Shenzhen

For the exclusive use of P. Ng, 2022.
SHENZHEN AT 40: CHINA’S SILICON HBSP No.: NTU205

VALLEY OF HARDWARE (1978-2018) Ref No.: ABCC-2018-021
Date: 12 September 2018
Boon-Siong Neo, Dolly Leow,
Wee-Kiat Lim and Coco Wang
China’s economic liberalisation, which started in the late 1970s, transformed Shenzhen, a sleepy
rural neighbour to Hong Kong, into the country’s leading manufacturing and export hub by the
1990s. More recently, the city has evolved further to become the “Silicon Valley of Hardware”. In
this case, we examine the development of Shenzhen through three key phases of its economic
journey that span almost 40 years, beginning with a bold experiment in the form of Special
Economic Zone status. In the course of our analysis, we identify factors that have promoted its
evolution and push towards innovation. The analysis will cover four interrelated factors of national
comparative economic advantage, namely: firm strategy, structure and rivalry; related supporting
industries; demand conditions; and factor conditions. Lastly, we describe the threats that
Shenzhen may face in sustaining its growth.
INTRODUCTION
“It is not a question of control effectiveness; it is a question of our policy.”
Deng Xiaoping, November 1977

during his inspection of Guangdong province, upon learning that
large groups of Chinese people had fled to Hong Kong in search of a better life
Deng Xiaoping, the chief architect of China's economic reform and opening up, spoke these words during
his seminal tour of Guangdong province. Instead of advocating tougher border controls and remaining
closed to the world, he believed in improving the standard of living of his people through enterprise and
economic development. This push changed the political climate in China and ushered in sweeping reforms
for Shenzhen and other coastal cities in the country. In December 1978, Deng launched a barrage of
economic reforms; four months later, Shenzhen was designated a municipality. In August 1980, the city
was granted Special Economic Zone (SEZ) status. While economic development for the rest of the country
continued to be tightly reined in by the government, Shenzhen, Zhuhai, and Shantou were granted the
autonomy to pursue market-oriented policies.
Professor Boon-Siong Neo, Senior Research Scientist Dolly Leow, Senior Research Fellow Wee-Kiat Lim and Coco
Wang prepared this case based on published sources. This case is intended for class discussion and learning, and not
intended as source research material, or as illustration of effective or ineffective management.
COPYRIGHT © 2018 Nanyang Technological University, Singapore. All rights reserved. No part of this publication may
be copied, stored, transmitted, altered, reproduced or distributed in any form or medium whatsoever without the written
consent of Nanyang Technological University.
The Asian Business Case Centre, Nanyang Business School, Nanyang Technological University, Nanyang Avenue,
Singapore 639798. Phone: +65-6790-4864/6552, E-mail: asiacasecentre@ntu.edu.sg
This document is authorized for use only by Ping Sum Sammy Ng in MBA 661, Summer 2022 taught by CHEN LIU, Trinity Western University from Jun 2022 to Dec 2022.
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The year 2018 marks the 40th anniversary of China's reform, which brought on rapid economic
development in Shenzhen and other parts of China. How did Shenzhen evolve from its humble roots as a
little market town into a dynamic and innovative city? What made it so attractive to aspiring entrepreneurs?
What were the threats that it faced in its journey?
BACKGROUND
Shenzhen followed an export-led model that minimised economic restrictions and gave companies
preferential tax rates. It rapidly established itself as the “Factory of the World” by the early 90s. It particularly
flourished in the production of electronic and electrical goods as well as components, watches and clocks,
toys, garments and textiles, and plastic products. It was a successful experiment in bringing central planning
together with capitalism and market forces.
Today, Shenzhen has evolved further into China’s “Silicon Valley of Hardware” and a technology and
innovation powerhouse. The Chinese Corporate Innovation Report, 1 presented by HSBC China in
partnership with Yicai Media Group and Zhejiang University, found that companies based in Shenzhen
were the most competitive in terms of their “innovative power” (see Exhibit 1).2 In 2017, Clarivate Analytics
included 27 Guangdong-based enterprises in their ranking of China’s top 100 innovators; of these, 16 were
based in Shenzhen. 3 BYD, Coolpad Group, Huawei Technologies, TCL, Tencent, and ZTE are a few
companies that have been given special mention by the global research company.
SHENZHEN SPECIAL ECONOMIC ZONE: 1980 TO 1992 (see Exhibit 19)
Strategy, Structure, and Rivalry
“[The Party] has no money so we will give you a policy that allows you to charge ahead and cut
through your own difficult road.”4
Deng Xiaoping, November 1977

in a motivational speech to Guangdong leaders during his visit
Deng Xiaoping’s political resolve and active advocacy nationwide led to sweeping reforms in China’s
economy. In the 1980s, reforms pertaining to the price control system, labour contract system, cadre and
personnel system, wage system, land use rights, and housing were initiated (see Exhibit 2).
Deng reformed the hukou 5 household-responsibility system to improve each household’s income and
agricultural output. After a household fulfilled the government’s required agricultural output quota, it was
allowed to sell the remaining surplus in the private market. Agricultural production increased 25% between
1975 and 1985, setting a precedent for liberalising other parts of the economy. 6 In October 1984, a dual
1
HSBC China. (2017). Chinese corporate innovation report 2017. Retrieved from http://www.business.hsbc.com.cn/-
/media/library/markets-selective/china/pdfs/chinese-corporate-innovation-report-2017-cn.pdf
2
“Innovative power” refers to the amount a company spends on R&D, its innovative efficiency (how well the company’s R&D
investment translates into sales and how novel its business models are), and the number of patents filed.
3
Clarivate Analytics. (2017, November 7). China’s 100 most innovative companies in 2017. Retrieved from
https://clarivate.com/blog/news/china-accounts-six-ten-patents-published-world-wide-innovation-shifts-electronics-hi-tech-
industry-automotive-domestic-appliances-electric-power-generation-innovation-qu/
4
How Guangdong gave birth to reforms and opening-up. (2014, August 20). China Daily. Retrieved from
http://www.chinadaily.com.cn/china/2014-08/20/content_18455710.htm
5
Hukou is a system of household registration in China. A household registration record officially identifies a person as a resident of
an area, and includes identifying information such as name, parents, spouse, and date of birth. The system descends in part from
ancient Chinese household registration systems. Source: Miller, T. (2012). China's urban billion: The story behind the biggest
migration in human history. London: Zed Books.
6
Hunt, M. H. (2016). The world transformed: 1945 to the present. New York: Oxford University Press.
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price system was introduced, in which an official price coexisted with a market price that emerged in non-
official markets. 7 In the state sector, wage reforms saw the introduction of two salary components for
workers: a take-home monetary wage and a non-monetary wage comprising various welfare-related goods
provided by state-owned enterprises (SOEs).8
The country was opened to foreign investment and private businesses were allowed to operate. Enterprises
enjoyed preferential tax policies (such as lower tax rates, tax holidays, duty-free imports, and exemption
from export taxes) and easier repatriation of capital investments and corporate profits. With fiscal reforms
in the form of profit tax substituting for profit remittance in 1980, enterprises had more incentive to produce
and sell goods and services.9
Each SEZ was relatively free of bureaucratic regulations and interventions. Under this decentralisation of
state control, local provincial leaders experimented with ways to increase economic growth and privatise
the state sector. Government administration was also drastically simplified to make the business
environment more conducive for commerce. Even SOEs were reformed: an industrial-responsibility system
that was similar to the household-responsibility system was set up in the 1980s to promote the development
of SOEs by allowing individuals or groups to take up contracts to manage the enterprises.
Thousands of Hong Kong manufacturers shifted their operations up north to Shenzhen, forming the first
wave of enterprises that set Shenzhen on the path to being a production and manufacturing hub. As
observed by the Hong Kong government in its 1991 budget debate:
“What we see is the Government’s high land price policy and unreasonable labour measures which
have made it impossible for many factories of small and medium size to continue production in Hong
Kong, thereby forcing the factory operators to relocate their factories to Shenzhen and Dongguan
for reprocessing of products… the substantial relocation of manufacturing activities across the
border was related in no small part to the strong push for further opening up of the Mainland
sometime after Mr Deng Xiaoping’s visit to Guangdong…”10
By the late 1980s, high-tech multinational corporations (MNCs) were attracted to Shenzhen’s favourable
business environment. These included Huawei Technologies (in 1987) and Foxconn (in 1988), which made
components for Dell, HP, and Apple. By end 1985, a total of 4,696 contracts had been signed with foreign
businesses; Shenzhen saw US$1.384 billion in foreign capital inflow and 929 foreign-funded enterprises
founded. Competing head-to-head with these MNCs were local firms which had emerged under the same
favourable business conditions. These included ZTE, China's largest listed telecoms equipment company,
which was founded in Shenzhen in 1985, and Mindray, one of the leading global providers of medical
devices and solutions, which was founded in 1991 and headquartered in Shenzhen. 11
Demand Conditions
If a product says “Made in China”, chances are that the product, or parts of it, came from the Pearl
River Delta.12
Shenzhen exported competitively-priced products, including many OEM items, for global markets. Main
categories of export products included micro-computers, colour TV sets, electronic units, cameras, electric
7
Li, K. (2001). The two decades of Chinese economic reform compared. China & World Economy. Retrieved from
http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN002826.pdf
8
ibid.
9
ibid.
10
Hong Kong Legislative Council Secretariat. (N.D.). Relocation of the manufacturing sector outside Hong Kong in the 1980s and the
early 1990s. Retrieved from http://www.legco.gov.hk/yr98-99/english/sec/library/98901.pdf
11
Mindray. (N.D.). Profile. Retrieved from http://www.mindray.com/en/about.html
12
Skidmore, Owings & Merrill. (2016, October 27). Lessons from the world’s largest megacity. Retrieved from
https://medium.com/@SOM/lessons-from-the-worlds-largest-megacity-9d36d66eb4f9
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fans, telephone sets, watches, bicycles, garments, fabric, and plastic products such as toys. 13 In its first five
years as a SEZ, Shenzhen’s industrial output grew at an annual average rate of 91% (see Exhibit 3). By
the end of 1985, Shenzhen had a gross industrial output value of RMB 3.188 billion, of which exports
accounted for RMB 860.3 million (or 32.25% of the total). Exhibit 4 shows the overall export value for
Shenzhen in USD from 1980 to 1992. Between 1981 and 1985, the annual average growth rate of exports
was a massive 118.8%. Major export trade partners included Hong Kong, Singapore, Japan, the United
Kingdom, Germany, Italy, the United States, and Canada.14
Shenzhen also gained infamy as the “Capital of Shanzhai”,15 as many of its factories were making clever
imitations and copies of simple products such as electrical appliances, apparel, watches, and toys. 16 The
process of creating shanzhai goods involved reverse engineering and rapid duplication of products at low
cost and reasonable quality.
Factor Conditions
Upon being designated as a SEZ in 1980, Shenzhen worked quickly to attract investments and manpower,
establish industrial zones, and develop the necessary infrastructure to support logistics and businesses.
This was done with the aim of developing an export-oriented economy. An ecosystem surrounding this
industrial framework also emerged quickly, particularly for the electronics industry.
The Shekou Industrial Zone was the first industrial zone in Shenzhen, and the first in China to open up to
the world. One slogan – the first of many to follow – coined by the people of Shekou was “Time is Money,
Efficiency is Life”. It inspired Shenzhen pioneers to work hard to demonstrate the possibility of building a
thriving and promising city to the rest of the nation.
During his second tour of Guangdong in 1992, Deng Xiaoping was taken to the revolving restaurant at the
top of the International Trade Building, which was constructed at the rate of one storey every three days;
that breakneck pace of construction was maintained for 53 storeys. 17 This resonated with a term that Deng
coined earlier to describe the construction of Shenzhen University, “Shenzhen speed”. The students of
Shenzhen University had designed and built their own campus, in what Deng proudly felt was a
demonstration of the SEZ’s patriotism and national commitment to succeed.
In its early days, the city thrived in part due to its proximity to Hong Kong, a global financial hub that offered
easy availability of funding and foreign capital. It was also supported by the best seaports in the world in
Hong Kong and Guangzhou, which gave it an edge in logistics and exporting.
The Shenzhen Stock Exchange was established in 1990. To date, the Shenzhen and Shanghai Stock
Exchanges are the only two stock exchanges in the Chinese mainland. The opening of the Shenzhen
Bao’an International Airport in 1991 marked the birth of the city’s modern network of integrated sea, air,
and land transportation infrastructure.
13
Shenzhen Municipal Bureau of Statistics. (2017). Shenzhen statistical yearbook 2017. Beijing: China Statistics Press.
14
Guangdong Statistics Bureau. (N.D.). 广东统计信息网 (Guangdong Statistics Bureau information portal). Retrieved from
http://www.gdstats.gov.cn/
15
Shanzhai refers to the culture of producing knock-off consumer goods which look very similar to those created by other brands
(and usually trademarked), but produced at a lower price and quality.
16
There are multiple speculations on the how the term “shanzhai” (山寨) came about. One is that the term originated from Hong Kong
in the 1970s, where there were many cottage industries. Such home-based workshops were called “shanzhai”. In Cantonese, the
vernacular in Hong Kong and much of Guangzhou, “zhai” connoted seedy business outlets and cottages, rather than its formal,
more oft-used definition in standard Chinese (Mandarin) as a fortress.
17
O’Donnell, M. A. (2013, April 27). On Shenzhen speed. Retrieved from https://shenzhennoted.com/2013/04/27/on-shenzhen-
speed/
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In 1980, Shenzhen’s registered population was 320,000. 18 The new rules implemented in its first phase of
economic reform allowed some freedom of movement for people under China’s hukou registration system.
This resulted in graduates and other migrants from all over China flocking into Shenzhen, enhancing its
talent pool. By 1992, the migrant population in Shenzhen was 1.9 million, while the population of registered
Shenzhen residents was 800,000. 19
Despite this, Shenzhen-based manufacturers grappled with labour shortages and high wages (see Exhibit
3) that came with the meteoric rise of its economy. In the first five years of Shenzhen’s development as a
SEZ, employment grew at an annual average growth rate of 17%, while yearly wages grew 20%.
Manufacturers quickly realised that it was less profitable to maintain small-scale factories, and that they
would have to either relocate to cheaper places or move up the value chain to survive. This realisation
paved the way for further strategic adjustments to the city’s economic development. In 1985, low-skill
manufacturing started to give way to more skill-intensive industries such as the emerging high-tech sector.20
In particular, local enterprises, which used to rely heavily on imported parts and know-how, started
leveraging on their experience accumulated in producing shanzhai goods to create their own products.
Related Supporting Industries
Following the approach taken by Japanese and Korean manufacturers in the past, about 90% of Chinese
home appliances enterprises made products under foreign brand names as OEM manufacturers,
particularly for home appliances such as microwave ovens, air-conditioners, and refrigerators.21,22 Under
China’s classification of industrial structure, secondary industries in Shenzhen employed close to 70% of
the labour force as at 1990,23 and light industries contributed 75% of the city’s gross output value. 24 There
were close to 20,000 registered enterprises, with three-quarters of them being domestically-funded. 25
Together, these workers and factories were responsible for manufacturing the bulk of products that were
“Made in China” and sold around the world.
It was also during this first phase of Shenzhen’s development that the original Huaqiangbei Market (see Box
1) was established in 1988.26 Nestled within an industrial park in the remote Futian subdistrict, the market was
located in an office building together with a number of electronics assembly factories.27 The other operators
in the building essentially served as an electronics component supply and support facility. As such, the market
offered a great variety of electronic components at very competitive prices.28
18
19
ibid.
20
O’Donnell, M. A., Wong, W., & Bach, W. (2017). Learning from Shenzhen. Chicago: The University of Chicago Press.
21
Chen, X. (2007, July). Is China the factory of the world?. Retrieved from
https://www.apu.ac.jp/rcaps/uploads/fckeditor/publications/workingPapers/RCAPS_Occasional_Paper_07-4.pdf
22
ibid.
23
Manufacturing is classified under “secondary industries”. Source: Shenzhen Municipal Bureau of Statistics. (2017). Shenzhen
statistical yearbook 2017. Beijing: China Statistics Press.
24
“Light industries” refers to the sectors that produce consumer goods. Source: ibid.
25
ibid.
26
Wu, Q. & Liu, Z. (2011, January). Analyzing the value chain of China’s knock-off handset industry. China Economist. Retrieved
from http://www.chinaeconomist.com/index.php/2016/07/22/analyzing-the-value-chains-of-chinas-knock-off-handset-industry1/
27
Chen, Q. (2018, February 11). Huaqiangbei: More than an electronics marketplace. Global Times. Retrieved from
http://www.globaltimes.cn/content/1089226.shtml
28
ibid.
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Box 1: Huaqiangbei (华强北) Market

Huaqiangbei Market, located in the subdistrict of Futian in Shenzhen, supports the city’s operations
as a major electronics manufacturing hub. Its sprawling electronics marketplaces have earned
Shenzhen the nickname of “China's Silicon Delta” and the “Silicon Valley of Hardware”. The area is
reported to be the largest electronics market in China and possibly one of the largest in the world.
The first market building was built in 1988. It was torn down and subsequently rebuilt in 1997 as part
of its expansion. Presently, there are over 20 shopping malls which collectively make up about 70
million square metres of commercial area in the market, generating annual sales of over RMB 20
billion and employing 130,000 people.
The main malls are:
 SEG Electronic Market – a 10-floor building selling cables, tools, electronic parts, personal
computers, laptops, GPS devices, and other gadgets such as wearables fitness trackers and
smart watches;
 Huaqiang Electronic World – this area comprises several multi-floor buildings selling electronic
parts (new and used), electronics repair services, tools, chips, LEDs, cables, and consumer
electronics;
 Yuanwang Digital Mall – this mall features mobile cell phones, computers, gadgets, iPhone and
iPad cases, and drones and related accessories; and
 Cyber Digital Mall – this is the go-to mall for cameras and brand name electronic gadgets.
Photos were taken by authors on site. Source: Shenzhen Shopper
DEEPENING MARKET REFORMS: 1992 TO 2006 (see Exhibit 20)
The first phase of China’s economic reform and opening up saw Shenzhen’s transformation from a little
market town to a modern industrialised city. Its development and adoption of a market economy drew no
lack of criticism. In 1992, Deng Xiaoping expressed his support for Shenzhen during his second visit to the
South:
“A planned economy is not just about socialism as there is also planning under capitalism; a
market economy is not just about capitalism as there are also markets under socialism.”29
Deng Xiaoping, January 1992, during his second visit to the South
29
How Guangdong gave birth to reforms and opening-up. (2014, August 20). China Daily. Retrieved from
http://www.chinadaily.com.cn/china/2014-08/20/content_18455710.htm
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In October 1992, the 14th Chinese Communist Party Congress officially reaffirmed China’s commitment to
deepen the same reforms and development programmes which had directed its economic policies since
1978,30 sending a clear signal to the world that China was open for business.
Further adjustments to macroeconomic policies were made to modernise market systems and the financial
sector, promote enterprise development, and advance the use of technology. For example, the 1995 Central
Bank Law introduced institutional and structural changes to the finance sector,31 allowing state-owned banks
to behave and compete like any commercial bank.32 The Shenzhen Capital Group was set up in August 1999
to drive enterprise development by providing venture funds and private equity.
Reforms were deepened in the wage and labour system, the price system, land rights, legal framework,
governmental administration, and the management of state-owned enterprises. SOEs restructured their
shareholding through limited liability, joint stock, or listed companies, 33 even as the state continued to pump
national resources into elite SOEs to develop them into flagship conglomerates. 34
From 1992 onwards, Shenzhen concentrated its efforts on the cultivation of the automobile and parts, fine
chemicals, and high-end equipment manufacturing industries. By 1995, its large- and medium-sized
enterprises spanned more than 30 industrial clusters and churned out an industrial output value of RMB
45.9 billion. The city’s modern manufacturing factories produced thousands of products such as home
appliances, textiles and garments, electronics, and optical-mechanical-electronic integrated components.
As China developed and its domestic industrial structure changed, Shenzhen also transitioned into its next
phase; this was characterised by the birth of many high-tech and knowledge-intensive enterprises in the
city, fuelling its technological development and industrial upgrading. BYD was established in 1995,
specialising in IT, automobiles, and new energy. The firm is currently the largest supplier of rechargeable
batteries in the world and has the largest market share for nickel-cadmium batteries, handset Li-ion
batteries, cellphone chargers, and keypads worldwide. 35 Tencent, the Chinese web giant which offers
everything from online and mobile games to search, software development, e-commerce, and instant
messaging, was founded in Shenzhen in 1993. In addition, large-scale foreign investments continued to
flow into Shenzhen (see Exhibit 5) from international conglomerates like IBM, Philips, Compaq, Olympus,
Lucent, and Thomson.36
Demand Conditions
China experienced rapid economic growth averaging 10% a year from 1980 to 1985.37 During this phase,
its per capita income grew from RMB 464 to RMB 5,074 (see Exhibit 6), while average national wages
increased from RMB 762 to RMB 5,500. These twin factors lifted its people out of poverty, resulting in a 10-
fold increase in household consumption expenditure, from RMB 238 to RMB 2,330 during that period.
China’s manufacturing industries started shifting inwards to satisfy domestic demand from its booming
30
Full text of Jiang Zemin’s report at 14th Party Congress. (2011, March 29). Beijing Review. Retrieved from
http://www.bjreview.com.cn/document/txt/2011-03/29/content_363504_3.htm
31
Li, K. (2001). The two decades of Chinese economic reform compared. China & World Economy. Retrieved from
http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN002826.pdf
32
ibid.
33
ibid.
34
ibid.
35
He, H. (2015, April 20). Top 5 tech giants who shape Shenzhen, 'China's Silicon Valley'. South China Morning Post. Retrieved from
http://www.scmp.com/lifestyle/technology/enterprises/article/1765430/top-5-tech-giants-who-shape-shenzhen-chinas-silicon
36
Hong Kong Trade Development Council. (2015, March 24). Shenzhen High-tech Industrial Development Zone. Retrieved from
http://hkmb.hktdc.com/en/1X09WO9R/hktdc-research/Shenzhen-High-tech-Industrial-Development-Zone
37
World Bank. (N.D.). The World Bank in China. Retrieved from http://www.worldbank.org/en/country/china/overview
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population of 1.2 billion. In 1995, the demand for consumer products amounted to RMB 2.06 trillion, 38 rising
11.65% to RMB 2.3 trillion by 2000.39
China became a member of the World Trade Organization (WTO) on 11 December 2001. 40 With its entry,
China was officially integrated with the rest of the global economy, enabling it to attract more foreign
investments and export more goods and services. More importantly, its WTO status meant that reforms in
China’s laws, trade policies, and business regulations had to be kept up, ensuring that the process of
change and development did not stop.
Factor Conditions
The Shenzhen High-Tech Industrial Development Zone (HIDZ), which was set up in 1996 in the Nanshan
District, covered an area of 11.5 square kilometres and housed major industries such as electronics,
information technology (IT), biology, optical-electrical-mechanical integrated components, pharmaceuticals,
and other high-tech industries.41 Huawei, ZTE, Skyworth, IBM, Philips, and Compaq were headquartered
in the HIDZ, 42 and the park was a mere 30 minutes away from the city centre, Shenzhen Bao'an
International Airport, and Shenzhen Port. 43 In 2012, the park realised a gross industrial output of RMB 486.5
billion, while its value-added industrial output hit RMB 131.5 billion in 2012, accounting for 26% of
Shenzhen's total industrial output.44
The introduction and emergence of more MNCs and local enterprises have added pressure on the
employment situation in Shenzhen. Talent has continued to flow into the city, drawn by the international
reputation of tech heavyweights and MNCs like Huawei and Apple supplier Foxconn as well as the
innovativeness of local companies such as Tencent and ZTE. Over a period of 15 years (from 1991 to
2005), the average growth rate for year-end total employment in Shenzhen stayed high (close to 12%),
while average yearly wages climbed by 15% (see Exhibit 3).
The number of Shenzhen-registered enterprises grew from 839 in 1980 to 20,000 in 1990 45 and more than
100,000 in 2000.46 The number of private enterprises grew from zero to 43,000 over the same period.
Equity and debt financing was sorely needed to support these companies, especially as government funds
preferred infrastructure investments and lower-risk industries. 47 As such, Shenzhen Capital Group Co.
(SCGC) was founded by the Shenzhen municipal government in August 1999 as a professional domestic
venture capital (VC) firm.48
Since its inception, SCGC had been steadily developing the private sector and stimulating the city’s
economic growth with investments in emerging industries and companies. The VC primarily invested in
SMEs, innovative high-tech enterprises, and enterprises in emerging industries at different growth stages:
whether they were newly established, experiencing rapid growth, or transforming and reorganising
themselves into mature outfits. 49 Its main industries of interest included IT, internet, new media,
biopharmaceuticals, new energy, environmental protection, chemical engineering, new materials, high-end
38
National Bureau of Statistics. (N.D.). National Bureau of Statistics of China. Retrieved from http://www.stats.gov.cn/english/
39
ibid.
40
World Trade Organization. (N.D.). China and the WTO. Retrieved from https://www.wto.org/english/thewto_e/countries_e/china_e.htm
41
Hong Kong Trade Development Council. (2015, March 24). Shenzhen High-tech Industrial Zone. Retrieved from
http://hkmb.hktdc.com/en/1X09WO9R/hktdc-research/Shenzhen-High-tech-Industrial-Development-Zone
42
ibid.
43
ibid.
44
ibid.
45
46
ibid.
47
Ahlstrom, D., Bruton, G. D., & Yeh, K. S. (2007, September). Venture capital in China: Past, present and future. Asia Pacific Journal
of Business, 24(3), pp. 247-268.
48
Shenzhen Capital Group Co. (N.D.). SCGC. Retrieved from http://www.szvc.com.cn/english/Home/index.shtml
49
ibid.
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equipment manufacturing, consumption goods, and so on. 50 These sectors were typically supported by
national policies.
By the end of March 2018, SCGC was the top VC in the country, based on the number of portfolio
companies and the number of listed portfolio companies: 859 portfolio companies, 138 of which had been
listed in 16 capital markets worldwide (see Exhibit 7), and investments totalling RMB 35.2 billion. 51
While manufacturing contributed substantially to the city’s Gross Domestic Product (GDP) (see Exhibit 8),
there was a shift towards high-end manufacturing industries, which included industrial clusters such as
consumer appliances, textiles and garments, IT and optical–mechanical-electronic integrated components. In
many factories, this meant robots and automation replaced human labour (see Exhibit 9).
In the mid-1990s, a time where personal computers became popular around the world, the businesses at
Huaqiangbei Market added consumer electronics to their original component offerings. 52 In 1997, the
original Huaqiangbei Market building was torn down and rebuilt for expansion. Factories that were based
in that area in the first phase moved out to create space for retail shops.53 The area remained China’s top
electronics street, hawking anything in any size and shape, from circuit boards, LEDs, bolts, screws,
batteries, screens, memory cards, chips, to hard drives that went into every conceivable electronic gadget.
Huaqiangbei Market was in turn supported by an ecosystem of factories that used the retail spaces for
sales and business development.
In addition, migrants from other parts of China were drawn to Huaqiangbei Market, resulting in a great influx
of entrepreneurs and new businesses.54 Meanwhile, the shanzhai spirit prevailed, and duplication as well
as reverse engineering capabilities were “upgraded” to blatant copying of high-end equipment and
innovative consumer products such as mobile phones and personal laptops. This trend was particularly
prevalent at Huaqiangbei Market.
SHENZHEN AS AN INNOVATION HUB: 2006 TO TODAY (see Exhibit 21)
Around the start of the 21st century, countries around the world experienced a technological revolution with
the rise of high-tech industries that disrupted many countries’ traditional production means and industrial
structures. Similarly, for China and Shenzhen, the ability to ride this wave of new technology was key to its
future economic prosperity. Amongst the country’s numerous initiatives crafted under its 11th five-year plan
(for 2006 to 2010), the acceleration of the development of the high-tech industry was top on the list.55
In December 2012, after Xi Jinping took over the reins of the Chinese Communist Party, he made Shenzhen
the first stop of his tour in Guangdong, a move that was evocative of Deng Xiaoping’s iconic visits in 1977
and 1992.56 His strong commitment to developing the area was further reinforced in March 2016, when
President Xi put forth the country’s 13th five-year plan (for 2016 to 2020): innovation would be the primary
50
Shenzhen Capital Group Co. (N.D.). SCGC. Retrieved from http://www.szvc.com.cn/english/Home/index.shtml
51
ibid.
52
53
ibid.
54
ibid.
55
China's National People's Congress. (2006). China: 11th five-year plan (2006-2010) for economic and social development.
Retrieved from https://policy.asiapacificenergy.org/node/115
56
Kor, K. B. (2012, December 8). Xi Jinping: Chinese leader makes Shenzhen first stop in south tour. The Straits Times. Retrieved
from http://www.straitstimes.com/asia/xi-jinping-chinese-leader-makes-shenzhen-first-stop-in-south-tour
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driver of China’s economic development, and the central government would continue to promote Shenzhen
as a city of industry and innovation.
“We will support the Pearl River Delta as it leads [our national efforts in] opening up, innovation,
transformation and upgrading, and accelerate[s] the development of science and technology
centres and industrial innovation centres in Shenzhen.”57
National reforms were developed to support and promote high-tech industries in the country. These reforms
were a testament to China’s compliance with WTO rules that mandated further reform and restructuring.
To attract foreign capital, the central government vowed to promote investment opportunities extensively
and to improve the quality of service for foreign investors. 58 To create a favourable environment for new-
and high-tech industries, it accelerated the construction of High-Tech Industrial Parks as well as startup
and incubator spaces.59
Shenzhen’s economic blueprint aimed to develop six strategic rising industries: bioindustry, internet, new
energy, new materials, cultural innovation, and next generation information technology.60 The city continued
to introduce and attract other heavyweight innovative enterprises. BGI, founded in 1999 in Beijing with the
vision of using genomics to benefit the human race and at present the world’s largest genomics organisation,
moved its headquarters to Shenzhen in 2007, joining the ranks of high-tech enterprises such as ZTE, BYD,
and Tencent. Founded in 2006, Da-Jiang Innovations (DJI) produces a range of drones and drone-related
products for amateur and professional use, including unmanned aerial vehicles (drones), flying platforms,
flight controllers for multi-rotor aerial vehicles, helicopter accessories, aerial and handheld gimbals, and
ground stations. Established in 2012, Royole develops novel flexible display technologies and VR headsets,
and has a production facility in Shenzhen.
Today, high-tech industries remain the key economic driving pillar for Shenzhen, accounting for 60% of its
total industrial output (see Exhibit 8).61 Exhibit 10A shows Shenzhen’s impressive intellectual property
output statistics over the last 15 years – a testimony to the city’s innovativeness. Shenzhen alone accounts
for close to 20% of all patent applications in China (see Exhibit 10B). Its enterprises also file more
international patents than those in France or Britain (see Exhibit 10C).62 Estimates put Shenzhen at nine
months ahead of anywhere in the world or any hardware company in terms of developing innovative new
products.63 Exhibit 10D shows 10 enterprises in China with the most international patent applications in
2016 – six of which are based in Shenzhen.
Demand Conditions
China recorded a population of 1.3 billion in 2015 64 and 430 million households in 2014. 65 Average wages
and household consumption expenditure have continued to increase with the country’s GDP since it opened
up to the world (see Exhibit 6). With a rising per capita disposable income and a growing middle class,
consumer demand has boomed, particularly for electronic products (see Exhibit 11). However, the increase
57
China's National People's Congress. (2016). The 13th five-year plan for economic and social development of the People’s Republic
of China. Retrieved from http://en.ndrc.gov.cn/newsrelease/201612/P020161207645765233498.pdf.
58
China's National People's Congress. (2006). China: 11th five-year plan (2006-2010) for economic and social development.
Retrieved from https://policy.asiapacificenergy.org/node/115
59
ibid.
60
He, H. (2014, January 23). Hi-tech industry helps Shenzhen beat GDP goal. South China Morning Post. Retrieved from
http://www.scmp.com/business/economy/article/1411321/hi-tech-industry-helps-shenzhen-beat-gdp-goal
61
O’Donnell, M. A., Wong, W., & Bach, W. (2017). Learning from Shenzhen. Chicago: The University of Chicago Press.
62
Shenzhen is a hothouse of innovation. (2017, April 8). The Economist. Retrieved from https://www.economist.com/news/special-
report/21720076-copycats-are-out-innovators-are-shenzhen-hothouse-innovation
63
Lowe, A. (2017, September 17). In Shenzhen, tech entrepreneurs chase the Chinese dream. Channel News Asia. Retrieved from
https://www.channelnewsasia.com/news/asiapacific/in-shenzhen-tech-entrepreneurs-chase-the-chinese-dream-9171776
64
National Bureau of Statistics. (N.D.). National Bureau of Statistics of China. Retrieved from http://www.stats.gov.cn/english/
65
China ranks first in the world for number of households with 430 million households. (2014, May 14). China News. Retrieved from
http://www.chinanews.com/gn/2014/05-14/6171563.shtml
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in affluence has also led Chinese consumers to become more demanding, expecting more sophisticated
products that match those of global brands while costing less.
China’s huge population size has also supported innovations in two ways: idea generation, and the rapid
testing and commercialisation of these ideas. A large population has given innovators a seemingly endless
supply of problems to solve and needs to cater to. Rapid innovation calls for a spiralling cycle of continuous
development, testing, roll-out, improvements, and refinements. One cycle typically takes six months, but in
China, this may take only about six to eight weeks.
In Shenzhen, many innovations are fuelled by consumer-facing industries and the growth of internet access
and usage, due to the rise of smartphones, e-commerce, and online services. OnePlus, a two year old
Shenzhen-based smartphone startup, launched its first model in 2014 and sold 1.5 million sets. 66 By relying
on Shenzhen’s hardware and software ecosystems, coupled with an open-source environment, it was able
to build cheaper phones that matched the designs and features of leading global brands. Tencent’s WeChat,
a social media platform, added e-commerce features which allowed users to shop on the platform,
published an app that enabled on-the-go taxi booking, and, in 2013, started to support mobile payments.
Operating within Shenzhen’s hardware ecosystem, drone startup DJI became one of the largest
manufacturers of unmanned aerial vehicles in the world, making Shenzhen the world’s first drone capital
with a 70% market share of the global consumer drone market and more than 300 companies dedicated to
the business of unmanned aerial vehicles alone. 67
Factor Conditions
New as well as repurposed buildings in the Nanshan district in Shenzhen house countless incubators and
startups (see Exhibit 17C), with each building hanging large banners emblazoned with the slogan “Follow
Our Party, Start Your Business” (see Exhibit 12). Conveniently located within this concentration of startups
and incubators is a supportive ecosystem of government agencies, software companies, universities
offering MBA programmes, cafés, co-working spaces offering discussion and meeting venues, and other
related facilities and services. High-Tech Industrial Zones similar to the Shenzhen High-Tech Industrial
Development Zone were established in other areas such as Longhua Banxuegang, Baolong, Kuichong
Dapeng, and University City. 68 The Nanshan Robotics Industrial Park commenced operations in 2014. 69
To ensure a steady flow of talent, Shenzhen’s municipal government offered a series of initiatives and incentives
to attract skilled Chinese workers, entrepreneurs, and startups. Graduates (from universities, professional
schools, or polytechnics) who were registered as Shenzhen residents and started their business there would
receive various rebates and incentives, including discounted official rental, startup grants, and even special
grants of up to RMB 200,000 for specific emerging industries such as new materials, renewables, life sciences,
and next generation telecommunications.70,71 In fact, to commemorate China’s 30th anniversary of opening up,
two local slogans dominated the Shenzhen cityscape: “改革创新是深圳的根，深圳的魂”(“Born Through
Reform, Driven by Innovation”) and“鼓励创新，宽容失败”(“Encourage Innovation, Fear No Failure”).
66
McKinsey Global Institute. (2015, October). The China effect on global innovation. Retrieved from
https://www.mckinsey.com/~/media/McKinsey/Global%20Themes/Innovation/Gauging%20the%20strength%20of%20Chinese%2
0innovation/MGI%20China%20Effect_Full%20report_October_2015.ashx
67
68
Invest Shenzhen. (2014, August 11). High-tech industry zone. Retrieved from http://en.szinvest.gov.cn/pr/encyclopedia/hightech/
69
China Daily. (2016, October 26). Shenzhen Nanshan Robotics Industrial Park. Retrieved from
http://www.chinadaily.com.cn/regional/2016-10/26/content_27181113.htm
70
Shenzhen Municipal Commission of Human Resources and Social Security. (N.D.). 创业扶持 (Business support). Retrieved from
http://www.szhrss.gov.cn/ztfw/cjjy/cyfw/cybt/
71
Shenzhen Municipal Commission of Human Resources and Social Security. (2016, May 12). 深圳市人力资源和社会保障局深圳市
财政委员会关于印发《深圳市自主创业扶持补贴办法》的通知 (Notice of the Shenzhen Municipal Commission of Human
Resources and Social Security on printing and distributing the measures for supporting subsidies for self-employment in Shenzhen).
Retrieved from http://www.szhrss.gov.cn/ztfw/jycybt/jycyzcfg/201509/t20150930_3245052.htm
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Skilled and talented engineers, many of whom have undergone apprenticeships at Shenzhen’s OEM
factories or at Huaqiangbei Market (see Exhibit 13), populate the city. Established in 2014 with an office in
Shenzhen, SenseTime, China’s leading artificial intelligence company, employs 140 Ph.D. holders. In
addition, Shenzhen has more than 6,000 design companies that employ more than 100,000 people and
are involved in various design fields such as graphic design, industry design, interior and architectural
design, fashion design, toy design, jewellery design, crafts, and so on. 72
“The passion of people who had been restrained for many years under the planned economy
system exploded in this city.”73
Zhou Luming, Deputy Director General
Shenzhen Bureau of Science, Technology and Information
The city’s culture encourages its youth to innovate and be entrepreneurial. 74 Because of its reputation, a
constant stream of ambitious millennials and entrepreneurs continues to flow into the city, transforming it
into one of the world’s most youthful hubs of innovation and enterprise. 75 Close to 75% of the city’s
population is in the age group of 15-44 years.76 Local statistics also show that the average age of residents
in Shenzhen is 28.65 years, and people aged 20 to 29 make up 35.77% of the city’s population. 77 More
importantly, the culture, passion, and enthusiasm among these young talents are highly infectious. Many
MNCs – Apple, Microsoft, and Facebook, for instance – have opted to locate their offices in the city so as
to stay close to the latest trends as well as these “bright sparks”.
Since 2013, Shenzhen has spent over 4% of its annual GDP on R&D (see Exhibit 14A),78 with most of the
funds coming from private companies (see Exhibit 14B).79 Green Pine Capital, another Shenzhen-based
VC, was established in 2007 (see Box 2).Chinese internet giants Baidu, Alibaba, and Tencent (collectively
termed “BAT”) have also launched funds in recent years to serve the strategic development of various
enterprises; for example, Baidu invests primarily in AI-related tech while Tencent invests in media and
social network projects. According to data from the Shenzhen Chamber of Investment, the total amount of
investment from the top 100 Shenzhen VC funds in 2016 was RMB 58 billion, up 40% compared to 2015. 80
Shenzhen boasts four achievements among its enterprises during this third phase of growth:81
1. Over 90% of R&D centres in Shenzhen were located in enterprises
2. Over 90% of researchers in Shenzhen worked in enterprises
3. Over 90% in R&D funding in Shenzhen was from enterprises
4. Over 90% service-invention patents in Shenzhen came from enterprises
72
UNESCO Creative Cities Network. (N.D.). Shenzhen. Retrieved from https://en.unesco.org/creative-cities/shenzhen
73
Naturejobs.com. (2007, September 26). Spotlight on Shenzhen. Retrieved from
http://www.nature.com/naturejobs/science/articles/10.1038/nj0181
74
Jenna [@jl22] (2017, December 26). Shenzhen, China: where tech dreams come true. Hacker Noon. Retrieved from
https://hackernoon.com/shenzhen-china-where-tech-dreams-come-true-718cf13a6913
75
76
Coresight Research. (2017, June 18). Deep dive: Shenzhen — An international hub of hardware innovation. Retrieved from
https://www.fungglobalretailtech.com/research/deep-dive-shenzhen-international-hub-hardware-innovation/
77
China.org.cn. (N.D.). Shenzhen: Paradise for young people. Retrieved from http://www.china.org.cn/english/1548.htm
78
79
80
81
The Central People’s Government of the People’s Republic of China. (2006, March 19). 深圳落实科学发展观 “4 个 90%” 显自主创
新 3 大亮点 (Shenzhen realises “four 90% achievements” in scientific development, highlighting three learning points from pursuing
independent innovation). Retrieved from http://www.gov.cn/jrzg/2006-03/19/content_230821.htm
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Box 2: Green Pine Capital
Green Pine Capital Partners, a venture capital firm, was established in Shenzhen in 2007 and has operated
in the city ever since. In 2017, its war chest reached RMB 8 billion yuan (about US$1.3 billion) across 18
funds, investing in more than 240 projects nationwide.82 The company and its founders, Li Wei and Luo
Fei, consistently make it to Forbes’ rankings of the top VC firms and venture capitalists in China.
Green Pine Capital directs their investments toward high-growth innovative startups, particularly in the
internet, IT, life sciences, medical services, electronics, and optics sectors. 83 Judging by its investment
track record, it does not shy away from funding startups in angel (20%) and Series A rounds (65%), and
prefers startups that are building “killer” products and services that position them to be leaders in their field.
The veteran VC firm goes beyond studying the technical capabilities of the startups in which it invests. It also
aims to identify management teams that possess strong business acumen to succeed in China’s cutthroat
startup scene. Green Pine’s focus on teamwork cannot be overemphasised; founder Li Wei once remarked that
a leader could be a powerful lion, but still be vulnerable to a pack of hyenas. “In business competition today, the
advantage gained from teamwork is much higher than the advantage gained from technology. Technology is
only a primer and what ultimately determines success or failure is the team.”84
Over the years, Green Pine Capital achieved notable success. It backed 52 startups that exited in one way
or another, including 15 listed on the SME board of the Shenzhen Stock Exchange.85 One of their success
stories was BGI, a genetics sequencing startup established in 1999 that went public on the Shenzhen Stock
Exchange in 2017, at a listing price of RMB 13.64. Its share price was RMB 169.30 as of 4 April 2018.
Huaqiangbei Market has evolved over time from an electronics component marketplace to a consumer
electronics marketplace, and then to its present form: an ecosystem for electronics manufacturing that enables
rapid prototyping, scaling up of innovative products, and getting goods to market speedily.86 At Huaqiangbei
Market, one can not only acquire the necessary hardware for development, but also technology expertise:
some vendors are able to support the entire value chain from conceptualisation, design, software development,
prototype development, and testing to production. It is every maker’s dream one-stop shop.
Talent attraction is key to the success of Huaqiangbei Market. Those who came to Shenzhen earlier and
cut their teeth on technology and production during the prior eras of shanzhai would have already honed
their capabilities in reverse engineering and rapid duplication, and be primed to do well in design,
prototyping, and product development.
“...shanzhai is a powerful force behind Shenzhen’s design success. Through constantly tweaking
and testing knockoffs, the industry ended up inventing entirely new products…”87
82
Peng, D. (2017, December 11). 南派 PE 大佬：低调的松禾资本与 19 个 IPO 的项目 (Southern private equity: Underdog VC Green
Pine Capital and its 19 IPO projects). Ex-Shares. Retrieved from https://mp.weixin.qq.com/s/n7IZVwKk7hRNZS04plXBMA
83
ibid.
84
Liu, Q. (2016, September 27). 松禾资本厉伟：当家 9 年掌管 90 亿，一位南派 PE 大佬背后的“流金岁月” (Li Wei of Green Pine
Capital: Controlling 9 billion yuan in 9 years, the story behind a leader in Southern private equity). PE Daily. Retrieved from
http://news.pedaily.cn/201609/20160927403476_all.shtml
85
Peng, D. (2017, December 11). 南派 PE 大佬：低调的松禾资本与 19 个 IPO 的项目 (Southern private equity: Underdog VC
Green Pine Capital and its 19 IPO projects). Ex-Shares. Retrieved from https://mp.weixin.qq.com/s/n7IZVwKk7hRNZS04plXBMA
86
87
Cormier, B. (2017, March 22). Shenzhen moves beyond its manufacturing past, embraces design future. Metropolis. Retrieved
from https://www.metropolismag.com/cities/shenzhen-moves-beyond-manufacturing-embraces-design/
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At Huaqiangbei Market, there are more than 3,000 enterprises that are able to offer design services,
software, and hardware for mobile phones alone.88 Adopting a “shop in front, factory at the back” (前店后
厂) retail concept, nearby Dongguan provides much of the manufacturing and factory assembly capacity
needed for enterprises in Shenzhen. Today, Dongguan’s economy is driven by export-oriented
manufacturing, much like Shenzhen in its early days (see Exhibits 15A and 15B).
Shenzhen makers use open source hardware and software, and share information online related to their
inventions. Open source aligns with the deeply entrenched Chinese culture of shanzhai. When others are
free to leverage and ride on the information to further improve their products and innovations, the pace of
technology advancement and adoption is accelerated. This open sharing mindset is what sets Shenzhen
apart from other technology hubs. In the West, innovations are often constrained and delayed by legal
issues due to an obsession with protecting intellectual property. In Shenzhen, the going philosophy is that
“it is not stealing ideas; it is sharing ideas”. 89 David Li of Shenzhen’s Open Innovative Lab has this to say
about the “Maker Movement” in Shenzhen:
“…the copycats have since morphed into a powerful ecosystem of collaborative, fast-learning
suppliers and factories. Anybody can come to Shenzhen with an idea and get it prototyped, tested,
made and put on the market at a decent price. Silicon Valley is obsessed with rich-world problems
but Shenzhen’s open innovators work on affordable solutions for the masses on everything from
healthcare to pollution to banking.”90
SHENZHEN: MOVING FORWARD (see Exhibit 21)
“In only thirty years, Shenzhen has exploded into a technological nirvana created by the perfect
confluence of supply and innovation that the city has built itself around.”91
Modern day Shenzhen is arguably the most successful city in the Pearl River Delta (PRD) experiment (see
Exhibit 16A). It consistently records the highest GDP per capita in the last 20 years, signalling growth, a
productive workforce, and a high standard of living. The city is also the leading SEZ of the three created
within Guangdong by Deng Xiaoping (see Exhibit 16B). Will it be able to continue travelling along this
trajectory? What challenges might it face in the foreseeable future?
Ever since the new generation of leaders headed by President Xi Jinping rose to power in 2012, China’s
economic development has been enriched with new strategies and ideas. In addition to Shenzhen, other
innovation cluster cities have been created – most notably Beijing and Shanghai. Each plays a different
role in the country; each also competes with one another for resources such as talent and VC funds.
While Shenzhen is China’s mecca of hardware technology and internet startups, Beijing is the country’s
centre for software and Shanghai is the life sciences hub. Beijing is home to tech firms like Xiaomi and
Baidu, and VCs such as IDG Capital and Sequoia Capital. The world’s top three global pharmaceutical
companies, Johnson & Johnson, Roche, and Pfizer, are based in Shanghai, where one can find the largest
88
Wu, Q. & Liu, Z. (2011, January). Analyzing the value chain of China’s knock-off handset industry. China Economist. Retrieved
from http://www.chinaeconomist.com/index.php/2016/07/22/analyzing-the-value-chains-of-chinas-knock-off-handset-industry1/
89
Jenna [@jl22] (2017, December 26). Shenzhen, China: where tech dreams come true. Hacker Noon. Retrieved from
https://hackernoon.com/shenzhen-china-where-tech-dreams-come-true-718cf13a6913
90
91
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concentration of life sciences firms in China. 92 Exhibit 17A shows the per capita GDP growth rate for the
three innovation clusters in recent years. Despite the three cities’ diverse specialisations, the adverse
consequences of rising competition are starting to show, with Shenzhen’s per capita GDP growth rate going
on the decline while that of the other two cities continues to rise.
Certain industries appear to be “protected” in China by being granted a unique favourable operating
environment. This is typically effected via government legislation, with the twin aims of maintaining social
order and safeguarding national security. For example, top global internet players are absent in China,
arising from an extensive system of censorship created by the central government which blocks thousands
of websites and popular platforms like Facebook, Google, Instagram, and YouTube. Meanwhile, Chinese
versions of similar platforms have been allowed to propagate within the country, namely WeChat and Baidu,
which have an entire captive local market to cater to.
This “advantage” of serving only the China economy, however, works against companies when they attempt
to expand beyond the local market. Having met the needs of the Chinese market for the past 30 years,
especially in the consumer arena (i.e. home appliances, TVs, mobile phones, personal computers, and
online services), these companies may not have the necessary capabilities to gain significant market share
and succeed on the global platform. For example, in 2015, Chinese automobile manufacturers had a mere
20% market share in the global car market.93 State-owned SAIC, an automotive design and manufacturing
company, was only able to manage a lowly 7th rank worldwide in 2016 based on sales. 94
Demand Conditions
China’s population is expected to peak at 1.4 billion in 2025. 95 Its growing population and their increasingly
sophisticated needs, driven by greater affluence and higher educational levels, inevitably add pressure on
enterprises to innovate at a faster rate. The first wave of manufactured goods may have been “good
enough”, but to thrive in the next stage, companies will need to offer better design and functionality in their
products, while ensuring affordability and price competitiveness.
While Shenzhen’s copycat products have always been frowned upon by Western countries, the shanzhai
experience of Chinese manufacturers in their home market could potentially give the latter an edge over
global players, particularly in meeting the needs of low-income and middle-income consumers (especially
in developing countries) with rapidly-designed low-cost innovations.
Factor Conditions
While makers in Shenzhen gain from operating within an efficient ecosystem, innovators in Beijing benefit
from being in the capital – close to government ministries. In a survey conducted by Renmin University of
China in 2016, Beijing was voted China’s best environment for startups (see Exhibit 17C). 96 Beijing’s
Zhongguancun Science Park (also known as “China’s Silicon Valley”) is also close to two top tertiary
educational institutions, namely Peking University and Tsinghua University. As such, it comes as no
92
Based on revenue. Source: Statista. (N.D.). 2018 ranking of the global top 10 biotech and pharmaceutical companies based on
revenue (in billion U.S. dollars). Refer to: https://www.statista.com/statistics/272717/top-global-biotech-and-pharmaceutical-
companies-based-on-revenue/
93
Statista. (N.D.). China’s share of the global car market in 2010 and 2011 with a forecast up to 2025. Retrieved from
https://www.statista.com/statistics/225123/chinas-share-of-the-global-car-market/
94
Statista. (N.D.). Leading auto and truck manufacturers worldwide in 2016 based on sales. Retrieved from
https://www.statista.com/statistics/269034/leading-car-companies-worldwide-based-on-revenue/
95
Population of the World. (N.D.). Projections of population growth of China (2025). Retrieved from
https://www.livepopulation.com/population-projections/china-2025.html
96
Chen, C. & Abkowitz, A. (2016, March 4). Beijing has China’s best environment for startups, new survey says. The Wall Street
Journal. Retrieved from https://blogs.wsj.com/chinarealtime/2016/03/04/beijing-has-best-environment-for-startups-new-survey-
says/
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surprise that Beijing companies secured the largest investments from Chinese angel investors in 2015 (see
Exhibit 18).97
Shanghai is also well supported in terms of having institutes of higher education and a skilled population
(see Exhibit 17B). As the financial hub of China, Shanghai is an attractive choice for startups, especially
those in the field of financial technology (also known as “fintech”). As one of the most international and
cosmopolitan cities in China, it is a natural magnet for startups wishing to collaborate with MNCs. 98
To compete with these Tier 1 cities, Shenzhen needs to ramp up its capacity to innovate and create original
products and services, provide more support for scientific research and development, and improve its
institutes of higher learning to provide the necessary talent (see Exhibit 17B).
In 2017, VCs and the local government became more cautious about supporting new projects. 99 Startups
tend to raise funds continuously within a short funding period of six to 12 months. 100 In addition, most
Chinese VC funds prefer to back Chinese entrepreneurs as they believe one needs to be from China to
understand the local market.101 That being said, China’s VC investment in 2017 reached US$40 billion, a
15% increase from the year before, according to global audit and consulting firm KPMG. In fact, five of the
global top 10 VC investments in Q4 2017 took place in China. 102 In March 2018, Shenzhen’s municipal
government launched an angel seed fund with several partners and an initial sum of RMB 5 billion (about
US$793 million), in a bid to catalyse development in strategic emerging industries and transform its
manufacturing base.103
According to a report by the World Bank, East Asia experienced significant urban expansion from 2000 to
2010.104 More than 80% of this urban expansion took place in China, whose urban areas make up two-
thirds of total urban land in the region. In fact, the Pearl River Delta (PRD) region has already overtaken
Tokyo as the largest metropolitan area in East Asia. As with rapid urbanisation and economic progress
seen elsewhere, the PRD has grappled with issues of labour mobility and job scarcity, affordable housing,
public transportation, access to health and educational services, and environmental pollution which affects
quality of life.
As Shenzhen becomes more integrated with Hong Kong, Macao, and several other Guangdong cities as
part of China’s PRD Greater Bay Area initiative, the city is poised to maintain its status as an innovation
powerhouse for a long time to come.105 The population of Shenzhen is expected to grow to 12.67 million in
2030. 106 Policies created to proactively support the city’s growth with the provision of land, housing,
infrastructure, and services are important “soft” factors that make Shenzhen attractive to top talent.
Reforming China’s unique hukou registration system would also improve citizen mobility.
97
Lin, J. (2015, September 12). Zhejiang overtook Shenzhen; New third board facilitated booming angel investment exits. PE Daily.
Retrieved from http://en.pedaily.cn/Item.aspx?id=220667
98
Where should you base your startup in China? Five expat entrepreneurs weigh in. (2015, May 12). Technode. Retrieved from
https://technode.com/2015/05/12/where-should-you-base-your-startup-in-china-five-expat-entrepreneurs-weigh-in/
99
100
ibid.
101
ibid.
102
Xie, Y. (2018, January 19). Venture capital investment in AI doubled to US$12 billion in 2017. South China Morning Post. Retrieved
from http://www.scmp.com/business/banking-finance/article/2129576/venture-capital-investment-ai-doubles-us12-billion-2017
103
深圳市天使投资引导基金揭牌 (Shenzhen Angel Investment Guided Fund unveiled). (2018, March 26). Shenzhen News.
Retrieved from http://www.sz-qb.com/html/2018-03/26/content_95650.htm
104
World Bank. (2015). East Asia’s changing urban landscape: Measuring a decade of spatial growth. Retrieved from
https://www.worldbank.org/content/dam/Worldbank/Publications/Urban%20Development/EAP_Urban_Expansion_full_report_we
b.pdf
105
Wong, H. (2017, December 26). Commentary: The magnificent new global city cluster in China’s Pearl River Delta. Channel News
Asia. Retrieved from https://www.channelnewsasia.com/news/business/commentary-the-magnificent-new-global-city-cluster-in-
china-s-9498040
106
Statista. (N.D.). China: Population of Shenzhen from 1995 to 2030 (in millions). Retrieved from
https://www.statista.com/statistics/466986/china-population-of-shenzhen/
Page 17
ABCC-2018-021
EXHIBIT 1: THE CHINESE CORPORATE INNOVATION REPORT RANKS

SHENZHEN AS THE MOST INNOVATIVE CITY
Source: HSBC China
Page 18
ABCC-2018-021
EXHIBIT 2: ECONOMIC REFORMS FOR SHENZHEN – 1979 TO 1990
Reforms Year
 Price system 1979
 Labour system
1980
 Labour wage system
 Housing system
 Capital construction system/tendering and bidding system 1981
 Cadre and personnel system
 Establishing stock exchange 1983
 Establishing foreign exchange regulation centre 1985
 Ownership reform of State-Owned Enterprises 1986
 Public auctions of land use rights 1987
Source: Shenzhen Museum
EXHIBIT 3: ANNUAL AVERAGE GROWTH RATE OF ECONOMIC INDICATORS

FOR SHENZHEN – 1981 TO 2015
Annual Average Growth Rate

Five-Year Period Gross Output Value Year-end Total
Average Yearly Wages
of Industry Employed
1981-1985 91.3 17.0 19.8
1986-1990 46.9 27.3 12.2
1991-1995 36.9 22.3 23.3
1996-2000 20.8 9.7 13.2
2001-2005 24.7 3.9 7.4
2006-2010 14.8 5.6 9.2
2011-2015 7.8 3.6 9.9
Notes:
“Industry” refers to the material production sector which is engaged in the extraction of natural resources
and processing and reprocessing of minerals and agricultural products including: (1) extraction of natural
resources; (2) processing and reprocessing of farm and related products; (3) manufacture of industrial
products; and (4) repair and renovation of industrial products.
Source: Shenzhen Municipal Bureau of Statistics
Page 19
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EXHIBIT 4: SHENZHEN’S TOTAL EXPORTS – 1980 TO 1992
Year Total Exports (USD) Annual Average Growth Rate (%)

1980 11,240,000
1981 17,450,000
1982 15,970,000
1983 62,300,000 118.8
1984 265,390,000
1985 563,400,000
1986 725,520,000
1987 1,413,540,000
1988 1,849,490,000 39.7
1989 2,174,280,000
1990 8,151,650,000
1991 9,862,400,000
1992 12,000,190,000
EXHIBIT 5: FOREIGN-FUNDED ENTERPRISES IN SHENZHEN – 1992 TO 2005
Year Foreign-funded enterprises

1992 7,639
1993 11,802
1994 14,767
1995 16,765
1996 18,011
1997 17,093
1998 16,161
1999 17,997
2000 18,151
2001 19,175
2002 19,461
2003 21,883
2004 22,728
2005 24,252
Page 20
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EXHIBIT 6: NATION-WIDE ECONOMIC INDICATORS OF GROWTH – 1980 TO 2005
Per Capita GDP Average Wages Household Consumption Expenditure (in

Year
(in RMB) (in RMB) RMB)
1980 464 762 238
1985 860 1,148 440
1990 1,654 2,140 831
1995 5,074 5,500 2,330
2000 7,902 9,333 3,721
2005 14,259 18,200 5,771
2010 30,876 36,539 10,919
2015 49,992 62,029 19,308
Source: National Bureau of Statistics
EXHIBIT 7: SHENZHEN CAPITAL GROUP PORTFOLIO OF 138

COMPANIES THAT HAVE BEEN LISTED
Source: Shenzhen Capital Group
Page 21
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EXHIBIT 8: COMPOSITION OF GDP BY THREE INDUSTRIES FOR SHENZHEN – 2011 TO 2016
Composition (out of 100%)

Year
Primary Industry Secondary Industry Tertiary Industry
1990 4.1 44.8 51.1
1995 1.5 50.1 48.4
2000 0.7 49.7 49.6
2005 0.2 53.4 46.4
2010 0.1 46.2 53.7
2011 0.1 46.3 53.6
2012 0.1 44.1 55.8
2013 - 43.2 56.8
2014 - 42.6 57.4
2015 - 41.2 58.8
2016 - 39.9 60.1
Notes:
“Three Industries” refers to the following industrial classification: agriculture and resource extraction are
classified under “Primary Industry”; manufacturing is classified under “Secondary Industry”; technology and
services are classified under “Tertiary Industry”.
Source: Statistics Bureau of Shenzhen City
EXHIBIT 9: INVESTMENT IN FIXED ASSETS FOR THE MANUFACTURING

INDUSTRY IN SHENZHEN – 1990 TO 2005
Investment in Fixed Assets

Year
for the Manufacturing Industry (RMB)
1990 1,748,760,000
1995 2,205,380,000
2000 9,820,950,000
2005 25,736,460,000
Page 22
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EXHIBIT 10A: PATENT STATISTICS FOR SHENZHEN – 2001 TO 2016
Number of
Number of Number of
Number of Patent International Number of
Year Invention Patent Invention Patents
Applications Patent Patents Certified
Applications Certified
Applications
2001 6,033 1,033 - 3,506 7
2002 7,917 1,846 - 4,486 91
2003 12,361 3,526 - 4,937 276
2004 14,918 4,751 331 7,737 864
2005 20,940 8,327 789 8,983 917
2006 29,728 14,576 1,661 11,494 1,361
2007 35,808 19,198 2,170 15,552 2,257
2008 36,249 18,757 2,709 18,805 5,409
2009 42,279 20,520 3,800 25,894 8,132
2010 49,430 23,956 5,584 34,951 9,615
2011 63,522 28,823 7,933 39,363 11,826
2012 73,130 31,075 8,024 48,662 13,068
2013 80,657 32,208 10,049 49,756 10,987
2014 82,254 31,077 11,639 53,687 12,040
2015 105,481 40,028 13,308 72,120 16,957
2016 145,294 56,336 19,648 75,043 17,666
Source: Statistics Bureau of Shenzhen City
EXHIBIT 10B: PATENT STATISTICS: SHENZHEN VS. CHINA – 2012 TO 2016
Number of Patent Shenzhen as Number of Invention Patent Shenzhen as a

Applications a Proportion Applications Proportion of
Year
of China China
China Shenzhen (%) China Shenzhen (%)
2012 489,945 73,130 14.9 176,167 31,075 17.6
2013 560,918 80,657 14.4 205,146 32,208 15.7
2014 630,561 82,254 13.0 239,925 31,077 13.0
2015 638,513 105,481 16.5 245,688 40,028 16.3
Source: National Bureau of Statistics; Statistics Bureau of Shenzhen City
Page 23
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EXHIBIT 10C: INTERNATIONAL PATENT STATISTICS: SHENZHEN VS. FRANCE AND

THE UNITED KINGDOM – 2011 TO 2016
25,000
19,648
20,000
15,000 13,308
11,639
10,049
10,000
7,933 8,024
7,406 8,261 8,421 8,208
7,802 7,905
5,000
5,268 5,290 5,496
4,876 4,917 4,848
0
2011 2012 2013 2014 2015 2016
Shenzhen France UK
Source: World Intellectual Property Office
EXHIBIT 10D: INTERNATIONAL PATENT APPLICATIONS OF

TOP 10 ENTERPRISES IN CHINA IN 2016
Source: World Intellectual Property Office
Page 24
ABCC-2018-021
EXHIBIT 11: NATION-WIDE PER CAPITA DISPOSABLE INCOME AND

CONSUMPTION EXPENDITURE – 2013 TO 2015
25,000
21,966
20,000
20,167
18,311
15,000 15,712
14,491
13,220
10,000
5,000
0
2013 2014 2015
Per Capita Disposable Income (in RMB) Per Capita Consumption Expenditure (in RMB)
Source: National Bureau of Statistics
EXHIBIT 12: BANNER SLOGAN AMIDST TOWERING BUILDINGS

AT SHENZHEN’S NANSHAN INNOVATION DISTRICT
Source: Photo was taken by authors on site.
Page 25
ABCC-2018-021
EXHIBIT 13: NUMBER OF SCIENTISTS AND ENGINEERS IN SHENZHEN – 2009 TO 2016
400,000
345,387
350,000
283,887 293,258 293,416
300,000 267,527
246,797 239,929
250,000
186,607
200,000
150,000
100,000
50,000
-
2009 2010 2011 2012 2013 2014 2015 2016
Scientists & Engineers in Shenzhen
EXHIBIT 14A: R&D EXPENDITURE AS A PERCENTAGE OF SHENZHEN’S GDP – 2013 TO 2016
4.4
4.32
4.3
4.2 4.18
4.1
4.01 4
4
3.9
3.8
2013 2014 2015 2016
% of Shenzhen's GDP
Page 26
ABCC-2018-021
EXHIBIT 14B: ENTERPRISE FUNDS AS A PERCENTAGE OF SHENZHEN’S

R&D EXPENDITURE – 2010 TO 2016
94.74
95 94.34
93.86 93.92 94.08
94
93
91.52 91.77
92
91
90
89
2010 2011 2012 2013 2014 2015 2016
% of Shenzhen's R&D Expenditure
Notes:
“Enterprise Funds” refers to funds raised by enterprises or received by universities or research institutions
from enterprises for scientific or technical development projects. It excludes funds from government
agencies, financial institutions, and foreign institutions.
EXHIBIT 15A: NUMBER OF INDUSTRIAL ENTERPRISES IN SHENZHEN

AND DONGGUAN – 2000 TO 2015
Number of Industrial Enterprises

City
2000 2005 2010 2011 2012 2013 2014 2015
Shenzhen 1,834 5,214 8,249 5,692 5,835 6,523 6,355 6,539
Dongguan 1,663 4,504 5,899 4,243 4,526 5,361 5,377 5,688
Source: Guangdong Statistics Bureau
EXHIBIT 15B: NUMBER OF INDUSTRIAL ENTERPRISES THAT MANUFACTURE COMMUNICATION

EQUIPMENT, COMPUTERS, AND OTHER ELECTRONIC EQUIPMENT IN SHENZHEN AND
DONGGUAN – 2008 TO 2015
Number of Industrial Enterprises that Manufacture Communication Equipment,

City Computers, and other Electronic Equipment
2008 2009 2010 2011 2012 2013 2014 2015
Shenzhen 2,007 1,922 1,912 1,545 1,629 1,863 1,877 1,968
Dongguan 896 860 929 762 818 962 980 1,022
Page 27
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EXHIBIT 16A: PER CAPITA GROSS DOMESTIC PRODUCT (IN RMB) OF CITIES IN THE PEARL
RIVER DELTA (PRD) – 1994 TO 2015
Per Capita Gross Domestic Product (in RMB)

City
1994 2000 2005 2010 2015
Shenzhen 17,990 32,800 60,801 96,184 157,985
Guangzhou 15,487 25,626 53,809 87,458 136,188
Zhuhai 16,720 27,770 45,320 78,030 124,706
Foshan 14,422 20,231 42,066 79,902 108,299
Zhongshan 10,605 15,077 36,435 60,888 94,030
Dongguan 11,06 13,679 33,287 53,193 75,616
Huizhou 7,248 13,877 21,909 38,650 66,231
Jiangmei 7,596 12,851 19,546 35,622 49,608
Zhaoqing 5,281 7,422 11,890 28,052 48,670
EXHIBIT 16B: PER CAPITA GROSS DOMESTIC PRODUCT (IN RMB) OF SPECIAL ECONOMIC
ZONES (SEZ) LOCATED IN GUANGDONG PROVINCE – 1994 TO 2015
Per Capita Gross Domestic Product (in RMB)

SEZ
1994 2000 2005 2010 2015
Shenzhen 17,990 32,800 60,801 96,184 157,985
Zhuhai 16,720 27,770 45,320 78,030 124,706
Shantou 5,021 9,741 12,883 21,330 33,732
Page 28
ABCC-2018-021
EXHIBIT 17A: PER CAPITA GROSS DOMESTIC PRODUCT GROWTH RATE COMPARISON:
SHENZHEN, BEIJING, AND SHANGHAI – 2011 TO 2016
Year Per Capita GDP Growth Rate Per Capita GDP Growth Per Capita GDP Growth
for Shenzhen (%) Rate for Beijing (%) Rate for Shanghai (%)
2011 7.3 3.8 5.0
2012 9.0 4.9 5.7
2013 9.6 5.2 6.2
2014 7.6 5.2 6.0
2015 5.2 5.5 6.9
2016 3.7 6.3 7.0
Source: National Bureau of Statistics; Shenzhen Municipal Bureau of Statistics
EXHIBIT 17B: MULTI-CITY COMPARISON: SHENZHEN, BEIJING, AND SHANGHAI – 2015
Indicator Shenzhen Beijing Shanghai

Population 11,378,700 21,710,000 24,150,000
GDP (in billion RMB) 1,750 2,301 2,512
Per capita GDP (in RMB) 158,000 106,497 103,796
Average yearly wages (in RMB) 81,034 111,390 109,174
Higher Education:
No. of tertiary institutions 12 91 67
Enrolment 90,112 603,557 511,623
Graduates 23,397 154,449 128,711
Research & Development:
R&D expenditure (in billion RMB) 73,238 24,408 47,424
Full-time R&D personnel 173,764 50,773 94,981
No. of patent applications 105,481 20,024 21,725
No. of invention patent applications 40,028 10,281 10,740
No. of international patent applications 13,308 4,490 1,060
Notes:
Institutes of higher education include full-time universities, independent colleges, technical colleges,
professional colleges, and other similar institutions, and refer to educational establishments set up
according to government standards as well as evaluation and approval procedures.
Source: National Bureau of Statistics; Shenzhen Municipal Bureau of Statistics; State Intellectual Property Office of the P.R.C.
Page 29
ABCC-2018-021
EXHIBIT 17C: NUMBER OF STARTUPS IN SHENZHEN, BEIJING,

AND SHANGHAI – 2015 TO 2017
10,000
8,746
9,000
8,000
7,000 6,167
6,000 5,270 5,254
5,000
3,791
4,000
3,000 2,185
3,276
2,000
2,069 2,306
1,000
0
2015 2016 2017
Shenzhen Beijing Shanghai
Notes:
The number of firms categorised or certified as high-tech companies has been used as a proxy for the
number of startups. This certification allows companies to enjoy tax rebates and is subjected to review
every three years.
Source: Shenzhen Science and Technology Innovation Committee; Beijing Municipal Science and Technology Commission; Shanghai
Science and Technology Commission
Page 30
ABCC-2018-021
EXHIBIT 18: GEOGRAPHICAL DISTRIBUTION OF CHINESE ANGEL INVESTMENTS FROM

JANUARY TO NOVEMBER 2015 (BY NUMBER OF DEALS)
Source: PE Data
Page 31
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EXHIBIT 19: SHENZHEN DEVELOPMENT PHASE 1: 1980 TO 1992
Source: Created by authors.
EXHIBIT 20: SHENZHEN DEVELOPMENT PHASE 2: 1992 TO 2006

ABCC-2018-021
Page 32
Page 33
ABCC-2018-021
EXHIBIT 21: SHENZHEN DEVELOPMENT PHASE 3: BEYOND 2006

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SHENZHEN AT 40: CHINA’S SILICON HBSP No.: NTU205

“It is not a question of control effectiveness; it is a question of our policy.”

Deng Xiaoping, November 1977

SHENZHEN SPECIAL ECONOMIC ZONE: 1980 TO 1992 (see Exhibit 19)

Strategy, Structure, and Rivalry

Deng Xiaoping, November 1977

Related Supporting Industries

Box 1: Huaqiangbei (华强北) Market

The main malls are:

Photos were taken by authors on site. Source: Shenzhen Shopper

DEEPENING MARKET REFORMS: 1992 TO 2006 (see Exhibit 20)

Strategy, Structure, and Rivalry

Related Supporting Industries

SHENZHEN AS AN INNOVATION HUB: 2006 TO TODAY (see Exhibit 21)

Strategy, Structure, and Rivalry

Box 2: Green Pine Capital

Related Supporting Industries

SHENZHEN: MOVING FORWARD (see Exhibit 21)

Strategy, Structure, and Rivalry

EXHIBIT 1: THE CHINESE CORPORATE INNOVATION REPORT RANKS

Source: HSBC China

EXHIBIT 2: ECONOMIC REFORMS FOR SHENZHEN – 1979 TO 1990

Source: Shenzhen Museum

EXHIBIT 3: ANNUAL AVERAGE GROWTH RATE OF ECONOMIC INDICATORS

Annual Average Growth Rate

Source: Shenzhen Municipal Bureau of Statistics

EXHIBIT 4: SHENZHEN’S TOTAL EXPORTS – 1980 TO 1992

Year Total Exports (USD) Annual Average Growth Rate (%)

Source: Shenzhen Municipal Bureau of Statistics

EXHIBIT 5: FOREIGN-FUNDED ENTERPRISES IN SHENZHEN – 1992 TO 2005

Year Foreign-funded enterprises

Source: Shenzhen Municipal Bureau of Statistics

EXHIBIT 6: NATION-WIDE ECONOMIC INDICATORS OF GROWTH – 1980 TO 2005

Per Capita GDP Average Wages Household Consumption Expenditure (in

Source: National Bureau of Statistics

EXHIBIT 7: SHENZHEN CAPITAL GROUP PORTFOLIO OF 138

Source: Shenzhen Capital Group

EXHIBIT 8: COMPOSITION OF GDP BY THREE INDUSTRIES FOR SHENZHEN – 2011 TO 2016

Composition (out of 100%)

Source: Statistics Bureau of Shenzhen City

EXHIBIT 9: INVESTMENT IN FIXED ASSETS FOR THE MANUFACTURING

Investment in Fixed Assets

Source: Shenzhen Municipal Bureau of Statistics

EXHIBIT 10A: PATENT STATISTICS FOR SHENZHEN – 2001 TO 2016

Source: Statistics Bureau of Shenzhen City

EXHIBIT 10B: PATENT STATISTICS: SHENZHEN VS. CHINA – 2012 TO 2016

Number of Patent Shenzhen as Number of Invention Patent Shenzhen as a

Source: National Bureau of Statistics; Statistics Bureau of Shenzhen City

EXHIBIT 10C: INTERNATIONAL PATENT STATISTICS: SHENZHEN VS. FRANCE AND

Source: World Intellectual Property Office

EXHIBIT 10D: INTERNATIONAL PATENT APPLICATIONS OF

Source: World Intellectual Property Office

EXHIBIT 11: NATION-WIDE PER CAPITA DISPOSABLE INCOME AND

Source: National Bureau of Statistics

EXHIBIT 12: BANNER SLOGAN AMIDST TOWERING BUILDINGS

Source: Photo was taken by authors on site.

EXHIBIT 13: NUMBER OF SCIENTISTS AND ENGINEERS IN SHENZHEN – 2009 TO 2016

Scientists & Engineers in Shenzhen