The Role of Formal and Informal Chinese Institutions in Shaping the Entrepreneurial Landscape
Ecole Supérieure de Commerce de Pau (ESCPAU) France
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This paper views entrepreneurship in China as a legitimacy seeking process. We use institutional theoryas a lens to understand the pattern of entrepreneurship in China. We also examine how rapidly changingformal and informal institutions are likely to bring change in entrepreneurship in the country.
China, institutions, entrepreneurship, legitimacy
While the Chinese Communist Party (CCP) maintained political dominance thanks mainly to entrepre-neurs that were highly innovative in carrying out state plans to build industries and launch new enter-prises (Yang, 2002), “reemergence” of private entrepreneurship (Guiheux, 2006) in the country is arecent phenomenon. In recent years, indeed, there has been a rapid growth of entrepreneurship in China. As of 2005, China had about 24 million small independent companies and the number is growing at15-20% annually (Loyalka, 2006). Small to medium sized enterprises (SMEs) account for 75% of newjobs (Loyalka, 2006). For most of these enterprises, entrepreneurship is considered to play a very impor-tant role (Daokui Li et al., 2006).
International differences in entrepreneurship are typically framed as a result of cultural differencesacross countries. The existing studies on entrepreneurship thus narrowly focus on culture (Busenitz etal., 2000) and a number of them have linked Hofstede's (1980) cultural dimensions -especially indivi-dualism-to examine a country’s propensity to engage in entrepreneurial activities.
The findings of studies focusing on individualism are, however, inconsistent and confusing. While somecommentators argued that collectivism is negatively related with entrepreneurial activities (Takyi-Asiedu,1993), others have found a limited correlation between countries' levels of individualism and entrepre-neurship (Acs 1992; European Network for SME Research 1996; Mueller and Thomas, 1997). Similarly,Harper (2003) rejected the idea that people in individualist cultures are more entrepreneurial than thosein collectivist cultures. He, however, proposed that developing countries characterized by collective cul-ture may have different social organizations that may impact on entrepreneurship patterns (Harper,2003). Likewise, Holt (1997) found that Chinese and U.S. entrepreneurs did not differ significantly interms of their emphasis on individualism and acceptance of uncertainty (Hofstede, 1980). It can thusbe concluded that private entrepreneurship either encourages individualism and acceptance of uncer-tainty or attracts people with values comparable to entrepreneurs (Morris and Schindehutte, 2005).
Other researchers point to declining differences in development across cultures (Baumol, 1986) and glo-bal diffusion of entrepreneurial institutions (Gereffi and Hempel, 1996) such as IPO markets in coun-tries considered to be characterized by nonentrepreneurial cultures (Edmundson et al 1996). These stu-dies provide support for the notion that Hofstede's (1980) measures of culture are far from sufficient todescribe cross-country differences in entrepreneurial activity. In China’s case, close state control can bearguably attributed to the failure of apparently-abundant Chinese entrepreneurship (Moore, 1997). These examples imply that in addition to cultural differences, entrepreneurship is determined by a num-ber of other forces.
Perspectives on entrepreneurship in the social sciences include focus on the role of economic, politicaland legal institutions in facilitating or hindering entrepreneurship (Djankov and Roland, 2006). Referringto China, Guiheux (2006) argues that entrepreneurship in the country can be attributed to initiativescoming from society (informal institutions) and the setting up of a new legal framework (formal institu-tions). To broaden our understanding of international similarities and differences in entrepreneurship,researchers have emphasized the necessity to study a broader set of institutions (Busenitz, et al., 2000)and the complex interaction between different kinds of entrepreneurs and the institutional environmentin which they are embedded (Yang, 2002).
Clearly, thus there are under explored issues on how institutions with opposing and different perspecti-ves are shaping entrepreneurship in China. The purpose of our study is to fill this research void. To morefully understand factors driving Chinese entrepreneurship landscape, in this article we integrate andapply findings in literatures on institutional theory. We propose a framework, which identifies very clearcontexts and attendant mechanisms associated with institutional influence on entrepreneurship inChina.
In the remainder of the paper, we first briefly review the theoretical foundation. Then, we translate thetheories within the context and limits of China and attempt to explain the nature of Chinese institutionsthat influence the country’s response to private entrepreneurship with some propositions. The final sec-tion provides conclusion and implications.
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1.1 - Entrepreneurship as a legitimacy seeking process
It is important to note that institutional theory is described as “a theory of legitimacy seeking” (Dicksonet al., 2004, p. 81). Isomorphism is arguably positively related to legitimacy (Deephouse, 1996). In anattempt to gain legitimacy, organizations thus adopt certain behaviors irrespective of whether such beha-viors increase organizational efficiency (Campbell 2004; George et al., 2006).
Organizations that are able to acquire legitimacy from external institutional actors, on the other hand,are likely to gain resources as well as maintain control over the environment (George et al., 2006). Putdifferently, an organization can increase its chance of survival and/or growth by engaging in actions thatare approved by powerful institutional actors, used by organizations that are perceived to be ‘successful’(Newman, 2000), or have the backing and approval of professions in their industry or field (Aldrich1999; Baum and Oliver 1991; Meyer and Scott 1983; Ruef and Scott 1998; Sitkin and Sutcliffe,1991). Non-isomorphic responses that deviate away from “established structures, practices, and utte-rances of other actors in the environment” (George et al., 2006), on the other hand, are likely to faceresistance.
Institutional influence on entrepreneurship becomes an admittedly complex process (Dickson et al.,2004), when organizations have to derive legitimacy from multiple sources. In China’s context, entre-preneurs have to acquire legitimacy from the state regulations, local authorities and bureaucrats, busi-ness partners, employee (Yang, 2002) and the society.
1.2 - Scott’s institutional pillars and entrepreneurship in China
Table 1 presents institutional influence on entrepreneurship in China in terms of three institutionalpillars proposed by Scott (1995, 2001): regulative, normative and cognitive. Regulative institutionsconsist of "explicit regulative processes: rule setting, monitoring, and sanctioning activities" (Scott,1995). They are related to regulatory bodies and the existing laws and rules that influence offshore out-sourcing. Normative components introduce "a prescriptive, evaluative, and obligatory dimension intosocial life" (Scott 1995). Practices that are consistent with and take into account different assumptionsand value systems of national cultures are likely to be successful (Schneider, 1999). Cognitive institu-tions represent culturally supported habits that influence the pattern of entrepreneurship. The nature ofentrepreneurship is a function of a cognitive institutions related to history, culture, ideology, and socialattitudes (Doucouliagos, 1995). In most cases, they are associated with cognitive legitimacy concernsthat are based on subconsciously accepted rules and customs as well as some taken-for-granted cultu-ral account related to entrepreneurship (Berger and Luckmann, 1967). Cognitive programs affect theway people notice, categorize, and interpret stimuli from the environment.
Institutional Institutional forces Effect on entrepreneurship in China component
Entrepreneurial ventures perceived as potential
Resistance to substantive actions to promote
threats to the CCP regime (Yang 2002).
entrepreneurship and even some regressive changes.
Private entrepreneurs depend to a large extent
on informal norms and networks for security.
Substantive measures to encourage private
"getihu" or “cadres" (Hsu 2006;
Society's attitude toward business increasingly
favoring entrepreneurship, especially related
to high technologies (Hsu 2006; Han and Baumgarte 2000).
Culture of complacency, conformity and risk
Hinders discovery and exploitation of new
market opportunities. The Western level of risk is unacceptable in China (Harwit 2002).
Entrepreneurs are sensitive to the communist
regime and the society, which resist ownership
of private property (Economist 2006).
Perceived “glass ceiling” for ethnic Chinese
They prefer starting their own businesses.
employees at multinationals (Browne 2004).
Rapid increase in the returns of overseas
innovation, and risk taking (Wang 2001). Table 1: Understanding institutional influence on the Chinese pattern of entrepreneurship
1.3 - Diffusion of entrepreneurship among the CCP
Institutionalists use the concept of diffusion to refer to the spread of institutional principles or practicesamong a population of actors (David and Foray, 1994; Strang and Meyer, 1993). Prior researchers havealso noted typical patterns of events and relationships in institutionalization and institutional changes(Lawrence et al., 2001). New values, norms, practices and ideas are first recognized, and then accep-ted by relatively few actors and then widely diffused (Leblebici et al., 1994; Meyer and Rowan, 1977). Finally, they reach to a stage of saturation and complete legitimation (Zucker, 1987). In this regard, itis important to note that, although the Chinese Communist Party's (CCP) policies and formal legal insti-tutions regarding private entrepreneurship have gone through stages: strict prohibition, tolerance,accommodation, and encouragement (Peng, 2004), there has been a lack of complete legitimation toentrepreneurship. For instance, property rights in China aren't yet well-defined and fully binding(Mourdoukoutas, 2004). Private enterprises are thus never sure which resources are their property andunder their command and for what length of time (Mourdoukoutas, 2004).
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The work of Paul D. Bush (1983, 1987, 1989, 1994), among others, provides us with additionalinsights into the temporal dimension of institutional changes. According to this approach, the processof institutional adjustment is broken down into two phases: Phase I involves ceremonial encapsulation,and Phase II involves regressive or progressive changes. These phases are conceptually similar to whatNorth (1990) refers as the “cause-effect-cause" model.
In the first phase, the ideas of entrepreneurship and private ownership are ‘encapsulated’ within the exis-ting value structure (Bush, 1994). In this phase, such decisions are mainly based on technical grounds(Tolbert and Zucker, 1983). This stage involves no change in the value structure of the community. Theidea of entrepreneurship is introduced without disrupting the patterns of power, status, and other formsof existing differential advantages (Bush, 1994).
According to North’s (1993) "shared mental models", institutional evolution is influenced by the feed-back process by which human beings perceive and react to changes in their environment. Phase II is aresult of reaction to entrepreneurship and starts when entrepreneurship demonstrate new instrumental-ly warranted possibilities for correlating behaviors, which are not sanctioned by the community's tradi-tional pattern of values (Bush, 1994). While decisions in the early phase are based on technical grounds,legitimacy pressures play a critical role in the latter phase (Tolbert and Zucker, 1983). That is, organi-zations must strive to achieve social legitimacy in addition to technological and operational efficiency toprosper in their environment (Abernathy and Chua, 1996).
In a progressive change, the new instrumentally warranted patterns of behavior displace ceremoniallywarranted patterns of behavior (Bush 1994). The sustainability of progressive institutional changesrequires "minimal dislocation". Put differently, the incorporation of the new instrumental behavior has aminimally disruptive effect on other instrumental patterns of behavior in the community (Bush 1994).
An unintended consequence of entrepreneurship is disruption in existing power structure. In a regressi-ve change, new instrumentally warranted behavior is suppressed and additional patterns of ceremonial-ly warranted behavior are instituted to secure the suppression (Bush, 1994).
1.5 - Institutional changes crested by entrepreneurship
Entrepreneurs may also bring institutional changes as they stimulate new isomorphic pressures, modifythe nature of existing pressures or replace one type of pressure by another. Structural changes institu-tions can be explained in terms of coercive, normative and mimetic isomorphism (DiMaggio and Powell,1983). Scott (1995, 2001) describes these forces in terms of regulative, normative and cognitive pro-cesses respectively (Table 1).
2. Institutions and Entrepreneurship in China
The conservative faction in the Chinese Communist Party considers entrepreneurial ventures as poten-tial threats to the party’s dominance, ideology, administrative authority and moral standards (Yang,2002). The leftist opposition leaders have thus employed China's rising income gap and increasing socialunrest to criticize and justify measures against private entrepreneurship (Kahn, 2006). Some analystsargue that the delay in granting full rights to private entrepreneurs reflects “ideological rigidity and insti-tutional inertia against changes” (Peng, 2004).
Chinese leftist leaders thus perceive improved legal institutions as potential challenges for legitimacy tothe CCP regime (Potter 2004). Consequently, Chinese legal institutions related to entrepreneurship havebeen victims of political ideology (Yang, 2002). Following the Tiananmen events in 1989, the conserva-tive faction’s actions severely impacted private entrepreneurs. Estimates suggest that the number of pri-vate enterprises reduced by 50% that year (Ling, 1998).
We can, however, argue that institutional actors bringing regressive changes in Chinese institutions willweaken over time. Why might this be the case? First, as noted above, although many Chinese govern-ment officials and policymakers consider China’s integration with the global market associated withsignificant socioeconomic costs, they cannot openly reject global integration (Heer, 2000). To gain legi-timacy from international institutions such as the World Trade Organization (WTO), China is required torespect private entrepreneurship and ownership of private property.
Second, entrepreneurs are being openly accepted into the CCP's inner circle. The CCP’s policies and for-mal legal institutions encourage entrepreneurship (Peng, 2004). The CCP in 2002 changed its bylawsto allow entrepreneurs to become members (Loyalka, 2006). In a speech on July 1, 2001, during cele-brations of the party's 80th anniversary, President Jiang Zemin acknowledged the benefit that capitalistsbring to the economy (Hoogewerf, 2002). He also handed party membership to a capitalist and one ofChina's most respected private companies and the first private company to list on a foreign stock exchan-ge (Pomfret, 2001). In another instance, in January 2003, the CCP appointed Yin Mingshan, one ofChina's wealthiest private entrepreneurs, as deputy chairman of an advisory body to the government ofChongqing municipality, the first private businessman in China to be awarded such a high position (TheEconomist March 29, 2003). Although some analysts argue that the seemingly impressive position car-ried “no real power”, optimists argue that these entrepreneurs will give the private sector a more power-ful voice in policymaking (The Economist March 29, 2003) and further weaken forces contributing toregressive changes in institutions influencing private entrepreneurship. In line with these arguments, thefollowing propositions are presented:
Proposition 1a: In China, forces contributing to progressive changes in institutions related to entrepreneurship and private property will strengthen over time. Proposition 1b: In China, forces contributing to regressive changes in institutions related to entrepreneurship and private property will weaken over time.
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2.2 - Development of entrepreneurship and substantiveness
in laws protecting private property: a progressive change
Chinese communities arguably have a greater cultural disposition toward entrepreneurship (Waldinger etal., 1990). Traditionally, regulative institutional such as insecurity of property rights and close statecontrol hindered entrepreneurship in China (Djankov and Roland, 2006; Moore, 1997). Some commen-tators argue that the traditional culture of entrepreneurship will strengthen efforts to create the rule oflaw in China (Shuli, 2004).
A good example to illustrate how Chinese entrepreneurs are influencing regulative institutions related toentrepreneurship is the changes in laws related to intellectual property rights (IPR) in recent years. Withrapid increase in the creation of IP by local firms, these firms are actively participating in substantivemeasures that could help strengthen the country’s IP regime. According to the Chinese Supreme Court,in 2005, over 16,000 civil cases and 3,500 criminal cases related to IP rights violations were handledby Chinese courts and more than 2,900 people were jailed (Culpan, 2006). The number of cases invol-ving IPR protection including patents, trade secrets and counterfeit goods increased by 21percent in2005 (AFX News Limited, 2006). It is also important to note that 95 percent of China's IPR relatedcases in 2005 were brought by Chinese companies (Culpan, 2006).
The Chinese nano technology industry provides a visible example to illustrate how local IP creation leadsto substantive actions to protect IPR. Chinese scientists are capable of producing carbon nanotubes 60times faster than their U.S. counterparts (Stokes, 2005). The Nanometer Technology Center establishedin Beijing is actively involved in protecting IPR (Singer et al., 2005).
A rapid increase in domestic IP creation has led to more substantive measures to protect IPR. UnderChina’s recently enacted new piracy laws, buyers of pirated goods can be fined 5-10 times the value ofthe goods and manufacturers face jail time and equipment confiscation (Kanellos, 2002). The govern-ment has provided a significant empowerment to regulatory agencies involved in IPR issues such as theState Administration of Industry and Commerce, the State Administration of Press and Publications, theintellectual property right office and the State Pharmaceutical Administration (Yang, 2002). Similarly,China announced its plans to open special centers in 50 cities by 2006 to handle IPR infringement com-plaints as well as to provide consulting services (MacLeod, 2006). In sum, we argue that:
Proposition 2: The development of entrepreneurship will provide pressure to enhance regulati- ve institutions related to private property and entrepreneurship.
2.3 - Formal and informal institutions and implementation capabilities
Prior research has indicated that the degree to which ideas such as private ownership are translated intolocal practices is a function of implementation capacities (Scott et al., 2000). The relative strength ofstate institutions in implementing and enforcing laws related to entrepreneurship, thus, can make orbreak governments' policies and firms' innovation strategies (Spencer et al., 2005).
Implementation capabilities are largely influenced by informal institutions which do not necessarilychange at the same rate as formal institutions. North (1990) noted that "although formal rules may chan-ge overnight as the result of political and judicial decisions, informal constraints embodied in customs,traditions, and codes of conduct are much more impervious to deliberate policies". In the Chinese entre-
preneurship landscape, there has been a rapid shift in formal institutions related to entrepreneurship. Following the 1978 economic and political reforms, China enacted thousands of new laws to protect pri-vate property and IP (Pei 1998; Meredith, 2003); and abolished or amended many laws in these areasto comply with World Trade Organization (WTO) obligations (Hughes, 2005).
Nonetheless, informal institutions are not changing at the same rate as formal institutions. Mao argua-bly developed a critique of capitalism, private property, and inequality as well as material interest(Guiheux, 2006). During the Mao era, private entrepreneurship was virtually eradicated and was a poli-tical taboo in China (Loyalka 2006; Peng, 2004). Entrepreneurship was “shunned” in China as late asthe 1980s (Wehrfritz and Seno, 2003). After decades of socialism, the idea of respecting the constitu-tional rights of private entrepreneurs has been slow to diffuse among various institutional actors in China(Nee, 1989).
Chinese incubators thus lack proper mindsets in assisting and guiding private entrepreneurs (Harwit,2002). Private enterprises also complain about difficulties in dealing with state-owned banks for loansand other state agencies as well as harassment and extortion by local cadres, tax officers and othergovernment officials (The Economist 2002; Yang, 2002).
As discussed above, until a few years ago, when private entrepreneurs’ rights were violated, they lackedlegal protection (Yang, 2002). The situation is, however, changing rapidly. Like in a number of otherAsian economies, China is “shifting from top-down, state-directed technology policies to more flexible,market-oriented approaches that foster innovation and entrepreneurship” (Segal, 2004) and is adoptingpolicies that actively encourage entrepreneurship (Schramm, 2004).
Among many examples that illustrate such a trend, let us consider some. Sender (2000) documents astory related to state-run China Telecom’s complaint against two entrepreneur brothers who started offe-ring callback services in Fujian as an alternative to China Telecom’s monopoly and high charges. Thecourts weren't convinced the brothers had violated any laws and ruled against China Telecom. Recently,Pfizer successfully went against a major Chinese ministry-level government agency to defend its Viagrapatent (Boswell and Baker, 2006). Across these two examples we see how state-owned monopolies’ andgovernment agencies’ control and power are declining. It is proposed:
Proposition 3: Over time, informal institutions and enforcement capabilities will change to catch up with the formal institutions.
2.4 - Shift from double entrepreneurship towards legal
Institutional boundaries for economic activities are not well defined in emerging economies such asChina. Exploitation the regulative uncertainty and the weak rules of laws has arguably become an impor-tant form of entrepreneurship in China (Kolko, 1997). Yang (2002) refers this phenomenon prevalent inmany developing economies as “double entrepreneurship” which entails maximizing economic rewardsand minimizing sociopolitical risks. In a rapidly changing environment like that of China, entrepreneursfind attractive economic niches from outside the current institutional boundaries (Yang, 2002). Forinstance, entrepreneurs depend on relations with government bureaucrats to obtain a license to enterand remain in a business (Mourdoukoutas, 2004). At the same time, because of ineffective legal enfor-cement of private property rights, they have to acquire political and administrative protection or dependupon informal norms for security (Yang, 2002).
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In many developing countries, starting a business entails overcoming a significant amount of red tape(Schramm, 2004). In China, one way to overcome bureaucratic red tape for businesspeople has been tobe close to the CCP in order to gain advantages and preferential treatments (Guiheux, 2006). A mem-bership in CCP would give an entrepreneur easier access to loans and official protection and discoura-ges the entry of new players in the market (Guiheux, 2006). In addition, entrepreneurs also spend timeand energy in forming and maintaining “guanxi” (networks) and cultivating ties with officials (lobbying)through gifts or bribery (Yang, 2002). In China, the factors discussed above limit an entrepreneur’s abi-lity to pursue genuine ideas and business opportunities (Mourdoukoutas, 2004). In sum, whereas entre-preneurship in the West is about identifying profitable opportunities, in China, "the ability to form analliance" with those who control the financial, physical or human resources is critical to succeed (Krug,2004).
Institutional environment shapes private entrepreneurs’ motivation to enter into politics. For instance,one study found that the probability of an entrepreneur's political participation decreases by 8% to 20%from the mean when institutional indices related to markets and market-supporting institutions improveby one standard deviation (Li et al., 2006). Improvement in market-supporting institutions or transfor-mation of a socialist economy into a market economy can thus be an important force in converting dou-ble entrepreneurship into legal entrepreneurship (Yang, 2002). In recent years, Chinese regulative lands-cape has undergone significant improvement in rule setting and monitoring activities. Such an environ-ment is expected to promote legal entrepreneurship. Based on above discussion, the following proposi-tion is presented:
Proposition 4: Over time, with the development in regulative institutions, the Chinese entre- preneurship landscape will shift from double entrepreneurship to legal entrepreneurship.
2.5 - Societal perception of entrepreneurs
The perception of entrepreneurship in China is drastically different from market economies(Mourdoukoutas, 2004). Mao arguably developed a strong critique of capitalism, private property, inco-me and wealth inequality and material interest (Guiheux, 2006). During the Mao era, private entrepre-neurship was thus virtually non-existent and was a political taboo (Loyalka, 2006; Peng, 2004). Traditionally entrepreneurship was not the most desired one for China's best and brightest and was limi-ted to people with criminal records that found it difficult to find other jobs (Nair, 1996). Policies thatwere reminiscent of the Chinese Communist Public Goods Regime (Solinger, 1995) thus discouragedprivate entrepreneurship. Most entrepreneurs are still considered as “selfish, avaricious peddlers”, or"getihu" (Hsu, 2006).
Private entrepreneurship in China is the result of the “market track” of the Chinese “dual-trackapproach”, in which economic agents were allowed to participate in the market at free-market prices pro-vided they fulfill their social obligations (Lau et al., 2001). However, as late as the 1990s, Chinesesocieties had highly negative perception of those trying to build their own company (Harwit, 2002). Entrepreneurs are still considered members of the working class striving for China's development ratherthan risk takers (Mourdoukoutas, 2004). In an ethnographic study conducted in the Chinese city ofHarbin, Hsu (2006) found some entrepreneurs were understood as "cadres" and were judged by their abi-lity to provide socialist benefits for their employees, rather than by their success at generating profits.
Faced with such societal perceptions, China's entrepreneurs are also sensitive to the society and thecommunist regime that still resist ideas related to the ownership of private property (Economist, 2006). Accumulating a huge amount of wealth is thus still a “delicate subject” in China (Hoogewerf, 2002).
As noted above, although China is still characterized by a significant integration of state and social orga-nization (Moore, 1997), attitude toward businesses and private entrepreneurship and a business careeris rapidly shifting in the positive direction (Han and Baumgarte 2000, Nair, 1996). Entrepreneurs havestarted to get more respect in the society (Loyalka, 2006). Some Chinese leaders have also provided vali-dity to entrepreneurship. Even Deng said: "To be rich is to be glorious" (Nair, 1996). Hsu’s (2006) fin-ding also provided support for such a trend. Educated entrepreneurs running high-tech businesses areseen as highly respected good businesspeople (Hsu, 2006). The above leads to the following:
Proposition 5a: The societal perception of private entrepreneurship will be more positive overtime in China.
Proposition 5b: Private entrepreneurs in China will have a better cognitive assessment of theiroccupation over time.
2.6 - Inflow of overseas Chinese and the influence on
“Social remittances” associated with immigrants in the form of various resources such as ideas, beha-viors, identities and social capital play critical roles in promoting immigrant entrepreneurship in thehome country (Levitt, 1998). In this regard, it is important to note that much of the new entrepre-neurship in China can be attributed to an increasing number of overseas Chinese educated abroad thatare returning home, some with significant entrepreneurship experience in industrialized world. Estimatessuggest that there are about 200,000 Chinese who have returned to the country after working or stu-dying abroad (Loyalka, 2006). Moreover, because of perceived “glass ceiling” for ethnic Chineseemployees at multinationals (Browne, 2004), more and more Chinese prefer to start their own busines-ses.
Before proceeding further it is important note that researchers argue that it would be erroneous to assu-me the existence of a generic Chinese culture. There is arguably a major difference between the socialorganization and risk taking behavior of Chinese that have stayed in China for their whole life andOverseas Chinese (Moore, 1997).
First, consider proper Chinese. Some commentators argue that Chinese culture does not encourage inde-pendent thinking (Friedman, 2005). Compared to managers in the West, Chinese managers are morelikely to avoid uncertainty, less likely to exhibit innovations and possess low degree of self-determinationand risk taking (Holt, 1997, p. 490; Anderson et al., 2003). Chinese managers also tend to be confor-mists, adhering to standard rules and procedures, rather than to personal insights based on their pro-fessional experiences (Mourdoukoutas, 2004). Entrepreneurship as discovery and exploitation of marketopportunities and the introduction of new products and processes arguably are incompatible with China'sculture of complacency and conformity (Mourdoukoutas, 2004). Some observe that entrepreneurship inChina is arguably about copying products invented and innovated in other countries (Loyalka, 2006;Mourdoukoutas, 2004).
Overseas Chinese with educations and entrepreneurship experience in the industrialized world, on theother hand, tend to be more similar to managers from the Western world. A rapid rate of returns ofChinese with education and entrepreneurial experience in the industrialized world is thus likely to pro-mote risk taking and innovativeness in China.
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Overseas Chinese returnees are likely to influence the Chinese entrepreneurship landscape through anumber of mechanisms. The Overseas Chinese in Asia have earned reputation for developing complexand dense social organizations and institutions (Wu and Wu 1980; Moore, 1997). In recent years,Chinese returnees have started developing such institutions in the mainland. Wang (2001) observed theevolution of a “club culture” in China, which has stimulated interaction among various ingredients ofentrepreneurship promoting innovation and risk taking. Existence of such a culture is especially evidentin industrial and high-tech parks of the country (Loyalka, 2006). Overseas Chinese have contributed inproducing synergies and to thicken existing Institutional (Amin and Thrift 1995; Keeble, Lawson et al.,1999).
While lifelong working for big enterprises is considered to be the most sought after career in Japan(Muller et al., 2004), employment in big state owned factories is ideal for many Chinese. People whohave spent most of their life in such careers may not like the idea of entrepreneurship (Loyalka, 2006). Likewise, thanks to elite cultivation” in China’s IT education, over half of IT graduates pursue seniortechnological or managerial positions after a couple of years of work rather than pursuing entrepreneu-rial ventures (Kharbanda and Suman, 2002). There is thus no culture to promote entrepreneurship inChina. Successful entrepreneurial spin-offs from Chinese returnees may promote risk taking behavioramong Chinese.
On a more speculative basis, we can argue that Chinese returnees may also change other components ofChinese institutions such as the Chinese VC landscape, which currently discourages risk taking. InChina, most VC funds are linked to the government and can be considered as a loan (Harwit, 2002). Enterprises that are able to obtain VC funds feel an obligation not to lose the resources. Moreover, anincubator losing the government owned money also becomes a target of official criticism. Chinesegovernment VC funds thus cannot accept the Western level of risk taking (Harwit, 2002). There is alrea-dy evidence of a significant inflow of VC in China thanks to dense networks of overseas Chinese (UNDP,2001). Estimates suggest that overseas Chinese control assets worth trillions of dollars. The discussionin this section is summarized as:
Proposition 6: The inflow of overseas Chinese into the mainland is positively related to simila- rity of Chinese entrepreneurship pattern with that of the Western world in terms of (a) risk taking; (b) product innovations.
In this paper, we employed institutional theory to examine the pattern of Chinese entrepreneurship. Notwithstanding, the existence of a Chinese entrepreneurial culture, regulative institutions traditionallyseverely obstructed the growth of private entrepreneurship in China. Nonetheless, Chinese regulativeinstitutions are undergoing fundamental and extraordinary shifts. Such shifts directly as well as indirectlythrough informal institutions are likely to facilitate entrepreneurship in China. From the above discus-sion, we can draw a number of implications.
With the change in formal institutions, profiles of entrepreneurs are likely to change. Strengthening ruleof law and increased regulative certainty, for instance, are likely to encourage legal entrepreneurship anddiscourage double entrepreneurship. We can expect that profiles of individuals who are likely to be suc-cessful in legal entrepreneurship are likely to different from those that are likely to be successful in dou-ble entrepreneurship. Given that China is rapidly moving toward a market economy, “institutional entre-preneurs”, that are skillful at dealing with government officials and public opinion are likely to face risksin a changed economy (Daokui Li et al., 2006).
As Veblen (1915) argued, transition from state ownership toward private ownership and a market eco-nomy can lead to changes in cultural and behavioral characteristics. Economic motives and behaviors ofindividuals are also likely to change (Karayiannis and Young, 2003). Entrepreneurial activities themsel-ves can lead to "new cognitive paradigm”, which are likely to change the ingredients of entrepreneurs-hip in China. As noted above, some entrepreneurs are still considered as selfish and in some cases thesuccess is measured in terms of their contribution to the society. The lens through which the societyviews entrepreneurship and measures of success of entrepreneurs may change over time.
As noted above, rapid rise in the inflow of Chinese with education and experience in entrepreneurial ven-tures in Western countries is also like to bring significant changes in "way of thinking” related to entre-preneurship. An increasing number of Chinese educated abroad are returning home. In 2002 alone, over18,000 Chinese graduated from foreign universities returned to China. This figure was 47% more thanin 2001, double that in 2000, and over three times the figure for 1995 (Lynch, 2003). Chinese withexperience in entrepreneurial ventures in the U.S. are thus expected to have a more positive attitudetowards risk taking. As mentioned above, there has been an emergence of “club culture”, which has sti-mulated interactions among entrepreneurs and other professionals (Wang, 2001). Such interactions withChinese returned from overseas, proper Chinese entrepreneurs are likely to develop more positive attitu-de towards risk taking.
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