Big businesses versus institutions for entrepreneurship: new firm creation and growth in China

Abstract This study on entrepreneurship in China compares the relative importance of institutions with that of a new and less studied variable—big businesses. This study considers two aspects of entrepreneurship: new firm creation and new firm growth. Regression analyses are conducted using province-year panel data from 174 observations. We first find some evidence of positive but diminishing marginal impacts of the aggregate index representing institutional development on new firm creation and growth. Second, we confirm the robust impact of the greater presence of big businesses in a province on the sales of new firms, measured by the sales sum of new firms per population in each province. This result is consistent with the linkage effect, whereby big businesses build their supply chains and promote new firms to be their suppliers. We find no evidence of a net barrier-to-entry effect of big businesses on new firm creation, suggesting that positive spillover effects tend to offset negative barrier-to-entry effects on new firm creation. In terms of policy implications, the results suggest that for an economy at the middle-income stage, promoting big businesses is justified as it has no negative effects on new firm creation, while it positively affects new firm growth.