China has for several years been heralded by western business leaders as ‘the place to be’. Yet despite the widespread excitement, the business successes of foreign companies operating and investing there have been limited, both in terms of quantity and in terms of magnitude. This week’s edition of The Economist, however, draws attention to the recent stellar performance of Israeli-Chinese venture firm Infinity in addressing the Chinese opportunity via its Infinity I-China fund.
The article focuses on the history of Infinity – the firm was founded by Amir Gal-Or in 1993 – and the reasons for which it has gained relatively unbridled access to the tightly controlled Chinese investment market. First, the firm has secured Chinese government entities as co-investors in its two China-focused funds. Second, and perhaps more importantly, the fund’s investments have included Chinese companies that focus on developing and deploying new technologies and intellectual property.
The second point is indicative of the Chinese government’s determination to move up the value chain and shift away from a focus on goods being ‘made in China’ towards a focus on goods being ‘invented in China’. As China’s economy develops, this shift to higher value added activities is no doubt a logical progression. But the (multi) trillion dollar question is whether China can nurture a culture of innovation and creative destruction which has proven fundamental success of the United States (through Silicon Valley) and Israel.
By developing new technologies and intellectual property, Israel has proven itself as an ‘intensive’ economic powerhouse – its greatest commercial achievements result from doing things in new and different ways, not from building companies that succeed through achieving economies of scale. On the contrary, China has mastered the science of manufacturing and has established itself as the world-leading ‘extensive’ economic powerhouse, but has to date fallen short on developing world-beating technologies. The relative strengths of the two nations suggest that there is potential for Israeli technologists and Chinese industrialists to exploit synergies in working together. And as Infinity has demonstrated, the Chinese government is amenable to supporting commercial arrangements which help build a foundation for future Chinese technological innovation.
The article rightly suggests that “managing transfers of technology and production across multiple countries and entities is horribly complex”. Yet there is a compelling opportunity for firms that focus on ironing out this complexity. By facilitating technology transfer and consequently helping China become a more technology and intellectual property-focused nation, Israeli companies will be better positioned to receive the Chinese government’s seal of approval. And further down the line, western firms may benefit as the Chinese government will have a vested interest in ensuring that local companies comply with western standards of intellectual property protection (assuming a considerable share of the global pool of intellectual property will at that time be Chinese-owned). One thing remains clear: western firms seeking success in China need to find the right partners. The case of Infinity suggests that for the time being the Chinese government may represent the best partner of all.