The Chinese government has been actively supporting startups in response to the slowdown in economic growth and the sluggish job market. In its 13th Five-Year Plan (2016-2020), the concepts of Dazhong Chuangye ,which signifies mass entrepreneurship and innovation, and Chuangke , which translates into “technical makers,” have emerged as main keywords. In addition, the establishment of business incubator spaces called Zhongchuang kongjian,meaning “maker-spaces for the people,” is expanding nationwide.
  Following the trend, leading cities for startups such as Beijing, Shenzhen and Shanghai, as well as other local governments, are making every effort to create a startup eco-system. Among these, Chengdu in Sichuan Province and Wuhan in Hubei Province are gaining attention. In this report, we analyze the changing trends, investment and policy directions for startups in China. We also further analyze the entrepreneurial eco-system of Chengdu and Wuhan to draw implications for future cooperation.
  The number of China’s startups in 2015 was 4,439,000, rising to the highest ever. The hottest sector for startups was in the area of services, more particularly internet, culture and education services. Startups must overcome very fierce competition for survival, as the percentage of expert-led startups is small and startups are concentrated in similar target sectors. Investment for startups also recorded a historic amount. Along with the collapse of the stock market, unicorn companies have suffered a drop in profitability and investment for startups looks to have shrunk in the first half of 2015. However with vigorous fund exit taking place through the “new third board” OTC (over the counter) market, China remains the second-largest in number of unicorn companies in the world after the United States.
  The Chinese government is removing restrictions on company establishment in terms of the process and cost required, also launching a government guidance fund to encourage investment for startups as well as to help startups diversify their funding channels. In addition, it is promoting new start-up spaces (Zhongchuang kongjian), based on the judgment that incubating is an effective means to develop innovative ability and employment.
  Meanwhile, the supporting system for startups in Chengdu and Wuhan is building up rapidly, but the software to run this system remains weak and there is a lack of diversity and domain expertise in supporting services. Moreover, the number of experts like management specialists and investors who can mentor the startup teams are fewer than in Eastern cities in China. Therefore, Chengdu and Wuhan show a high demand for skillful and experienced manpower. Finding themselves unable to internally resolve these shortages, they are actively recruiting talent from outside. Thus, Chengdu has established cooperation channels with South Korea, Singapore, the EU (Germany, France), and Wuhan with Taiwan, the USA, UK and others, under various preferential policies.
  As a result, the following policy implications can be drawn. Above all, it is necessary to establish and vitalize cooperation channels for startups. Both cities have a high potential to develop startup eco-systems, and are willing to cooperate with Korea. Therefore, Korea has to promote the cooperation of the working-level committees and personnel exchange led by the Ministry of Science, ICT and Future Planning or the Small and Medium Business Administration, which are the main organizations in charge of startup policies in Korea. It is also necessary to hold regular events to improve the mutual entrepreneurial environment and market understanding, and help companies form a network. Especially, these events should be regularized on an annual basis, in the manner of regular exchange events held between Wuhan and Silicon Valley. The online platform Kechuangtong should be used to share corporate information between Chengdu and Korea as a mutual information channel.
  Second, a specialist group needs to be adopted to enhance cooperation with Chengdu and Wuhan as well as to increase the success rate of startups, as we see in the case of cooperation between Chengdu and France, which designated management specialists as mentors to mutually support startups on each side. The mutual incubator service has to be a key part of cooperation, but it is preferable to exchange opinions on the operating system through the dispatch of managers. Furthermore, it will be necessary to actively communicate the opinions of the Korean side in order to carry out effective exchange and cooperation measures and ensure proper operations at Sino-Korea Innovation and Startup Park in Chengdu.
  Third, Korea must establish a joint investment platform with Chengdu and Wuhan to support Korean startups which aim at the Chinese market as well as to attract Chinese capital to Korea. In addition, we must be able to grasp the investment trends of both countries and obtain information on local prospective companies. Furthermore, increasing the fund size of Korean venture capital willing to enter the Chinese market would contribute to the development of related technologies and industries.
  Fourth, deregulation is necessary to revive domestic business and improve the competitiveness of startups. Unlike China, Korea applies a positive list system, and there are many regulatory measures such as enforcement ordinances, enforcement regulations, and guides. This has been identified as an obstacle for active entrepreneurship and innovation through business convergence. Therefore, the government, industry, and political circles should conduct active discussions to seek ways to resolve these issues.
  Next, the four main implications for businesses are as follow. First, it is necessary to develop items with high local preference through preliminary research on Chengdu and Wuhan markets. For example, Chengdu is famous for conspicuous and show-off consumption, and tends to be fashion-conscious in spite of its inland location. The region also shows an interest in culture and gourmet. Wuhan has high demands for transportation, culture, and bio/healthcare services.
  Second, the cooperation of support services for startups should be sought. As most incubators located in Chengdu and Wuhan are lacking in operational know-how, Korean incubators could consider entering the market to provide consulting services and supporting the entry of Korean enterprises into the cities.
  Third, Korean startups should make use of support organizations with networks in China. There are several ways to enter the Chinese market, such as pitching on Demo Day or setting up a local company in China, but these approaches are difficult to implement without Chinese experts. Thus, receiving assistance from domestic incubators which have specialized networks in China, for instance Born2Global and Hanwha DreamPlus, is recommended.
  Finally, it is time to preemptively invest in Chinese startups. In particular, the internet business sector is an area in which investment should be considered, as it poses difficulties for foreign companies to advance into due to Chinese domestic regulations.