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Study: China's free enterprise economy succeeds via bottom-up development

Entrepreneurship is taking off in China and with little input from the government, reports a new Cornell study. It is the capitalism of the private sector -- not government -- that is powering China's huge economy, say the researchers, making the rise of capitalism in China very similar to the West's.

"The surprising finding is how little government actually is needed to enable entrepreneurial activities," said Victor Nee, Goldwin Smith professor of sociology and director of the Center for the Study of Economy and Society at Cornell, who led the study. "Where markets rule, profit opportunities naturally draw in new entrepreneurs, no matter how adverse the institutional environment may be initially. Once a critical mass of private firms operates in specific niches, social norms and networks fulfill many of the functions that textbook economics assigns to government and legal institutions."

Nee and his colleagues at Cornell, Lund University and the Shanghai Academy of Social Sciences conducted a survey in 2006 and 2009 of a random sample of 700 private firms in seven cities of the Yangzi Delta region to determine the underlying mechanisms that enable the explosive growth of China's private firm economy.

The study concluded that "top-down approaches of institutional change as often advocated by policy advisers may be much less viable than China's gradual bottom-up economic development," Nee said. "Sustainable and viable institutional change enabling China's private enterprise economy is much more likely to depend on the entrepreneurs themselves rather than on government. In this sense, the rise of capitalism in China does not differ much from the rise of capitalism in the West."

Nee and Sonja Opper of Lund University will first present their findings June 18 at the Cornell-sponsored international symposium, "Capitalism from Below: Markets and Institutional Change in China," in Shanghai.

The starting point of the five-year study was the puzzling observation that China's private firms -- with more than 75 percent of the urban workforce and 68 percent of GDP -- have emerged as the most dynamic economic force in the nation.

Such firms, which are not supported by government-sponsored industrial policy programs and state-owned banks, have been able to out-compete the public-owned sector and play a central role in the global economy, Nee said.

In 2007, for example, state-owned and nonstate commercial banks allocated only 1 percent of loans to private firms, a mere 1 percent increase from 1984. Furthermore, only 6 percent of the government's massive investment in science and technology went to private firms, where 21 percent of technology development took place. In 2008, 38 percent of patent applications submitted by medium and large firms came from private firms, compared with 18 percent from state-owned enterprises, which received 82 percent of government innovation funding for science and technology.

The emergence of private-sector entrepreneurship has prompted the development of codes of conduct and business norms before laws and regulations are implemented, Nee said. Also, the study found that Chinese entrepreneurs are more concerned with their reputations, information sharing and community sanctions by other members of their business network than with threats of a lawsuit and legal recourse.

Most entrepreneurs use their networks to bypass resource constraints imposed by policies that discriminate against private firms to protect state-owned enterprises, Nee said. Opper added that these networks have enabled success, even when such formal institutions as the banking sector have made private firm development difficult.

"What really mattered in China was the self-organization of market players," Opper said.

The study was supported primarily by the John Templeton Foundation with additional funding from the Swedish Research Council and Cornell's College of Arts and Sciences

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Joe Schwartz