Conference on Global Entrepreneurship: Economic Development for Asia and the U.S. – General Session 1 Welcome & Global Entrepreneurship Between Asia and the U.S.

Betty Lee Sung: I’m Professor Betty Lee Sung, chair of the Asian American Asian Research Institute and I have the very distinct honor and privilege as chair of this Institute to welcome all of you to our Fourth Annual Conference on Global Entrepreneurship, Economic Development for Asia and the United States. The Institute is the scholarly research and resource center that focuses on policies and issues that affect Asians ands Asian Americans. Our institute is very young—this is our fourth year—but under the very capable leadership of Dr. Thomas Tan, and the support of our chancellor, the Board of Trustees, and the faculty and staff of the twenty colleges of the City University, I think we have accomplished a lot and come a long way.

We also want to acknowledge the contribution of our co-sponsors today. There’s the White House Initiative for Asian American Pacific Islanders under the executive directorship of Eddy Badrina, and he and his staff came all the way from Washington DC this morning, caught the 4am shuttle, and are here with us today. Eddy do you want to stand up? Eddy and Eric. One of our co sponsors is also the Committee of 100 and today they are represented by Kathy Lee, Kathy, where are you? Is Alice here yet? She will be here later. She is the executive director of the Committee of 100. We have the Chinese Association for Science and Business, under the execute directorship of Dr. Daxi Li. Daxi, where are you? And also the Weissman Center of International Business at Baruch College right here, Dr. Terrence Martell. The prestige and standing of these sponsors speak to the quality of our conference and our presentations, so we hope you’ll attend every one of these sessions, because I think the speakers have a lot to say. And now we are very very honored that we’ve always had the unwavering support of one of our trustees of the board of trustees of CUNY, Dr. Kathleen Pesile and I’m very happy to present her to say a few words to you.

Kathleen Pesile: Good morning, Honored guests and members of AAARI, I’m delighted to be here this morning. I would like to give you some greetings from my fellow trustees at the University and also the trustee Wellington Chen will be participating in the conference this afternoon. From the inception in 2001, the trustees were very eager to approve the Institute, because its primary focus was going to be and is on the issues of policies that affect Asian Americans. As a former international banker who has worked in Asia and has led a delegation of educators to Shanghai University and Nanjing University, I think your efforts for the past four years are very impressive, and I encourage you to continue the dialogue of multidimensional issues. I’m going to be with you for the better part of the morning, but then I do have to leave. I have my friend and colleague Christine Wong here in case you have any questions to ask of her or myself and she’ll relay them on to me. But I do hope you have a wonderful day today; this is a delightful conference. Keep up the efforts because the only way to succeed is to actually continue the dialogue. Thank you.

Betty Lee Sung: Thank you very much. Now we’ll have a few words of welcome from the president of Baruch College. This is the college in which you are now sitting, and you can see this is a brand new college; we have a gorgeous conference center here. President Kathleen Waldron will now say a few words of welcome.

Kathleen Waldron: Thank you Betty. Welcome to Baruch College. Some of you have already asked if you can rent these facilities for future conferences and yes, that was the design. This building was built in 2001, and really epitomizes the energy and dynamism that you can see at Baruch College today. With 15,500 students, both undergraduate and graduate students, Baruch College is the most diverse college in the United States, according to US News and World Report. And we are proud of that diversity, and we embrace it. Not only on behalf of our students, but also on behalf of the faculty and staff who work here and provide that education.

But really I think what is probably more interesting to you today is if I may just say something about what we do with entrepreneurship at Baruch College. We have worked very hard to develop our Entrepreneurship Academic Program, in line with our support programs for Entrepreneurships in New York City. In particular, we have established the Field Center for Entrepreneurship, which is housed in this building; and we have a part of that that is affiliated with the Small Business Development Association, where we advise and greet over 1,000 small business leaders in New York City, to help develop their businesses, plan them, do management studies, marketing studies, and really help those entrepreneurs get started. In addition we are very proud to co-sponsor with Merrill Lynch the IPO Challenge Entrepreneurship competition, which brings teams of high school students to this room, where they launch their ideas and their dreams of what businesses they someday might start. It’s a wonderful program that brings executives from Merrill Lynch in with high school students and some faculty at Baruch, to talk about forming teams to create entrepreneurial plans of study. There’s a competition, a winner, and of course a prize; and with the prize money we hope the entrepreneurs start their program. We do that for high school and we also do that for college. So, the Entrepreneurship activities and the contest are going to take place in about another month. And we do this on an annual basis as well as our continuing working with Entrepreneurs in New York City. I welcome you to Baruch College. I think a topic of global Entrepreneurship is particularly important between Asia and the United States today. We read about it in the newspapers everyday. I wish I could stay for the whole conference, but I will be here for part of it. Have a good conference, and learn a lot. Thank you.

Betty Lee Sung: Thank you President Waldron. I think, as most of you know, Baruch College is the Business College—that’s what it specializes in in the City University system. Now we have as our first presider of the first session, “Overview of Global Entrepreneurship between Asia and the United States,” Dr. Terrence Martell, and he is going to preside over this first panel and session. May I introduce Dr. Martell. And, as I’m trying to save time, I’m not going to go into any of the lengthy introductions of the speakers and the presiders. It’s all in the back of your book and in your program, so please read up on it. So, let me present Dr. Martell.

Dr. Terrence Martell: Thank you, Betty, and welcome. I’m Terry Martell. I’m the director of the Weissman Center of International Business. We are very pleased to co­sponsor this event here at Baruch College. After all, 30% of our students are Asian American, so it’s an extremely appropriate, extremely valuable conference. This is an overview session, to kind of set the tone of today’s events, and I think without further ado I want to get right into the meat of the matter here, and introduce our first speaker, which is the keynote speaker, Professor Richard Wong, Deputy Vice Chancellor of the Hong Kong University. Dr. Wong is a renowned economist, educated at the University of Chicago. He is active in advancing economic research on policy issues in Hong Kong and mainland China through his work as the founding director of both the Hong Kong Center of Economic Research and the Hong Kong Institute of Economics and Business Strategies. He is currently serving as a member of the Hong Kong Government Economic Advisory Committee, University Grants Committee, Housing Authority, Exchange Fund Advisory Committee, and numerous other public bodies. Professor Wong.

Richard Wong: Thank you Dr. Martell for the introduction. It’s a great pleasure to be here at AAARI and I would like to thank all the sponsors for making it possible for me to come and speak to you. When I got the invitation a while ago, my inclination was to say no, because I was invited to speak on Global Entrepreneurship, and I had thought that I hadn’t done any work on that lately. In fact, I haven’t done any work in that area at all since I graduated from the University. But it so happened that my PhD thesis was on Entrepreneurship, and I thought ‘Well, after so long, maybe it’s time to read up a little bit on the matter,’ and so if my observations and views are rather shallow, please forgive me, I’m very vintage.

But actually reading some of the materials recently I’ve discovered that things haven’t really changed all that much since I’ve touched the subject. According to a study on Global Entrepreneurship, initiated by Babson College and the London Business School, they survey about 34 nations, and they have been ongoing for a quite a few years. Of the 34 nations, with a total working population of some 566 million, they discovered about 73 million of them were entrepreneurs, which means they had worked in starting new businesses. Of course, for me, this is not novel at all. If you were to go to any poor country, all of them, or most of them are entrepreneurs. A farmer is an entrepreneur. The family firm is at the heart of most traditional agriculture, and they are all entrepreneurs. So actually most of the population in a poor country is poor, but they are entrepreneurs; they are family-based farmers. In fact, the Babson Study confirmed that in poor countries 50% of the people are entrepreneurs, and, in fact, that is because they are farmers. They are very entrepreneurial in every sense of the word.

Another thing that is also very interesting is that they have discovered a number of things that are quite common across these countries, which is quite stable. The ranking of the percentage of the population that is engaged in entrepreneurship tends to be very stable over the many years that they have conducted the study. There is some fluctuation, but not very much change from year to year, suggesting that the percentage of people who are in entrepreneurship is a result, not of policy decisions of macroeconomic fluctuation, but something that is very ingrained in the basic way society and the economy is operating, and what I would like to call fundamental institutional structural factors that don’t change – they do change over time, but they don’t change year to year very quickly. One of the things is that the peak age group for people who go into entrepreneurship tends to be relatively young. They are in the age group of 25 to 34, and this seems to be the case whether you are in a low income country, middle income country, or high income country. I think in the United States, we know which category they are in – but people do start business relatively young. Sometimes people go into entrepreneurship because they see an opportunity, and sometimes they go in out of necessity—they lost their job or some other reasons; this is not uncommon. I will tell you why I decided to study entrepreneurship for my PhD thesis: because based on my own childhood experience of looking at things around me.

Another very important phenomenon is that the percentage of people engaged—as a percentage of the working population—in entrepreneurship, by which I mean start up businesses, is U-shaped. A lot of poor, low income countries tend to have a high percentage of entrepreneurship, and rich countries, high income countries, also have a high percentage of entrepreneurship. The middle income group is the lowest, in terms of percentage. That’s not unusual, that’s quite common, and it’s not difficult to understand: organization that takes you from a lower income, to a higher income typically means leaving agriculture, going to industry, and then you hit services. In industries, people tend to have jobs as a worker, as an employee in a fairly large size manufacturing plant. When you are in agriculture, it’s typically a small family firm. When you go into services there are opportunities for more start-up businesses. So, actually, being in a middle income group actually has low entrepreneurship, as far as I can tell. Based on the Babson survey, and I’m going to use their findings, but interpret it in a different way, so anyone from Babson, please don’t get upset. It has been discovered that most of the empirical evidence around the world shows that the largest single service sector is the consumer services. And that is, of course, we are taking an urban area and we are leaving the agricultural aside. In the urban area, the consumer services: your Mom and Pop grocery store, your family restaurant, these are the start-up businesses, and of course, in the typical “image” of some Asian Americans, they do laundry, they do these things…These are all family firms.

A very small percentage of the start-up companies see themselves as a high potential start up, meaning they see themselves as innovating, relying on new technology, entering a market that is new and there is no competition, they are ahead of the game, the competition will come later. The way Microsoft started—that’s a high innovation company. What percentage of all entrepreneurs are probably engaged in that high innovation, forward-looking sector? Three percent. Most entrepreneurship is not about innovating fancy, new ideas and new technology; it’s running a Mom and Pop grocery store, your restaurant—these are all very entrepreneurial family firms.

One very important thing that one should notice about entrepreneurs is the following: in the empirical findings, entrepreneurs provide two thirds of the financing for a start-up. Then they go out and get some external funding. Where do they get their funding from? Venture capitalists, right? No. A very small percentage of the funding comes from the venture capitalists. In fact they rely on something like one third of the funding from outsiders. But who are the providers of capital for a start-up company? When I was a student, there was a paper published, and I don’t even remember the title of the paper, but it said something like the “Four F” relationship. And I don’t even remember what the Four Fs are because I couldn’t find the paper before I came, but I remember that there were several that were very obvious: family, friends, relatives, basically people who know you. After all, starting up a business is a high risk venture, and only people who know you well enough—not based on you application forms submitted to a venture capitalist—but people who know you from childhood, know whether you’re trustworthy, whether you are a reliable person, diligent, will give you the capital. And in fact almost a third of a start-up capital comes from friends, and relatives and close relatives, usually. There is a whole literature on informal financing, which is financing outside.

If we were to look at the total amount of start-up capital that goes into forming all of this venture capital across these 34 nations that Babson College and London Business School did, they constituted about 3.5% of the GDP. That’s the amount of capital that goes in to start-up capital across 34 nations. That’s quite large, quite a bit of investment, 3.5%. Of that 3.5%, 2.3% of that GDP is provided by the entrepreneur himself. But about 1.2% is borrowed from somebody. That 1.2% is overwhelmingly borrowed from friends and relatives. Only 0.1% of the GDP comes from venture capitalists. Venture capitalism is the modern version whereby highly sophisticated bankers, risk capitalists, begin to access innovation technology and how there might be the opportunity later on through IPO and other exit strategies where one can participate in start-up capital. But since most start-up business is not innovative, but routine, then who will invest in that? Well, people who trust you, not people who have faith in your business. It’s not your business that is important, but who you are.

Having said all that, why do people go into business as opposed to looking for a job, looking for an employment? I think there are many reasons and a lot of them are institutional. First of all, it’s obviously institutional because the formal labor market, in terms of employment opportunities, makes it difficult for you to find a job, and that is not just because economic times are bad. But largely, especially in poor countries—low income countries—getting a formal job in an organized labor market usually requires formal qualifications that are not accessible to the vast majority of the population: getting a degree, getting a high school degree, high school qualification, where education opportunities are not in abundance to most people. Finding formal employment jobs is denied to a lot of people. And there may be many forms of discrimination in the employment place. People don’t like you for… reasons of your looks, the way you dress, so on and so forth, your accent, what have you. Then, finding a formal job becomes a challenge, but becoming an entrepreneur is not a problem, because you hire yourself directly.

The other thing that is also relevant, other than these labor market institutional barriers, that encourage some people to go into businesses, is that getting a start-up capital—and let us notice two fundamental issues—most of the people go into entrepreneurship at the age of 25 to 34. At the age of 25 to 34 you have not accumulated a lot of capital. So, how do you go into that business? You economize in hiring cheap free labor – that’s what farmers do. They get married and have lots of kids, very early.

That’s how you do it. That’s why in agriculture you have very large families who do that. What about start-up business in the urban area? Do they do that? Yes, they do that too. They get married early and have lots of kids. It’s empirically very viable. That was part of my thesis, a long time ago. I did graduate, so … I suppose it has not been refuted.

This is what I’d like to share with you in terms of a personal observation of childhood, living and growing up in Hong Kong. The typical predominant entrepreneurial form that I noticed as a child in urban Hong Kong was the hawker. The hawker is a street vendor. I think there might still be some around New York City—not too many now, it’s taken up by Wall Street and all these other fancy buildings, sort of driven these guys to ethnic neighborhoods and so forth. Of course, typically, the greatest threat to the hawker’s business was when the neighborhood policeman shows up. You are not supposed to be doing a business without a license on the pavement. There is an extremely sophisticated operation going on, reminiscent of the animal kingdom in the wild jungle, and that is the following: you would see that the typical person manning that street vendor’s little operation is the wife. She stands all day, works all day, does all the transaction. The husband, however, usually goes and has a siesta at the back of the street, sleeping most of his time, and when he is awake, playing chess or what have you with fellow hawkers, male hawkers. The children play around at the end of the street, sometimes doing homework, mom calling to them. And then, something happens—the neighborhood policeman is spotted by the children. They are allowed to play at the end of the street, not in the middle. Why? They are posted to spot the policeman. They perform a role: they cry out loud, and then everybody knows. And that is the only time that the husband has a positive role in the whole operation. He jumps up, pushes the cart as quickly as he can, turning many streets to escape the policeman. That’s a pretty sophisticated operation; you see that in the animal kingdom and so forth. That is a family business: financing, all these operations, how it works. And this is a way of edging out a life for entrepreneurs. This is the familiar low income and sometimes middle income entrepreneur.

Then there is the sophisticated entrepreneur, the ones we have in Silicon Valley, close to Cambridge, Massachusetts, where there are investment bankers and other risk capitalists; that’s very different. That’s based on R & D, knowledge, very sophisticated education, and I also have an example of that. Actually those of you who heard me speak yesterday in a different context will probably be bored by this example, but I think this is a wonderful example that I learned only fairly recently. One of the graduates of my University, who had graduated with an architect degree only last year, upon graduation, told his father that this was the last day that he would be an architect. There were no jobs—no good jobs, that’s what he meant. There are always jobs, but not a good one in Hong Kong as an architect. So, he is going to quit being an architect the day he graduates and he is going to join two of his friends to go to mainland China, to Nanjing, where they’ll set up a shop, hiring 15 computer programmers from China, much cheaper than in Hong Kong, and they are going to write software games that can be downloaded from the internet onto your mobile phone. They figured that they can come up with one idea a day, and with the three of them, they’ll probably have 1,000 ideas. If three of them worked, they would have earned more than what they need to upkeep the whole business. This is a different type of entrepreneur: innovative, some knowledge, putting together a business in a very unknown environment. They didn’t even actually have the skill set for it. They were trained as architects, but then, architects are about design, so, computer games are also something about design, I presume, I don’t really know. But I thought it was a very interesting example of someone spotting opportunities, putting together businesses, which is very different.

The innovative entrepreneur that I see in Hong Kong today is, of course, very different from the not-so-innovative entrepreneur that I saw as a child in Hong Kong. But I think the descriptions of entrepreneurs around the world are largely like that. There are those who go into routine business—they are the vast majority of the population. There is, of course, a great deal of interest to see whether government policy is necessary to help the 97% that are not the high tech, R & D-oriented ones. I really don’t know what policies the government can really do to help people, because I don’t think government policies can overcome the asymmetric information of whether that person is a worthwhile person to lend money to. Banks are not willing to lend money to these start-up businesses, so there’s no business for government, I would think; however, there is a lot of room for friends and relatives. I do think, therefore, the value of traditional modes of networking, of credit raising, is actually very often underrated in modern studies, and I think perhaps even there, there are a lot of ways by which we screen worthwhile investment opportunities, start-up businesses, that are not known to modern bankers, but are known to the traditional credit screeners in that market.

With that, I’d like to finally say that this is my overall view of the different types of entrepreneurship: some are more prevalent in the rich countries, and some are more prevalent in the poor countries. Poor country entrepreneurs rely on informal networks to raise money, rich country entrepreneurs rely again primarily on informal networks, very seldom do they go to banks and to venture capitalists where there are genuine difficulties. In fact, the United States is probably the only country where a sophisticated, modern financing credit evaluation and risk-taking toolkits have been developed. I don’t think it has been developed anywhere else. This is the most sophisticated capital market; therefore, it’s no wonder that more than two thirds of all venture capital start-ups are start-ups in the United States; nowhere else can we do that. I think the rest of the world does not have a lot to learn, because you have to have a very sophisticated financial system before you can tap into modern capital financing techniques of the venture capitalist type. With that, let me stop here and I’ll be happy to take questions, if there are any, later on. Thank you very much.

Terrence Martell: Thank you Dr. Wong for laying out a very cogent overview of the session, the importance of asymmetric information and the importance of financing are things that will be discussed throughout the day. There was one comment that you made that really caught me up short: this idea of children as cheap labor—it may work in the East, but it certainly is not working in New York. So, if you are looking for a second career, may be you could talk to parents about seeing what we can do to get the children-as-cheap-labor concept going here. That would help our capital markets and certainly my personal net worth.

Our second speaker is Clarence Kwan, the national managing partner of the Chinese Services Group, Deloitte & Touche. Clarence Kwan has more than 26 years of insurance and advisory experience in the U.S., China, and Eastern Europe. From 1995 to 2002 he was based in Beijing as Deputy CEO of the China Practice of Deloitte. He has worked in Houston, New York, and Taipei. He has multinational experience, multicultural experience and he is here to share some of his insights with us. Thank you.

Clarence T. Kwan: While I’m getting my slides going, I’d like to expand on Dr. Wong’s profile of an entrepreneur. I believe everyone here is an entrepreneur. We all run our own company. We go to work, earn revenue, we have to do R & D so we can improve our value. Then we choose the best buyer of our service to sell to; we are constantly looking for a better market. So I think everyone of us is an entrepreneur. And I consider myself a global entrepreneur, because even though I’ve been with a company—Deloitte is a 16 billion dollar organization, we have offices in 140 countries—but I still consider myself an entrepreneur, because, particularly, on a global basis, I started my office in Prague from about 25 people and in three years we grew to about 250 people. When I went to Beijing we had an office with less than 40 people. We grew to about 500 people in seven years, so it’s a very interesting process. I’d like to share with you some of my observations, since I know China the best, I’d like to talk to you about how some of our clients, some of our global clients are looking at China in terms of the opportunity there, and what the implication is for the aspiring global entrepreneurs for that market.

Quickly, I think most people look at China from four different angles: one is China is a world factory; secondly, China is a very huge consumer market; third, China is a major buyer around the world; and finally, China is a global investor. If you look at China as a world factory, the manufacturing sectors more than doubled in the last ten years. The characteristic of the manufacturing in China also has changed dramatically over the last 20 years from low technology to high technology, from labor intensive to high capital intensive, from SOE-dominated to now more private sector oriented. Of course the foreign investment into China, last year of 60 billion dollars, actually made a lot of difference in China. The foreign investor entity accounts for 31% of China’s total industrial output and 55% of the export. Why is this the case? Of course, labor cost is a reason. Labor cost, as you can see from this chart, is about 1/26 of that of the US, is about 1/6 of that of Mexico. Just having cheap labor cost is not enough. If you look at the bottom sentence, “China every year generates between 350 thousand to 400 thousand engineers,” which is about seven times that of the U.S. So, it’s not just the cheap labor, but quality labor.

Another reason why a lot more foreign companies are going in there is because there is gradually a formation of a major industry cluster in China. If you look at the investment: initially, most of the investment goes into the program in the Pearl River Delta back in the early 1980s, and that accounts for about a quarter of the total foreign direct investment into China. It accounts for 36% of the export. If you look at it, they started with, basically moving from toys, shoes, textiles and garments. They still generate close to 40% of the apparel in China for export purposes. But now it’s moving into the consumer electronics. So we’ve got a major cluster around the Pearl River Delta, with Hong Kong as a primary driver, Shenzhen is a primary driver there.

Another major cluster is in the Yangtze River Delta area; that accounts for about 1/3 of the total foreign direct investment, 20% of China’s GDP. If you look at, they have about 35 cities with a population greater than a million people, so it’s not only a commerce center, but also a financial center and a major heavy-industry center. A lot of petro-chemicals are being built around there because they have plenty of water down in this part of the world. And lastly the Bohai Rim, the Beijing, Tianjin, Liaoning, and Shandong area. They account for about 21% of foreign direct investment. So, of course those are the hotbeds of Chinese economic development for the last 20 years, but what we are seeing is the bow-and-arrow effect. You see that the coastal province is in the shape of a bow. But what you start seeing is the arrow effect, which is development along the Yangtze River Delta. And the interesting thing is this arrow is pointing at the U.S. So I think if you are interested in looking at where the opportunity is, not only should you be looking at the cultural provinces, but I think you have to start to consider the Yangtze River Basin.

Because China is such a manufacturing center, people are sourcing from it at an increasing rate. If you look at Wal-Mart: 18 billion in the year 2004. And every company, in different industries—in retail, telecom, manufacturing—they all source significantly from China. The danger of that is a lot of middle men are being dis-intermediated. A lot of our clients are very much worried that their clients in the U.S. are bypassing them and sourcing directly from China. Of course we all know China is a huge consumer market—1.3 billion people, 21% of the global population. But how many of you know that China has 129 cities where the population is greater than a million people? Compared to the US, only nine. In 2003, Chinese per capita GDP has exceeded $1,000, for the first time. If you remember the history of the four dragons in Asia, when they hit $1,000 GDP per capita, they would not slow down the growth until they hit $10,000. So, China still has a long way to go to hit $10,000.

Retail is a huge number, but more importantly is the growing in middle class, which is about 175 to 200 million people. We use a definition of having a household income of about 10,000 USD with household asset of about 40,000 USD. That’s a significant growing part of buying power. Lastly, I think we all know about this 4+2+1 syndrome. In China, starting from 1980, they have adopted the one child policy, so basically every child today in China has two parents and four grandparents to spend money on him. So, that’s a very interesting buying pattern there. China is a major buyer, you can say China sells you the cheap commodity, but they push up the energy price, push up the raw material price, push up the steel price and cement price. The import for China moved from only $4.1 billion in 1970, to about $561 billion in 2004. Now they are the third largest import market for the world. Of course they are buying raw material, they are buying industrial equipment, aircrafts, they are also buying food, they’ve become a net food importer in 2004. Also now, China is the United States’ largest growing export market.

This is a very interesting chart. If you look at China’s overall trade relationships, it’s basically even. But they run a surplus against the U.S., they run a deficit against countries like South Korea, Taiwan, Japan. So, in effect, China has become a processing center for some of those countries, and with a final stop being the U.S., so, some of the deficit you can say is a transfer from Taiwan. Some of the surpluses against the U.S., is really a transfer from Taiwan, South Korea and Japan. Very interesting chart.

And lastly I want to talk about China as a global investor. We all know about the foreign currency reserve China has: it’s over $650 billion. Not only are they are investing that money into the U.S. Treasury bill and supporting our war in Iraq, but also they started making foreign direct investments. They made about 1.8 billion dollars in 2004, overseas, one third of those going to emerging markets like Latin America. Cumulatively they hit about a $40 billion foreign direct investment. Why are they investing overseas? They are investing overseas because they need access to the natural resources, like crude oil, like mineral. They also need to find a market to utilize their excess domestic capacity in a lot of electronic goods area; they need to hit new markets. They also want to acquire technology brand names, just like the Lenovo-IBM PC deal. It’s very interesting. Now, for example, in the U.S., one of the most successful states in attracting Chinese investment is South Carolina. They actually have a representative sitting in Shanghai to try to talk to Chinese companies, to move there. Haier, the largest white goods manufacturer and consumer electronic company in China, they set up the plan in 1999, since then $126 million from China has been invested in South Carolina. They employ about 1,200 people locally. Interesting to know, South Carolina exports to China have increased 70% since 1999. China could make a difference.

It’s difficult to talk about China without a quick comparison with India. Both countries have a similar population, but if you look at the size of the labor force, China is almost double the size of India. The GDP, basically double. One of the most alarming areas, if you look at the total FDI inflow, India is only 10% of that of China. And if you look at the spending on infrastructure development, China spends $128 billion versus $18. That creates a very big difference in terms of business environment. Now, with that, you can take a look at where your opportunity might be as an entrepreneur, but also I can tell you the entrepreneurship in China, the growth in the private sectors is very strong in China.

I won’t bore you with all the details, but let me just close by sharing with you the ten golden rules for the entrepreneur. Those three Chinese characters mean entrepreneur, i-:, chuangyezhe, and I’ll explain to you later.
1.
Everything is possible…

2.
But nothing is easy.

3.
“Just do it”, instead of “Be patient”.

4.
No pain, no gain. Now, the first character, i, chuang, on this side, is a knife, is a sword, so it can hurt you. This word also means wound. So, you can be wounded as an entrepreneur, but that’s okay: no pain, no gain.

5.
Be careful with free advice. [(laughter) Terrence Martell: That’s an accounting firm talking!]

6.
And when you go to China, watch out, a lot of times you will see they issue the regulations on what they call a “provisional” basis—they can change it any time.

7.
And a lot of times, when you talk to your Chinese counterpart, they always say, “Oh, basically no problem” jibenzhang meiyou shenme wenti. [On slide: “Basically, no problem” means BIG problem]

8.
And also this is my favorite – signing a contract means it’s the beginning of the real negotiation.

9.
When you are feeling good, don’t forget rule number 2, nothing is easy.

10.
When you are in trouble, think about rule number one, everything is possible.

With that, thank you.

Terrence Martell: Our penultimate speaker is Mr. Alejandro Reyes, who is the policy adviser for the Pacific Basin Economic Council in Hong Kong. Alejandro Reyes is a visiting scholar at the EW Script School of Journalism at Ohio University. For 16 years he has been in Hong Kong-based journalism, specializing in Asian economics, business and regional affairs. He worked for Asia Week, in a variety positions, and he was the chief of the Hong Kong and Singapore bureau. He currently is policy advisor to Pacific Basin Economic Council and senior advisor for Asia to the John Templeton Foundation. Born in the Philippines, he was educated in United States and the UK.

Alejandro Reyes: I tend to make Power Points mainly to help me with my stream of consciousness, so, I’m going to stay here and just use the Power Point for myself. So I’m going to rebel against the tyranny of the Power Point. But if there’s anything I learned working for a few months at the Canadian government it is that every policy starts out as a Power Point presentation. And one of my most nerve-racking moments was when our minister was delivering a policy briefing in cabinet and he had to have an appointed Power Point operator, somebody to press the buttons for him, because he has a PhD in International Law and couldn’t be trusted to press the buttons. But I had the great honor of being the backup Power Point operator. In case the appointed Power Point operator should have been hit by a bus, or suddenly got food poisoning, so I have a little bit of experience, but it always makes me nervous.

I’m not an academic, I’m not a professional journalist, I’m not with a big firm; though I’d like to think of myself as a global entrepreneur because these days my life is a bit strange. I sit in Athens, Ohio, which is two hours outside of Colombus, and I spend mornings talking to journalism students, I spend evenings talking to clients in Asia, I spend early mornings talking to clients in Europe. All from my little home office in Athens, Ohio. So, in many ways, I am a creature of globalization. But what I wanted to do is step back a little bit and talk from an observer’s point of view, maybe a practitioner, if you will, in some ways. And I always think that when one’s talking about globalization…one of the things I’m doing is writing a book on the movement against globalization and I often get questions about the book: are you for or against it? And the way I put it is that you can’t really be for or against globalization. Are you for or against the sun rising in the morning? [lights come on, laughter] It’s not whether you’re for or against it, it’s that you have to make do with it. The sun rises and what are you going to do with the day? How are you going to take advantage and make the best advantage of what’s going on, maximize the advantages and limit the disadvantages? I always find that there’s a globalization story in almost anything. When I was leaving where I’m staying in New York today—I love show and tell—I thought, “Well, can I bring something that would illustrate some of the points I am trying to make?” And I brought this, which is, for those aficionados of the Apple computer, you realize this is an adapter with a British plug on it. When I look at this I say, well what is the globalization story that this tells? I look at the small print, which most of us don’t really read, but it’s quite revealing. It says here, designed in California. That makes sense because Apple is in Coopertino. Assembled in Thailand and then it has also indications of components made in Japan.

This is pretty much one of the stories I want to talk about. How in the context of globalization we have to understand: what are the challenges entrepreneurs face today? One of the biggest challenges is trying to understand globalization trends. One of them is the fact that we have had lower tariffs, expansion of trade, and hence, globalization of sourcing. Something like this is produced not just by somebody sitting in California who then hands the design over to somebody next door and it’s all manufactured in California. The design is made in California and then Apple finds sources for all the components from wherever it makes sense—from India, from Malaysia, from China—and then assembles it, again, where it makes sense. One of the most interesting documentaries I’ve seen recently is a documentary producer that went to a clothing store in Toronto and picked out a suit and tried to find where, how is the suit made. And he discovered that it was an amazing globalization story—that the textile came from Bangladesh, the buttons from India, the thread from Korea. All the components were shipped to Romania, then trucked to Belarus, assembled there and air freighted to Canada. This is the trade story that is going on and I think entrepreneurs these days have to understand what’s going on.

Doctor Wong talked about financial markets and the globalization of financial markets, an important issue. I talked about the globalization of sourcing. Clarence talked about regional groupings. It’s very important these days for entrepreneurs to understand how regions are shaping Pearl River Delta, the Yangtze River Delta, the Asian area. How the borders are falling in terms of how that is really improving terms of trade and how that is helping companies or entrepreneurs who really want to keep costs down, be productive, and deliver goods in a timely and reasonable price. To leverage from the competitive, to use the competitive advantage from each of these locations to do the best business that they can. In other words, entrepreneurs, truly global entrepreneurs, need to be aware of these trends. The emergence of China and India has been spoken about. I know my colleague here will talk about the impact of technology, how the Internet is really changing the way we do business.

One story, that I don’t know if you’ve followed, is that recently there were two Americans who were convicted in Shanghai of selling DVDs through the Internet. They were sourcing pirated DVDs and selling them all over the world on EBay and on a Russian website. I think they sold something like 180,000 DVDs. Now think about it, in many ways it’s global entrepreneurship: Americans going to China, positioning themselves in Shanghai and doing a global business using the Internet. Unfortunately, it’s illegal. That is one of the things that you have to look at these days. So the impact of technology plays into the drive to cut costs, the China price, how China and India are bringing down the price of good and services.

Then I’d like to mention two other trends: the heightened risk in our world today. And New Yorkers are surely aware about the security concerns, but I also wanted to raise some other issues, such as public health. We in Hong Kong know about the dangers of SARS and how some of these risks, some of these problems, can affect the supply chain. Entrepreneurs these days have to be aware of many of these risks: terror, earthquakes, natural disasters, tsunamis. In other words, as you globalize your supply chain, you need to be much more aware of some of these problems. And lastly I’d just mentioned corporate social responsibility, and we’re going to talk about this this afternoon, but it’s about the globalization of the corporation and the heightened interest in communities and how companies are behaving in their communities. Particularly more attention paid towards corporate government, environmental protection, sustainable development, corruption issues. Many of these issues are now issues that are global in concern, and are issues that entrepreneurs, particularly entrepreneurs that want to have a global presence, that want to take advantage of globalization trends, have to be aware of.

What does this really mean for entrepreneurship? I’ll go very quickly because time is of the essence. I would say it means that entrepreneurs have to be smart about their sourcing. They have to understand supply chain management, understand that outsourcing really means bringing together the right ingredients. Trying to find, well, where can I get all these different components? For example, I was just looking at the Canadian International Trade website and I was interested by some of the success stories that the Canadian government likes to highlight. One of them was a company, I think in Winnipeg, that’s selling machines that produce metal tubes for motorcycles, to China. Because they see an opportunity, a growing demand in China for motorcycles. Well, Canadians don’t really produce motorcycles you can export, but perhaps there are opportunities such as producing the machine that bends these tubes, that then you sell to China to help them produce their motorcycles. For example, another company highlighted was a company that sells street sweeping equipment to India. It’s an interesting concept. In India there’s a greater desire to improve the environment, public health issues. There’s a company in Canada that has adapted its mining, sweeping, and drilling technology to produce street sweeping equipment. So there’s an opportunity there, an international opportunity.

That’s the hallmark of the global entrepreneur: finding this niche, finding this specialization, taking advantage of the rise of China and India, making smart use of technology, trying to keep costs down. And for someone like myself, we have to remember, even an individual—and this is why the wave of globalization today is so different—globalization seems to have become a personal thing. For want of a better analogy, we’ve had waves of globalization before, but it’s like a tsunami. Every time the wave goes deeper, it goes further inland. These days because of the impact of technology and the impact of the widening trade, the impact of globalization keeps coming in, twisting people’s lives. As we’ve said here before, we each are entrepreneurs and we have to really take in a number of global issues. It’s not enough just to be a farmer or a hawker. I’m sort of a hawker of policy sitting in Athens, Ohio. I have to be aware of what’s going on in Singapore or what’s going on in China. If you are an individual entrepreneur, you need to look after your own marketing, you need to look after your own innovation. Innovation is incredibly important and increasingly so. I think that’s one of the areas that the United States is still the leader, in terms of innovation. And lastly I’d say global awareness. There’s a necessity to be aware of political, economic trends going on, interests of civil societies, social responsibility, public health development, security concerns, and even corruption issues. These are many of the issues that entrepreneurs now have to think about.

So lastly, what are the implications for the U.S. and Asia? In many ways the U.S. and Asia are compliments. As Dr. Wong pointed out, the United States has the capital, Asia has the labor. United States has the innovation, Asia can execute. United States consumes, Asia can produce. We see that in the way that deficits are working at the moment. But there are challenges. And the questions I’d put out there are, can the United States maintain its edge in innovation? That’s a very important question, particularly being in a university, that we have to deal with. The whole globalization story is that economies keep moving up that value scale. While the United States has the lead in innovation, education, and information, these leads can vanish very quickly. We know how many PhDs are coming out of India and China, many of them being educated here. And these are important questions. Can Asia maintain its cost advantages? China is a fantastic economy because it has first, third, second world all in one. They keep moving out the cheaper production to the hinterland. So with that, I’ll finish and I’ll just say entrepreneurship has really changed because of globalization and many of these are trends we need to be aware of. Thank you.

Terrence Martell: Thank you and I want to thank the first three speakers for accommodating a slight shift: we’re adding a fourth speaker to this panel. I don’t want you to think we’re going to go too long. Mr. Tang has promised me he will go through sixty-two slides in three minutes. This remains to be seen. However, he is already on the program for later today. So what I want you to think is that you’re going to get a time saving in the afternoon, take a present value of the time savings, and we will have it in the morning. So this will go a little longer than the break, but it will just make the break more meaningful.

Mark Tang is the director of the Biotechnical Communications Center at Rutgers Business School. He also runs a venture investment fund, called World Technology Fund. He works very actively with Chinese Biotechnical companies, through his leadership role in the World Biotechnical Forum. And he has written a book, The Essential Biotech Investment Guide. Sir.

C. Mark Tang: Thank you, I will try to save time. Thank you for inviting me to speak here. We had wonderful speakers this morning, talking about entrepreneurship, why China. And I’m particularly going to talk about one of the emerging areas in China, which is biotech. I myself was a biochemist by training and became an investment banker by mistake and since then I’ve been working in this area. I spend two of my weekdays at Rutgers, teaching venture capital and biotech-related courses and the rest of my time does venture capital, and my evening time I do some philanthropy work with Asia. So I go to sleep very late because I have to call Asia at night.

This slide essentially show you in the United States over the last five years, the biotech sector has over performed Standard & Poors and also the NASDAQ. When I started in 1993 as an investment banker, I called forty investment banking firms and they told me biotech was risky. Luckily one of them offered me a job, but since the year 2000, everything is different now. We see there are over 400 drugs in late clinical trial, and about 400 have been approved and there are about fifteen companies that have been profitable. So the biotech business model has been proving itself. One of the growing areas is Asia actually; it’s getting very hot. This is the number we had, I probably should add that it’s two years ago. This is the number of companies in Asia. I just came back from China and the Minister of Science and Technology told me that their website has 360 biotech companies in Asia.

The reason biotech is surging is because of three factors. One is the particular way of the Asian government, the governments and the officials want to get voters and keep their jobs, so they have to do biotech. The other one is a global, industrial drive, which mainly came from the United States. And a lot of money has poured into it. Typically the technology, actually, the global drive here is one of three areas. You’ve probably heard of one, the post-genomic era, means new technologies. The second area is the big pharmas, which is having problems, you’ve heard about Merck, the CEO has been ousted—that was the title this morning—because in order to keep their double digit growing as Wall Street would like them, they have to keep up with the drug candidates and they are having problems. Biotech is the area they are looking at. The other way, as Clarence mentioned, is the aging population in the U.S. as well as in China. As there are a lot of people getting old, they need more drugs and people also like to live better, they like things to grow hair and Viagra and stuff. So they keep the sector.

So, why Asia? Clarence has clearly stated that China is the place, but I think my talk will be more specifically on biotech. First is the natural resources. There is a huge amount of reports that there are actually twice as many scientists graduating in China than in the U.S. And positive demographic trends, which I mentioned; market potential, which Clarence mentioned. Also the policies: the government is giving a lot of money. We’re talking about Singapore putting in two billion in two years. The Taiwanese, the Korean, and Japanese have pledged over ten million in ten years. That’s a lot of money. The most important thing is returning scientists from the West, which in China they are called “sea turtle” haigui, the driving force for the West. The other side, if you look at the market share in Asia, you’ll see that China has 34% and India has 16%, Korea has 16%. China clearly is the biggest market, but if you add up China, Taiwan and Hong Kong, the number is a lot bigger.

Typically there are three business models in biotech. One is platform technologies. Somehow the business model rotates. In the year 2000 you could raise a lot of money if you had genomic tool technologies and then that died. Right now you have to be in a therapeutic area in order to get funded. If you’re not doing R&D, if you don’t have a late stage product, you can’t get any money from the venture capitalists. Some of the hybrids get some platform technology, get some revenue and then does the R&D. Drugs are very expensive; it takes about 12-16 years, $800 to $1.2 billion, according to McKinsey estimates. And there’s a lot of risk, essentially there’s more risk to die. This is the critical factor when looking to the U.S. and Asia. For example, from Phase I to II, you have 30% chance to die, 70% chance for it to work. Then Phase II to III a 30% chance to pass and Phase III a 25% pass. At every stage you could die. And the only country that can afford it is the United States: they had a $28 billion dollar budget last year and that’s a lot bigger than a lot of Asian countries. So that plays the role of Asia. These are the binomial trees and show exact numbers of when they are going to die, when they are going to survive.

One thing where biotech is different from others is that they don’t really have revenues. So the IP is the most important component for biotech start-ups. That’s why I brought a group of visitors to Shanghai for a conference, the bigger ones went there. A lot of them are concerned about the IPs, so this year I brought another group of people to address this problem. I mentioned India and China; they are concerned about IPs though the law has been updated in China, but the problem is enforcement. In India, they still have a problem with the law but they have made some changes recently.

The challenge of this sector for those growing is they still have some problems. One is the lack of first-class scientists. People who did really well stay and make a lot of money in the U.S. And scientific managers—there are really very few business managers going back to Asia, although a growing amount is coming back. Also, there is a lack of a strong research base, although China has thousands of research institutions, but it’s still relatively weak compared to the U.S. and Europe. The gross of expenditure on R&D is still low, in China about 2% and U.S. and Japan about 8%, also because the GDP price is a lot bigger over here; this may remain.

The other problem we had is, I think we had a keynote speaker coming from China, he makes the policies for the Chinese VC. Asia’s problem is the shortage of private venture capital, which is a skill—how to manage and how to allocate the funds— because in the United States, as the speakers previously mentioned, the VC community plays a very critical role in bio-entrepreneurship. This is the thing we wanted to see improve in Asia and we are working with the Asian governments in this area.

I am showing China and India because they are so similar. Why China and India? Because they have a huge market, large resource base of scientists, competitive labor, and bio-diversity as the pros. The cons are IP concerns, VC industry, and low price index. I made this speech in India in February and I visited both science parks in China and India. I found out that in the biotech sector, China is much stronger. But in the chemical area, India has the lead because they started a long time ago. The problem is solving these strategies. There are actually two strategies: they encourage the overseas trained citizens to go back to working in their country and this typically has been adapted by Taiwan and India, and China. Taiwan did very well in the ’80s when there was a recession in the U.S., they moved all the IT personnel to Taiwan and it boomed there, and they are working on biotech. We’ll see how that works out. The other way to do it is to buy foreign talents, and the only country that can afford it is Singapore. No other country can do that, although China is starting to try to buy some back, so they called “100 scholars” and then they are paid by their Hong Kong tycoon and import them back…I will skip this.

The reason why we think Asia is good is because China had a telecom and IT boom. I think the next boom is biotech. Skip these [referring to the slides]. Who will be the leader in biotech? We have here Taiwan and Singapore, this is by S. G. Cohen. But if you add China and Taiwan and consider Taiwan as part of China, you’re already number one. And who is going to play well? China and India are going to compete for the best in this area. My talk is on Nature Biotechnology published in July 2003 and this is just one word on outsourcing. This is my book, published in the U.S.; it costs 28 dollars. The same one in China costs 28 RMB, so it’s an [8.2] difference. That tells you the story of biotech. Lots of R&D, billions of dollars of R&D in the U.S. The clinical trial can be moved to Asia, and that’s actually the way to go in Asia. This is the course I teach at Rutgers, doing venture capital. And on this last slide I’ll show you that we formed a non-profit organization and we’re very active in Asia. We provide training programs on entrepreneurship and venture capital. Clarence’s firms are very generous. Wherever I go, to India, to China, they follow us and support us. We just did a seminar in [Deli] last week. Thank you very much.

Terrence Martell: Mr. Tang promised to do that again this afternoon, but only slower, in case you missed any of the materials he put up there and quickly took off. I would remind the audience, as we outsource the clinical testing to China, we might want to remember the social responsibility arguments that have been made from time to time. That’s not an arbitrage I would recommend. Any way, we have our break now, please be back for the afternoon session. The morning started out well, thank you all very, very much.