Will Entrepreneurship Promote Productivity Growth in China?

• Author: Jun Wang
• Published date: 01 May 2020
• DOI: http://doi.org/10.1111/cwe.12333
• Date: 01 May 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 73–89, Vol. 28, No. 3, 2020

73

Will Entrepreneurship Promote Productivity

Growth in China?

Jun Wang*

Abstract

Based on data obtained from the Survey of Industrial Firms in China, the Chinese

General Social Survey and prefecture-level city data, this paper explores whether

entrepreneurship will promote productivity growth in China. The research also

examines whether entrepreneurship acts as a transmission mechanism affecting

productivity through market competition, knowledge spillover and factor structure.

Our empirical results reveal a relatively significant U-shaped relationship between

entrepreneurship and productivity and confirm the existence of a transmission

mechanism of entrepreneurship. Among the three effects, the market competition

effect is the most significant, followed by knowledge spillover and factor structure

effects. An entrepreneurial heterogeneity test reveals that there is no significant

difference between the effect of necessity entrepreneurship and overall entrepreneurship

on productivity. However, a positive correlation is found between opportunistic

entrepreneurship and productivity. Therefore, entrepreneurship plays a unique role in

promoting economic growth in China.

Key words: entrepreneurship, factor structure, knowledge spillover, market competition,

productivity

JEL codes: D24, L26, O47, R11, R12

I. Introduction

Since the 17th National Congress in 2007, the Chinese government has implemented

various measures to actively promote entrepreneurial activities as a means to boost

employment. In 2014, Premier Li Keqiang’s announcement at the Summer Davos

Forum created a wave of development of “public entrepreneurship” and “grassroots

entrepreneurship.” The 2015 government work report also clearly advocated “public

entrepreneurship and innovation.” Against the backdrop of these developments, Chinese

people have been actively participating in entrepreneurial activities, and the number of

*Jun Wang, Professor, Guangdong University of Foreign Studies, China. Email: wangjun200213@163.com.

This work was supported by the National Natural Science Foundation of China (No. 71973036).

Correction added on 26 June 2020, after initial online publication. A duplicate of this article was published under the

DOI 10.1111/cwe.12301. This duplicate has now been deleted and its DOI redirected to this version of the article.

Jun Wang / 73–89, Vol. 28, No. 3, 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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entrepreneurs has been steadily increasing. China Health and Nutrition Survey (CHNS)

data indicate that non-farm self-employment in China grew by more than 10 percent

during 1990–2014, and the ratio of self-employed to employed individuals increased

from 3.5 percent in 1990 to 32.36 percent in 2014, accounting for one-third of national

employment. According to the Global Entrepreneurship Monitor (GEM) database, the

entrepreneurship activity index in 2014 was 15.53 in China, higher than the US (13.81),

the UK (10.66), Germany (5.27), Japan (3.83) and other developed countries.

Existing literature argues that entrepreneurship has unique advantages for

promoting economic growth, increasing market scale and stimulating innovations (Acs

and Audretsch, 2003; Fotopoulos, 2012; Block et al., 2013; Aparicio et al., 2016). The

Chinese economy has entered a new phase in which rapid economic growth has begun

to stabilize at a lower level, the demographic dividend is diminishing and capital return

is declining. On the one hand, China needs to alleviate employment pressures resulting

from the slowdown of economic growth, while on the other hand it has to improve

its economic structure through entrepreneurship to achieve the goals of “structural

adjustment” and “steady growth.”

Productivity growth not only reflects the productivity of microeconomic entities

but also indicates regional or national trends in economic growth. Increasing the

productivity rate has become an essential aspect of materializing China’s plans for

structural transformation and high-quality growth. Many foreign and Chinese academics

have estimated China’s total factor productivity (TFP). Some report that China’s

overall TFP is low and that growth is slow or even stagnant, implying that TFP makes

a relatively small contribution to China’s economic growth (Young, 2003; Yang, 2015).

Figures 1 and 2 show China’s TFP and the trend in TFP growth during 2004–2013,

respectively. During this period, China has not achieved continuous productivity growth.

Furthermore, a decline in productivity is observed during certain years.

In this study, we seek to ascertain whether China can promote TFP growth

through entrepreneurship and therefore examine the impact of entrepreneurship and

its transmission mechanism on productivity. The contributions of this paper are as

follows: First, new private enterprises and individual persons engaged in entrepreneurial

activities are considered at two different dimensions of entrepreneurship. This research

overcomes the estimation bias caused by defining entrepreneurship from a single

perspective, such as an individual or enterprise. Second, this paper proposes that

entrepreneurship can promote productivity by promoting market competition, improving

knowledge spillovers and optimizing factor structure. It explores the micromechanism

of entrepreneurship, which impacts productivity. Third, entrepreneurship is divided

into necessity and opportunity entrepreneurship, and the impact of different types of