At the annual meeting of the Contemporary Chinese Study Association of Japan 2016, held at the Keio University SFC campus, we organized a session entitled “Epicenter of China’s Innovation: Shenzhen.” Since the discussion was remarkable interesting, and I found there are many accesses by foreign web users, I just briefly report the discussion as below. There were three presentations, and got many comments from audiences. Any comments are welcome.

1. First presentation: Prof. Tomoo Marukawa on “What is ‘special’ about Shenzhen?”

In the first report, Prof. Tomoo Marukawa (University of Tokyo) reported on the research questions of the whole session, the title says, “What is ‘special’ about Shenzhen?”. Basically, this question became a research question throughout the session. I will write a summary of the report with a keystroke.

1) In Shenzhen, although the number of university faculty members is extremely small, the number of patent applications for invention patents is remarkably large, and it is “outlier value” in China. If the value derived from the correlation between the number of university faculty members and the number of patents in various parts of China is the predicted value, Shenzhen produces a patent of 46 times of the predicted value. In fact, it means that Shenzhen’s patent production is largely based on researchers of private companies, not universities.

2) Looking at the growth rate of Shenzhen’s number of patents, a substantial change in growth rate is observed in 1997. 1997 was an epoch.

3) A recommendation by Liu Guoming of the Chinese Academy of Social Sciences invited to Shenzhen in 1992 was adopted extensively in the Shenzhen 9th Five-Year Plan (1996-2000). By looking at the contents, it includes High-tech industries promotion etc, it was very foreseeable contents.

4) Huawei’s employees also had to get a “temporary residential permit,” and gradually gained policy support later on. Even compared with Beijing and Shanghai, it may be cited as the special condition of Shenzhen, issuing a temporary residential permit. Relatively, being tolerant and open to outside technicians was important aspect of Shenzhen’s success.

 

2. Second presentation: Dr. Koichiro Kimura on Startup in Shenzhen

In the 2nd report, Kimichiro Kimura (Institute of Developing Economies, JETRO) reported on “Increasing startup and changing Chinese economy: Innovation and ‘Going Gobal’ through startup”.

1) He has especially focused on companies that are active in overseas markets. For example Huawei, ZTE, Lenovo, Haier, Midea and others. However, recently, startup companies are also rapidly growing. It is necessary to consider how to think about this phenomenon.

2) Although growth of startups such as SZOIL and SEEED are observed, it seems that the growth of Internet technology, the presence of orders from the bay area, the spread of smartphones / tablets, etc., namely the global contexts are important factor behind the Shenzhen’s rise.

3) Shenzhen is getting along with waves, such as popularization of open source manufacturing, popularization of cloud funding, the appearance of a company that supports start-ups. Imitation is also occurring frequently, but according to HAX, it is not easy to combine multiple functions and create a community with the users. But in Maker Fair Shenzhen, there were a lot of imitation products of Makeblock.

 

3. Third presentation: Dr. Asei Ito (me) on drone industry

As a third report I gave a report titled “Digital Dragon Head, Shenzhen: A case of unmanned aerial vehicle (drone) industry.” The main points are as follows.

1) The drones are so-called “flying smartphones,” so the parts overlap with the smartphone. Since China is making 450 million smartphones in 2015, it is certain that China will become the production base of drone. Interesting thing is not just production base, but a pioneer company DJI has appeared from China. In other words, “Emerging industries are born from an emerging country.” This mechanism is necessary for analysis.

2) Behind the mechanism, DJI used the Pearl River Delta supply chain while making in-house flight controllers. Because there is a foundation parts industry at the regions, it is easily possible to deal with new emerging industries and products. Besides Frank Wang of DJI, young entrepreneurs in Shenzhen are basically born in the 1980s and a lot of people graduated from the top engineering universities. So for Shenzhen, there was another important epoch in the late 2000s, namely at the time these entrepreneurs started their own businesses.

3) DJI does not “catch up” to imitate industrialized countries or companies, does not “catch-down” to sell medium and low price goods to the low-end market of emerging countries. In addition, core parts, namely flight controller is in-house. It is a very interesting pattern. However, looking at the registration information of the company, DJI is a 100% investment company from Hong Kong and should be treated as a foreign capital company. Looking at the notification of regulations on investment by foreign capital, this point is a mystery as it is said drone manufactures must be owned by local Chinese side at least 51%.

4) Speaking of the number of patents, there are more in Beijing, so we should focus on the characteristics of Shenzhen which still based on a hub of the electronics and IT industry. Personally I would like to call Shenzhen as the “Digital Dragon Head.”

 

4. Discussion

And so far, three people reported 20 minutes each. Here after is discussion. It was greatly exciting from here; some important questions are as follows.

1) Comment by Professor Ryoji Nakagawa,  Ritsumeikan University

In Shenzhen I knew there were two worlds of Majors (Huawei, ZTE, Tencent etc.) and Shanzhai (guerrilla world). But this time in the session, I realized there is another world, Makers / Startup. The problem here is the relationship between the three worlds. From Shanzhai, what kind of route can you upgrade to Makers / Startup and can you level up from Makers / Startup to Majors?

2) My note

As expected, Professor Nakagawa specializing in the electronics industry, this comment was quite exciting. In my opinion, DJI was developing and selling flight controllers (for single rotor) with just the number of employees at the founding of the company in 2006, so it was just the startup. Ten years later, the corporate value reached 1 billion dollars, becoming “unicorn.”Obviously DJI was a case of transition from Makers / Startup to Majors. It may also be necessary to examine the paths of Vivo and Oppo that are successful worldwide smartphone market. In the case of upgrading from Shenzhen to startup, I think there are many cases.

Another thing that can be pointed out is the huge world that exists outside the three above worlds. It is a foreign-trade-oriented processing trade / OEM world, namely ‘old Shenzhen world’. It seems that this still exists. This world was hit hard by the 2008 financial crisis. I think that this is the story behind the rise of Makers / Startup. I think that the timing of the change was also important.

Many other interesting questions were raised by audiences as below.

1) Is DJI an exceptional case among Chinese enterprises?

2) Richard Florida points out, tolerance, is important. Is Shenzhen tolerant place?

3) Since Shenzhen is away from Beijing, does this geographical condition provide a good environment for technology development and innovation?

4) Because Shenzhen is an artificial city, is there no interest group?

5) As for the change in Shenzhen, did the gradual change occur rather than the epoch-making period?

6) Conversely, is there an innovative state-owned enterprise?

7) Why is Japan struggling with drone industry?

8) How does the development of Shenzhen lead to the development of China as a whole?

9) How much can we explain the Shenzhen’s growth by number of migration or population growth?

10) Although special factors have been pointed out in case studies such as Zhongguancun, Wenzhou and Yiwu respectively, in Shenzhen, more important factors and universal logic should be emphasized. In particular, the function of the market mechanism and the presence of government intervention should be examined.