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  • Becoming Global Billionaires from Mainland China: Theory and Evidence

    Kezhou Xiao

    Department of Economics London School of Economics and Political Science (LSE)

    This paper has been presented at LSE Work-in-Progress (London); Fudan University (Shanghai); Peking University (Beijing); Xi’an Jiaotong University (Xi’an); AMES 2019,

    Xiamen University (Xia’men).

    June 24, 2019

    Kezhou Xiao (LSE) Billionaires June 24, 2019 1 / 64

  • Introduction

    贫穷不是社会主义。致富光荣。[Translation: Poverty is not socialism. To get rich is glorious.]

    邓小平[Deng Xiaoping]

    The true pacemakers of socialism were not the intellectuals or agi-

    tators who preach it but the Vanderbilts, Carnegies and Rockfellers.

    p.134, Capitalism, Socialism, and Democracy, Schumpeter [1942]

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  • Outline of the Presentation

    Empirical Motivation: The Increase in the Numbers of Billionaire Entrepreneurs from Mainland China A China Puzzle from the perspective of “extractive” institutions. My Research Question: How to reconcile between the two?

    A China Puzzle: Becoming Global Billionaires in a Seemingly Extractive Institution.

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  • Becoming Global Billionaries from Mainland China

    Stylized facts on China’s Emerging Global Billionaires (2003-2017, The World’s Billionaires, Forbes):

    Fact 1: China witnessed the largest increase in absolute numbers of global billionaires Fact 2: While China experienced the largest gains in the share of global billionaires, United State saw its share drop from almost half to less than 30% Fact 3: While China witnessed the largest increase in the number of top 100 global billionaires, United State remained dominant in absolute numbers for the top 100 league.

    Channelling the Incentives by Deng’s Reformist Strategy To get rich is glorious. - Deng Xiaoping.

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  • Global Stylized Fact 1: Increase in Absolute Numbers Among Global Billionaire Entrepreneurs

    Fact 1: China witnessed the largest increase in absolute numbers of global billionaires (2003-2017, The World’s Billionaires, Forbes)

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  • Global Stylized Fact 2: Increase in the Share of Global Billionaire Entrepreneurs

    Fact 2: While China experienced the largest gains in the share of global billionaires, United State saw its share drop from almost half to less than 30%(2003-2017, The World’s Billionaires, Forbes)

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  • Global Stylized Fact 3: Increase in the Numbers Among Top 100 Billionaire Entrepreneurs

    Fact 3: While China witnessed the largest increase in the number of top 100 global billionaires, United State remained dominant in absolute numbers for the top 100 league.

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  • A Puzzle: Becoming Global Billionaire Entrepreneurs from Mainland China

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  • An Outline: Why is this Question So Important

    Micro-agents of innovation and creative destruction [Schumpeter, 1942] How do these entrepreneurs become global billionaires in a country ruled by a communist party? Evaluating latest theoretical framework: the problems with existing political economy theories(a critique of Acemoglu and Robinson [2012]) Construct a Unique Database: The World’s Billionaires, Forbes 2017 & Hurun’s China Rich List, 2016, Orbis, company website, publicly available info via a detailed codebook. Propose a Political Economy Framework in the spirit of Baumol [1990] Estimate an Empirical framework: A human equation approach

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  • The Grand Debate on China: Leading Academics versus Leading Self-made Billionaires

    A China Puzzle: Becoming Global Billionaires How to become global billionaires in a seemingly “extractive” institution?

    Why nation fails: Extractive institutions cannot be compatible with sustained and innovation-based growth [Acemoglu and Robinson, 2012]. Creative destruction should not be there at all! Self-made billionaire Jack Ma (Global Billionaire Ranking: 23, Forbes 2017 Feb version, Net worth: 28.3 Billion USD), at Stanford Program on Regions of Innovation and Entrepreneurship http://fsi.stanford.edu/news/jack_ma_ideas_and

    _technology_can_change_the_world_20130506

    Who is right? My take: Seek truth from facts. - Deng Xiaoping.

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    http://fsi.stanford.edu/news/jack_ma_ideas_and_technology_can_change_the_world_20130506

  • The Grand Debate on China: Academics’ Sceptical Views

    A China Puzzle: Becoming Global Billionaires How to become global billionaires in a seemingly “extractive” institution?

    ...even though extractive institutions can generate some growth,

    they will usually not generate sustained economic growth, and cer-

    tainly not the type of growth that is accompanied by creative de-

    struction. When both political and economic institutions are ex-

    tractive, incentives will not be there for creative destruction and

    technological change.

    p.94, Why Nations Fail, Acemoglu and Robinson [2012]

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  • Who is Jack Ma and Why does his view matter?

    A China Puzzle: Becoming Global Billionaires How to become global billionaires in a seemingly “extractive” institution?

    Self-made Global Billionaires (Net worth: 28.3 Billion USD, Feb 2017 Forbes) Fascinated by Silicon Valley, American Style Entrepreneurship. Fluent in English, previously an English teacher in China from humble social backgrounds Alibaba Group Listed on NYSE (ticker: BABA)

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  • Self-Made Billionaire Jack Ma’s Views

    A China Puzzle: Becoming Global Billionaires How to become global billionaires in a seemingly “extractive” institution?

    ...“change creates opportunities for ordinary people like you and

    me”, noted Ma. The significant changes in China will offer young people opportunities to shine as technology has leveled the playing

    field.

    ...It is against this transformative context that Alibaba will continue

    to stay true to its original mission — to make it easy to do business

    anywhere in the world.

    Transcript: Jack Ma’s speech at Stanford University on May

    4, 2013, http: / / fsi .stanford .edu/ news/ jack _ma _ideas _and _technology _can _change _the _world _20130506

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    http://fsi.stanford.edu/news/jack_ma_ideas_and_technology_can_change_the_world_20130506

  • Digging deeper: Why is Jack Ma so Successful?

    A China Puzzle: Becoming Global Billionaires How to become global billionaires in a seemingly “extractive” institution?

    Critical capital injection from Masayoshi Son, CEO of softbank and currently the richest man in Japan. (circa 1999, 20 Million USD) “At the Bloomberg Global Business Forum earlier this year, Son said that he was drawn to Alibaba not because of the business model or technology, but because of the charisma and leadership of founder Jack Ma.” (CNBC report)

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  • VIE Structure in Practice: Alibaba as an Example

    The VIE structure used by Alibaba (SEC registration statement):

    Source: Alibaba’s Registration Statement to the SEC, the U.S regulator, https: / / www .sec .gov/ Archives/ edgar/ data/ 1577552/ 000119312514184994/

    d709111df1 .htm Kezhou Xiao (LSE) Billionaires June 24, 2019 15 / 64

    https://www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm

  • Playing Global Capitalism in a Communist Party-State: Why Open Economy Matters?

    The Political Economy Solution for the Best Grassroot Enterpreneurs in the Innovation Sector: The power of VIE structures: a marriage between indigenous entrepreneurship and global capital market!

    Why VIE structures? Open up avenues for obtaining foreign financing Bypassing tedious foreign operation and ownership regulations within China An ingenious financing vehicle to float outside China, mainly in the U.S By listing on U.S markets, dual class stock (A and B type of stocks) can be issued. (e.g. Google/Alphabet, Facebook. etc all did it)!

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  • My Research Method: Following the Money and Inspecting the Superstars

    Research Question/Motivation at the Operational Level: Do global billionaires in China become rich via political connections (crony state capitalism) or self-made in competitions (innovative capitalism competing in a global market)?

    The research focus is to understand the impact of the social and political background of these entrepreneurs on their first scoop of gold in the formative years and the choices of financing in later stages. Formative stage: How did they make their first scoop of gold? Financing/investment stage: How did they finance their investments to grow their enterprises to today’s level?

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  • The Grand Deb