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Philip Greenspun asked, "what kind of business should one start given that one already has a person on the ground in Shanghai?" Here's my response.

You should start a firm that, rather than doing commodity IT outsourcing, generates solutions to hard problems using a high-volume competition model. The goal is to drive creativity through competition: a customer provides a high-level challenge (I need to improve the efficiency of our widget manufacturing process), and you bring many different minds to bear on that challenge.

This is contrary to the conventional wisdom that Chinese offshoring is for uncreative work, but I think that (1) it has a chance of actually working, and if does work it will be huge and (2) it can exploit the population size advantage. The key is the competition model. In a nation as populous yet per-capita poor as China, those who get as far as technical school have made the cut over and over again. They are ruthlessly competitive, expert in doing things exactly right.

This has the unfortunate consequence of making them somewhat less creative, focusing on efficiency and correctness of product rather than originality. Still, out of a hundred top Chinese programmers, there must be a handful of already creative ones. In the right environment, others around them can learn to appreciate creativity. And if you want to motivate those others to learn faster, why not use the same motivator that has pushed them through years of difficult schooling? You can even recruit by inviting solutions to open research problems and offering a cash prize. Within the corporation, give the most creative employees a higher status (but do not stratify too much within these ranks in order to encourage mixing, freeform discussion, and serendipity).

Think of it as the marriage of Silicon Valley risk-taking and Chinese labor costs.