With respect to “reason”, St Augustine argued that reason and faith could not be separated, but that faith preceded reason, purifying the soul and preparing it to accept the light of reason. St Thomas Aquinas explained, with respect to reason, that man did not have sufficient wisdom to penetrate the nature of everything, and so needed to apply reason to approach truth one step at a time.

Senior Partner, Director of the Company Law and Legal Advisers Professional Committee
Longan Law Firm

The essence of a “rational” market economy is the process of applying reason to buiness in a systematic and sustained fashion. The foundation for the development of various aspects of Western society is rooted in the cultural soil arising from its beliefs.

Max Weber pointed out that the reason that the capital economy only arose in Europe is that, of all the world’s major religions, only Protestantism gave people the moral ideas of refraining from material consumption and actively seeking wealth. The Protestant work ethic broke traditional ties, creating new doctrinal ethics and belief culture that made entrepreneurs willing to reinvest their profits so as to benefit the overall interests of society. This is precisely the key to the rise of “rational” market economies in the West. Rodney Stark argues that the rise of the West was based on the victory of reason: with the application of reason in business, and under the responsive protection of the state, the capital economy flourished, and this was the victory won by the West.

‘Unicorn’ enterprises should be treated rationally. The unicorn in Western mythology, a white horse-like creature with a spiraling horn on its forehead, represents nobility and purity, and had the power to render poison harmless. Now, the word “unicorn” usually refers to startups with a valuation of more than US$1 billion on the private and public markets.

The unicorn enterprise is the typical representative of the new economy and the concentrated manifestation of the urban or regional innovative entrepreneurial ecology. The bursting forth of a large number of unicorn enterprises is of great significance to the fostering of creative emerging industries, the disruptive change to traditional industries and the innovation-driven development of regional economies.

With the opening of the green channel for unicorn IPOs, how do investors rationally invest in unicorn enterprises that are on the verge of listing? How do we rationally assess the economic value of, and the social responsibility bearable by, unicorn enterprises? These are questions that we need to consider in a level-headed manner.

First of all, a unicorn enterprise must be a market entity engaged in fair competition, be able to participate in market competition in accordance with the rules of the market and decide on its production, operations, growth targets and resource allocation based on market rules. Second, it must be a freely competing market entity, i.e., it can decide on its development strategy, market orientation, marketing approaches, etc., at its own discretion, without being influenced by such factors as administrative instructions. And third, it is required to have a market in which it can freely trade, based on market economy rules and order. A true market economy is necessarily a “rational” market economy, not a “semi” market economy subject to administrative instructions.

Present Chinese society relies to a great extent on economic development, but its core driving force is not the spirit of a “rational” market economy; rather, it is almost entirely driven by profit. A social economy lacking in rational spirit and almost entirely driven by the profit motive will invariably overlook harmonious and sustainable social development, human rights and dignity, environmental protection, beliefs, social ethics and morality, and other such factors.

Why is it so difficult for state-owned enterprises to birth unicorns? The percentage of central government controlled enterprises numbered among unicorn enterprises is quite small, something that is closely associated with the nature of their property rights. First, such enterprises are state owned, so, in accordance with the requirements of the State-Owned Assets Supervision and Administration Commission of the State Council, their operators are only permitted to take methods of investment that are characterized by stable operations and may not opt for high-risk investment and operation, whereas the great majority of successful unicorn enterprises have been tested by numerous instances of market competition and elimination risk under multiple rounds of capital drive. Accordingly, the nature and management model of central government-controlled enterprises make it difficult for them to take major investment risks to nurture a unicorn.

Second, numerous central government-controlled enterprises are the big boys in their industry, which, by relying on the monopolistic policies accorded them by the state, can relatively easily earn high profits and so are not required to take risks in nurturing a unicorn in a new sector.

Third, central government-controlled enterprises are governed by an entire set of complex internal management procedures, with one investment often requiring the carrying out of several approval procedures, whereas the investment opportunities of unicorns are often ephemeral, making it impossible for them to wait on ponderous approval procedures. Accordingly, central government-controlled enterprises often see good opportunities slip through their fingers.

Practical significance of the rational development of unicorn enterprises. When evaluating unicorn enterprises, it is not enough to only look at their operating profit and total market capitalization, but also their value and contribution to society, their ability to satisfy and resolve the public’s demands and issues, and their core competitiveness should be taken into consideration, as only in this way can the true mission, value and significance of a unicorn enterprise be manifested.

What is important is that a unicorn enterprise should maintain integrity, and not evade taxes, produce fake or substandard goods, or engage in fraud, as only in this way can its merit be called “noble” and “pure”. Unicorn enterprises should draw on the spirit of the “rational” market economy, and have a sense of social mission and positive values, so as to become an enterprise that can genuinely benefit society.

(Video in Mandarin Chinese)

Liu Xiaoming is a senior partner and director of the Company Law and legal advisers professional committee at Longan Law Firm. He can be contacted on +86 10 6532 0366 or by e-mail at xiaoming@longanlaw.com