More unicorn companies should be fostered. Photo: TUCHONG

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In the tide of globalization and digitalization, unicorn companies are at the forefront of new economic development, leveraging disruptive technologies and innovative business models. They play a crucial role in advancing new quality productive forces (NQPFs) and serve as key indicators of a nation or region’s innovation and competitiveness. At this juncture, delving into the mechanisms behind the emergence of unicorn companies and optimizing supportive policies are vital for fostering their growth in China.

Scarcity

New unicorn companies confront with difficulties such as global economic fluctuations, capital liquidity challenges, and the evolving dynamics of emerging markets.  

First, macroeconomic fluctuations play a role. The global economic environment has become increasingly uncertain, marked by frequent geopolitical conflicts and trade frictions, impacting the international expansion of Chinese enterprises. These external shocks have shaken market confidence, reducing investors’ appetite for riskier assets and thus constraining the financing landscape for unicorn companies.

Second, technological development and market changes influence this trend. The data factor, an important production factor in the digital era, is critical to the rapid growth of unicorn enterprises. However, the prevalence of “data silos” hampers companies’ ability to access and utilize data, further challenging high-tech startups. At the same time, Chinese unicorns are transitioning from consumer-focused sectors driven by business model innovation to cutting-edge technology sectors driven by disruptive technologies such as artificial intelligence, high-end chips, and renewable energy. This shift reflects market self-regulation, innovation-driven growth, policy guidance, and changing investment preferences. As the initial rapid growth from business model innovations wanes and new sectors pose higher entry barriers, the emergence of unicorn companies is becoming increasingly challenging.

Third, policy and regulatory adjustments play a role. In the evolution of new industries and business models, regulatory policies undergo continuous refinement. Such adjustments can introduce compliance risks, temporarily affecting companies’ operational strategies and market positioning. Risk-averse investors, wary of uncertainty, reduce their exposure to high-risk areas, slowing the growth and valuation of startups.

Fourth, capital market fluctuations influence the cost of financing and the vigor of venture capital activity. As valuations of unicorn companies return to more rational levels, investors are shifting their focus from high-risk, high-reward ventures to more stable, return-focused investments. This recalibration affects funding for startups, further intertwining with economic and entrepreneurial expectations, contributing to the present scarcity of unicorn enterprises.

Mechanism

The emergence of unicorn enterprises is far from coincidental; it is a complex phenomenon shaped by the interplay of key factors. Comparative studies on the clustering of global unicorn companies reveal that these enterprises tend to concentrate in cities with robust digital entrepreneurship ecosystems (DEEs). DEEs, as the most dynamic foundational units in the digital economy, not only provide and safeguard digital infrastructure and institutional frameworks but also foster and amplify entrepreneurial spirit. In the digital age, as value creation shifts from traditional value chains to digital ecosystems, DEEs have become pivotal in explaining disparities in high-quality entrepreneurial outcomes, including the rise of unicorn enterprises. However, DEEs are not naturally occurring phenomena; their development is not a causality-based “discovery process” but an effect-based “shaping process.” This indicates that DEE construction is neither singular nor uniform but instead exhibits heterogeneity and diversity. In other words, the pathways to the emergence of unicorn companies involve “multiple concurrent” and  “different routes to the same destination” scenarios.

In addition, the emergence of unicorn enterprises is supported by five distinct mechanisms, each reflecting a unique ecological configuration. The first is the innovation-driven model, exemplified by Silicon Valley in the United States. Here, high-end talent propels the research and development of disruptive technologies, attracting venture capital and fostering robust innovation capabilities and market competitiveness. The second is the market opportunity model, as seen in Hangzhou, particularly in the e-commerce sector. This approach emphasizes a deep understanding of user needs, rapid product iteration, and agile adjustments to business models, enabling enterprises to adapt to market changes and achieve accelerated growth. The third mechanism is the capital-enabled model, represented by Beijing. Government policies provide a favorable environment, while venture capital and capital markets offer financial support. Incubators further enhance growth by supplying resources and guidance, creating a cohesive support system for enterprises. The fourth is the symbiotic innovation model, prominent in Shanghai and Guangzhou. This model thrives on diverse participation, where stakeholders with complementary capabilities share resources. A culture that encourages innovation and tolerates failure strengthens the foundation for enterprise development. The fifth mechanism is the policy-guided innovation model, seen in cities like Shenzhen. In this model, government policies and strategic planning offer direction and support for innovation, incentivizing enterprises to pursue research, development, and technological advancements. Each of these mechanisms emerges from the interaction of multiple factors. In specific regional and industrial contexts, these factors coalesce to create distinctive DEEs, which provide fertile ground and driving forces for the birth and growth of unicorn enterprises.

Prosperity

To foster the emergence of more unicorn enterprises in China, a concerted effort involving multiple stakeholders and diverse strategies is essential. First, achieving a better integration of an effective government and an efficient market is crucial. Establishing a policy system aligned with the growth needs of unicorn enterprises is necessary. It is suggested to ensure continuity and consistency in regulation to stabilize market expectations. Strengthening top-level design and crafting comprehensive industrial development plans are also vital. Targeted support policies should be introduced, with regular evaluations of their effectiveness and feedback mechanisms to ensure alignment with enterprise needs. Optimizing the business environment further requires relaxing market access restrictions, encouraging cross-sector collaboration, expediting innovation transformations, and exploring new markets and growth opportunities. Additionally, fostering an innovation-friendly atmosphere involves respecting and motivating entrepreneurs, protecting innovation outcomes, and establishing supportive systems to encourage creative endeavors.

Second, deepening financial system reforms and optimizing financing mechanisms for unicorn enterprises are imperative. A multi-level financing system should be built, emphasizing diversified and hybrid models based on shared benefits and risks. For major industries and emerging markets, leveraging the guiding role of government sci-tech investment funds and state-owned master funds is key. Resources must be integrated into the venture capital market, and patient capital expanded to provide full-chain, lifecycle financial services. Encouraging financial innovation within controlled risks is essential, with initiatives such as establishing equity trading platforms for innovative enterprises, refining incentive and error-tolerance mechanisms for fund investments, and developing innovative credit products and services. These measures aim to deliver tailored financing solutions for unicorn enterprises.

Third, constructing an open and symbiotic DEE is vital. High-output DEEs are pivotal for promoting unicorn enterprises, necessitating a break from the notion of a single “optimal path.” Regions should leverage their unique resources and factor endowments, analyze the emergence mechanisms of established DEEs, identify bottlenecks, and optimize policy resource allocation based on local conditions. Efforts should prioritize key factors critical for high-output DEEs, focusing development efforts rather than attempting to address all influences. Promoting coordination among government, market, and societal DEE factors is essential to align resources effectively. By navigating uncertainties with clear strategic direction, a “combination punch” approach can drive the development of robust DEEs, laying the groundwork for unicorn enterprise growth.

Yu Weizhen is a professor from the School of Business at Hangzhou City University.

Edited by ZHAO YUAN