The municipal government of Guangzhou, formerly known as Canton, the most populous city in the province of Guangdong in southern China, is seeking to create a startup ecosystem for companies in very early stages of development and is partnering with a former chief scientist of Israel to help recreate the startup nation’s success locally.
The local authorities are seeking to turn the city into a tech powerhouse and a knowledge-based economy with international influence by 2020, and are stepping up efforts to boost innovation in a variety of sectors, including information technology (IT), biotechnology, new materials and energy.
The Guangzhou Municipal Government has asked Yehoshua (Shuki) Gleitman to collaborate on setting up a local incubator program, similar to those he helped set up while heading Israel’s Chief Scientist Office. The office of the Chief Scientist in Israel has been in charge of setting out the nation’s innovation policies, and for years has run incubator programs in Israel that have helped nurture new technologies.
By the end of 2016, some 4,740 high-tech companies were located in Guangzhou, some 2,820 of which were newly set up, ranking the city second, after Beijing, in the number of startups it is home to.
As China, the world’s second-largest economy shifts its identity from a manufacturing and labor-intensive economy to a high-end innovative force, Asian giants including Alibaba Group, Hutchison Water Ltd., and Huawei have set up R&D centers, invested in funds and snapped up Israeli startups and companies. Israel sees China as a strategic partner and a key country for economic cooperation and has allocated to the East Asian giant six Israeli trade missions — more than to any other country.
Even so, China is still a “relatively minor player” in the Israeli economy, focusing almost exclusively on strategic investments, a report by IVC Research Center, which tracks Israel’s high-tech scene, said in February.
“They are looking to learn from what we did in Israel,” said Gleitman, who is also a former director general of Israel’s Ministry of Trade & Commerce and has spearheaded Israel’s innovation and national R&D programs. “They want to build an incubation center that will promote early seed-stage companies, by financing them and offsetting some of the risk that is associated with early developments.”
The program will provide investment grants for some $400,000 to $450,000 per project, he said, and the idea is to invest both in Chinese ventures and Israeli ventures that will be set up in the region.
The incubator, which started its activities in 2017, has already invested in one Chinese initiative and two Israeli projects, Gleitman said.
The idea is to draw Israeli entrepreneurs to China’s shores and to encourage them to develop their products locally and then access the huge Chinese market.
The fields of interest of this incubation center would be life sciences and biotechnology firms, he said.
Gleitman scoffs at the idea that this might encourage brain drain from Israel. “There is no such a thing as brain drain,” he said. “Without funding, some of these companies would never even stand a chance of getting off ground. So, this would be an additional avenue of funding.”
“Also,” he added, “successful entrepreneurs, even if they make it abroad, will then come back to Israel with their success and their knowledge and help feed the local tech environment. Brains come and go; this only adds to their experience and to Israel’s tech ecosystem.”
Extending an existing partnership
The new collaboration is an extension of an existing partnership between Gleitman, a group of Israeli entrepreneurs and the Guangzhou Municipal Government, which in 2016 set up the Guangzhou-Israel Sino Bio-industry Investment Fund (GIBF).
The 600 million RMB fund (some $100 million) seeks to invest and promote the establishment of Chinese subsidiaries of Israeli companies that are active in the biomedical field. The Israeli-Chinese subsidiaries, registered and set up in the Guangzhou Development District, have full exclusive rights to the intellectual property of the Israeli parent company and total freedom of operation in China.
The fund’s strategy is to establish Chinese subsidiaries in which the Israeli company holds a majority stake. As a result, the Israeli company benefits from all the value created in China and not only from proceeds or royalties on sales by a local partner, agent or distributor, as is often the case when entering the Chinese market, Gleitman explained.
“This is a new and very attractive model for the Israeli companies to operate in China,” he said. “It is a model that works and is good for China and for Israel.”
Because GIBF is made up of an Israeli-Chinese team, the companies chosen for investment can more easily overcome barriers of language, culture, mentality and trust, Gleitman said.
Setting up a local Chinese enterprise, as the model envisages, also overcomes recent Chinese curbs on foreign investment, he said. At the end of 2016, the Chinese government issued restrictions on outbound investments but subsequently clarified its position and eased some the rules. China and the US are also on the brink of a trade war, with both nations threatening to impose tariffs on imports.
“You are setting up a company and manufacturing in China, so the recent regulations don’t apply in this situation,” he said.
The fund invests in companies that have already have a developed product and are seeking to penetrate the Chinese market. “We set up companies in China from scratch,” he said. “This opens doors to a completely new market and Israelis retain 51% of the newly set up company.”
The fund invests up to $8 million per company, he said.
Since its inception, the GIBF has closed four investment transactions and established four new Chinese joint ventures, including a startup developing orthopedic implants based on carbon fibers and one working on advanced monitoring devices for pregnant women.
The fund is expected to close added investments this year, said Gleitman, who is the chairman of the fund. Gleitman also believes there will be a follow-up fund to the current fund. “This was just a pilot,” he said. “I expect the next fund to be much bigger.”