Chinese entrepreneurship: today and tomorrow
Garry D. Bruton and David Ahlstrom
The People’s Republic of China is one of the fastest growing economies in the world, with a growth rate in terms of GDP that has exceeded 7 percent annually for over two decades. China now has the world’s seventh largest economy, behind the United States, Japan, and several Western European countries. On a purchasing power parity basis, China is thought to have the second highest country GDP, only behind the United States (Central Intelligence Agency, 2003). The growth in China has come in large measure from foreign direct investment by firms from the developed economies of Asia and the West, as they financed businesses to produce products for export. Additionally, much growth has also been promoted by reform in the state owned sector, such as the conversion of commune brigade organizations into township and village enterprises and private companies upon the initiation of economic liberalization in the late 1970s (Naughton, 1995).
Today, however, recently founded privateenterprises are an increasingly important part of economic development in China. It is estimated that there are now over a million such enterprises (Xinhua News Agency, 1998). These enterprises initially developed illegally, since citizens’ right to own private property in China was not formally recognized until 2000. However, in 2002, private entrepreneurs had attained such status that they were invited to join the Chinese Communist Party for the first time.
While entrepreneurs and private enterprises have both increased in number in recent years, the investigation of entrepreneurs in China has remained largely anecdotal. The existing re search literature can be viewed along four dimensions: the broad environment in China for entrepreneurs; entrepreneur orientation; entrepreneurial strategies; and the financing of entrepreneurial firms and venture capital. We briefly review each of these research streams in this article, before offering an agenda for future research in this domain.
Broad Environment
There have been limited efforts to discuss the broad environment for entrepreneurs in China. These efforts include the initial investigation of entrepreneurship in China. Specifically, Tsang (1994, 1995) provided the groundwork for investigation of the domain by highlighting the existence of entrepreneurs in China despite the fact they were technically still not legal at that time. These initial investigations helped to draw attention to the unique and influential institutional environment facing entrepreneurs in China (Peng and Heath, 1996). Chow and Fung (1996) extended this earlier work by generating additional detail about private entrepreneurs. However, again, their study principally provided insight into the nature of the individuals who were entrepreneurs and their backgrounds. More recently, researchers have investigated the institutional environment and its effect on entrepreneurship in China (Peng, 2000, 2001; Ahlstrom and Bruton, 2001). Institutional theory introduces a broad range of variables to explain how the institutional environment affects organizations (Powell and DiMaggio, 1991). Institutions in a country also fundamentally influence how organizations evolve and which ones come into existence (North, 1990).
Entrepreneurial Orientation
Another widely examined topic within the entrepreneurship domain in China is the orientation of entrepreneurs in that country. The three principal articles that have examined the orientations of Chinese entrepreneurs have focused on how these entrepreneurs personally approach China’s unique institutional environment. Some evidence suggests that there are a few similarities between entrepreneurs in mature economies and those in China. For example, Lau and Busentiz (2001) found that the entrepreneur’s commitment, need for achievement, and the nature of the social environment affected the entrepreneur’s orientation toward firm growth. They found that the relative importance of these factors may be different from that of mature economies, but the focus on growth by private firms in China was the same as in mature economies.
Other researchers found some similarities, but also began to identify differences. For example, Holt (1997) pointed out that the Confucian philosophy so common in China resulted in differences in entrepreneurial behavior, such as giving greater weight to tradition. Tan (2001) continued with this perspective by highlighting that risk taking among Chinese entrepreneurs was lower than among entrepreneurs from the West. The negative view of failure in Confucian philosophy is substantial and likely contributed to this risk aversion. Tan, Luo, and Zhang’s (1998) results supported the view that entrepreneurial strategies in China typically reflect this lower risk taking orientation.
Entrepreneurial Strategies
A large number of articles have focused on the actual strategies that entrepreneurial firms in China have used in the pursuit of commercial success. The distinguishing factor here is that the institutional setting in China results in unique strategies that may not have companion strategies in more developed economies. For example, in mature economies, start up firms and new industries must generate an acceptance or legitimacy among those with whom they deal. Tsang (1996) points out that many private firms in China generate legitimacy for themselves in ways that do not occur in the West. For example, such entrepreneurial firms often have to hide the fact they are private firms by associating them selves with government entities through various methods.
The absence of resources such as financing for expansion, managerial talent, and information about the market in a transitional economy such as China also leads to unique strategies (e.g., networking) to generate needed resources. Both Peng (2001) and Zhao and Aram (1995) highlight the benefit to entrepreneurial ventures in generating resources by networking with other firms and key individuals in the environment. Recent research has also examined how private firms in China can actively manage the institutional environment to build legitimacy and better secure their position (Ahlstrom and Bruton, 2001).
Entrepreneurial Financing
A small body of literature is beginning to examine the financing of private ventures in China. The financing of new ventures is known to be critical to their success. However, in an environment where there is no (or a very limited) legitimacy for private entrepreneurs and no institutions that may lead to the financing of such ventures, the question of resource acquisition is critical. Chow and Fung (2000) detail some of the initial liquidity constraints that face private entrepreneurs. Bruton and colleagues (Bruton et al., 1999; Ahlstrom, Bruton, and Chan, 2000; Bruton and Ahlstrom, 2003) examined the development and practice of venture capital in China. They found that while there is a nascent venture capital industry in China, the industry there is closer to what is called private equity in the United States and actually provides little financing to start up firms. China’s venture capital industry funds buyouts and provides mezza nine financing to expanding businesses and infrastructure projects.
Future Research Needs
As highlighted by our discussion of financing, the existing research evidence about entrepreneurship in China points to a range of issues that are not always relevant to entrepreneurial success. Thus, future research should examine how entrepreneurs actually start their firms in China. The sources of funds are very different – some would say more varied. How do entrepreneurs get started and how do they sustain growth in the absence of an extensive venture capital industry, but in the presence of financing from a number of non traditional sources such as government bureaus and state owned enterprises? Also, the growth stage of Chinese entrepreneurial firms can be very different. Entrepreneurs in China are often reticent to grow; they often prefer to shift money out of the firm and store it safely (and out of sight). How do they maintain reason able firm growth while balancing this perceived need to conceal their success to some extent? What is the relationship with the central government and local governments? At a higher level of analysis, why do entrepreneurs in China often exhibit the need to conceal their (and their firms’) success? How do entrepreneurs minimize interference from the many potential ‘‘mother in law’’ organizations that are able to extract resources from the firm (Ahlstrom, Bruton, and Lui, 2000)? What are the exit options avail able to entrepreneurs in China? Equity markets are still not as open and liquid as those in the US. How do entrepreneurs make money (i.e., gener ate returns) in such markets? Should entrepreneurs in China go overseas for financing and a listing? If so, what are the implications of this, given the legal regulations in China, and how do entrepreneurs manage this apparent balancing act?
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