Entrepreneurship and Economic Growth: Evidence from China's Transition

Using China's provincial-level panel data over 1978-2008, we examine the effects of entrepreneurship on economic growth in the context of China's transition from a centrally planned economy to a market-oriented one. We divide entrepreneurship into two types: one is business creation and the other is innovation. Our estimation results show that both types of entrepreneurship have significant positive effects on growth rate of China's GDP per capita over the sample period. Specifically, the annual growth rate of GDP per capita will increase by 1.98 percentage points if business creation entrepreneurship increases by one standard deviation. And the annual growth rate will increase by 1.34 percentage points if innovation entrepreneurship increases by one percent. We use instrumental variable method to overcome the possible endogeneity problem and establish the causal relationship between entrepreneurship and growth. The results are robust even when we control for different sets of demographical and institutional variables. China's experience shows that a strong government does not conflict with entrepreneurs' role. China's growth confirms the old wisdom that only in an economic system with well-protected private property, well-constructed infrastructure and well-safeguarded free market can entrepreneurship be brought into full play and serve as a driver of economic growth.