Tian Xuan: Financial reform promotes new productive forces, and stable macroeconomic policy guidance is crucial.

Maintaining the continuity, stability, and consistency of policies, and forming a continuous, stable, and consistent expectation in the market is crucial.

“To stimulate technological innovation, we should develop patient capital, encourage early-stage venture capital investment by enterprises, while encouraging rule of law, opening up the Capital Market, and maintaining policy continuity, stability, and consistency, all of which are very important.” Recently, at the “2024 First Financial Value List · Financial Summit,” National People’s Congress representative and Dean of the National Institute of Financial Research at Tsinghua University, Tian Xuan, delivered a keynote speech on “Financial Reform Promoting New Productivity.”

Tian Xuan believes that after 2010, China’s economic rise has entered the so-called “new normal”, the growth rate from high-speed rise to medium-high speed and medium-speed rise, and now the economic growth rate is about 5%, forcing us to find a new way of economic rise, from high-speed rise to high-quality rise change, the development of new quality productivity, so as to better promote the stable and high-quality rise of the economy.

What is innovation? Why is innovation so difficult? How should we support technological innovation with innovative incentives?

At the summit, Tian Xuan talked about the important support and leverage of financial support for technological innovation. And emphasized the need for a healthy and open Capital Market. At the same time, stable macro policy guidance is also crucial.

Financial market opening can promote innovation.

The Central Financial Work Conference in 2023 proposed the construction of a strong financial country with “Five Major Articles”, among which the first major article is Fintech. Fintech is how to use financial means to promote technological innovation, while enterprises are the main body of technological innovation.

“We are trying to build a macro theoretical framework. From a macro perspective, we follow the financial system; from a meso perspective, we follow how participants in the financial market influence corporate innovation motivation and outcomes; from a micro perspective, we follow corporate strategies and adjustments of corporate factors,” said Tian Xuan.

He believes that financial support for technological innovation is very important, involving several specific aspects as a driving force and lever.

Grab one is a healthy and open Capital Market. Due to the fact that credit financing has always been the main financing channel in China’s financial market, the share of equity financing is very low, and the development of the Capital Market is extremely uneven.

The Central Financial Work Conference pointed out that finance is the lifeblood of the real economy, and it should take the real economy as the fundamental starting point and foothold.

Tian Xuan said that for industries with high dependence on external financing, the development level of the equity market is positively correlated with the number, quality, originality and universality of industry innovation, while the development level of the credit market is negatively correlated with them.

In terms of opening up to the outside world, Tian Xuan found through data comparison of 20 countries and regions that the opening of the financial market can promote innovation. “After the Capital Market of a country is opened, foreign institutional investors enter, and the number and quality of corporate innovation, including the number of innovative enterprises, will be significantly improved.”

The data shows that in countries that achieved financial market opening between 1981 and 2008, the average number of innovations, innovation quality, and number of innovative enterprises rose by 13%, 16%, and 11%, respectively.

Secondly, Tian Xuan believes that a stable macro policy orientation is also crucial. By analyzing data from 42 countries, he found that whether a country’s policy leans slightly left, slightly right, towards capital, or towards labor, it has no significant impact on corporate innovation. This is because entrepreneurs can adjust their investment decisions based on macro policies. However, what they fear the most is uncertainty. When entrepreneurs are unsure about the future policy direction, all they can do is wait and observe, reduce long-term investments, and focus more on short-term investments.

Based on this, Tian Xuan emphasized that it is very important to maintain the continuity, stability and consistency of policies and form continuous and stable expectations for the market. “In general, in order to stimulate scientific and technological innovation and develop new quality productivity, we should develop patient capital, encourage enterprises to make early venture capital, encourage the rule of law, open the capital market, and maintain policy continuity, stability and consistency, which are all very important.” He said.

Financial support for technological innovation requires a brand new organizational form

Financial support for technological innovation cannot be separated from a culture that embraces individuality and tolerates failure.

A scholar once conducted a study in which he interviewed dozens of ‘super entrepreneurs’, namely the founders of unicorns, and summarized the traits of these ‘super entrepreneurs’. ‘These traits, which may not be liked in daily life, are precisely the characteristics that ‘super entrepreneurs’ possess. In other words, ‘super entrepreneurs’ engage in disruptive innovation and develop new productive forces. They often go against the tide and take unconventional paths, so we must have corresponding tolerance for them in order to encourage them to continue exploring and experimenting,’ said Tian Xuan.

The most important drivers and forces for entrepreneurship and innovation are private sale equity funds and venture capital firms. By comparison, currently, a key characteristic of venture capital funds is that foreign funds generally have a lifespan of 10 to 12 years, while domestic funds are relatively shorter, ranging from 3 to 5 years, now it’s about ‘5+2’ 7 years. ‘In general, domestic funds have a much shorter lifespan than those in the United States, which means that domestic funds are not patient enough and cannot fully achieve early investment, small-scale investment, long-term investment in hard technology. Foreign funds, on the other hand, can truly invest in early-stage projects, tolerate failure, and accommodate individuality,’ Tian Xuan said.

Regarding the difference in the duration of domestic funds and US funds, Tian Xuan believes that this is related to the composition of LPs behind them. In the United States, only 2% are wealthy families and individuals, and the vast majority are institutional investors. Among institutional investors, pension funds, retirement funds, and university endowment funds account for the majority, and the characteristic of these funds is to pursue long-term stable cash flow.

In China, the main sources of funding are government-sponsored platforms/government agencies, individuals, and industry capital. However, due to problems with the government evaluation system and mechanism related to the preservation and appreciation of state-owned assets, it is difficult to invest in hard technology at an early stage or in small amounts. Investors are unwilling to take high risks, and ‘this requires a higher tolerance for company failures’ - Tian Xuan.

In addition, innovative financial support for technology requires new organizational forms, such as corporate venture capital (CVC). Tian Xuan explained that the source of CVC funds is the parent company behind it, and non-financial companies establish venture capital funds to directly invest in start-ups through affiliated institutions. For example, Intel and Google in the United States, as well as Xiaomi and Lenovo in China.

He said that the main purpose of the investment is not for financial returns, but more for the strategic layout of the parent company. Therefore, the investment is made with its own funds, without the need to raise funds from LP, and there is no pressure to exit. The duration can be very long. ‘CVC has the important characteristic of a high tolerance for failure and a high requirement for the quantity and quality of innovation in the invested enterprises.’

Tian Xuan emphasized, ‘It is very important to incentivize technological innovation and encourage companies to introduce early-stage venture capital.’

At the same time, a sound legal environment is also essential. ‘Marketization, legalization, and internationalization have a significant impact on innovation.’ Tian Xuan said that by observing data from 32 countries and regions, it was found that better protection for investors can enhance enterprise research and development investment. Furthermore, using data from 44 countries and regions, it was found that investor protection has a positive impact on the investment efficiency of enterprises. Moreover, through the data analysis of 539 listed companies in 27 countries and regions, it was found that in countries with better protection for minority shareholders, the valuation of companies is higher.

Tian Xuan emphasized that personal bankruptcy laws that are lenient towards debtors can encourage entrepreneurship, while corporate bankruptcy laws that are lenient towards debtors can encourage corporate innovation. The protection of intellectual property rights also plays a crucial role in technological innovation for businesses, so the construction of the rule of law has a significant positive impact on corporate innovation.

Source: Sina

Author: First Financial