"The Power of Local Networks: Returnee Entrepreneurs, School Ties, and Firm Performance"

Abstract

Returnees—nationals of a developing country who have studied or worked in a developed economy and later returned to their home countries—appear ideally positioned to start new ventures. Yet a growing body of research suggests that they perform no better—or even worse—than home-grown entrepreneurs, a phenomenon we refer to as “returnee liability.” While previous research has sought the solution to this puzzle in institutional conditions in returnees’ home countries, the key contribution of this paper is to propose a novel mechanism that accounts for returnee liability; namely, returnees’ lack of social networks in the regions where they start their new ventures. To provide evidence for this mechanism, we explore how a returnee entrepreneur’s and her top management team’s local social capital affects her venture’s performance. Using a unique, hand-coded dataset on Chinese high-technology firms, we find that ventures established by returnee entrepreneurs with more school ties in the region where the new ventures are located are less disadvantaged, relative to those founded by home-grown entrepreneurs, than those founded by returnees who have fewer school ties there. We also find that returnee entrepreneurs who lack local school ties can benefit from the local school ties of their top management team members, but only if these members have an equity stake in the venture. These findings expand our understanding of returnee entrepreneurs and provide important new evidence for the role of social networks in creating new ventures.