Why Beijing is magnet for innovation in China

Despite competition from other cities, the capital retains edge in the high-tech space

If astrophysicist and cosmologist George Smoot, a 2006 Nobel Prize winner and a physics professor at the University of California, Berkeley, chose Beijing as his first destination for an investment in a high-tech project, it speaks as much about the stature of China's capital as for the fact that he is a sharp investor.

Around the middle of this month, Smoot inked an agreement with the Zhongguancun Science Park or Z-Park-based O.ME, a one-year-old 3D-printing startup, to invest as much as 20 million yuan ($3.13 million).

To be sure, this sort of deal is not rare in Beijing's Z-Park, commonly referred to as China's Silicon Valley.

According to a recent report by PricewaterhouseCoopers LLP, Beijing secured more than half of deals last year by equity funds and venture capital firms in China's telecommunications, media and technology space, the so-called TMT sector.

More than 40 percent of the deals were struck in or around the park which saw more than 13,000 new companies being set up in 2014 alone, said Guo Hong, director of the Administrative Committee of the Z-Park.

The startup boom has significantly boosted high-tech innovation in the Z-Park. "The total revenue of the nearly 20,000 high-tech enterprises in Zhongguancun reached 3.6 trillion yuan in 2014, a growth of 18 percent year-on-year," said Guo.

Contracts relating to technology were worth 313.6 billion yuan, and accounted for 40 percent of China's total amount. "The companies created a large number of high-tech products, which can be commercialized," he said.

The large number of Beijing-based venture capital firms and incubators, which support startups and encourage innovation, is one of the main reasons why the Z-Park and Beijing lead China's high-tech sector, said Guo.

Since its founding in 1988, the Z-Park has created a unique "ecosystem" for the development of high-tech industry, he said. Home to Internet giants such as Baidu Inc, which is listed on New York's Nasdaq, e-commerce group JD.com Inc and smartphone manufacturer Xiaomi Corp, the Z-Park is China's first cluster for high-tech development.

Apart from next-generation Internet, the park also has a strong interest in industries like mobile telecommunications and technologies related to satellites, healthcare, energy saving and transportation.

However, with the central government underlining innovation and entrepreneurship, an increasing number of cities such as Shanghai, Shenzhen and Chengdu have followed the trend of offering incentives and formulating policies to encourage innovation, particularly in the high-tech sector.

As other high-tech centers continue to emerge in China, Beijing's advantage in the high concentration of venture capital will erode, said Frank Hawke, China director for the Stanford Graduate School of Business.

"But Beijing has a number of advantages over other Chinese cities that are structural and therefore long-term. For example, Beijing boasts the highest and finest concentration of institutions of higher learning, which attract the best and brightest talent from all over China.

"To the extent that government policy plays into specific instances of innovation and entrepreneurship, proximity to Beijing can be an advantage," said Hawke, whose business schools runs a training program for entrepreneurs in Beijing.

"Because of its centrality in terms of talent, especially in the area of software design and engineering, Beijing has emerged as a center for innovation and entrepreneurship in the tech sector," said Hawke.

"On the other hand, the Pearl River Delta, and to some extent the Yangtze River Delta, have become centers of manufacturing innovation because of the high concentration of export-led manufacturing in those regions," he said.