CHINA TORCH PROGRAM

Policy System on Promoting SME

Innovation & Entrepreneurship in
China

Dr. LIANG Gui , Director General

Torch High Technology Industry Development Center
Ministry of Science and Technology, China
Torch Center : Nature, History &
Position
CHINA TORCH PROGRAM

• Nature
– A public entity as a director subsidiary under MOST
• History
– 1988: Established to implement Torch Program (www.ctp.gov.cn )
– 1999: In-house Innofund Administration Center set up (
www.innofund.gov.cn )
– 2006: Integration with China Technology Market Administration Center (
www.sinotechmart.org )
• Current Position
– The sole agency commissioned by MOST to improve the overall
environment for innovation and high-tech industry development

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 Outlines CHINA TORCH PROGRAM

• An Overview on SMEs in China

• Public Measures to Promote Innovation &
Entrepreneurship
• Challenges still Facing
• Future Strategy

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SMEs in China:
Contributions to Economy and CHINA TORCH PROGRAM

Innovation
– A rapid growth since 1978
• 99.6% of all companies registered
– Already an essential part of the national economy
• 58.5 % of GDP
• 68% of import and export volume
• 48.2 % of tax revenue
• 75% of urban employment
– Technology-based SMEs
• 140,000 by end of 2004
– 92% are private
– only 3% of all SMEs, but having created:
• 66% patents
• 75% technology innovations
• 82% new products

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SMEs in China:
Difficulties and Constraints
CHINA TORCH PROGRAM

• Innovation and Development Restricted as a Result of Capital Scarcity

– Limited own capital
– Restricted external financing
• Bank loan difficult due to scale and lack of guaranties
– Only 10% can obtain bank credits
• Commercial capitals risk-evasive (not for innovation)
• Fund raising from capital market more difficult
• Government funding mainly to research institutes as a legacy of
the planned economy

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Public Measures CHINA TORCH PROGRAM

to Promote Innovation &

Entrepreneurship
• Technology Business Incubators
• Improvement in Overall Environment
• Innovation Fund for Tech-based SMEs
• “Roadmap Scheme”

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TBIs :
Earlier Efforts to Promote Entrepreneurship
CHINA TORCH PROGRAM

and Innovation
• A major content of China Torch Program (www.ctp.gov.cn )
• Missions: Nurturing of technopreneurs and technology-base
startups
• Statistics (2005):
• Total number: 510, (general and sector-specific)
• Incubating area: 15 million m2
• Tenant companies: 33,048
• Accumulated graduates: 11,671

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TBIs: Recent Development CHINA TORCH PROGRAM

• Diversified forms
– 58 university science parks
– 45 innovation park for overseas returned scholars
• Sector Specific Incubation
– Biomedicine Incubator, Shanghai
– Advanced Material Incubator, Beijing
– Marine Technology Incubator, Tianjin
• Multiple Ownership (gov. business. VC. Multinationals)
• Networking at central and local levels

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Improvement in Overall Environment CHINA TORCH PROGRAM

• SMEs Promotion Law implemented in 2003

• SME board in Shenzhen Stock Exchange
– launched in May, 2004
– 50 Companies listed currently
• OTC Stock Trading System (Third Board)
• Over 10 high-tech companies from Zhongguancun Science Park
entered the system
• A good demonstration of the government's continuing efforts to
build a multi-level capital market
• “Third Board” companies are expected to have easier access to
SME Board or the Shenzhen and Shanghai Stock Exchanges
• To be extended to more science parks

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 Innofund: SBIR in China CHINA TORCH PROGRAM

• Supporting projects in early stage commercialization with

– Innovative technology and
– Good market potential but
– Unattractive for commercial capital
• Laying the foundation for industrial expansion and introduction
of commercial funds
– Targeting at “market failure” where government support is
needed;
– Bridging the gap of capital market
– Incubating innovative start-ups

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 Innofund: Filling the Market Gap CHINA TORCH PROGRAM

Income
Mature

Innofund IPO/M&A
CB
High Growth &
Expansion
Development Prototype VC
Idea

Death Valley
TechnologyGrowth LifeCycle

FFF
Time

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Innofund: an Overview CHINA TORCH PROGRAM

• Birth: May, 1999 (www.innofund.gov.cn)

• Nature: Central Government Funding
• Major Statistics (1999-2005)
– Applications received: 30,623
– Projects approved: 7,962
– Total funding allocated: 5.2bn CNY ($ 650 M )
– Average funding: 650,000 CNY ($ 81,250)

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Innofund: Target Group CHINA TORCH PROGRAM

• Applicant Qualifications
– Independent business entity
– Involving in high-tech R&D, production/services
– R&D investment/sales > 5%
– Technological personnel/total employees > 30%
– Various ownership (Chinese equity 50% up)
– Less than 500 employees

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Innofund: Funding to Innovation CHINA TORCH PROGRAM

Innofund Funding 1999-2005

1600 1552
1464
1400
1197
1200
1089
1008
1000 1000 Projec ts
872
820 780 830
780
800 660
660
540 Funding
600

400

200

0
99' 00' 01' 02' 03' 04' 05'
(Million CNY)

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Innofund: Technology Priorities CHINA TORCH PROGRAM

Innofund Projects 1999-2004 (By Technology Field)

409, 6%
IT
278, 4%
Biotech
1287, 20%
Material
Automation
Environment
2223, 36% Energy
Others

1042, 16%
27, 0%
1144, 18%

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Innofund: Achievements CHINA TORCH PROGRAM

• Support to Early-stage Companies Emphasized

– Start-up companies (<18 months): 31%
– Companies with less than 100 people: 60%
– Companies with less than 50 people: 41%
• Innovation Promoted
– 17% projects holds IPR (4946 projects funded 1999-2003)
• Transformation Facilitated
– 15.6% projects from National Key R&D Program and 863
Program
• Fund-raising Channels Broadened for Tech-based SMEs
– Innofund funding expanded by 17 times by investment from
• Employment Contribution
– 63 new jobs created by one project on average

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Roadmap Scheme:
Joint Efforts to Promote SME Innovation & CHINA TORCH PROGRAM

Growth
• Roadmap Scheme for Growth of Tech-based SMEs
– Initiated by Innofund in 2004 with sponsors including
• Innofund Administration Center (Innofund)
• Shenzhen Stock Exchange (SSE)
• State Development Bank (SDB)
• National Incubator Association (Incubators)
• National VC Association (VCs)
– Aim
• To create a favorable environment for the development of
tech-based SMEs at various stages via joint efforts from
various aspects

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Roadmap Scheme: Total Solution for SME CHINA TORCH PROGRAM

Growth

Incubators
Com. Banks SSE
Services
Loans
Training, OTC, IPO

Tech-based SMEs Exit

Tech-based Equity
SME Loans Grant Funding VCs
Default Reserve
Fund of funds
SDB Innofund

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Roadmap Scheme: Missions CHINA TORCH PROGRAM

– Promotion of seed/early stage (Dead Valley) financing

• Innofund “Investment Subsidy” to “Start-up” projects
– Grant to tenant company innovation projects which has been invested
by the selected incubators
– Support to technological innovations by SMEs
• Innofund funding to be strengthened with more attention to
cultivate innovative enterprises rather than only the projects
– Establishment of Innovation Network
• Incubators as the nodes
– Equity investment by public funds to promote/guide VC development
• Fund of funds to be set up with investment from Innofund to
technology-oriented VC funds (SBIC?)
– Leading commercial loans to tech-based SMEs (SDB SME Loans)
– Promotion the establishment of a multi-layered capital market system

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Challenges: Lack of Core Technologies CHINA TORCH PROGRAM

Key Technology Patents of Major IT Products

120 114 114

100

80 69 72
65
60 57
Total
40 33 Chinese

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9
0
DVD PC Color TV Mobile
Phone

Note: All the nine DVD patents and ten of the 72 Color TV patents possessed by
Chinese enterprises are not core technologies.

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Challenges:
Indigenous Innovation Capacity still CHINA TORCH PROGRAM

Weaker
• Patent Preemption and Patent Barrier
– Advantage in technology monopoly by multinationals
– High-priced patent fee thus charged
• Independent Innovation Restricted
– Market dominancy by large corporation and multinationals hinder
the innovation and development of SMEs via
• Acquisition
• Branding (OEM)
– “Market for Technology” strategy not ideally realized as expected
• Reluctance of foreign-funded enterprises to disseminate technology
• JVs mostly involved in license manufacturing rather than product
development
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 Challenges: Patent Barrier CHINA TORCH PROGRAM

World Patents in Bio-Engineering

12% 4%
USA
Europe
51% Japan
33% Others

World Patents in IC Products

10%
16% Japan
USA
S.Korea
55%
China
19%

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Challenges: the Recognition CHINA TORCH PROGRAM

• There is still a lack of driving force and overall capacity for

sustainable innovation in our current economic system and
so…

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 Future: An Innovation-oriented Country CHINA TORCH PROGRAM

• A Strategic Decision: Building up the innovation-oriented

country
– Strengthening the indigenous innovation capacity
– Technological innovation system with enterprises as the
core hub, and combine industry, university and research
institution
– Commercialized S&T intermediaries service system
– Regional innovation system with specific characteristics
and advantages

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Future: Strategic Missions of Torch CHINA TORCH PROGRAM

• Torch will play an important role to realize the national strategy

– Creating innovation headstreams (“Growing Seedlings”)
• To reinforce the development of tech-based SME community
• To lower the individual risk and cost of the innovation activities
undertaken by tech-based SMEs
– Developing Innovation Clusters (“Forestation”)
• To guide the random innovation activities of SMEs to follow the
national development strategy so as to build up
• the innovation ecosystems representing national
competitiveness
– Environment Building (“The soil”)
• Capital
• Technology
• People
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Future: “Growing Seedlings” CHINA TORCH PROGRAM

• Addressing the “Death Valley” Problem

– A socialized and multiply funding system
• Enhancing the leveraging effect of public funding (Innofund)
• Catalyzing the emergence of business angels and promoting the
establishment of BANs
• Drafting specific policies to promote the effective integration of
business angels and technology business incubators
– A coordinated integrate fostering system
• Continuous implementation of the “Roadmap Scheme”
• Promoting the incubation mode of entrepreneurial tutor (SCORE)
combined with professional incubation
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Future: “Forestation” CHINA TORCH PROGRAM

• Developing Innovation Clusters

– Fostering technology innovation alliances
• To promote the networking, interaction and collaboration among
key innovation players
– Establishing innovation relay centers (CIRCs)
• To make easier access for SMEs to applicable innovation
resources so as
• To lower the information cost, transaction cost and
organizational cost of innovation activities
– Encouraging the upgrading in the value chain
• Technology-based Export Promotion Project
– From OEM to ODM( Own Design and Manufacturing) &OBM (Own
Brand Manufacturing ）
• COSEP (China Offshore Software Engineering Project)

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 Final Words: Joint Innovation CHINA TORCH PROGRAM

• We promote joint innovation partnership between Chinese and

foreign innovative SMEs via cooperation with counterpart
innovation agencies in other countries:
– OESO anvar (France)
– CDTI (Spain)
– EDB (Singapore)
– INSME (International Network of SMEs)

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 Future: “Growing Seedlings” CHINA TORCH PROGRAM

Funding System
Seedlings (Market)

Sprouts (Products)

Seeds (Idea)
High Growth
Innovative SMEs
Entrepreneurial Team

Innovative Technologies with

Good Market Potential
Fostering System
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Clusters: Hotbeds for Innovation CHINA TORCH PROGRAM

(B. Klein & Rosenberg ）

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Future: Optimized Funding and Fostering
CHINA TORCH PROGRAM

System
Income Mature

Innofund & BAF IPO/M&A

Funding CB
High Growth &
Expansion
VC
Prototype
Idea

Development

FFF Incubator & Angel TechnologyGrowth LifeCycle

Fostering
Time

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 CHINA TORCH PROGRAM

Thank You ！
感谢各位！

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