Humanities and Social Sciences Area, IIM Indore
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China is the largest transition economy in the world today, making an institutional shift from relationship-based to rule-based transactions (Krug and Hendrischke, 2008; Li, 2013; Rottig, 2016). Considering the heavily state-based, government-run legal system backing this institutional transition, the creation of entrepreneurship in China is seen as very different from that in other economies (Ahlstrom and Bruton, 2002; Nee and Opper, 2012; Opper and Nee, 2015; Chatterjee and Sahasranamam, 2018). A key rule-based policy measure enabling entrepreneurship and innovation is the protection of property rights, since this incentivizes individuals to innovate (Teece, 1986; Li, 2004). This paper studies the effect of a property protection regime on entrepreneurship in China, and specifically on the investment of human and financial capital towards entrepreneurship.
In the wake of economic reforms in China, a series of economic activities were unleashed. Domestic entrepreneurial organizations, including town and village enterprises, transformed state-owned enterprises and private start-ups, and emerged as significant driving forces behind the rapid economic growth and job creation in China (Huang, 2008; The Economist, 2011). In the past decade and a half, the gradual weakening of Chinese state control of the economy has changed the institutional and incentive regime, encouraging the emergence of new enterprises (Bruton et al., 2010; Alon and Rottig, 2013; Shen and Tsai, 2016). For example, the time required for starting a business has decreased from 48 days in 2004 to 33 days in 2014 (World Bank, 2015a). This ease of starting a business has led to an increase in the entrepreneurship rate from 13.05% in 2004 to 31.3% in 2014 (World Bank, 2015b). Despite this marked increase, academic research has paid limited attention towards a scholarly understanding of the effect of institutional transition towards a rule-based transaction regime on entrepreneurship in China (Yamakawa et al., 2013; Ahlstrom and Ding, 2014; Bruton and Chen, 2016; Chatterjee and Sahasranamam, 2018).
In an attempt to respond to the research gap mentioned above, and drawing on property rights theory, this study explores the following question: what is the contingent effect property rights policy changes have on the investment of individual human capital and financial capital towards entrepreneurship in China? China has a tradition of supporting and protecting its state-owned enterprises (Li, 2004). As a result, these established organizations have always been in a better position than individuals to benefit from the legal and government infrastructure (Deng et al., 2010; Alon et al., 2013; Shu, 2017). First, they were in a position to enforce regulations that restrict the actions of their start-up competitors (Shane, 2001; Krug and Hendrischke, 2003). Second, with greater access to political and other formal and informal institutional resources, they could infringe on a new venture’s unique concept (Li, 2004; Kim and Li, 2014). The Chinese government enacted two fundamental policy changes related to property rights to tilt this upper hand of state enterprises in favour of entrepreneurship, namely, the constitutional amendment to protect lawful rights of the private sector in 2004 and the property rights law in 2007.The implementation of the property rights policy changes in 2004 and 2007 offers us a unique setting to study private entrepreneurship in state-controlled economies like China (Krug and Hendrischke, 2003, 2008; Li, 2004; Brunt, 2011). Furthermore, to understand the effect that property rights changes have on entrepreneurship, this study analyses the entrepreneurship entry data for two time periods, one before and the other after the implementation of the legislation. This research uses a cross-sectional data set consisting of over 2,000 observations collected by the Global Entrepreneurship Monitor (GEM) through its 2002 and 2009 surveys that examine the relationship.
This study uses the unique setting of institutional transition in China to understand the effect of property rights on entrepreneurship in state-controlled economies. The main contribution of the work is in understanding the contingent effect of property rights policy changes in China on the investment of individual resources towards entrepreneurship entry, and how the effect varies for opportunity and necessity entrepreneurship.
The study results suggest that individual human capital has a positive effect on individual entrepreneurship entry only during the post-property rights period, with the effect being non-significant in the pre-property rights period. The insignificant effect in the pre-property rights period goes against prior evidence that argues for a positive relationship between individual human capital and entrepreneurship choice (Davidsson and Honig, 2003; De Clercq et al., 2013). This insignificant effect implies that property rights protection is a critical factor when it comes to the investment of individuals’ human capital towards starting
a venture. Moreover, it indicates that, during weak property rights protection in state-controlled economies, people would prefer to direct their human capital towards paid employment rather than risk it towards a more uncertain self-employment initiative (O’Brien et al., 2003; Batjargal, 2007).
The study finds that during the pre-property rights period there is a negative and significant effect of financial capital on entrepreneurial entry and this relationship becomes significant during the post-property rights period. This observation also offers contradictory evidence to previous research which had found a positive correlation between individual financial capital and entrepreneurship choice (Arenius and Minniti, 2005; De Clercq et al., 2013). The chi-square test result confirmed that the property rights regime change made a significant difference to the investment of individual financial capital towards entrepreneurship in China. This result suggests that, for an investment of personal financial capital, entrepreneurs need to be assured of protection for their property. Such assured protection will also enable them to handle other associated risks, such as financial security of the family, fear of bankruptcy, and loss of reputation (Shane and Cable, 2002; Li, 2004; Bergmann and Sternberg, 2007; Lee et al., 2011).
Based on the results for the investment of capital towards the two forms of entrepreneurship the research finds that higher levels of personal capital encourage opportunity entrepreneurship and necessity entrepreneurship differently, and its effect is contingent on the property rights protection. There is an insignificant impact on individual human capital on opportunity entrepreneurship entry during both the periods, suggesting a limited influence of property rights protection on human capital investment towards opportunity entrepreneurship. However, contrary to the expectations (Block and Wagner, 2010; Baptista et al., 2014), it was found that property rights protection has a significant effect on the investment of both human and financial capital towards necessity entrepreneurship. In the case of necessity entrepreneurship during both the periods, it was observed that the effect of individual human capital is negative and significant. The chi-square result confirms that the property rights regime made a significant difference in reducing the magnitude of the negative significant effect between individual human capital and necessity entrepreneurship choice. In addition, there is a negative and significant impact on individual financial capital and necessity entrepreneurship in the pre-property rights period that becomes non-significant in the post-property rights era. These effects of property rights on investment of private capital towards necessity entrepreneurship were unexpected, given that necessity entrepreneurship is associated with lower levels of complexity and is a choice made when there is a lack of alternatives (Reynolds et al., 2005; Thurik et al., 2008; Xavier-Oliveira et al., 2015).
The results of the effect of individual financial capital on the different forms of entrepreneurship help to better understand the negative influence of individual financial capital on overall entrepreneurship in 2002. and the subsequent positive impact in 2009. Private financial capital had an active and significant effect on opportunity entrepreneurship only in the post-property rights period, with the effect being non-significant in the pre-property rights era. On the other hand, the relationship between financial capital and necessity entrepreneurship is negative and significant in the pre-property rights period, while it is non-significant in the post-property rights period. This negative and non-significant relationship suggests that the overall negative influence of personal financial capital on entrepreneurship in 2002 could be attributed to necessity entrepreneurship entry, while the positive effect in 2009 could be due to the effect on opportunity entrepreneurship entry. These findings emphasize that property rights protection and well-functioning markets are crucial for financial investment towards innovative activity led by opportunity entrepreneurs (McMullen et al., 2008; Autio and Acs, 2010). It further reveals that property rights are not just essential for opportunity entrepreneurship but are equally relevant for necessity entrepreneurship as well.
ORIGINAL ARTICLE: Sahasranamam, S., & Raman, G. V. (2018). Individual resources, property rights and entrepreneurship in China. International Journal of Emerging Markets (in press)