Financial development and the geographies of startup cities: evidence from China

Abstract

It has been widely observed that financial support is the key to entrepreneurial activities. The last decade has witnessed tremendous growth of startups and financial markets in China. Despite “mass entrepreneurship and innovation” becoming a national agenda item in China in recent years, few studies have investigated how financial development is related to entrepreneurial activities across cities in such an emerging economy. Drawing on a unique dataset of over 5000 startups in China, this study investigates the geographical characteristics of startup cities and the role of finance in promoting startups across Chinese cities. We find that there exists significant geographical concentration of startups. Beijing, Shanghai, and Shenzhen are the most important startup cities in the country. Regression results show that strong financial supports from both equity financing and credit financing are beneficial to the development of startups at the regional level. Venture capital availability is found to have very positive effects on the entrepreneurial activities in a city. The agglomeration of startups in financial centers and neighboring regions indicate that there exist strong positive externalities of metropolitan cities where the key financial, political, and technology resources are located.