Determinants of Entrepreneurship

In China

Master Thesis

By

Lulu Hui

Supervisor: Pontus Braunerhjelm

Program Economics of Innovation and Development

Royal Institute of Technology

October 2009

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Abstract

Recently the role of entrepreneurship in economic growth has gained increased

interest from both academicians and policy makers. Entrepreneurship is seen as an

important vehicle to foster private sector development, particularly so in developing

countries such as China, thereby influencing an economy’s route from poverty to

wealth. There is no unique definition of entrepreneurship, but a key component that

cuts through all definitions is that it has to do with starting some kind of new venture.

The aim of this master thesis, Determinants of Entrepreneurship in China, is to

provide an analysis of the main factors that have affected the development of

entrepreneurship in China, and those which are also likely to do so in the future. The

analysis is based upon six main factors; government policy, with particular emphasis

upon higher education and the geographical distribution of universities, overseas

experience, special regional factors, unemployment rate, and finally, family

background. The analysis will focus upon how higher education and access to

universities impacts Chinese entrepreneurship. For all factors implemented in the

analysis I will also present conclusions concerning their importance for

entrepreneurship.

Keywords: Entrepreneurship, Government policy, Education, Private sector

development

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Acknowledgements

I would like to express my appreciation to all those who have given me support and

encouragement during the completion of this thesis.

To my supervisor Pontus Braunerhjelm, I am deeply grateful. Without his help, I

would not have finished this paper. It is he who led me from confusion during the

early stages, to the clarity of understanding how to present the ideas I wished to

consider within my work. I have learned much through his supervision and have been

inspired by his useful advice and suggestions.

I also wish to thank to all of the staffs at the Department of Economics for their help

and kindness during my two years’ study and also to express my gratitude to my

fellow classmates.

Last but not least I am especially thankful to my parents and my husband Zongtao,

who have given me so much help and love. Whenever my patience was lost, they

were there by my side to support me.

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1. Introduction ................................................................................................................................... 1

1.1 Background ......................................................................................................................... 1

1.2 Methodology and data ......................................................................................................... 2

1.3 Goal and disposition ............................................................................................................ 2

2. Definition and basic explanation involved .................................................................................... 4

2.1 Concept conclusion from the literature on entrepreneur and entrepreneurship ................... 4

2.2 Productive, unproductive, and destructive entrepreneurship .............................................. 5

2.3 Entrepreneurship, SMEs, and large firms: what separates them? ....................................... 6

2.4 Unique Chinese entrepreneurship and factors associated with entrepreneurship ................ 6

2.5 Institutions and Entrepreneurship........................................................................................ 7

2.6 Education and Entrepreneurship ......................................................................................... 7

2.7 Regional Factors and Entrepreneurship .............................................................................. 8

3. Government policy and its effects on entrepreneurship ................................................................ 9

3.1 Theory support and explanation .......................................................................................... 9

3.1.1 System of taxation .................................................................................................. 10

3.1.2 Government regulations ......................................................................................... 10

3.1.3 Access to capital ..................................................................................................... 11

3.1.4 Legal system and property rights ........................................................................... 11

3.1.5 Business culture ..................................................................................................... 12

3.2 Early entrepreneurs in China and the beginning of Reform and Opening Up Policy ....... 12

3.3 Achievements of the Reform and Opening Up Policy in China ........................................ 13

3.4 Progress of entrepreneurial activities in China ................................................................. 14

4. Education and its effect on entrepreneurship .............................................................................. 16

4.1 Significant knowledge sources and the evolution of China’s education ........................... 16

4.2 Higher education in different provinces: a comparison .................................................... 18

4.3 University ranks and scientific contributions .................................................................... 21

4.4 University ranks based on China’s rich lists ..................................................................... 24

5. Overseas experience and relation to entrepreneurship ................................................................ 25

6. Regional factors and their effect on entrepreneurship ................................................................. 28

6.1 Shanghai and its internationalization culture .................................................................... 28

6.2 Zhejiang and private economy .......................................................................................... 29

6.3 Guangdong province and its immigration culture ............................................................. 30

7. Unemployment rate and its effect on entrepreneurship ............................................................... 31

7.1 Basic explanation .............................................................................................................. 31

7.2 China’s unemployment rate............................................................................................... 32

7.2.1 Analysis of China’s unemployment rate ................................................................. 33

7.2.2 China’s real unemployment situation ..................................................................... 33

7.2.3 Unemployment rate and entrepreneurship ............................................................. 34

8. Family background and the relation to entrepreneurship ............................................................ 34

9. Conclusion and recommendations for further research ............................................................... 35

10. Reference .................................................................................................................................. 37

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1. Introduction

1.1 Background

Entrepreneurship has been recognized as a micro driver of innovation and

economic growth (Wennekers and Thurik, 1999). Recognizing its importance, people

are willing to learn more about this concept and its underlying deeper meaning. This

increased interest in the entrepreneurship in the economy has led me to a research

attempting to identify the factors that promote entrepreneurship. Especially in China,

people’s awareness and understanding of the concepts of entrepreneurship and wealth,

have taken on a more profound understanding. Based on the increasing awareness of

entrepreneurship as a driving force behind economic growth, state and local

development efforts have been heavily directed toward promoting entrepreneurship in

recent decades (Sobel and King, 2005).

Innovation is a process which helps to transform an innovative idea or concept

through to successful implementation or operation within the market place, to, for

example, a new product, or a new production method (Baumol, 2002). The

entrepreneur performs a function that locates new ideas and puts them into effect

(Baumol, 1968). It seems that entrepreneurship could be taken as a vehicle that

diffuses and converts knowledge to economically viable products or services (Acs et

al 2009). We find it difficult to be successful without taking into consideration

differences in the availability of entrepreneurial talent and in the motivational

mechanism which drives them on (Baumol, 1968).

In general, in the past, the Chinese economy was essentially a government

economy. Economic activities were under the control of the government (Liu, 2008).

The Chinese government controls also this mechanism of diffusion and they have

right to determine whether an act of entrepreneurship is productive or not according to

their own governmental policies. Historically within Chinese society there have been

many outstanding inventions, such as printing, the compass, porcelain and so on.

Compared to that of a modern economy, such innovative creations when produced did

not prompt considerable economic growth in China. This was due to the lack of a free

market (Baumol, 2002). Therefore, the current unprecedented growth seen in China

today is from a free market environment, the key of which being free competition,

which encourages business to use innovation as a weapon to beat their competitors.

Both large and small firms are afraid of being replaced by their rivals; they will

continually strive for innovation within the current economy (Baumol, 2002).

In the past, government controlled the market place and its inventions. The

diffusion of knowledge could not be converted freely into economic results and great

inventions could not be well explored to maximize economic profit. It is obvious that

a market environment is much conducive to economic growth than is a centrally

planned environment (Knack, 1996). At such a stage of controlled or planned

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economy, entrepreneurship was also at the hand of government and economically

exploited by governmental officials. There were fewer stimuli to entrepreneurs’

innovation. Operation of enterprise was under the charge of the state.

The role that markets play in the process of development depends on the

public-policy design of the institutions that foster economic growth (Holcombe, 1998).

A key turning point for the development of private enterprise in China began in 1978

(Liu, 2008). Since the reform and opening-up policy in 1978, Chinese private

enterprise and the unique entrepreneurship have experienced much progression.

Looking back over 30 years’ of development and achievement, I hope to identify what

kind of factors affect entrepreneurship in China and enable these to be used for future

reference.

1.2 Methodology and data

This paper focuses on entrepreneurship and economic development, drawing on

previous research. An explorative approach is implemented. Histograms will be used

to compare the quantity of different provinces, and to conclude the causes. Case

studies will also be used to analyze the factors in three separate provinces.

Data collection is mainly from the National Bureau of Statistics of China and the

Ministry of Education of China. University rankings are from China University

Appraisal and Research Report 2009.

1.3 Goal and disposition

Economic inputs and resources are converted into entrepreneurial outcomes.

However, the amount of entrepreneurial outcomes result from economic inputs

depends primarily on the rules of the game, or government policies, under which

entrepreneurs operate (Hall and Sobel, 2006). There are also individual variables

including age, gender, education and experience of change to a variety of attitudes

that influenced entrepreneurial intentions (Davidsson, 1995).

As shown in previous research, government policy is an important factor for

entrepreneurship in every country. It could support or hinder the development of

entrepreneurial activities. Government policies in China primarily involve five main

aspects: taxation system, government regulations, access to capital, legal system and

property rights, and business culture. Government policy is the primary factor in

fostering economic development, since it is the fundamental guarantee for other

influencing factors. Without policy change, entrepreneurship cannot successfully be

augmented and improved. China’s reform and opening-up policy helped the Chinese

economy to transform from a planned economy into today’s almost complete market

economy. One objective has been to encourage the development of private enterprise

and entrepreneurship.

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Cultural factor should also be considered, including people’s attitude towards

success and failure. In addition to general factors, special circumstances including

overseas experience and family background will also be considered in the analysis.

Further below I also will discuss the regional characteristics that influence the

different provinces since China is a large and heterogenous country with a huge

population.

Education has been a core part of government policies to enhance skills and

entrepreneurial capabilities. Here I separately discuss the possible impact of higher

education on entrepreneurship. It is claimed to be more important in China because

the Chinese education system, particularly higher education institutes, have improved

considerably through the last 30 years. In fact, education plays an unprecedented role

in the development of entrepreneurship in China. I also pay particular attention to

unemployment, and relate it to the pull‖ and ―push‖ hypothesis described more in

detail further down.

In the following discussion, six factors that affect the emergence and improvement

of entrepreneurship in China will be analyzed.

1) Government policy

2) Education and university distribution

3) Overseas experience

4) Regional factors, e.g. location and culture

5) Unemployment rate

6) Family background

The above six factors could be divided into two main groups: external factors and

personal factors. As I mentioned before, a free market is the basic guarantee for the

growth of innovation and entrepreneurship. The external factors, including a stable

and foreseeable government policy, broad access to universities, high education

quality, a diversified regional culture background and different unemployment rate,

are the most important influencing factors that influence entrepreneurship. On the

other hand, personal factors such as experience and family background are also

important as explanations of entrepreneurship. The extent and prevalence of both

external and personal factors thus impact the functioning of free markets and growth

of entrepreneurship. In the analysis data are distributed on regions.

The analysis centers around the six factors presented above. Before dwelling into

each one of them (section 3 to 8), I will present the definition of entrepreneurs and

entrepreneurship that prevails in the literature (section 2). Finally, the conclusions as

regards the main effects of these factors on entrepreneurship, and to some extent

growth, are discussed in section 9. In addition, some policy recommendations will

also be given.

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2. Definition and basic explanation involved

2.1 Concept conclusion from the literature on entrepreneur

and entrepreneurship

How is the term entrepreneur defined in the literature? The following

characteristics are frequently advanced in the literature in order to define the

entrepreneur:

An individual who bears uncertainty (Knight, 1921)

An innovator (Schumpeter, 1934)

A decision maker (Baumol 1968, Casson 2003)

An industrial leader (Schumpeter, 1934)

An organizer and coordinator of economic resources (Marshall, 1890)

An arbitrageur, alert to opportunities (Kirzner, 1973; 1977)

An allocator of resources among alternative uses (Schultz, 1975).

Hence, an entrepreneur is not simply an individual who set up his own business

and make profits. In fact, the definition of entrepreneur is complex and contains a

variety of characteristics. The entrepreneur is not just a person, but just as often linked

to a dynamic process, or creation of value. He must lead, inspire and exercise what is

called ―leadership‖ in the business (Baumol, 1968). It could be a new product, a new

method of production or it could be a new market or a new source of supply

(Schumpeter 1911). But one common thread seems to be that entrepreneurship

implies embarking on a new venture.

Entrepreneur and entrepreneurship are ambiguous concepts with multiple

meanings. There are also many different definitions, but not a generally accepted one.

Currently there seems to be at least 13 different roles for entrepreneur represented in

economic literature, which could be divided into three main groups (Wennekers and

Thurik, 1999). They focus on different function of entrepreneur.

The neo-classical approach emphasizes the role of entrepreneur in leading

markets to equilibrium through their activities. The Austrians stress the abilities of

entrepreneur to perceive profit opportunities and to combine the resources to fulfill

unsatisfied needs, or to improve market inefficiencies. In the German or

Schumpeterian tradition economists concentrate on the entrepreneur as a creator of

instability and creative destruction. Different historical views of economists provide

us with a broad idea on entrepreneur and entrepreneurship. There are still other

definitions. The entrepreneur is“someone that always searches for change, responds to

it and exploits it as an opportunity” (Drucker, 1985). Characteristics of the

entrepreneur are, for examples, self-confidence and individual responsibility.

I choose the following definition of entrepreneurship (Wennekers and Thurik,

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1999, P20):

Entrepreneurship is the manifest ability and willingness of individuals, on their own,

in teams, within and outside existing organizations, to:

perceive and create new economic opportunities (new products, new production

methods, new organizational schemes and new product-market combinations)

and to

introduce their ideas in the market, in the face of uncertainty and other obstacles,

by makingdecisions on location, form and the use of resources and institutions.

Entrepreneurship matter and seem to be related to economic growth through

different mechanisms (Braunerhjelm 2008). Entrepreneurship is studied in terms of

the definitions both at micro-level, for example at the level of the individual firm or

entrepreneur, and at the macro-level (Praag and Versloot, 2007). These occur at three

levels. From the individual level, entrepreneurship is related to self-realization and

increase of personal wealth. From a firm level perspective, it concentrates on

performance, such as successful start-ups of new organization, entry into new markets

and innovations. From the macro level, it is associated with competitiveness and

economic growth. The performance of firm level would directly influence results of

the other two levels. The development of a firm will affect not only the entrepreneur’s

personal wealth but also the national economic growth.

2.2 Productive, unproductive, and destructive

entrepreneurship

Society encourages the development of entrepreneurship because of its perceived

indispensable role in the economy and its potential benefits to mankind. However, is

entrepreneurship always beneficial to society? I first need to understand the following

concepts before I can satisfy this question.

1) Productive entrepreneurship (Baumol, 1990): Entrepreneurial activities that have

productive contributions to society.

2) Unproductive entrepreneurship (Baumol, 1990): Entrepreneurial activities that

cause no productive contribution (e.g., rent-seeking behavior to acquire monopoly

profits).

3) Destructive entrepreneurship (Baumol, 1990): Entrepreneurial activities that cause

a reduction in productivity and output (e.g., organized crime).

Unproductive entrepreneurship involves simple accumulation of profit such as in

the case of rent seeking. Rent seeking refers to any activity whose objective is the

acquisition of certain monopolized profits or other economic rents that are currently

generated or potentially available in the economy. This activity may also be

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innovative; however, it contributes nothing to the modern economy. Compared to

productive entrepreneurship, unproductive entrepreneurship has little or no

contribution to real economic output. On the other hand, not only is destructive

entrepreneurship (such as organized crime) non-contributory to production, it also

threatens private and public property.

2.3 Entrepreneurship, SMEs, and large firms: what separates

them?

Small and medium enterprises (SMEs) have no universally accepted definition.

SMEs are commonly defined by size, in terms of the number of their employees. In

the European Union, for example, SMEs are defined as firms with up to 250

employees. However, in the United States and China, SMEs include firms with up to

500 and 300 employees, respectively.

Studies have shown that multinational enterprises (MNEs) are mainly responsible

for international trade and foreign direct investment (FDI), the key factors in

globalization. On the other hand, SMEs are mainly responsible for generating local

employment and new domestic markets.

SMEs are considered the origin of independent entrepreneurs and the primary

source of innovative ideas that could lead to unprecedented economic growth

(Baumol, 2002). On the other hand, large firms spend significantly on research and

development (R&D) in order to acquire new ideas. SMEs and large firms are

complementary as they both make significant contributions to economic growth.

However, compared with ―routinized‖ innovation in established enterprises, radical

innovation in SMEs plays a more significant role in the economy. Innovations in large

firms tend to be conservative and limited because focus is primarily on how existing

products may be improved. On the contrary, SMEs are more likely to produce new

techniques and revolutionary ideas, setting the stage for organizational restructuring

and changes. With the rise of the Internet and the extensive use of the e-mail and other

web-based tools, SMEs have expanded internationally and are making significant

contributions to globalization (Baumol, 2002).

2.4 Unique Chinese entrepreneurship and factors associated

with entrepreneurship

Today entrepreneurship is accepted and many Chinese view entrepreneurship as

a main strategy to succeed economically. Entrepreneurs detect new areas of potential

and new markets, develop strategies and improve technology. Their unique insights

have led both to personal prosperity and national growth.

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Chinese entrepreneurship is unique in that it includes two factors: the strong

desire for success and a clear path to follow. In addition, cultural and individual

differences across regions in China have produced diverse views and principles.

Indisputably, China is becoming an increasingly important birthplace of innovation.

2.5 Institutions and Entrepreneurship

Institutions matter for economic outcome. Institutions consist of the formal and

informal ―rules of the game‖, under which Entrepreneurs operate (Boettke and Coyne,

2009). So we define institutions as both the formal and informal rules governing

human behaviors (North, 1990). Different entrepreneurial activities across societies

and countries are mostly due to differences in institutions. And this institutional

environment restricts also the availability of the entrepreneurial opportunities.

Boettke and Coyne (2009) concluded that formal rules include codified legal and

political structures, as well as written rules such as constitutions, and informal rules

include culture, norms, conventions, and mores not backed by formal law, but by

social custom. Favorable institutions can help facilitate economic, social, and political

interactions.

There are two channels through which government policy impacts

entrepreneurship. The first channel is through government’s impact on the quantity

and quality of inputs used in the entrepreneurial process. The second channel is

through the impact of government policy on the institutional environment (Sobel et al.,

2007). Under a certain institutional environment or within a favorable context,

entrepreneurs can have intentions to discover new resources and technological

knowledge in order to find new market or set up new firm.

Entrepreneurship is seen as the engine of the growth, but emphasis should be

placed on an institutional environment that encourages entrepreneurship or, in which

entrepreneurial opportunities can be capitalized upon (Holcombe, 1998).

2.6 Education and Entrepreneurship

Education is about developing and augmenting an individual’s skills or

problem-solving abilities on a superficial level (Chamard, 1989). The schools can and

must plan an important role so that entrepreneurial talents not are lost. Especially

Higher education institutions (HEI) are supposed to play an important role in the

economic development of countries and regions (Paco, 2010). The UNESCO (1998)

framework for priority action for change and development for higher education stated

that HEI should develop innovative schemes of collaboration between institutions of

higher education and different sectors of society to ensure that higher education and

research programs effectively contribute to local, regional and national development.

Universities often, but not always, are at the heart of the process, birthing new

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ideas and training the workforces needed to implement them strong. Universities can

stimulate growth by cultivating enterprising faculty, educating students who become

entrepreneurs and those entrepreneurs’ employees, and transferring ideas that are

commercialized by local area entrepreneurs (Acs et al, 2008). Education is

traditionally viewed as an investment for the future. Firms run by the highly educated

self-employed have higher growth probabilities than those run by the less educated

ones, regardless of the market situation (Kangasharju and Pekkala, 2002). Research

also suggests that people who start businesses have a higher level of education than

people who do not (Bagates, 1995).

Entrepreneurs are not born, but are influenced by their experiences throughout

life, especially during their early years. These experiences include course taken during

their education and the role models to whom they are exposed as they grow. An

entrepreneur can be described as an individual who identifies an opportunity, develops

a strategy to pursue that opportunity, assembles the resources necessary for pursuit of

the opportunity and takes an initiative on the opportunity, usually starting a new

business.

One important determinant and probably the most easily influenced determinant

of entrepreneur performance is education (van derSluis and van Praag, 2004).

Education would enhance managerial ability, which in turn increased the probability

of entrepreneurship. The main factors affecting earnings are schooling and experience.

Education now has a positive effect on both the choice of and the performance in

entrepreneurship (Calvo and Wellisz, 1980), at least in the US (van der Sluis and van

Praag 2004).

Academics have long examined that entrepreneurial activity tends to vary across

regions and these differences in opportunities can explain why some regions have

higher start-up rates than others (Audretsch and Fritsch, 2002). Audretsch and

Lehmann (2005) found that universities in regions with a higher knowledge capacity

and greater knowledge output also generate a higher number of technology start-ups,

this mean that knowledge spillovers holds for regions as well as for industries.

2.7 Regional Factors and Entrepreneurship

Each functional labor market region is considered to be a place of origin for

product and market ideas (Andersson and Karlsson, 2006). Environmental

circumstances play an important role in explaining different levels of entrepreneurship

across regions or countries (Lasch, 2007). Florida (2002) has argued that social

diversity in a society is a proxy for the openness of this society with respect to new

ideas. Such openness is important in an environment where new ideas are transformed

into business ideas and ultimately to new firm startups (Saxenian, 1994).

Values are often seen as the hard core of a culture. People’s attitudes and values

toward work, wealth, new information, risk, and failure are quite relevant to personal

development and economic growth (Wennekers and Thurik, 1999). These values are

probably true to most of the people in the same region. The impact of cultural

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background on entrepreneurship and economic growth could be significant and direct.

Culture is used to refer to the enduring set of values of a nation, a region, or an

organization. Differences in value systems and cultural orientations towards

entrepreneurship have been argued to affect entrepreneurship（Thomas and Mueller,

2000）. Wennekers (2005) suggest a role for culture that certain societal values may be

conducive to new firm formation and economic dynamism in general. Davidsson and

Wiklund (1997) discuss also the role of values and beliefs in explaining regional

variations in new firm formation rates. It has often been argued that locational

attractiveness is one of the factors that made Silicon Valley happen (Saxenian, 1994).

If high-tech clusters are the outcome of sheer chance, then there is little or nothing

that policymakers can do to create them. But in regional development, local education

and university level, and infrastructure are important because they help make a

location an attractive place. Some regional policies, for example, building strong local

educational systems and institutions and developing supporting infrastructure, help

stimulate the formation or growth of new companies.

Regional characteristics reflecting knowledge sources, communication

opportunities, and absorptive capacity have a positive influence on the arrival of

innovation ideas to firms, as measured by new export varieties and new export firms.

Entrepreneurs located in regions with a high potential for knowledge and information

spillovers are more likely to receive ideas that can generate innovations (Andersson

and Johansson, 2008). Lee (2004) suggests that the regions that are open and creative

and attract human capital enjoy more than dynamic entrepreneurship.

3. Government policy and its effects on

entrepreneurship

3.1 Theory support and explanation

It has been recognized that entrepreneurship and its function is a vital component

in the process of economic growth (Baumol, 1968). Entrepreneurship is one

mechanism to nurture economic growth. It improves economic structures and

economic systems. Growth in national income seems to be highly related with the rise

of new enterprises and the growth of start-ups. Entrepreneurship is also thought to be

an important factor in cultivating innovation, employment and economic growth

(Georgellis and Wall, 2006). Entrepreneurial activities can help governments solve

poverty and improve unemployment conditions by encouraging self-reliance through

self-employment. In addition, when entrepreneurs take advantage of some

opportunities, the economic environment changes, creating with it additional

opportunities. So, entrepreneurship leads to more entrepreneurship (Holcombe, 1998).

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Hence, entrepreneurship and entrepreneurs play crucial roles in the economic growth

of a country. They should be given more attention and provided more support.

The allocation of entrepreneurship is heavily influenced by the relative payoffs

society offers to such activities (Baumol, 1990). Policy can influence the allocation of

entrepreneurship more effectively than it can influence its supply. The rules of the

game that specify the relative payoffs to different entrepreneurial activities play a key

role in determining whether entrepreneurship will be allocated in productive or

unproductive directions. This can significantly affect the economy’s productivity and

growth. So, clear guidance for policymakers is to change the rules of the game in

order to stimulate the productive contribution of the entrepreneur.

Policies can either be viewed as "active‖ or "passive", depending on whether such

policy directly or indirectly supports and promotes entrepreneurship. Active policies

refer to actual and practical policies that could immediately help some firms, for

example, tax reduction in some special fields (Borton, 2008). On the other hand,

passive policies do not involve direct action but provide a good environment for the

development of entrepreneurship (Borton, 2008). Both policies may promote the

flourishing of entrepreneurship; however, passive policies bring more improvement

because every new firm will benefit from a healthy and complete environment, no

matter how small it is or where it is located.

Policies such as low taxes, fewer regulations, access to capital, secured property

rights and legal system, and a supportive business culture contribute to a healthy and

stable entrepreneurial environment

3.1.1 System of taxation

Taxation matters for entrepreneurship because it increases costs and lowers

earnings. At the outset, it may not be a good way of encouraging the development of

new enterprises, since the government needs taxes to uphold different societal

functions. With these conflicting interests, policymakers have to strike a cautious

balance between the need to generate revenues and the necessity to promote

entrepreneurship. If a balance is achieved, taxation policies can become the most

helpful and useful way of encouraging the growth of enterprises. Favorable policies

include reduction in taxes imposed on business enterprises, provision of lower tax

rates on investments, tax exemptions, and tax deductions.

The goal of Chinese Taxation system reform is to establish a uniform system. All

enterprises and businesses should have the same value-added tax, income tax, etc.

Some government officials and departments will implement the system but have no

right to change them. This helps resolve some kinds of tax problems to some extent in

China (Liu, 2008).

3.1.2 Government regulations

Properly designed government regulations are beneficial to the growth of small

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firms. Through regulations, the government can provide an information and

consultation system designed to help entrepreneurs and create a fair entrepreneurial

atmosphere. However, regulations must be kept simple and reasonable. The simpler

the regulations are, the quicker small firms will comply and adapt. Fewer regulations

from the government help relieve pressure on firms and promote savings. Also, in

order to reduce transaction costs and help protect economic activities, the government

may introduce standardization into the market, for example, providing one-stop

service centers where entrepreneurs can get assistance.

In China, there are many government branches that have responsibilities for

managing and protecting the public sector, but no responsibilities for managing and

protecting the private sector (Liu, 2008). So if entrepreneurs have difficulties in

forming new enterprises, there is no way to get any help from the government

branches. On the contrary, if they earned money, there will be many government

officials eager to inspect them according to government regulations and rules.

3.1.3 Access to capital

In the entrepreneurial world, start-ups need funds to cover the costs of regulation

procedures and original set-up costs. If the government can help entrepreneurs find

these funds, start-ups will be unburdened of the need to search for sources of capital.

Moreover, this will encourage the expansion of enterprises. The Small Business

Administration (SBA) of the United States serves as a good example. The SBA is an

organization under the federal government that helps firms obtains capital. This

organization guarantees that some firms get access to capital; if the firms fail to pay

back their loans, the government will cover the loss (Borton, 2008). This action

motivates small firms to increase capital and expand operations. Admittedly, however,

the government takes a certain risk in this program.

In the early stage of development in China after 1978, it was not able for private

enterprises to borrow money from banks. Since the economic reforms, China has not

only a central bank but also four state-owned commercial banks in addition to several

shareholding commercial banks at the national level and some regional development

banks (Liu, 2008). These help satisfy the financing demands of private enterprises by

lending money.

3.1.4 Legal system and property rights

A transparent and credible legal system can provide a good environment for the

growth of small firms. In fact, the respect and protection of property rights are

primary stimulants in the flourishing of entrepreneurship. If the law cannot protect

intellectual rights, patents, and trademarks, then the incentives of innovation cannot

be ensured and entrepreneurs will not take the risk of investing on new products or

new techniques. On the contrary, if the government set up a sound legal system to

encourage innovation and investment, a positive signal is sent for inventions,

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innovations, and business expansion.

China is a developing country and we are a member of the WTO. It is obvious that

if we want to advance scientific research and technological innovation, we must

protect intellectual property rights.

3.1.5 Business culture

The government needs to take action and encourage the creation of a more

favorable business culture. This will certainly motivate entrepreneurs to expand their

operations. Policymakers may employ various methods to encourage the formation of

a desirable business culture. For one thing, the government can set up a complete

information network for entrepreneurs. Easier internet access can help entrepreneurs

acquire useful information. In addition, the government can create linkages between

entrepreneurs and universities, enabling professors to provide more creative input

depending on their professional knowledge and skills. Also, the government should

encourage entrepreneurship by enhancing the socio-economic status of entrepreneurs

through monetary rewards, incentives, and the like.

Traditionally, private entrepreneurs have occupied the bottom level of Chinese

society and their low social statuses were reinforced during the Mao period (Liao and

Sohmen, 2001). People’s attitudes have however changed rapidly.

3.2 Early entrepreneurs in China and the beginning of Reform

and Opening Up Policy

Entrepreneurship has taken many forms in China (Liao and Sohmen, 2001).

Before the 1980s, there were many small activities in retail. There were street vendors

who engaged in small businesses primarily for subsistence. There were no systems

and regulations governing their operations. Some of them were even illegal. They

comprised the first group of early entrepreneurs in China. Towards the end of the

1980s, a group of educated Chinese became entrepreneurs, entering into more

advanced sectors and they thrived in many industries. In comparison with the first

group, they chose to employ themselves and did not work simply for survival. Many

of them were engineers or were previously employed in some national enterprise.

They made good use of the Chinese economic reform policy and became the second

of the earliest entrepreneurs in China. With the new economic policy, people gained

better chances of being educated or trained abroad. From this opportunity emerged the

third group of entrepreneurs—those educated abroad who chose to return to China and

engage in business, and who have contributed much to the development of Chinese

private enterprises.

Historically, institutions in China held a hostile view towards the private

economic sector, which stemmed from the country’s socialist political ideology. Prior

13

to China’s economic reform policy, only state-owned enterprises in a planned

economy existed. Private economy was seen as the origin of capitalism that needed to

be completely eliminated. However, along with the changes in government’s attitude,

this view has gradually changed (Liu, 2008). In 1978, the Chinese government

decided to implement economic reforms and open up the economy step by step. Since

1980, five special economic zones have been created. In 1984, 14 more coastal cities

were opened. In 1985, many economic development zones were added and the coastal

belt of economic opening was realized. Gradually, the Chinese government also

decided to open the inland cities and set up more free-trade zones. With more

favorable policies in these economic areas, much capital has been attracted into China.

Specifically, international corporations have been attracted by favorable tax policies

and regulations on foreign investment. This advantageous environment, along with

other favorable trends, provided a very good condition and background for the

development of private enterprises.

3.3 Achievements of the Reform and Opening Up Policy in

China

The Reform and Opening Up Policy has been successfully implemented in China

for almost 30 years. It is said that these reforms and the involvement of China in the

world economy has greatly influenced China’s development and sphere of influence

in the global arena. The Reform and Opening Up Policy started in 1978. It was a

national policy designed to reform economic policies from the inside and to open up

the economy to the outside world. During this period, Chinese leader Deng Xiaoping

said that every nation and every country needs to learn from others — their strong

points and their advanced technology. This policy is considered as a great turning

point in Chinese history (Liu, 2008). Owing to this great policy, China’s economic

system has been transformed from a planned economy to a thriving socialist market

economy. China’s society has completely developed from closing down to opening up.

Most importantly, standards of living have been advanced from poverty to relative

richness and satisfaction.

In 1978, China had the 10th

largest economy and was the 32nd

biggest world

exporter contributing a meager 1.8% to the world’s economic growth rate. Currently,

China boasts the world’s 4th

largest economy and is the world’s second biggest

exporter. China’s contribution to the globe’s economic growth rate has reached 6%

(Peng, 2009). Undoubtedly, China holds an increasingly important role in

international business and continues to grow to become one of the world's greatest

economies. These achievements date back to the great Reform and Opening Up

Policy.

14

3.4 Progress of entrepreneurial activities in China

The Reform and Opening Up Policy 1978 was raised during the Third Plenum of

the Chinese Communist Party’s 11th

Central Committee. Although the plenum did not

announce any special policy on private business, it mandated that the government

concentrate on economic development and modernization. This produced a strong

stimulus for the growth of the private economy, after which there was rapid

development in individual and private enterprises (Liu, 2008).

During the early stages of China’s economic system, there were two types of

private enterprises. There were individual businesses with no more than five

employees and private enterprises hiring more than five employees. In 1988, the

Chinese government announced that if a unit with privately owned assets hired more

than eight employees, it would be treated as a private enterprise (Zheng, 2004).

When it comes to employment, private businesses are becoming an increasingly

important and indispensable component of the national economy (Tao, 2008). China’s

population is huge and the unemployment issue has always been severe. It is not

possible to solve the problem if the economy will simply rely on government

investment. There is a need for a system of innovation that can encourage multiple

types of enterprises that will absorb the large and growing workforce.

From 1978, private enterprises rapidly grew, reaching 500,000 by the end of 1988

(Liu, 2008). During this period, the government made many favorable policies to

recognize and encourage private businesses. In April 1984, the Central Committee

issued a document affirming the role of private business in promoting growth of the

economy, and provided basic legal protection. There were also regulations that

facilitated to register and manage enterprises.

A real boom of private businesses began after Deng Xiaoping’s ―South Touring

Talk‖ in April of 1992 (Liu, 2008). Xiaoping visited a series of places around

Shenzhen and Shanghai, and delivered talks in order to clear existing doubts. These

talks confirmed ―development‖ as the first principle in China. The Central Committee

also confirmed the role of private business from being ―supplemental to national

economy‖ to an ―important part of the economic system.‖ Xiaoping’s talks

encouraged the expansion and development of private business, the inflow of foreign

capital, and the investment of private capital within China. With these, China’s reform

and opening up stepped to a new phase.

Table.1 Private Firm Development from 1989- 2000

1989 1990 1991 1992 1993 1994

Number(1000) 91 98 108 140 238 432

Workforce(1000) 1,426 1,478 1,598 2,015 3,213 5,594

Registered Assets

(billion RMB)

8.5 9.5 12.3 22.1 68.1 144.8

1995 1996 1997 1998 1999 2000

15

Number(1000) 655 819 961 1,210 1,509 1,762

Workforce(1000) 822 10,007 11,450 14,453 16,498 20,112

Registered Assets

(billion RMB)

262.2 375.2 514 719.8 1,028.7 1,330.7

1989 1990 1991 1992 1993 1994

Number

Growth(%)

8.4 9.9 29.5 70.4 81.7

Workforce

Growth(%)

3.7 8.1 26.1 59.5 74

Registered Assets

Growth(%)

13.1 29.5 79.7 208.1 112.6

1995 1996 1997 1998 1999 2000

Number

Growth(%)

51.4 25.2 17.3 25 25.6 16.8

Workforce

Growth(%)

46.9 21.7 14.4 26.2 17.6 18.4

Registered Assets

Growth(%)

81.1 43.1 37 40 42.9 29.4

Source: Office of the State Bureau of Business Management, ed., Statistic Collection of Business

Administrative Management (1989-2000) and Yearbook of Taxation in China (1993-2000).

Some empirical studies have concluded that capital accumulation and expansion

of the labor force leave unexplained a very substantial proportion of the historical

growth of the nation’s output (Solow 1956, Baumol 1968). From the foregoing

discussion, the importance of policy on entrepreneurial activities is clear. According

to Chinese economic reform facts, there were two turning points in the development

of China’s history: one is the Third Plenum of the Chinese Communist Party’s 11th

Central Committee in 1978, and the other is Deng Xiaoping’s ―South Touring Talk‖ in

1992 (Liu, 2008). The Plenum initiated the Reform and Opening Up Policy, which

began a new phase in China’s economic development and also provided an

encouraging and advantageous environment for private business. On the other hand,

the ―South Touring Talk‖ occurred at a very sensitive period when both China and the

world were experiencing political instability and economic turmoil. Deng Xiaoping

presented his political vision, clearing doubts and confusion on the issue of ownership.

He pointed out that development and power were the truth and that economic reform

and growth must come first before any argument on capitalism or socialism. The

―South Touring Talk‖ represented the attitude of the government and painted a fresh

direction for China’s development.

By the end of 2001, China had already joined the World Trade Organization

(WTO) in order to integrate the country closer into the world economy. This accession

has become both a chance and a challenge for China and for private enterprises

(Cheng 2001, Tao 2008). Under the WTO agreement, private enterprises are to enjoy

the same treatment as foreign enterprises and have more opportunity to enter new

fields. However, in order to overcome international competition, local entrepreneurs

16

still need to make more value-added products and create new technology.

4. Education and its effect on entrepreneurship

4.1 Significant knowledge sources and the evolution of China’s

education

An entrepreneur who wishes to start a new business must have new ideas (Stam,

2008). However, more than ideas, the transformation of a new idea into practical use

is the biggest challenge that any entrepreneur will face. This could be referred to as

entrepreneurial opportunity. Entrepreneurship has been described as the process of

acting upon a previously unnoticed profit opportunity (Kirzner, 1973). Entrepreneurs

act on these insights and bring economic growth afterwards. But these profit

opportunity must come from somewhere. Entrepreneurial ideas arise when an

entrepreneur sees that the ideas developed by earlier entrepreneurs can be combined

to produce a new process or output (Holcombe, 1998). New scientific knowledge is

thus an important source of entrepreneurial opportunity. Certainly, knowledge does

not create entrepreneurial insights, but it does create the opportunity to notice things

that could not be noticed without that knowledge (Holcombe 1998, Acs et al 2009).

Universities and research organizations are recognized as knowledge sources of

entrepreneurial activities. This knowledge spillover has been aptly described by

economists as ―any original, valuable knowledge generated somewhere that becomes

accessible to external agents, whether it is knowledge fully characterizing an

innovation or knowledge of a more intermediate sort. This knowledge is absorbed by

an individual or group other than the originator.‖(Foray, 2004).

This is why I attach much importance to education, in general, and to the

distribution of educational institutions throughout the country, in particular. Facts

prove that many new private entrepreneurs have made good use of their knowledge

from universities when setting up their own private businesses. They have specific

knowledge to their own activities that others do not share and they recognize an

opportunity. This proves that higher educational institutions and universities play an

increasingly important role in the development of Chinese private enterprises.

People’s view on education and the government’s construction of the education

structure have also significantly improved.

One milestone in China’s education was the resumption of college entrance

examinations in 1977 (Wang, 2008). It was the Reform and Opening Up Policy that

caused this resumption after ten years of being interrupted by the culture revolution.

With this policy, the Chinese has tried to acquire a broader perspective of the world,

absorb advanced technology, and reconstruct the country energetically. It has also

helped education improve smoothly and cultivated many kinds of talents in many

17

industries.

In the next section of this thesis, the basic structure of Chinese education and its

different stages of evolution will be discussed. During the different stages, both

government’s attitude towards education and people’s view on education have made

remarkable progress. Furthermore, the increasing number of higher education students

has contributed to highly developed private enterprises, indicating that the

development of China’s private economy will be benefited by the improvement in

education levels and in the increase of knowledge sources.

China’s modern education has experienced three stages (Zou, 2008). The first

stage (1978 to 1986) was the early stage of the transformation of Chinese society. The

Chinese government firmly announced that education would be reconstructed with

strategic emphasis on the modernization and reform plan. Compared with using

education as a tool for ―battle‖, this was undoubtedly significant progress in the

change of thought and social development. During the second stage (1987 to 1999),

the government brought education and technology to the top position in the

development plan. Gradually, the state formed a social concept of reliance on science

and education towards prosperity as a nation. In the third stage (2000 to present)

China entered the new century and confirmed the role of education as the footstone of

the nation’s triumph. The Chinese believe that only education can guarantee fairness

in society. Education is not only related to the development of a country and to the

modernization of the economy, but also to the improvement and progress of human

lives.

China’s educational system mainly consists of four parts: basic education,

intermediate profession and technical education, higher education, and adult

education. In 1986, the government promulgated a law that mandated nine years of

compulsory education in order to raise education levels in most parts of the country

(Ministry of Education of China). From then on, the development of China’s higher

education has progressed enormously. In the past, the Chinese would have been proud

to have one university student per family. Such was rare because then, it was

extremely difficult to enter a university. In 2004, the number of higher education

students reached over 20 million, an unbelievable improvement in China’s

educational history. In addition, the educational structure has also been improved,

diversified, and made comprehensive. Compulsory education has been nationally

maintained since 2000 (Ministry of Education of China). The Chinese government

started the ―211 Project‖ to develop around 100 universities and colleges for the 21st

century. China has already achieved a complete frame of education and will

continuously improve as the future unfolds. (See Table 2)

18

Table2. Total Enrollment of Higher Education 2008 (unit: person)

Item New

Enrollment

Total

Enrollment

Graduates

with Degree

or Diplomas

Degrees

Conferred

Postgraduates 418612 1195047 311839 307746

Doctor's Degree 58022 222508 41464 39592

Master's Degree 360590 972539 270375 268154

Regular Undergraduates and College Students 5659194 18848954 4477907 1820516

Enrolled in Full Undergraduate Courses 2820971 10243030 1995944 1820516

Enrolled in Specialized Courses 2838223 8605924 2481963

Adult Undergraduates and College Students 1911132 5241550 1764400 90935

Enrolled in Full Undergraduate Courses 820858 2227218 674890 90935

Enrolled in Specialized Courses 1090274 3014332 1089510

Undergraduates and College Students Enrolled in

Internet-based Courses 1234385 3104800 828225 29312

Enrolled in Full Undergraduate Courses 497993 1369091 377161 29312

Enrolled in Specialized Courses 736392 1735709 451064

Employees Enrolled in Graduate Programs Leading to

Doctor's or Master's Degrees 126884 346068 72811

Students Taking Exams Leading to Diploma 19677 60844

Students Enrolled in Radio and Television Teaching

Programs 6695 6882

Classes for Self-learning Programs 374559 996251 199007

Postgraduate Courses for Advanced Study 60747 60209

College Preparatory Courses 28043

In-service Training Courses 1443825 3866893

Overseas Students 66509 92491 46322 6071

Source: National Bureau of Statistics of China

4.2 Higher education in different provinces: a comparison

Higher education institutions have been taken as a primary force in the strategy of

developing human resources to reinvigorate China’s economy (China University

Appraisal and Research report). These institutions are part of the national innovation

system and have been seen as the solid core of science innovation. They take the

responsibility of educating, cultivating, and bringing up students for the development

of the country and of enterprises. Higher educational institutions have two main

functions: teaching and scientific research. As mentioned earlier, they are seen as

knowledge sources of entrepreneurial opportunities due to the phenomenon of

knowledge spillover. By playing the role of sources of scientific knowledge or as the

19

base of bringing up future entrepreneurs, higher education institutions serve as the

driving force behind private enterprises.

At beginning of the 21st century, China had already been working to improve

higher education for more than 20 years (Ministry of Education of China). Since the

implementation of the Reform and Opening Up Policy, the Chinese government

decided to emphasize on the exploitation and construction of coastal cities in the

southeast, and gradually opened up inland cities. In order to lead China out of poverty

and enhance living conditions, the government allowed a small part of the population

to become rich. A wealthy portion of the population was seen as a means to bring the

whole country to a better life.

In the next section of this paper, a comparison on the quantity of higher

educational institutions in different provinces will be presented. China has a large

population but the number of university is not enough. When China’s educational

development is not mature, not everyone has the opportunity to receive higher

education. Therefore, the distribution of universities in China is closely linked with

the population. This comparison of higher educational population share will

demonstrate the significant role of higher education in the flourishing of private

enterprises in different provinces.

Provinces are ranked based on the number of their higher educational

institutions relative to their total population. China undertook the fifth and the latest

population census in 2000, and this data will be used for the comparison. In Table 3,

the number in the column of central ministries and agencies is included in the column

of full undergraduate course. Universities of central ministries and agencies are

directly under the Ministry of Education’s supervision (Ministry of Education of

China). Other universities are provincial universities, owned by the various provincial

authorities.

Table. 3a Comparison of the main provinces of the higher education institutes in

2003

Regular Institutions of Higher Education2003

Population

Census2000

(million)

Higher

educational

population

rate

Central

Ministries

and

Agencies

Full

Undergraduate

Courses

Specialized

Courses Total

Beijing 33 56 17 73 13.82 5.282

Tianjin 3 18 19 37 10.01 3.696

Shanghai 9 26 30 56 16.74 3.345

Qinghai 4 8 12 5.18 2.317

Ningxia 1 3 9 12 5.62 2.135

Shanxi 6 30 27 57 36.05 1.581

Xizang 3 1 4 2.62 1.527

Heilongjiang 3 22 32 54 36.89 1.464

Zhejiang 2 23 41 64 46.77 1.368

20

Xinjiang 11 15 26 19.25 1.351

Jiangxi 17 37 54 41.4 1.304

Jiangsu 10 42 52 94 74.38 1.264

Hebei 5 26 57 83 67.44 1.231

Anhui 2 24 49 73 59.86 1.220

Gansu 2 13 18 31 25.62 1.210

Neimenggu 10 17 27 23.76 1.136

Guizhou 10 24 34 35.25 0.965

Shandong 2 33 52 85 90.79 0.936

Guangdong 4 31 46 77 86.42 0.891

Yunnan 16 18 34 42.88 0.793

Henan 1 24 47 71 92.56 0.767

Sichuan 6 27 35 62 83.29 0.744

Source: Yearbook of China Educational Statistics (2003)/National Bureau of Statistics of China

Table. 3b Comparison of the main provinces of the higher education institutes

in 2003

Higher Educational population rate

0.000

1.000

2.000

3.000

4.000

5.000

6.000

Beijing

Tianjin

Shanghai

Qinghai

Ningxia

Shanxi

Xizang

Heilongjiang

Zhejiang

Xinjiang

Jiangxi

Jiangsu

Hebei

Anhui

Gansu

Neimenggu

Guizhou

Shandong

Guangdong

Yunnan

Henan

Sichuan

Higher Educationalpopulation rate

From Table 3 we can draw the following conclusions:

(1) In general, Beijing, Tianjin, Shanghai, and other coastal provinces have some kind

of absolute advantage of higher educational population share. It means that within

these coastal provinces, there is comparatively higher quantity of high-educated

people than other provinces. This is due to a number of factors, the most important

of which is the national policy that emphasizes the development coastal cities first.

I also find that Shanghai, Zhejiang, Jiangsu, and other coastal provinces have high

21

ranks. Beijing is on top of the list. This is not only the effect of policy, but also the

impact of history. Beijing was the capital of many dynasties and, in its long history,

has collected many talents and new thoughts. Furthermore, Beijing is the capital

of China and the center of politics, economy, culture, science, and education.

(2) Some inland and undeveloped provinces have received high ranks, including

Qinghai, Ningxia, and Tibet. At first glance, this may be confusing; however,

these ranks were brought about not by the advantageous quantity of higher

educational institutions in these provinces, but their low population. In fact,

nominally, there are only a few higher educational institutions in these provinces.

In 2003, Tibet had only four.

(3) Referring to the column on central ministries and agencies, it is evident that the

quantity is low because their entrance requirements are more stringent than others.

With more support and encouragement from the government, students who want

to enter these universities need to get higher entrance scores. This represents not

only the quantity, but also the quality of universities in each province. Comparing

Beijing with Hebei reveals that Beijing has less than Hebei in the quantity of

higher educational institutions. However, Beijing has 33 universities that belong

to central ministries and agencies, and Hebei only has five. The difference

between these two provinces becomes obvious. Besides quantity, quality should

also be emphasized when constructing higher education universities.

4.3 University ranks and scientific contributions

In this section, I will focus on a quality analysis of different universities. The

judgment of quality is a complicated issue. A reliable Chinese university rank can be a

good reference when overseas universities recruit students from China.

Higher educational institutions are receiving more and more attention not only in

China but all over the world. They are cradles of innovative ideas and competitive

talents. Many former students in the university have become leaders of government

organizations and different enterprises. These students have made good use of their

educational background and experience in order to contribute to corporations and to

society. Hence, the distribution of universities also affects the progress and

development of local enterprises. Moreover, universities are centers of new ideas and

new thoughts, and economic progress can be derived from innovative ideas. In fact,

many corporations choose to sponsor or cooperate with universities in doing scientific

research.

How can I estimate or judge one university’s quality and research ability? This

calls for an integrated approach. In Table 4, an updated ranking of Chinese

universities and the ranking of these universities’ scientific contributions in 2009 are

presented. These ranks were gathered from extensive research and review of every

university’s performance. Depending on their performance, a score was given. The

universities were appraised based on three criteria: scientific research, talents

cultivation, and university reputation. Some subsidiary factors included science

22

innovation enjoinment, important scientific achievements, subject levels, outstanding

professors, former students, and so on. Finally, an average score was given for each

university.

Table.4 China’s University Rank 2009

Rank University Province Total

Score

Scientific

Research

Talents

Cultivating

Integrated

reputation

Science

Contribution

Rank

1 Peking University Beijing 100 92.77 100 100 1

2 Tsinghua University Beijing 95.06 100 83.05 88.48 2

3 Fudan University Shanghai 55.83 51.71 54.76 63.51 3

4 Zhejiang University Zhejiang 53.16 53.73 48.87 49.38 4

5 Nanjing University Jiangsu 43.99 42.36 42.33 43.7 6

6 Shanghai Jiao Tong

University Shanghai 43.47 48.34 34.64 43.65 11

7 Wuhan University Hubei 40.14 39.24 37.18 45.29 7

8 Renmin University Of

China Beijing 37.31 30.3 37.25 69.27 4

9 Jilin University Jilin 37.23 34.59 37.02 38.27 12

10 Sichuan University Sichuan 34.18 35.65 28.77 41.43 8

11 Central China University

Science and Technology Hubei 33.15 34.54 28.07 39.26 22

12 Zhongshan University Guangdong 32.72 32.96 27.5 48.45 17

13 Nankai University Tianjin 30.09 29.29 26.49 44.01 8

14 Beijing Normal University Beijing 29.33 28.97 24.48 48.78 10

15 Shandong University Shandong 28.98 24.9 29.62 39.26 15

16 China Science &

Technology University Anhui 28.7 29.59 23.97 38.49 24

17 Harbin Institute of

Technology Heilongjiang 28.32 28.1 25 37.04 20

18 Middle and Southern

University Hunan 28.22 27.7 25.1 37.94 12

19 Xi'an Jiaotong University Shanxi 27.45 26.2 25.17 37.23 14

20 Xiamen University Fujian 26.4 25.05 23.55 41.26 18

Source: China university appraisal and research report, 2009

The ranking may have changed just recently but its general structure remains the

same. Beijing and Shanghai, with their absolute advantages, hold the highest ranks in

the quantity and quality of universities. Some universities such as Peking University,

Tsinghua University, and Fudan University are even famous overseas. It is worth

noting that the ranks were generated not only according to the reputation of each

university, but also to the ability and competence of their students.

Some coastal provinces such as Zhejiang, Jiangsu, and Guangdong also have high

ranking universities. Their complete appraisals are still higher than that of those in the

23

inland provinces. However, I cannot ignore the progress and development of some

inland universities. Xi’an Jiaotong University, which is located in Shanxi, is very

famous in Central China. It is a comprehensive university hosting more than nine

main faculties. This university was taken as a priority by the government. Its

educational quality and science research capacity have been confirmed by the

government and the whole country. This university does not have a geographic

advantage and its reputation and achievement resulted mostly from the country’s

policy support and input.

The scientific contribution rank came from an estimation of natural science and

social science contributions of each university. These achievements take the forms of

papers, studies, reports, patents, and techniques (China University Appraisal and

Research report). Scientific contributions stand for the transformation of scientific

research to practical productivity and reflect the final contributions of these studies

and their practical value in society. Through the ranks on scientific contributions and

other research reports, we can easily find that Peking University is on top with its

numerous awards in the natural and social sciences. Tsinghua is the only university

that seems to be catching up. Since the reform and opening up in 1978, these two

universities have kept the leading role in the scientific field. However, I can still see

the differences between these two universities. Peking University is famous for its

social sciences while Tsinghua University is known for its scientific research and

developments.

Obviously, the top 20 universities in China have higher ranks on scientific

contribution. However, it is not entirely correct to assume that the rank of a university

stands for its real quality, although it can provide a proof and reference to estimate the

university’s impact on entrepreneurship. As we know, many talents in universities

have become initiators or creators of new enterprises. In the next section, I will use

the list and rank of millionaires from different universities to further discuss

education’s effect on entrepreneurship.

Table.5 China’s University Rank depending on China Rich List 2009

Rank University Province Former

Students Enrollment(thousand)

Former

Students

per

thousand

student

1 Peking University Beijing 35 33.108 1.057

2 Zhejiang University Zhejiang 23 38.832 0.592

3 Tsinghua University Beijing 22 25.804 0.853

4 Fudan University Shanghai 20 26.04 0.768

5 Renmin University Of China Beijing 16 20.067 0.797

6

Middle and Southern University Hunan 9 50.206 0.179

South China University of Technology Guangdong 9 35.293 0.255

Shanghai Jiao Tong University Shanghai 9 33.417 0.269

9 Shenzhen University Guangdong 8 30 0.267

24

Nanjing University Jiangsu 8 24.405 0.328

11

Harbin Institute of Technology Heilongjiang 7 41 0.171

Shandong University Shandong 7 57.336 0.122

Nankai University Tianjin 7 22.296 0.314

14

Huazhong University of Science and

Technology

Hubei 6 55.966

0.107

East China Normal University Shanghai 6 22.805 0.263

Beihang University Beijing 6 22.856 0.263

Source: China university appraisal and research report, 2009/Ministry of Education of the

People's Republic of China

4.4 University ranks based on China’s rich lists

It has been more than ten years since Hurun started a rich list for China and

became famous for it. Rupert Hoogewerf was born in 1970 in Luxembourg. He is the

publisher of the Hurun Report, a monthly magazine best known for its "China Rich

List", which ranks the wealthiest individuals in China. Currently, many institutions

issue similar lists every year. From the beginning, these lists and ranks touched the

Chinese people’s sensitivity to wealth. China’s rich list could be recognized as the

sufficient revelation of the achievement that China’s private enterprises have gained

since the Reform and Opening Up Policy in 1978 (China University Appraisal and

Research report). The persons in the list could also be taken as the representatives of

great entrepreneurs. Their unique entrepreneurial abilities and process of success also

bring huge influence and drive to the people, especially to the new Chinese

generation.

Which university produced most of China’s millionaires? Table 5 gives us an

answer. This ranking is based on many well-known rich lists and independent

research on these people’s educational backgrounds. Also, this ranking included all of

those who have been listed in the rich lists prior to 2009. This rank can approximate

the contributions of different universities in nurturing management talents for

enterprises, and can also reflect the level of the universities’ capacity to cultivate

innovative human resources.

In the column, "former students" refers to the number of former students who

have appeared in China’s four famous lists from 1999 to 2008, including Forbes

China Rich List, Hurun China Rich List, Southern Weekly China Mainland Rich List,

and New Fortune China 500 Rich List. Peking University tops the list with almost 35

former students appearing in the four famous rich lists. Hence, Peking University has

been indisputably called the ―cradle of millionaires.‖ (China University Appraisal and

Research report). In general, the universities where these millionaires studied are

located in developed provinces and cities, while less of them graduated from the

central and western provinces. Obviously Beijing, Shanghai, Zhejiang, Guangdong,

and Jiangsu produced more millionaires.

25

However, an exception has to be made in the case of Guangdong Province. It did

not have an absolute advantage in the university rank list; however, its advantage has

been made apparent in this rich list. Guangdong’s prominence in the rich lists is not

only attributable to the economic development in the province, but also to the local

culture and the people’s desire for wealth. Some less-developed provinces such as

Heilongjiang and Hunan have also produced some famous millionaires. This suggests

that as long as people try to innovate and strive for success, there could be successful

entrepreneurs and millionaires in less-developed provinces. From these ranks, it may

be assumed that individuals with science and engineering educational backgrounds

are inclined to have better advantages. Integrated universities, for example Peking

University and Fudan University, which have relatively complete arts and sciences

subjects, tend to cultivate more millionaires than specialized universities.

These rich entrepreneurs could be taken as one of the most important

contributions of higher educational institutions to the country since the Reform and

Opening Up Policy (China University Appraisal and Research report).

Entrepreneurship should be valued because it carries the power to lead a small

enterprise to innovation and success, and has the spirit to lead ordinary individuals to

becoming millionaires. Nevertheless, the university should be valued more because it

is the cradle and origin of entrepreneurial and innovative ideas. The importance of

one’s educational background must be emphasized because one’s personality, will to

succeed, perspective in life, and capability may be shaped during his or her stint in the

university.

5. Overseas experience and relation to

entrepreneurship

In this part, I will discuss another factor that may influence entrepreneurship:

overseas experience. Overseas experience, especially overseas education experience,

is related to the process of forming entrepreneurial abilities. In the past, few Chinese

were given the chance to study or work abroad. Since the Reform and Opening Up

Policy in 1978, China's doors have been opened to the world and China has welcomed

a multitude of foreign students. In the meantime, many Chinese have gained the same

opportunity to study or work in other countries. In 2003, a total of 117,300 students

and scholars were studying abroad. In the same year, a total number of 20,100

students and scholars returned from overseas study. From 1978 to 2003, a total of

700,200 Chinese students and scholars studied in 108 countries and regions all over

the world. During the same period, a total of 172,800 returned. As for the 527,400

who have not yet returned, 356,600 of them are still studying, doing research, or

visiting as scholars in foreign higher educational institutions. During the 30-year

reform and opening up period, numerous students have flown abroad. Some of them

26

chose to return and share what they have learned from overseas; these people are

called ―returned overseas graduates‖ or ―overseas returnees.‖

From the 1980s to the early 1990s, Chinese overseas returnees have made

contributions mainly in the fields of science and education. According to statistics

from the Ministry of Education in China, overseas study has given rise to a number of

leaders in different subjects and levels in higher educational institutions. Among

higher educational universities directly under the Ministry of Education, overseas

returnees accounted for 78% of principals and 63% of Ph.D. supervisors. In addition,

81% of the members of the Chinese Academy of Sciences and 54% of the Chinese

Academy of Engineering were overseas returnees. In the late 1990s, something

changed. The new generation of overseas returnees played more and more important

roles in the fields of innovation and entrepreneurship. For one thing, China has been

transforming from a planned economy to a market economy as it opened up itself to

the world. For another, overseas returnees had a particular and incomparable

advantage during those knowledge-oriented times.

We can identify some general characteristics of overseas returnees and their

behaviors in starting new businesses (Wang, 2008).

They have higher educational background or experience. Majority of them are

researchers or Masteral and Doctorate degree holders. Some have at least

undergraduate degrees. These special backgrounds have helped them a lot in

setting up new businesses.

They tend to start businesses in high-tech fields (e.g., Internet, IT,

communication) and it seems easier for them to succeed in these industries.

Twenty percent (20%) of the returnees choose careers in the fields of law,

consulting, and education.

Generally, they intended to start new businesses in China after several years of

working abroad. On the average, the returnees have five years of overseas

work experience, which seems sufficient in finding right career directions. The

average age is 35. They prefer to find people with similar experiences and

form new teams as a way of starting business. They are also inclined to seek

financial help from venture capitalists.

Most returnees came from the United States. Some are from Europe, Japan,

and Canada. Most took majors in science and engineering, though a

considerable number took economics and business management.

Ninety percent (90%) of them are males. Female entrepreneurs tell us that it is

still difficult for women to set up new enterprises in China.

China’s rapid progress has provided a wide stage for overseas returnees to show

their personal competence and development. Consequently, it seems that the people’s

viewpoint on overseas returnees has greatly changed. Views towards them are

becoming more rational and employers are no longer afraid, hesitant, and insecure to

employ them. Unfortunately, the competitive advantage of the new generation of

overseas returnees is falling.

In order to analyze this change, I need to review the experience of the early

27

groups of overseas returnees. In general, the present successful entrepreneurs come

from the early group of Chinese students who studied abroad during the 1980s and the

1990s. Before going abroad, they were already the elites in their universities and in

their professional fields. They went overseas due to their excellent studies and

abilities. Many of them worked in China for many years and understood both Eastern

and Western worlds. As China entered the WTO, may of these expatriates chose to

return and to start their own business. Their absolute advantage of education and

experience were welcomed by numerous employers, though many of them chose to

set up new enterprises. At the beginning of the 21st century, overseas returnees needed

to have high educational background and well-prepared knowledge structures if they

planned to set up new enterprises. They preferred to start in high-tech fields,

especially in the realm of information technology.

Charles Zhang, founder of SOHU.com, serves as a good example. He finished his

Doctorate from the Massachusetts Institute of Technology (MIT), in the United States.

Today, Zhang is regarded as one of China’s Internet pioneers. It was he who

introduced the culture and operation of the Internet to most Chinese and his success

came from his complete understanding of the Internet. Another example is Robin Li, a

very famous Chinese entrepreneur. He also graduated with a Master’s Degree from

the United States. He founded Baidu and has been the CEO of Baidu since 2004.

Baidu is the leading Chinese search engine and was listed in the NASDAQ in August

2005.

If there is relationship between entrepreneurship and experience, it can be

observed and clearly indicated through this early group of Chinese overseas returnees.

We can see a combination of Western and Eastern cultures in their experiences and

success stories. Their intelligence and diligence made them good examples for the

Chinese people to emulate and learn from. Their unique entrepreneurial abilities have

led to the realization of their dreams and personal values.

To sum up, there is confirmed relationship between overseas experience and

entrepreneurship. Kirzner (1973) describes entrepreneurs as the people who are alert

enough to spot previously unnoticed profit opportunities and act upon them. But some

people are in a better position or situation to notice certain profit opportunities than

others (Holcombe, 1998). Overseas experience absolutely inspires and influences

many people because with professional or educational training, they are more likely to

spot the potential opportunities. People who ever travel a lot in many countries can

notice opportunities because they find many new things in these countries might be

also available in China. The positive relationship has been shown to be successful by

earlier group of overseas returnees. However, for the new group, this relationship is

not as evident as it was for the first generation. All in all, the success of returnees

generally depends on whether they can seize the opportunity.

28

6. Regional factors and their effect on

entrepreneurship

Entrepreneurship is a primary catalyst for economic growth and regional

development. State and local policymaker are devoting considerable resources to

fostering entrepreneurship (Hall and Sobel, 2006). The experience of the last thirty

years shows that location and China’s historical and cultural background have had an

important influence on the development of the private entrepreneurship (Liu, 2008).

In this section, I will explain how regional factors affect entrepreneurship.

Considering the empirical studies previously discussed, several location-specific

factors to the entrepreneurship were chosen.

Regional factors mainly include historical and cultural background as well as

geographical influences. For purposes of analysis, three different provinces are used

as examples: Shanghai, Zhejiang, and Guangdong.

In general, these three provinces have special characteristics that affect

entrepreneurs and entrepreneurial activities. Shanghai, currently considered as the

largest metropolis, is the largest center of commerce and finance in Mainland China.

There is no doubt that Shanghai is an international city, but when dealing with private

enterprises and local entrepreneurs, it is not the first city that comes to mind. Zhejiang

Province’s private economy stays on top of all private economies in Mainland China.

In China’s top 500 list of private enterprises, Zhejiang enterprises hold 203 positions.

On the other hand, Guangdong of Southern China houses many entrepreneurs and

millionaires. Its advantageous location enabled it to attract more connections and

trade. In China, the idea of wealth is always related with the name Guangdong.

6.1 Shanghai and its internationalization culture

Shanghai is located in China’s central eastern coast at the mouth of the Yangtze

River. Shanghai’s geographic advantages have made it a multinational hub since its

early history. As a fishing town, Shanghai became one of the earliest cities opened up

to foreign trade in 1842. Gradually, the city grew as an international city of finance

and business, serving as a bridge between the West and the East. Economic reforms in

Shanghai have brought huge developments. In fact, it is now the world’s busiest cargo

port.

Shanghai’s cultural background is always connected with internationalization

because of its close and early connections to global trade. Shanghai’s cultural style is

a combination of the East and the West, and a merger of the North and the South. Its

formation depended on China’s traditional culture, but it has been enormously

affected by multinational culture after it was opened to foreign trade. Shanghai’s

culture is unique that it is either conservative and traditional or modern and

29

fashionable.

Shanghai’s location and cultural background has made it an international city. It is

here that many international corporations have chosen to set up their offices and

factories. Almost every famous brand can be found in this city. Unfortunately,

Shanghai’s local private businesses are not developing because of internationalization

(Technology Entrepreneurship, 2007). Thus, the people of Shanghai grew to become

very good managers, instead of excellent innovators (Li, 2010). It is not fair to judge

the entire populace; however, the general characteristics of this city are not inclined

towards innovation. The people of Shanghai are more inclined to be a simple staff

member in the company holding a common but permanent job. This means that the

innovative part of entrepreneurship cannot be completely represented in Shanghai; the

private economy in Shanghai is not as prosperous as in Zhejiang and Guangdong

Provinces (Huang, 2008). In the next section, I will present the features of Zhejiang

and discuss its significant differences with Shanghai.

6.2 Zhejiang and private economy

The experience of Shanghai shows that location, history, and cultural background

of regions greatly influence the development of private economy. Zhejiang Province

is famous for its strong private economy. This achievement is called the ―Zhejiang

mode‖ or the ―Zhejiang phenomenon.‖ (Luo, 2007). People in this province have

earned the country’s attention and admiration because of their diligence and wisdom.

Zhejiang is an eastern coastal province. Its three largest cities are Hangzhou,

Wenzhou, and Ningbo. It is famous for the production of rice and silk. Within this

province, especially in Wenzhou and Taizhou, market economy had already developed

to some extent even before the national Reform and Opening Up Policy (Liao, 2001).

The people started their own businesses very early, even though it was not legal and

common at that time. They also utilized free-trade, which is the origin of market

economies. After the government’s permission and encouragement of a market

economy, the private economy in this province has achieved more freedom, and has

progressed very rapidly. In addition to the progress within the province, people tried

to seek other provinces and other cities for business. Zhejiang’s main economic

structure is private. The revenue per capita in this province is higher than in many

other places.

Culture is regarded as the set of shared attitudes, values, goals, and practices that

characterizes an institution, organization, or group. Culture has significant influence

on people’s view and behaviors. Hence, culture can have a huge influence on a

region’s economy and development. The high economic growth rate of Zhejiang

province is closely related to entrepreneurship. Zhejiang’s entrepreneurial tendencies

are founded in their culture background. After being influenced by people in Hong

Kong, Taiwan, and Macao, the people of Zhejiang learned to admire successful

entrepreneurs. In its early history, everyone strived to make more money. Zhejiang

entrepreneurship can be characterized by focus on business, risk-taking, and hard

30

work. It is a common saying in China that there are Zhejiang people wherever there is

a market and there will be a market if there are Zhejiang people (Zhong, 2008).

Entrepreneurship is a kind of soft power. The level of the region’s economy

mostly depends on the level of entrepreneurial activities. The basic values that drive

entrepreneurship, as shown by Zhejiang, are innovation, cooperation, and healthy

competition. There is also the value of freedom. These values drive the people of

Zhejiang to leave their hometown and venture into new businesses overseas. Currently,

one can find various kinds of business set up by Wenzhou people all around the world.

In addition, Zhejiang’s educational system is better, more complete, and definitely in

the lead. Zhejiang University, for example, is famous as the largest integrated

university in China. It has also fostered numerous entrepreneurs and millionaires. In

national university and rich list rankings, many of Zhejiang universities are found.

Zhejiang’s economic success seems to originate in its cultural background. In

2007, Zhejiang’s GDP and GDP per capita ranked 4th

in China. Its strong private

economy always seems to be one explanation of the high revenue per capita. If there

is anything we can learn from the case of Zhejiang Province, it should be their spirit.

The Zhejiang spirit makes everyone in the province desire to become an entrepreneur

and consider hard experiences as a necessary part of becoming rich.

6.3 Guangdong province and its immigration culture

Guangdong is an economically strong province and it has the highest GDP in

China. From the beginning of the 21st century, the industries of Guangdong have

gradually been transformed from primary and secondary to tertiary industries. Many

local high-tech enterprises have grown, including Huawei and ZTE Corporation.

Guangdong’s private economy is also very prosperous. Shenzhen’s development

shows us a feature of Guangdong culture.

Guangdong is a province in the southern coast of China. This province is also

known by its English name ―Canton Province.‖ The capital of the province and its

economic hub, Shenzhen, are important and prosperous cities in China. This province

connects with Hong Kong and Macao. Due to the province’s early communication

with the outside world, Guangdong was the earliest to make contact with other

cultures. Since the Reform and Opening Up Policy, many cities in Guangdong

province have become special economic zones.

Guangdong was the homeland and the base of operation of Dr. Sun Yat-Sen,

considered as the founder of modern China. Hence, Guangdong could be seen as an

active place of culture and thinking. Guangdong has three main nationalities and three

main local languages. Since the reform and opening up, this province has absorbed

many immigrants, especially in Shenzhen. Shenzhen’s immigrants even exceed its

number of local citizens; thus, Shenzhen is called the ―immigration city.‖ This kind of

city has the advantage of cross-cultural encounters. Many people of different cultures

and backgrounds gather together in this city. It makes the people of the city

broad-minded and friendly. Due to the effect of the immigration culture, the people in

31

this province are more open-minded, compared to those in other provinces. An open

culture is favorable to development. This open culture has resulted mostly from the

influence of Hong Kong. The geographic advantage of being connected to Hong

Kong and its close communication with this international city have made Guangdong

more ―Western‖ compared with other provinces. So Guangdong has the mode for

innovation in entrepreneurship.

Guangdong is the most prosperous province in China. It has sufficient resources

and a developed economic system. This has resulted primarily from its cultural

background and the influence of Hong Kong. People emphasize the development of

education in Guangdong. The universities hone many entrepreneurs and millionaires.

The people of Guangdong have comparatively higher standards of living than many

inland provinces.

7. Unemployment rate and its effect on

entrepreneurship

7.1 Basic explanation

There are various causes of unemployment and people do not agree on which

causes are most important because different countries have their unique situations and

economic stages, and experience different levels of unemployment. The effects of

unemployment are serious. To counteract unemployment, investment is important in

the long run.

Some studies find that greater unemployment serves as a catalyst for startup

activity (Reynolds et al, 1995). Still others have found that unemployment reduces the

amount of entrepreneurial activity (Audretsch, 1995). The relation between

unemployment and entrepreneurship is a controversy discussed issue in previous

studies. At the individual level, unemployment is regarded as a trigger to become

entrepreneurs. At the regional level, markets with a high unemployment rate are often

considered as a unfavorable environment entrepreneurship.

The relationship between unemployment and entrepreneurship has so far mostly

been led on the basis of the "refugee effect" (i.e. unemployment stimulating new

venture formation) and the "Schumpeter effect" (i.e. higher levels of entrepreneurship

reducing unemployment). See for instance Lasch, (2007).

Depending on ones perspective, there are two types of ―hypotheses‖:

The “push” hypotheses, which present a positive relationship between

entrepreneurship and unemployment (Parker, 2004):

1) Higher unemployment rates reduce the opportunity costs of leaving paid

employment.

2) Higher unemployment rates decrease the cost of input factors.

32

The “pull” hypotheses, which present a negative relationship between

entrepreneurship and unemployment (Parker, 2004):

1) Higher unemployment rates decrease market demand.

2) Higher unemployment rates decrease the opportunity of paid employment

if the business fails.

7.2 China’s unemployment rate

The concept of unemployment rate in China is different from its universally

accepted meaning. It only includes unemployed people who have been registered in

the government structure, without including new graduates and people who live in the

countryside. In the past, China took the concept of ―unemployment‖ as an evil

produced by capitalism. The idea of ―ready to be employed‖ has always been

accepted in place of unemployment.

33

7.2.1 Analysis of China’s unemployment rate

In this section, I shall look at unemployment rates in China in recent years and

present some conclusions based on available data.

Table.6 China’s unemployment rate from 1978 to 2008

Year 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Rate(%) 5.3 5.4 4.9 3.8 3.2 2.3 1.9 1.9 2.0 2.0 2.0

Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Rate(%) 2.6 2.5 2.3 2.3 2.6 2.8 2.9 3.0 3.1 3.1 3.1

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008

Rate(%) 3.1 3.6 4.0 4.3 4.2 4.2 4.1 4.0 4.2

Source: Yearbook of China Statistics (2008)

Since the Reform and Opening Up Policy, China’s economy was completely

reformed. After China’s Cultural Revolution, unemployment rates increased. Due to

the economic reform carried out successfully in the country, the Chinese government

placed a renewed emphasis on the development of the economy. State-owned

enterprises also gained much achievement. Many private enterprises gradually grew

and expanded. The rate of unemployment fell considerably, compared to the earlier

years. Since the middle and late 1990s, state-owned enterprises have experienced

many problems, including low efficiency and complicated structures. There was a

trend of encouraging the development of private enterprises and reforming

state-owned enterprises. Many state-owned enterprises gradually shifted towards

becoming private structures. This resulted in millions of people losing their jobs.

Since the end of the 1990s, unemployment rates have been increasing.

7.2.2 China’s real unemployment situation

In 2008, the official unemployment rate issued by the Human Resource and

Social Security Department was approximately 4.2%, while the unemployment rate

issued by China Academy of Social Science was 9.4%. The result issued by China

Academy of Social Science depended on ―research data‖ while the other depended on

―register data.‖ The problem of unemployment is always serious because of China’s

huge population. After the reform of state-owned enterprises, millions of people lost

their jobs. Many of the unemployed were middle-aged and without any special skills.

In order to help them find jobs, the government issued a number of policy initiatives

(e.g., tax reduction) to encourage this group of people to start new businesses.

Another serious source of unemployment in China is the huge number of new

34

graduates. In 2008, there were almost five million new graduates, and the figures rise

to seven million if other kinds of schools were included. The increasing enrollment in

universities resulted in the employment problem of new graduates. New graduates

will find it more difficult to find jobs compared to their earlier counterparts. The huge

number of new graduates already exceeds the amount that employers actually need in

the present market. In addition, most of these graduates have no work experience and

employers tend to hire people who can handle the job instantly. This problem is

compounded by the influence of the worldwide financial crisis. Many enterprises are

closing down and the employment of new graduates remains a primary concern.

7.2.3 Unemployment rate and entrepreneurship

Most studies show that entrepreneurship leads to substantial benefits in term of ,

for example, employment effects and innovations (Praag and Versloot, 2007). The

relationship between unemployment rate and entrepreneurship could be positive or

negative. In my opinion, it depends on a person’s background and social situation.

Unemployment can become the primary force to create new enterprises, especially

people with longer working experiences and higher educational backgrounds. Under a

situation where the labor force and input factors are being decreased, innovation and

new businesses can arise. However, success requires a combination of good

opportunity and confirmed ideas. High unemployment rates will stimulate more

capable people to exploit and use their entrepreneurial skills.

On the other hand, high unemployment rates can also bring many disadvantages

such as a sluggish market and lower market demands. People do not want to pay more

money when buying commodities, which would be very discouraging and constrictive

for entrepreneurs. In addition, people have to take the risk to create; if they fail, the

cost and the damage in spirit can be serious. Moreover, it will be more difficult to find

jobs when unemployment is high. In conclusion, the relationship between

unemployment and entrepreneurship is ambiguous. Unemployment has been shown to

affect entrepreneurship activity. Depending on Chinese facts, we give support for

unemployment as important factor for entrepreneurship. But at the individual level, it

depends not only on social factors but also on private factors if one can become

entrepreneur.

8. Family background and the relation to

entrepreneurship

The influence of family on people is fundamental. The culture and way of

35

training in the family will affect a person’s life. In general, a more wealthy family can

provide a good environment for a person’s development and also afford to have their

children entering higher education, which will be significant in honing entrepreneurial

skills. In addition, a family that has its own enterprise will turn over the business to

family members.

In China, family consciousness is very strong. China’s start-ups are controlled by

families. The Confucianism-steeped Chinese culture is believed to be the main reason

(Liao and Sohmen, 2001). Many entrepreneurs would be pleased hiring spouses and

siblings in helping to operate the company. The manager must be someone within the

family; the father always transfers the leading position directly to his son.

It is no wonder that the family enterprise is the most common private enterprise,

especially in Zhejiang Province. Since the Reform and Opening Up Policy, there have

been more than 30 years of development in China’s private economy. Most of these

private enterprises are still under the control of the first generation of entrepreneurs.

However, the problem of managing and expanding the current private enterprises rests

on the next generation. There is no doubt that this well-educated second generation

will take over the private economy, but it is far from certain that they will have the

same entrepreneurial spirit.

9. Conclusion and recommendations for further

research

Entrepreneurship is always summarized as the process of business start-ups or the

creation of new organizations. It is also regarded as a vehicle of innovation and more

employment. Many governments understand its influence and encourage its

development. Currently, many publications of excellent enterprises and millionaires

show us that the people’s view on private economy and wealth is changing in China.

Entrepreneurs are now being admired as pillars of society. Many entrepreneurial

activities have led to the creation of new businesses and new opportunities that have

greatly contributed to the welfare of society.

China’s entrepreneurship is unique. The Chinese people exhibit strong desire for

success and wealth, after a long period of poverty and instability. The process of

private economy development in China is the best representation of entrepreneurship.

In this paper, we identified six main factors that affect entrepreneurship.

Government policy is the fundamental support for economic development. Both

active and passive government policies promote the flourishing of entrepreneurship.

The prosperity of China’s private economy can be traced to the Reform and Opening

Up Policy of 1978. This policy was a historical turning point from closing down to

opening up, and it also provided the private economy with a feasible and favorable

macro environment. The influence of government policy comes first before any other

36

factors.

Education is one part of government policies, although I have discussed it

separately in order to emphasize its special role in China. Higher educational

institutions and universities have a profound influence on entrepreneurship. A more

even distribution of universities would enhance the level of education, especially

among the remote provinces of China. The university is always regarded as the origin

of innovative ideas and the cradle of talents. China’s list of new enterprises and

millionaires shows us that the quality of universities directly affects the

entrepreneurial and career competence of students.

People who have overseas work or study experience can help enhance the

possibility of creating new enterprises. In China, the typical example is the first

generation of overseas returnees that made significant contributions to China’s

entrepreneurship, particularly in the high-tech industries. Due to the numerous

provinces and diversified cultures in China, different regional factors such as location

and cultural background affect the direction of local economic progress.

Unemployment is also related to entrepreneurship. Unemployment may

simultaneously produce positive and negative results at the individual level. Family

background is another influential factor in explaining entrepreneurship. A good family

background has a positive influence on education and experience, though most of

China’s entrepreneurial successes were built from nothing.

In conclusion, the evolution of entrepreneurship in China has unique

characteristics. The growth of China’s private economy seems to be driven partly by

entrepreneurs. In this paper, I have explored how certain external and personal factors

separately affect China’s progress in entrepreneurship. In addition, I would like to

present some recommendations for further research.

1. Government attitudes shape the country’s direction. Economic development should

be placed first, even if China espouses a socialist ideology. The Reform and Opening

Up Policy can be regarded as the first and most successful step leading to China’s

development. As China’s economy integrates with the world, more attention should be

given to an appropriate institutional setting. 2. The influence of education on

entrepreneurship seems essential. The special atmosphere found in universities

encourages entrepreneurial spirits. Indeed, the university is indispensable; however, a

person with potentials can also realize his entrepreneurial potential even without a

university background. Furthermore, there are some doubts on quality and accuracy of

China’s university rank. The role of higher education on entrepreneurship needs to be

more carefully analyzed. 3. With rapid developments in the IT world, China’s own IT

achievements are closely reaching the world’s highest. Will the influence of

expatriates and overseas experience on entrepreneurship decrease in the future?

Students who have been educated in China have a higher entrepreneurial competence

today. 4. Regional culture affects the directions of development. While every province

should be proud of its own achievement, each should also reflect on its shortcomings.

For instance, the people of Shanghai need to ask why their local people can serve as

excellent managers but not as good innovators.5.Unemployment rates in China must

be correctly presented and clearly understood. Should the government use reasonable

37

methods in calculating real unemployment rates? While there is a need to first

confirm the economic stability of the society, a real unemployment rate may stimulate

the people’s entrepreneurial skills and bring more progress to China’s private

economy.

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