrepreneurship as a Good Career Choice) (Figure 13 and Figure 14) with an institutional variable regarding the level of corruption to create another parameter called “Cultural Support” (Szerb et al., 2013) (Figure 12). It shows a mixed picture that individual respect for entrepreneurs is high, while high corruption impairs their positive social role. On the other hand, some parameters (Diversion of Public Funds, Public Trust in Politicians, and Irregular Payments and Bribe) addressed by the WEF reports measure the ethics and corruption (Figure 15 to Figure 17). The results of the GEDI reports are consistent with the WEF reports. Again, the interaction of the different elements within the ecosystem might lead to the different outputs and outcomes of the ecosystem (Stam, 2014). Therefore, when taking into account corruption, the high level of corruption in China undermines the high status and steady career paths of legitimate entrepreneurs. Even though some progress has been made in curbing corruption, it remains a problematic factor for doing business in China.

Figure 13: The extent of High Status to Successful Entrepreneurs,2010-2016

Source: GEM 0 10 20 30 40 50 60 70 80 90 2010 2011 2012 2013 2014 2015 2016 P ercen ta g e China Taiwan

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Figure 14: Entrepreneurship as a Good Career Choice, 2010-2016

Source: GEM

Figure 15: The Ranking of Diversion of public funds, 2010-2016

Source: WEF

Figure 16: The Ranking of Irregular payments and bribes, 2010-2016

Source: WEF 64 66 68 70 72 74 76 2010 2011 2012 2013 2014 2015 2016 P ercen ta g e China Taiwan 0 10 20 30 40 50 60 2010 2011 2012 2013 2014 2015 2016 China Taiwan 0 10 20 30 40 50 60 70 80 2010 2011 2012 2013 2014 2015 2016 Rank in g

Irregular payments and bribes (WEF)

China Taiwan

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Figure 17: The Ranking of Public trust in politicians, 2010-2016

Source: WEF

Physical Infrastructure

Sufficient physical conditions enable human interaction in general, and entrepreneurial action in particular (Stam, 2014). Physical infrastructure is divided into three parts: telecommunication, transportation, utilities. This study analyzes infrastructure combined with several available and latest data. Although the overall infrastructure of Taiwan is more sufficient and efficient than that of China, significant progress of the infrastructure in China compared to slow progress in Taiwan also can be found. The IMD report indicates that the ranking of the infrastructure in Taiwan has dropped from 12th to 21th, while China has progressed from 29th to 25th in the past five years (Figure 18).

0 5 10 15 20 25 30 35 40 2010 2011 2012 2013 2014 2015 2016 Rank in g

Public trust in politicians (WEF)

China Taiwan

33

Figure 18: The Ranking of Infrastructure, 2012-2016

Source: IMD

Figure 19: The Ranking of Infrastructure, 2006-2016

Source: WEF

Figure 20: The Score of Physical and services infrastructure, 2010-2016

Source: GEM 0 5 10 15 20 25 30 35 2012 2013 2014 2015 2016 China Taiwan 0 10 20 30 40 50 60 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 China Taiwan 0 1 2 3 4 5 2010 2011 2012 2013 2014 2015 2016 China Taiwan

34

However, the rankings of the IMD reports are slightly different to the rankings of the WEF reports (Figure 19) as well as the GEM reports with regard to Taiwan’s infrastructure (Figure 20). The infrastructure of the two countries has gradually improved in the last decade based on the WEF reports. It is possible that the IMD World Competitiveness Yearbook assesses the extent to which basic Infrastructure, technological infrastructure, scientific infrastructure, health and environment, and education affect the needs of business. Although the sub-factors of scientific and human resource which are not a pre-requisite for the existence of the entrepreneurial ecosystem belong to infrastructure, the ranking of the IMD report makes a comparison with other available data to support the argument. The subsequent sections introduce and compare three elements of the infrastructure including utilities, transportation, and telecommunications in the two countries.

In the early days, the China’s government put considerate investment funds into basic industries and infrastructure construction. The total investment was 18.27 trillion yuan between 2003 and 2007, which was 1.6 times that invested from 1978 to 2002. The investment in infrastructure accounted for between 25 percent and 35 percent of total fixed-asset investment (FIA) in China, a growth rate of 20 percent year on year (Wilkins & Zurawski, 2014). This rapid growth has enabled investment in China to become the highest proportion of investment in the world, standing at almost half of GDP in 20145(Wilkins & Zurawski, 2014).

Over the past decade, the largest share of FIA has been urban infrastructure like water conservation, waste management, and road maintenance, accounting for approximate 30 percent. Utilities have been the second largest element in the last decade, standing at around a quarter of infrastructure investment, whilst this share has been declined as reliable utilities have been sufficient for the majority of households.

5

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On the contrary, the share of transportation infrastructure witnessed an increasing trend. Transportation infrastructure has constituted roughly a quarter of total infrastructure investment (Yu, De Jong, Storm, & Mi, 2012). During the 11th Five-Year Plan (2006-2010), investment in transport infrastructure including domestic airports and affiliated facilities reached 250 billion yuan, equivalent to the total cumulative investment of the previous 25 years. Transport infrastructure progress has been rapid and significant during a period from 2000 to 2010, especially in the construction of highways and civil aviation. First, the number of the highway mileage sharply increased by 185.7 percent and reached 4.008 million kilometers (Shah et al., 2014). Second, the number of civil aviation mileage had climbed from 1.503 million kilometers to 2.765 million kilometers, an increase of 84%. In addition, the 175 commercial airports were constructed by the end of 2010, a rise of 33 airports during the 11th Five-Year Plan (CAAC, 2011). Third, the railway operating mileage reached 91,200 kilometers in 2010, a rise of 33%. The focus of infrastructure investment has been also emphasized in the 12th and 13th Five-Year Plan. From 2011 to 2015, fixed-asset investment in railways amounted to 3.58 trillion yuan, up 47.3 percent from the previous Five-Year Plan. The length of railways reached 121,000 kilometers by the end of 20156. Regarding highways, they invested 1.3 trillion yuan to construct roads, and the total mileage of the roads reached 4.5 million kilometers by the end of 20157. Next, the number of domestic commercial airports ascended to 207 in 2015. The number of commercial airports is expected to reach 260, an increase of 53 airports in the 13th Five-Year Plan (CAAC, 2017). A “five vertical and five horizontal” grid has constructed an integrated transport network, with a completion of a rapid

6

The State Council, The People’s Republic of China:

( http://english.gov.cn/news/top_news/2016/01/18/content_281475274283243.htm )

7

The State Council, The People’s Republic of China:

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railway network and a highway by the end of the 12th Five-Year Plan. The fixed-asset investment in transportation is projected to spend 15 trillion yuan in the 13th Five-Year Plan, around 2.5 trillion yuan more than that in the 12th Five-Year Plan8.

China also has a breakthrough in the development of telecommunication. The infrastructure investment in telecommunications, China’s fixed-asset investment in telecommunications reached 435 billion yuan in 2016, a twofold increase in the last decade. The internet penetration rate has reached 53.2 percent, a fivefold increase over ten years (CNNIC, 2017). Moreover, mobile devices have completely conquered the internet landscape in China. There is a fourfold increase in the percentage of internet users using a mobile device to access the internet with 24 percent and 95.1 percent respectively between 2007 and 2016 (CNNIC, 2017). However, in 2016 while the internet coverage rates in small cities or developing provinces were very low with 27.4 percent compared to big cities or developed provinces with much higher internet coverage rates with 72.6 percent.

Compared to China, infrastructure in Taiwan is robust and stable, with a complex and integrated domestic transportation network including high-speed rail, highway, and trans-island railways (Lin, 2015). The WEF report also notes that Taiwan has a well-developed infrastructure, with the exception of air transport (Klaus & Xavier, 2010). The coverage rate of utilities as tap water and power has been above 90 percent since the early 2000s. Furthermore, the broadband penetration steadily increased to 89.4 percent in 2016 (TWNIC, 2016), which is more widespread than China.

This prosperity stretches back over 50 years. In 1960s, the Taiwanese government promoted national infrastructure. In 1960s, the percentage of public investment was 12.8 percent of GDP, with a contribution to 26 percent of economic

8

Xinhua Finance Agency:

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growth. In the early 1970s, the investment in the Ten Major Construction Projects of Taiwan, which laid groundwork for Taiwan’s economic miracle in the 1980s, reached approximately US$ 6 billion. This project significantly improved the transportation infrastructure and utilities as the completion of the Taoyuan International Airport, Suao Harbour, Taichung Harbour, railway electrification, the North-Link Railway, petrochemical industry development, steel mills and shipyards in Kaohsiung and a nuclear power plant. In 1980s, the Taiwanese government promoted the subsequent important projects as the Twelve Construction Project and the Fourteen Construction Project. The average annual public investment increased to US $7 billion, which had increased an average annual rate of 8.6 percent. However, there has been a deceasing trend since 1980s. The average public investment in percentage of GDP has fallen to 4.4 percent during a period from 2011 to 2013. Furthermore, the backward ranking of the IMD World Competitiveness Report regarding the infrastructure in Taiwan highlights that the management of water resource, the development of energy, and air transport should be improved. Huang (2017) indicates that the efficiency of the authorities in Taiwan with regard to the physical infrastructure has faced in dispute since the progress of Taiwan is obviously behind other countries. For instance, the runway maintenance of the Taoyuan International Airport took 15 years and the government inefficiently spent more than 20 years on the construction of Taoyuan International Airport Express.

Demand

Access to a more or less exogenous demand for new goods and services is also of great importance (Spigel & Stam, 2016; Stam, 2014). This study exploits several parameters relating demand as goods market efficiency, market size, and so on from different reports, to address the advantages and disadvantages of China and Taiwan.

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In 2015, the population of 1.37 billion in China contributes to a generous GDP of US$10,982.8 billion, whereas the population of 23.5 million in Taiwan contributes to GDP of US$523.6 billion. Compared to China, Taiwan is a small and high-income economy, while China is a large and catching-up economy (Chang & Shih, 2004). The WEF report verifies the market potential in China as China owns the biggest domestic market size that surpassed the United Stated in 2015 as well as the best foreign market size that remains the first place in the world (Figure 21 and Figure 22). Taiwan is an export-oriented country due to the geographical location and the limited internal market. Although Taiwan does not have the big market size as much as China, the ranking of the market size in Taiwan, both domestic and foreign, had performed well until 2014 (Figure 23 and Figure 24). The trend is aligned with the National Expert Survey (NES) of the GEM report. China’s internal market has become dynamic opposed to Taiwan that the strength of internal market has been relatively weaker since 2015 (Figure 25).

Figure 21: The Ranking of Market Size: GDP (PPP$ Billions), 2006-2016

Source: WEF 0 5 10 15 20 25 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Taiwan China

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Figure 22: The Ranking of Market Size, 2006-2016

Source: WEF

Figure 23: The Ranking of Market Size: Domestic, 2006-2016

Source: WEF

Figure 24: The Ranking of Market Size: Foreign, 2006-2016

Source: WEF 0 5 10 15 20 25 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Taiwan China 0 5 10 15 20 25 30 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 China Taiwan 0 2 4 6 8 10 12 14 16 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Taiwan China

40

Figure 25: The Score of Internal market dynamics, 2010-2016

Source: GEM

The entry of start-ups drives the dynamic market, which in turn opens opportunities for those entrepreneurial ventures (Levie & Autio, 2008). The extent of the internal market openness further influences the efficiency of the market. Therefore, this study compares internal market openness of the GEM report with the ranking of goods market efficiency of the WEF report.

Figure 26 shows that the internal market in China is not open as much as in Taiwan, and therefore the market in Taiwan is more efficient than in China (Figure 27). The indicator of goods market efficiency is composed of 16 sub-indexes involving many aspects as the policy, the regulation, the intensity of competition, and so on. It might be the reason why the ranking of China has fluctuated between 2006 and 2016. Nonetheless, China is not a free market economy and the level of monopoly power is fairly high as a result of government intervention (Shah et al., 2014). Most of this monopoly power operates rights by the government. Although some laws and regulations (Anti-Unfair Competition Law of the People’s Republic of China in 1993 and Anti-monopoly Law of the People’s Republic of China in 2007) have been passed recently to decrease the level of monopoly and increase competition, there was no significant development in the market forces. In China, the market system is

0 1 2 3 4 5 2010 2011 2012 2013 2014 2015 2016 China Taiwan

41

underdeveloped, and there is lack of competition caused by high barriers to entry for foreign firms and new businesses. Moreover, it takes over a month to start up a business. Information asymmetry is another issue in the market between sellers and buyers. There is no social credibility system to evaluate sellers’ behaviour related to being dishonest. Consumers sometimes cannot distinguish the authenticity of the products. Therefore, the drawbacks make an impact on entrepreneurial behaviour.

However, the degree of internal market openness (Figure 26) and the degree of goods market efficiency (Figure 27) in Taiwan have declined after 2013 stemming from the lack of resources as well as the channel of entering a market for new businesses (GEM, 2016) Although the public policy apparently encourages entrepreneurship and the concerned departments formulate the relating policy toward entrepreneurship, it is likely that the duty of every department is still vague and the extent of integration is insufficient. Particularly, the budget that promotes the development of SMEs is evidently less than the budget for large businesses. Hence, the practice and the public policy exit the gap. In addition to the ambiguous responsibility between the central and local government, the local government is the lack of the resource and the budget.

Figure 26: The Score of Internal market openness, 2010-2016

Source: GEM 0 0.5 1 1.5 2 2.5 3 3.5 2010 2011 2012 2013 2014 2015 2016 China Taiwan

42

Figure 27: The Ranking of Goods Market Efficiency, 2006-2016

Source: GEM

Discussion

Stemming from over 50 years of political and economic separation, Taiwan and China vary in their entrepreneurial ecosystems. Taiwan is a small and high income economy, while China is a large and catching-up economy. From the above analysis of the fundamental causes of an ecosystem, overall framework conditions of Taiwan perform are better than that of China except for demand. However, it is crystal clear that China under the leadership of the government creates an unleashed economic growth and catches up with other developed countries. With respect to consequences, the evidence is explicit: how do ecosystems perform with respect to the entrepreneurship rates and the extent of innovation (as a proximate consequence, economic output) and creating more new value (as a final consequence, economic outcome). Thanks to the political reform, the economic reform, and the industrial infrastructure during the period between 1950s and 2000s, namely the Taiwanese economic miracle, the labor productivity in Taiwan had boosted in the last half century (Figure 1). The change of unemployment rate of Taiwan is because Taiwan is an export-oriented country as well as Taiwan’s economy is contingent on the worldwide economy (Figure 2). On the contrary, China’s unemployment rate is rather

0 10 20 30 40 50 60 70 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 China Taiwan

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stable. Although the economic outcomes of Taiwan still perform better than China, the economic outputs reveal that the entrepreneurial activity in China is more dynamic than in Taiwan (Figure 3). The proportion of Taiwanese entrepreneurial activity engaging in business service sectors has dropped since 2014 (Figure 5). In addition to the professional fields, the extent of innovation in Taiwan is not as strong as the extent of innovation in China (Figure 4 and Figure 6). Therefore, most of the available data displays that the government of Taiwan should pay attention to the breakthrough of China’s economic performance and the entrepreneurial ecosystem in China.

Compared to China, the strength of the Taiwanese government seems weakened and entrepreneurship lacks governmental support. The entrepreneurial environment in Taiwan is relatively conservative since Taiwanese enterprises have been positioned as original equipment manufacturing (OEM) and original brand manufacturing (OBM). Youngsters tend to work for large companies or be civil servants rather than start up their company.

Conclusion

An entrepreneurial ecosystem approach puts entrepreneurial individuals at the center, but highlights the importance of the context (Stam, 2014). The objective of this study was to compare the entrepreneurial ecosystems in China and in Taiwan. Building on some academics (Audretsch & Belitski, 2016; Isenberg, 2011; Stam, 2014) as well as the famous example of Silicon Valley, this study compares four essential factors (formal institutions, culture, physical infrastructure, and demand for new value) as a prerequisite for the successful ecosystem. By synthesizing a list of indicators from the powerful reports (the Global Entrepreneurship Monitor (GEM), the Global Competitiveness Report, the World Competitiveness Yearbook (WCY), the Global Entrepreneurship Development Index (GEDI), and the Global Start-up Ecosystem