Perspective: DeepSeek’s Achievements Conceal China’s Deteriorating Innovation Strategy
China’s Tech Landscape: Current Trends and Challenges
The rapid growth and innovation seen in China’s technology sector are currently facing significant hurdles. From state support for startups to declining foreign investment, the future of China’s tech industry is a topic of keen interest and concern.
Optimism in the Tech Industry
Recent developments have sparked renewed optimism among China’s tech startups. Notable advancements, such as DeepSeek’s highly efficient AI chatbot and the captivating performances of dancing robots on popular TV shows, highlight the country’s innovation potential. Additionally, the Chinese government has pledged a staggering 1 trillion yuan (approximately €127 billion) to support the private sector. This financial backing serves as a much-needed boost to an industry that has been significantly impacted by Beijing’s regulatory decisions, sluggish domestic economic growth, and escalating tensions in international trade, particularly with the United States.
Declining Venture Capital Investment
Despite the glimmers of hope, the challenges remain daunting. Venture capital investment in China has been on a downward trend since 2021, with a notable 32% decline in investments year-over-year, reducing the total to $33 billion in 2024. In comparison, the United States experienced investments totaling $178 billion, showcasing a stark contrast. In 2020, China’s venture capital market was larger than Europe’s, but recent figures illustrate a sharp decline, with China’s investment now only two-thirds of the European market.
Unicorns on the Decline
Historically significant companies, such as Baidu, Alibaba, and Tencent, paved the way for a new generation of tech giants like Didi and ByteDance. However, the emergence of new unicorns—startups valued at over $1 billion—has drastically decreased in recent years. Today, China averages two new unicorns per month, falling short of the pace set by both Europe and the U.S. The decline in foreign direct investment plays a crucial role in this trend. The previous model, where foreign venture capitalists provided not only funding but also essential guidance for scaling up, is now hampered by stricter regulations and geopolitical tensions.
State Influence on Innovation
The Chinese government has recognized the pressing need to foster innovation within its tech sector. President Xi Jinping has posed questions regarding the dwindling number of unicorns, emphasizing the necessity for early investment and a long-term focus on hard sciences. To respond to this challenge, state-owned enterprises (SOEs) have significantly increased their participation in funding tech development, contributing 40% of investments into emerging technologies as of 2024.
Implications of State-Led Investment
While the government’s increased focus on providing funding may appear beneficial, it raises concerns about the level of control exercised by the state over the economy. As long as the government dictates which companies advance in technology and determines funding distribution based on political agendas, innovation may suffer. This model restricts private companies’ ability to access capital and grow independently, which could ultimately lead to fewer successful tech startups.
Comparisons with Europe
In contrast, Europe has been adopting an inclusive and multi-stakeholder approach that emphasizes reduced risks in decision-making. This model prioritizes limiting state support to specific strategic sectors while ensuring that support is temporary. This flexibility contrasts sharply with China’s growing reliance on state-led initiatives, which can stifle private sector growth.
The Path Forward
While DeepSeek and its entrepreneurial peers, referred to as the "six little dragons of Hangzhou," have thrived under current policies, their success is largely self-originated rather than government-driven. To nurture the next generation of tech giants similar to Alibaba, China may need to move away from its rigid approach and encourage a more open and collaborative investment environment. Despite the desire for a resurgence in unicorns, significant changes to the current economic framework appear unlikely, leaving the sector at a crossroads.
Such an intricate landscape highlights the complexities of fostering innovation while navigating regulatory landscapes, and the path forward will require a delicate balance of interests from both state and private entities.
