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China Lacks Entrepreneurs, Researcher Says

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China may have made enormous strides in manufacturing in recent years, but it's got nothing on the United States in terms of entrepreneurship.

That's the finding of new research from the Kellogg School of Management, which contends that Shanghai, which accounts for 6.9 percent of the China’s total industrial output, has an "extraordinary" weakness in entrepreneurship.

"Because entrepreneurial businesses are important drivers of job creation, the absence of entrepreneurship in China’s richest city carries an economic cost that has implications for longer-term growth," said Yi Qian, an assistant professor of marketing at the Kellogg School of Management, who conducted the research with Yasheng Huang, a professor at the Massachusetts Institute of Technology.

“Shanghai is very dynamic and attracts a lot of foreign investment and has a lot of business opportunities, but these opportunities are not in indigenous businesses,” Qian said. “Ultimately, the country has to grow with domestic innovation and not just investments from foreigners.”

Qian believes that government policies enacted in the late 1980s to attract foreign investment and promote development of Shanghai’s industrial sector undermined growth of entrepreneurial businesses. The development program had two key elements, Qian said. First, the program called for an internationalization of Shanghai’s economy, with an emphasis on advanced technology and global brands. Second, the program called for eliminating anything that undermined a modern image of Shanghai. This included peasant-operated food and vegetable stalls, which are ubiquitous in China .

To purge Shanghai of these small businesses, the city centralized urban planning decisions, according to the study. It purchased land below cost from rural households and auctioned it at market prices to targeted industries. The proceeds were used to finance infrastructure development and other government obligations, according to Qian’s research.

Shanghai entrepreneurs and lawyers, in interviews with co-author Huang, reported other government-imposed obstacles to entrepreneurship. For example, until 2005, university professors, workers for nonprofits and general managers of state-owned enterprises were not allowed to launch private businesses. Another policy prevented residential apartments from being used for commercial purposes. In addition, private businesses were prevented from bidding on the big infrastructure projects that drove much of Shanghai’s growth during the late 1990s. Meanwhile, tax regulations favored so-called foreign-invested enterprises — businesses with at least 25 percent foreign equity.

“Entrepreneurship wasn’t encouraged,” Qian said.

She believes China will need to encourage entrepreneurship or pay the price in the long run.

"Entrepreneurship—new entrants and privately-owned businesses—create jobs and promote growth at a time when state-owned businesses are restructuring," Qian said. "Is Shanghai's growth model ideal if it has some of the anti-entrepreneurial consequences?" she asked. "With any growth policy, there are going to be pros and cons. My philosophy is to design policies that could help certain sectors and firms without sacrificing the rights of the others."

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