Self‐employment in Urban China: Entrepreneurship or Disguised Unemployment?

• Published date: 01 January 2022
• Author: Xinxin Ma,Shi Li
• Date: 01 January 2022
• DOI: http://doi.org/10.1111/cwe.12405

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 166–195, Vol. 30, No. 1, 2022

166

*Xinxin Ma (corresponding author), Professor, Faculty of Economics, Hosei University, Japan. Email: xxma@

hosei.ac.jp; Shi Li, Director, Institute for Common Prosperity and Development, and Distinguished Professor,

School of Public Affairs, Zhejiang University, China. Email: lishi9@zju.edu.cn. The authors are grateful to

Professor Björn A. Gustafsson, Professor Terry Sicular, and Professor Linxiang Ye for their helpful comments

and suggestions at the “International Workshop of CHIP 2018” in Hangzhou, China on November 14–15, 2020.

The authors appreciate the useful comments from associate professor Peng Zhan. This research was supported

fi nancially by the Japan Society for the Promotion of Science from the Ministry of Education, Culture, Sports,

Sciences and Technology of Japan (KAKENHI: Nos. 20H01512 and 20H01489).

Self-employment in Urban China:

Entrepreneurship or Disguised Unemployment?

Xinxin Ma, Shi Li*

Abstract

To explore the mechanism of entry to the self-employed sector in urban China, this study

tested two hypotheses: the entrepreneurship hypothesis and the disguised unemployment

hypothesis, investigating the impact of mass entrepreneurship and innovation policies on

business start-ups. Three main fi ndings emerged. First, the entrepreneurship hypothesis

was rejected for both local urban residents and migrants in 2013 but was supported for

both groups in 2018. Second, the causality relationship between mass entrepreneurship

and innovation policies and business starts-ups was not signifi cant. Third, the results

differed by group. The entrepreneurship hypothesis was supported for the younger

generation of migrants in 2018 but was clearly rejected for the less educated, both in the

local urban resident and migrant groups in 2013 and 2018. Robustness checks confi rmed

these conclusions.

Keywords: China, disguised unemployment, entrepreneurship, mass entrepreneurship

and innovation policies, self-employment

JEL codes: J21, J31, J46, J64

I. Introduction

In China, self-employment was criticized and prohibited as a capitalist phenomenon

during the planned economy period. However, to address the country’s urban

unemployment problem, self-employment was permitted after the 1980s. With the reform

in ownership and an increase in rural–urban migration, the number of self-employed

workers in urban China increased signifi cantly, from 0.15 million in 1978 to 21.36 million

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Self-employment in Urban China 167

in 2000 and 160.37 million in 2019 (NBS, 2020). In particular, as the development

of the digital economy became a strong factor accelerating economic growth, the

Chinese government published a set of mass entrepreneurship and innovation policies

(MEIPs) in 2016 to promote self-employment.1 The Implementation Opinions of the

General Offi ce of the State Council on Building Pilot Base for Mass Entrepreneurship

and Innovation (the first MEIP), published on May 12, 2016, announced the first

set of 28 pilot bases, including universities, research institutes, and companies. The

Implementation Opinions of the General Offi ce of the State Council on Building the

Second Pilot Base of Mass Entrepreneurship and Innovation (the second MEIP),

published on June 21, 2017, announced the second set of 92 pilot bases. Both

policies aimed to promote mass entrepreneurship and mass innovation, to support the

construction of bases for innovation and entrepreneurship in regions, universities,

research institutes, and enterprises, and to create innovation and entrepreneurial

experiences that could be replicated nationwide. The MEIPs were expected to increase

entrepreneurs’ entry to the self-employed sector and generate new businesses in China

(Table A1 in the appendix).

Why do individuals choose self-employment instead of working for other

businesses? Prior studies have proposed two hypotheses for Central and Eastern

European countries (Earle and Sakova, 2000; Hanley, 2000; Dimova and Gang,

2007; Jackson and Mach, 2009). The entrepreneurship hypothesis states that self-

employed individuals are successful business owners creating new jobs, new business

opportunities, and innovative products for society, thus contributing to higher

employment rates and economic growth (ILO, 1972). In contrast, the disguised

unemployment hypothesis states that when individuals cannot enter the formal sector,

they may have to work in the self-employed sector involuntarily, hoping to enter the

formal one in the future. This is equivalent to the remaining unemployed population,

including the majority of the rural–urban migrants in urban China (Minami and Ma,

2010, 2014). Which of the two hypotheses explains self-employment in urban China?

Do the MEIPs enhance business start-ups in China? This study attempted to answer

these two questions.

The main contributions of this study are as follows. First, previous studies on this

issue used micro-data to test the two hypotheses for Central and Eastern European

countries, but empirical studies on China are scarce. Ma (2016, 2017) tested the two

1Details of these policies are available from https://www.gov.cn/zhengce/content/2016-05/12/content_5072633/

htm, https://www.gov.cn/zhengce/content/2017-06/21/content_5204264/htm, and https://www.gov.cn/zhengce/

content/2020-012/24/content_5572999/htm [online; cited February 15, 2021].