Institutional Relationships，Start-up Size and Growth of Start-ups

Abstract

China is currently facing problems such as declining marginal output of investment, overcapacity, and insufficient innovation drive. It is urgent to obtain new growth momentum through innovation and entrepreneurship. “Mass entrepreneurship and innovation” is exactly the strategy advocated by the central government. Inspired by this strategy, some government officials and heads of state-owned enterprises also decide to quit their jobs and seek out entrepreneurial opportunities outside the system. The existing literature only focuses on the impact of institutional relationships on whether the individual will start a business, and does not really reflect the value of institutional relationships in entrepreneurial activities. Therefore, the more important research question is whether entrepreneurial institutional relationships will affect the initial size of start-ups and the long-term growth in the future when the entrepreneur leaves the system for business. If there is a significant impact, then “what are the impact channels” is also an important issue.We empirically test the impact of entrepreneurial institutional relationships on the size and long-term growth of start-ups. The data used in this study come from the 7th to the 10th Private Enterprise Survey data in 2006, 2008, 2010 and 2012. The results show that, compared with entrepreneurs from outside the system, the scale of entrepreneurs created by entrepreneurs with institutional relationships（former government official or head of state-owned enterprise）is 19.7 percentage points higher, and the compound growth rate of start-ups is 1.9 percentage points higher. Furthermore, we find that entrepreneurs who serve as public servants or SOE managers depend more on bank loans or restructured SOEs to obtain seed capital. They are more familiar with the government’s support policy, and more likely to get NPC deputies and CPPCC members or leaders of the Federation of Industry and Commerce. It can be seen that the above entrepreneurs have the advantages of resource acquisition, information superiority and political identity, which is beneficial for entrepreneurs to achieve better entrepreneurial results. Finally, this paper also finds that institutional relationships play a more limited role in regions with more developed financial industries.This paper shows that the informal institution such as institutional relationships play an important role when the formal institution is incomplete. In order to achieve the “mass entrepreneurship and innovation” strategy, we need to create a fairer and more just entrepreneurial environment, and promote the reform from administrative orientation to market-oriented resource allocation. This paper not only makes an important supplement to the relevant literature, but also provides valuable policy inspiration for China’s “mass entrepreneurship and innovation” strategy.