Path Dependence: The “Curse” of Natural Resources on Urban Entrepreneurship

ABSTRACT Rich natural resources discovered in a region, paradoxically, tend to hinder its economic development in the long run. This paper further explores the long‐term negative effect of natural resources on regional entrepreneurship from the view of behavioral inertia and interactions among local enterprises, government and residents. We empirically test the “curse” effect of natural resources on urban entrepreneurship using data from 285 prefectural cities in China from 2010 to 2015. Our findings show that first, for each one‐unit increase in a city's coal resources, the level of entrepreneurial spirit in that city decreases by 0.0063 units on average, with entrepreneurship in non‐coal‐related industries being significantly crowded out. Second, better institutional quality could help ease the “curse” of natural resources. When the urban corruption level decreases by 1% (i.e., institutional quality becomes better), the negative effect of coal resources on urban entrepreneurship will shrink by 0.0025%. Besides, the negative effect of natural resources on entrepreneurship can be mitigated or even reversed by breaking path dependence through proactive government reforms. Moreover, heterogeneity tests show that the “curse” of natural resources is more prominent for high‐risk opportunity entrepreneurship. Lastly, the crowding‐out effect of natural resources on entrepreneurial human capital is further testified through the slumping entrepreneurship in the technology‐intensive manufacturing industry and all types of service industries. These results provide insights for policy design to boost entrepreneurial activities and mitigate the potential “curse” of natural resources on entrepreneurship.