Remarks by Franklin L. Lavin
Under Secretary of Commerce for International Trade
Opening Remarks US-China Business Venture Forum
January 24, 2007
Thank you Alan (Dr. Alan Merten- President, George Mason University) for that kind introduction. Madame Ou (Xinqian,Vice Chair, China National Development and Reform Commission), it is a pleasure to see you again today. The Chinese delegation has come a long way to be here, and I hope your time here in Washington has been productive.
As Undersecretary of Commerce for International Trade, part of my job is to help U.S. companies succeed overseas, so I spend a great deal of my time working with companies across America on thinking through challenges and opportunities in overseas markets. I would like to share some of my insight on this issue with you about this and then, I would like to close with a challenge to the American and Chinese participants in today’s forum.
Is China Right for You?
One of my hopes is that every American company here thinks seriously about China and that every Chinese company think seriously about the U.S. We are important partners in the global economy and we have much to learn and benefit from one another.
For our part, the U.S. Department of Commerce views China as a strategic market, and a U.S. company that wants to develop global capabilities and stature must have a China strategy.
This does not mean that every U.S. company is ready for China, or even that every serious international company is ready for China, however it does mean that every company needs to find a way to think about China. The answer for every company may be different, but you have to find the right way to ask the question, “Is China right for me?”
Let’s look briefly at the opportunities and challenges of the China market.
The opportunities are enormous. China represents perhaps the fastest growing large economy in the world and it is the largest country in the world in terms of population. These are two of the reasons why we conclude that China is a strategic market. A serious international company can be absent from many markets in the world and still be effective, but it cannot long be absent from thinking about the Chinese market.
Even though China is still a developing country, millions of Chinese are now comfortable members of the middle class. While China’s GDP is growing at about 10% annually, many Chinese have consumption patterns that are growing closer to 20% annually. And when we look at younger, more affluent Chinese, typically in the urban and coastal areas, we often see lifestyle patterns similar to those any place in the Western developed world. In a number of product segments, from passenger planes, to personal computers, to cell phones, China’s consumption is enormous… and growing.
But what about the challenges? As I noted before, China is still a developing country, with its economic history still being written. American companies, particularly those without significant China and developing country experience will find a number of business challenges.
Let me highlight two issues that will apply to many of the sessions you will be attending today:
There are still significant problems in China with regard to intellectual property protection, a cornerstone of VC development. Without the ability of inventors and entrepreneurs to protect their creations, innovation is stifled and markets will not be able to assess the risks and benefits from their investments in emerging technologies and businesses. China is a nation full of great businesses and ideas, but unless those ideas can be protected, they are unlikely to find the investment they need.
Second, the free flow of international investment is sometimes limited. Business people would like to be able to seek funds from as many sources as possible. Investors would like to pursue projects in as many markets as possible. This means that in the best environment, foreign investors in China will be able to enter and exit projects easily, and investment decisions will be made by the parties involved. Unfortunately in China today there are many restrictions on investments and it is not easy to enter or to exit a project as it should be. This hurts China’s economy and hurts venture capital in China.
Let me sum up these challenges by observing a few statistics from a study by the World Bank, on the Ease of Doing Business: This study measures 175 countries and of them, China ranks at 93, up from 108 last year, ahead of countries like Russia (96). When it comes to investor protection, China’s ranking is 83rd, compared to other fast developing countries like India at 33 or Russia at 60. I can go on, but the point is that, although China has made great strides, reforms must be sustained and built upon to attract the risk capital that will be needed to sustain China’s growth.
It is also important to remember that business decisions are typically not abstract decisions made in a vacuum, but decisions made relative to other options. So a venture capital firm might decide that an investment in China represents a promising opportunity, but that a different investment in Mexico represents an even better opportunity. The point is that it is not good enough just to improve the operating environment and be satisfied because many countries in the world are constantly improving their operating environment. So if China, or any country, wants to continue to attract international business attention, it must improve its operating environment relative to other countries.
There are, as I see it, two challenges here for you today: I want the American companies to take as close a look as possible at the opportunities in China, to see if any fit within your investment criteria. China can be a challenging market, but I believe it can also be a highly rewarding one. And to our Chinese guests, my request is that you seek out ways to improve the business environment so it is more attractive to those who want to participate in your economy. Through this process those seeking investment opportunities and those needing investment can both benefit.
Thank you for being here. I wish you every success.