Economic activity is the most common form of civilizational interaction. Photo: TUCHONG

Amid globalization and digitalization, unicorn companies are in the vanguard of economic development by virtue of disruptive technology and innovative business models. They are key indicators of a country’s or a region’s innovation vitality and competitiveness, and act as vital forces in China’s endeavor to develop new quality productive forces.

In July 2024, the Political Bureau of the Central Committee of the Communist Party of China emphasized the need to strongly and effectively support the development of unicorn companies, sparking a new wave of public interest in unicorns. It is essential to thoroughly explore the mechanisms behind the emergence of unicorn companies, optimize relevant policy support, and analyze the main causes of the recent decline in the number of new unicorns in China, so that more unicorn companies can emerge in the country.

Causes of decline

The decline in the number of new Chinese unicorn companies can be attributed to several factors.

First, increased uncertainties in the global economy, particularly frequent geopolitical conflicts and trade frictions, have a negative impact on the internationalization of Chinese companies. These external shocks have led to fluctuations in market confidence and reduced investor interest in risk assets, thus affecting the financing environment for unicorn companies.

Second, while data is a key resource for the rapid growth of unicorn companies in reality, there still exist many “data silos,” limiting the means by which companies access and utilize data. At the same time, Chinese unicorn companies are gradually shifting from consumption driven by business models to advanced, disruptive technology such as artificial intelligence, high-end chips, and renewable energy. As the rapid growth fueled by early innovations in business models is tapering off, and the barriers to entry are high in new areas, emerging unicorn companies become less common.

Third, as new industries and new business models develop, regulatory policies are continually being adjusted, which can introduce compliance risks and negatively affect operational models and market strategies in the short term. Risk-averse capital invests less in high-risk sectors, which impacts the growth and valuation of startups.

Fourth, as the valuation of unicorn companies in the capital market returns to a reasonable level, investors shift from a high-risk, high-reward approach to prioritizing stability and return on investment, reducing their investment in startups.

Mechanisms behind emergence

Global comparative studies show that unicorn companies often concentrate in cities with robust digital entrepreneurship ecosystems (DEEs). In the digital age, where the creation of organizational value transitions from value chains to digital ecosystems, DEEs have become key to explaining differences in entrepreneurial performance. There are five typical mechanisms behind the emergence of unicorn companies.

Innovation-driven mechanism represented by Silicon Valley, USA: Highly-skilled talent leads the research and development of disruptive technology, which attracts venture capital and results in strong innovation capabilities and market competitiveness.

Market opportunity-driven mechanism represented by Hangzhou, China: The e-commerce industry, with a profound understanding of user demand, rapidly iterates products and nimbly adjusts business models to adapt to market changes.

Capital-enabled mechanism represented by Beijing, China: Government policies provide a favorable environment, venture capital and the capital market offer financial support, and incubators provide resources and guidance, jointly supporting business growth.

Symbiotic innovation mechanism represented by Shanghai and Guangzhou, China: Diverse participants with complementary capabilities and shared resources contribute to a supportive business culture that encourages innovation and tolerates failure.

Policy-guided innovation mechanism represented by Seoul, South Korea, and Shenzhen, China: Government policies and planning provide direction and support for innovation, encouraging companies to engage in research and development as well as technological innovation.

Concerted action

Encouraging the emergence of more unicorn companies in China necessitates multi-pronged efforts from various stakeholders.

Better integrate a well-functioning government with an efficient market: First, a policy system aligned with the growth of unicorn companies should be established. Second, it is necessary to evaluate policy effectiveness on a regular basis and establish corporate feedback mechanisms. Third, market access restrictions should be appropriately relaxed. Fourth, it is important to actively cultivate an environment conducive to innovation and entrepreneurship, respect and incentivize entrepreneurs, and protect the returns on innovation.

Optimize the financing system for unicorn companies: Diversified and hybrid financing models should be developed, while patient capital should be strengthened to provide full chain, full life cycle financial services for unicorn companies. Provided that risks are controllable, financial innovation should be encouraged to offer customized financing solutions to unicorns.

Build open and symbiotic DEEs: There is no single approach to building DEEs. Regions should tailor their approach to developing DEEs according to their own conditions, drawing upon the aforementioned five mechanisms and focusing on the key elements of highly effective DEEs, rather than attempting to address all determinants simultaneously.

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

Edited by WANG YOURAN