Institutional Barriers to Growth: Entrepreneurship, Human Capital and Institutional Change

Abstract

Prior research often focuses on how many entrepreneurial firms are created, rather than on institutions that encourage specific types of firms or entrepreneurs. This paper identifies institutional changes that reduce barriers to growth as an important factor influencing the propensity of individuals to start a business. The findings suggest that the impact of lower barriers to growth is shaped by the extent of the reduction in barriers to growth and the level of human capital of the individual. Only a large reduction in barriers to growth has a stronger impact in increasing the likelihood of founding at higher levels of human capital. I capitalize on two reforms lowering barriers to growth as natural experiments. One reform in 1988 only slightly lowered barriers to growth. The second reform in 1999 more strongly lowered barriers to growth with an amendment to the Chinese constitution reversed regulations that favored firms with foreign investors. This made it easier for domestic entrepreneurs to compete. I collected unique data through a survey of 2,966 alumni who graduated from a top Chinese university. Results show that reducing the institutional barriers to growth differently affects college-educated individuals with different levels of human capital.

Keywords: entrepreneurship, institutional theory, China, human capital