Among those successful foreign companies in Shanghai, very few are start-ups. Photo: IC

When I meet Michael Bates for the first time at a coffee shop on Nanjing Road West, the well-groomed, suavely attired American places a black briefcase between us, glances around covertly, then flips open the lid to reveal the mysterious contents therein. The entire prelude could be a scene out of some spy movie.

Inside the briefcase's red interior are a series of compartments, one containing what appears to be a power source attached to a network of cables. Is it some kind of thermo-electric conversion device? Or perhaps a breakthrough in perpetual energy technology?

"No," he shrugs casually. "It's a briefcase with a power bank, for, you know, charging your cellphone and stuff."

After some prodding during our interview, the Colorado-born expatriate concedes that his so-called invention, what he aggrandizingly calls "the ultimate" device-charging briefcase, is not exactly original. He simply combined two everyday objects, a portable battery pack and a businessman's briefcase, and started marketing it as his own product.

The feeling I get after speaking with Bates at length is that this product, which he intends to peddle for $99 - if, that is, he can obtain enough crowd-sourcing funds to manufacture it - has less to do with the device itself than it does his aspirations to become his own boss.

A glimpse at Bates' LinkedIn profile impresses with his Bachelor of Science in marketing and an MBA in corporate strategy and finance, but also divulges his seemingly love-hate relationship with the corporate world, including a series of short-term stints at various firms over the past decade, none which lasted any longer than six months.

"There is protectionism in a lot of firms and sometimes I couldn't do things as quickly as I wanted to. I'm ambitious. So for me, owning my own company, I have a lot of freedom to develop more quickly and do things better," he says.

Indeed, beneath Bates' obvious incompatibility with corporatism, there is a profound passion for business development, culminating into founding his new Shanghai-based company, Legion Concepts. And despite admitting to being naive about how to establish sales channels, obtain funding or any of the other fundamentals of doing business here, it is his drive and determination that Bates hopes will help him join the ranks of successful foreign entrepreneurs in Shanghai.

Admitted naivety

If there's one trait that foreign entrepreneurs in Shanghai tend to have in common, it is naivety. The same naivety that has compelled Michael Bates to try to learn how to navigate the front lines of doing business in China on his own also thrust Jeni Saeyang to success.

"I am not from a business background and I never did business here before. I was so naive. I did not have that block in my head. I just went there," Saeyang laughed when describing her first experiences in China entrepreneurialism.

Though she was born in Shanghai, Saeyang was raised in Australia and the US. A veritable foreigner, she returned to Shanghai for the first time in 2009, to take care of her grandmother. "I was working as an architect, but around then I read a book written by an American about how poorly made Chinese products are. So a part of me wanted to start my own business here to prove that China can make good products," Saeyang told the Global Times.

Saeyang knew that she wanted her product to be eco-friendly, but without a business model, sales channels or guanxi (special relationships) with local leaders, she felt lost. Nonetheless, she spent a year researching the market, working with local labs to develop formulas and meeting with 10 different factories in China, Singapore and the US before finally creating her first product, a biodegradable laundry detergent.

It was not until she had a supply of her product in hand that Saeyang started cold-calling prospective buyers in Shanghai to ask if they had an interest in stocking her soap. She made her first sale at Western imports grocer City Shop, followed by online grocery retailer Fields.

The first line of products by Eco & More, the name of Saeyang's new brand, was well received by the city's expat circles, namely wealthy health-conscious families. With that assurance, Saeyang re-invested her profits in developing new products such as plant-based floor cleaners and hand wash.

"We got big. We made $1 million last year. We were not a tiny little brand anymore. But we also started taking sales away from competitors, so we became the target," Saeyang reflected.

First, her competitors hacked into Eco & More's new online store. Then they started reporting frivolous complaints about her products to the government, resulting in a number of unwarranted investigations. But the biggest blow came when one of her largest and most trusted sellers began representing herself around China as the founder of Eco & More to sell fake shares in the company to unsuspecting investors.

Saeyang was forced to spend vast sums of her hard-earned money to legally protect herself and her company from competitors and predators. "I actually want to thank these dirty playing competitors, because if they hadn't targeted our company we might still be in a mess. We are the cleanest company in China now," Saeyang said with the confidence of a battle-tested veteran.

Customers refill floor cleaner at Jeni Saeyang's store. Photo: Courtesy of Jeni Saeyang

Innovation deficit

The percentage of foreigners living in China is 0.04 percent, extremely low compared to the foreign populations of other countries such as Germany (13 percent) and the US (25 percent), according to Wang Huiyao, president of the Center for China and Globalization, a leading independent think tank recognized by the Chinese Ministry of Civil Affairs. Even in India, the percentage reaches 0.6 percent. The world average is 3.4 percent. As a result of this isolation, China tends to lack the innovation and creative output that Western "melting pot" societies like San Francisco and Los Angeles are known for.

"People often say that China is not an immigrant country. But it is not true. Many people immigrated from Mongolia and other Eastern countries to China," Wang said. "The inner mobility of 300 million Chinese migrant workers has brought great benefit to the development of the society, but if China does not continue to allow international mobility, it will be hard for our country to become an innovative country."

Professor Zhang Yuchen of the School of Economics and Management at Tongji University told the Global Times that as of 2013, there were over 5,000 high-tech enterprises in Shanghai, with foreign invested companies accounting for 25 percent of them. These companies were responsible for half of the city's economic output and achieved 40 percent of the total net profits. But among all these companies, very few were start-ups.

Saeyang attributes this to minimal local government support for entrepreneurs and creative talent, which she says is "lacking" compared with pro-small-business countries such as Australia that offer financial assistance and incentives to start-ups.

During the annual session of the National People's Congress in March, Premier Li Keqiang acknowledged this deficit, stressing innovation as a key engine of China's economic growth. Among fierce market competition, Li said, innovation not only refers to products and technologies, but also business processes, organizational structures as well as ways of thinking.

In order to re-fashion itself as a global innovation hub, Shanghai is currently developing a more "inclusive" framework that includes attracting high-level foreign talent to the city. Under the new directive, foreign university graduates interested in investing in a Shanghai-based company or starting their own business here can apply for a two-year personal affairs residence permit.

The municipal government has also taken the necessary steps to make it easier for expatriates who are already here to apply for permanent residency. Foreigners with an annual income of 600,000 yuan ($96,600) and individual income tax payments of 120,000 yuan who have worked in Shanghai over four years and have stayed in this city for at least six months out of each of those years can now apply for green cards, which, it is hoped, will entice high-level talent to stay in the city instead of relocating elsewhere.

Learning the hard way

The difficult and complex process of obtaining a long-term visa in China is a common complaint heard among expats, and surely the new policies will help with that. But according to Xu Xiaoguang, the managing director of Ming Innovator Business Center, a business incubator helping people to start new companies in Shanghai, the two biggest challenges in China for expat entrepreneurs are language and networking.

Having received a certificate in Chinese from Southwestern University of Finance and Economics as well as getting a second MBA from Shanghai University's Executive Development Program, Michael Bates should in all accounts be more proficient in the language and culture, but at present he says he still does not even know how to register his new company in China. In spite of her success, Saeyang is in the same situation; as she is "illiterate" in Chinese, she requires a translator to help her read all her contracts and business agreements.

Both entrepreneurs are also learning the hard way that establishing guanxi with the right people in China is a requisite to seeing your business succeed. "Chinese people establish channels and networks before starting their businesses. It is not like how Westerners do things, which is to think of an idea first," she sighed.

Nonetheless, Saeyang is doing quite well for herself. Having emerged from near-bankruptcy following her legal troubles, Eco & More will have five brick-and-mortar storefronts in Shanghai by the end of the year, and the brand also has plans to expand into Hangzhou and Beijing. Earlier this year, Saeyang was nominated by Cartier for their annual global Women's Initiative Awards.

As for Bates, he is currently meeting with local agencies who claim to be able to help foreigners establish companies in China. One gave him a bid of 25,000 yuan to register his company for him, and while Bates said he does not want to have to pay this amount just to have some paperwork filed, perhaps he should take a cue from Saeyang, who is no stranger to paying out exorbitant sums in order to move forward.

"The biggest mistake for expats here is that they think they know better, so they do not try to understand local mentality," Saeyang said.