"Little Giants and Big Hopes: How Government Designation Affects Startup Innovation in China

Abstract

This thesis primarily investigates the means through which China’s government incentivizes startups and tech enterprises to work on policy objectives related to securing the country’s future critical technologies. Specifically, it examines the role of designation of a startup as a ‘little giant’ on their probability of success. “Little giants” are high-tech SMEs operating in critical technology areas related to Chinese national security. Some examples of these industries are: aerospace, intelligent manufacturing, energy, materials, among others. My original research hypothesis theorized that through the designation of a company as a ‘little giant’, private investors are incentivized to preferentially pursue investment opportunities in these companies because ‘little giants’ have been relatively derisked by the government and made eligible for a suite of special benefits, which private market investors will crowd-into, compounding their odds of success through their own value-added services. The method through which I research the effect of designation as a ‘little giant’ on startup success is a holistic analysis of the funding environment for these startups as seen in both the private equity markets and public exchanges made available for these startups to trade on. Additionally, I use select case studies of ‘little giants’ and the benefits afforded to them by virtue of the designation to illustrate the benefits enjoyed by said companies. I find that the designation of ‘little giant’ far from guarantees success for a startup. Investors take the label into account but do not neglect the fundamentals in favor of simply piling into these ‘little giants’ for the fact that they will benefit from government subsidies and freedom from policy headwinds. Instead, investors very selectively invest in these companies, implying that there’s a difference in the signal the government intends to communicate and the signal that the market is receiving. The government may hope to direct private capital into would-be high-tech enterprises, but private market investment rates and outcomes do not seem to reconcile with this narrative. However, through select case studies I do find that some ‘little giants’ enjoy great market development benefits via SOE-owned firms and ‘single champions’, which are existing market leaders within a vertical, buying products from ‘little giants’, often in the place of an existing supplier relationship with a foreign firm. I find early signs of success in this program in a number of unexpected places: cohort graduation rates of ‘little giants’ into 'single champions' in the aerospace industry, findings from case studies that indicate ‘little giants’ may benefit from greater access to clients who are owned by SOEs as well as those labeled ‘single champions’, and evidence of top tier investors crowding into select ‘little giants’. I find that while ‘little giants’ may not start off as the most innovative tech SMEs, market development support from ‘single champions’ and SOE-owned firms may allow them to survive long enough to eventually innovate, rather than doing so from the get-go. I conclude by finding that to-date the ‘little giants’ program is a highly inefficient means of weaponizing provincial incentives to serve the central administration’s policy objectives through many competing emerging technology hubs. These redundancies are bad for market efficiency, but good for progress in Chinese national security objectives and reshoring manufacturing. The program just might end up accomplishing what the PRC wants