This document discusses entrepreneurial performance in developing economies, using China as a case study. It examines how the institutional environment in China has transitioned from central government planning and control to market-based incentives. The document presents hypotheses that entrepreneurial success is driven by factors like government ties early on, but later depends more on experience, access to programs, and innovation. It also describes a survey of Tsinghua University alumni used to study entrepreneurs in China and benchmark them against other data sources.

1. Performance in a Developing Economy
Entrepreneurial Performance in a
Developing Economy: Evidence
from China
Chuck Eesley
March 8th, 2010
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S T A N F O R D U N I V E R S I T Y • Management Science & Engineering

2. Performance in a Developing Economy
Institutional Environments and Entrepreneurship
Drivers of entrepreneurial entry and performance (different contexts)
Developed economy
 Entrepreneurs from Technology-Based Universities - with David Hsu
(Wharton), Ed Roberts (MIT)
 Bringing Entrepreneurial Ideas to Life
 Cutting Your Teeth - Prior entrepreneurial experience
Developing economy
 The Right Stuff
– Role of institutional environment in selection of high human capital
entrepreneurs
 Entrepreneurial Performance in a Developing Country: Evidence from
China
 What Drives an Innovation Strategy?
– Role of Institutional Env./funding of S&T in search for ideas
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3. Performance in a Developing Economy
Most Work on Entrepreneurship Done in Developed Economy
Individual Level Institutional Level
Overall Economic growth ++
Entrep. Entry ++ +
Entrep. Performance ++ ?
•Representative entrepreneurship
•Self-employment (include lawyers and doctors)
•Tech-based entrepreneurship
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4. Performance in a Developing Economy
Who is an entrepreneur?
 Entrepreneurs (self-employed) tend to have wealth (Blanchflower, Oswald, 1998;
Nanda, 2010), self employed parents (Sorensen, 2007; Dunn and Holtz-Eakin, 2000),
low opportunity costs (Amit et al., 1995), more educated (Fairlie, Woodruff, 2007),
in their 30s-40s (Levesque and Minniti, 2006), generalists (Lazear, 2004), tend to be
brokers (Burt, Raider, 2002), low on uncertainty avoidance/higher on
individualism (McGrath, MacMillan and Scheinberg, 1992), and achievement need
(Johnson, 1990; Roberts, 1991)
 Tech entrepreneurs are more highly educated (Roberts, 1991), come from VC-
backed firms (Gompers et al., 2005) and often male, engineering/management
background, and non-U.S. citizens (Saxenian, 1999; Hsu, Roberts & Eesley, 2007)
 In developing world? Entrep. family, friends, value work, wealth (Djankov
et al., 2006)
 Human capital, overseas, academics less likely (Eesley, 2010)
 Interaction between individual and institutional environment characteristics
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5. Performance in a Developing Economy
Who is a successful entrepreneur? (developed economy)
 Self-efficacy (Baum, 2004) Education - Master‘s degree (Roberts, 1991)
 Prior entrepreneurial experience (Roberts and Eesley, 2010; Shane and
Khurana, 2003)
 Managerial achievements (Eisenhardt&Schoonhoven, 1990)
 Work in an entrepreneurial prominent organization (Burton, Sorensen,
& Beckman, 2002)
 Cohesive social network (Shane, Cable, 2002)
 Growth market (Eisenhardt and Schoonhoven, 1990)
 Planning (Delmar, Shane, 2003)
 Tech-entrepreneurs also: attract VC funding (Chemmanur, Krishnan, and
Nandy, 2008), larger founding teams, transfer tech. from parent
organizations, product and marketing orientation (Roberts, 1991; 1992)
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6. Performance in a Developing Economy
Factors that Drive Founding Do Not Drive Performance
Founding Performance
Parental entrepreneurship Managerial Experience, prior founding
Wealth Lower wealth
Low opportunity costs High opportunity costs
Male Either gender
VC-backed firm work experience Entrep. prominent organization
Broker network Cohesive network
Need for achievement Self-efficacy
Education Education
Low uncertainty avoidance, high individualism Product, marketing orientation
Generalists Growth market
Non-U.S. citizen Either
In 30s-40s Any age
Planning, VC
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7. Performance in a Developing Economy
Institutional Environment and Competitive Advantage
 Successful entrepreneur, developing economy?
 Individual characteristics, context characteristics, and their
interaction drive performance
– Team and industry (Eisenhardt and Schoonhoven, 1990)
 As institutional environment changes, individual and context
characteristics that drive performance change
 Institutions – political, social, legal (formal and informal)
constraints on indiv. and orgs. (Scott, 2001; North, 1990)
 Transition – government planning and control  free market
institutions
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8. Performance in a Developing Economy
Emerging Economies and Government Ties
 Firms with government and managerial ties outperform (Peng and Luo, 2000)
 Picking winners, providing resources (nefarious)
 Privatization auctions that are not fully competitive (Schamis, 2002)
 Closer relationships with state-owned firms (Backman, 2001)
 Better access to credit (Khwaja and Mian, 2005; Leuz and Oberholzer-Gee,
2006; Li, et al, 2009)
 Government bailouts (Faccio, Masulis and McConnell, 2006)
 Over time?
 Ties to sociopolitical elites increase the propensity to form cross-border
alliances yet when the regime changed, these ties became a liability (Siegel,
2007)
 Elites in transitional economies have been able to translate their power into
economic benefits? (Nee, 1996; Walder, 2002; Walder, 2003)
8  New firms? Technology firms?
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9. Performance in a Developing Economy
Elite Entrepreneurs in a Developing Economy
 Push vs. pull entrepreneurship
 Eliminates subsistence entrepreneurship
 Focus on form of entrepreneurship tends to result in economic
growth, not poverty alleviation
 Desired homogeneity in skills, opportunity costs, more narrow,
well-defined set, at risk for technology-based entrepreneurship
 Comparing apples to apples
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10. Performance in a Developing Economy
Model/Hypotheses
 Relaxing constraints on entry/markets, allowing market institutions
 Providing information on opportunities
 Stepping away, other institutions play a role
 Incentives for entrepreneurial behavior
Central Transition Free Markets
Planning/Control
Phase I Phase II Phase III
Entry is difficult Other institution or Entrep.
gov. driven process/skill driven
Government ties Other institutional Entrep. experience
or govt. programs and innovation
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11. Performance in a Developing Economy
Hypotheses:
H1: In the beginning, in institutional environments transitioning from an
emphasis of government central planning and control, entrepreneurs in
locations where government control was initially relaxed will create larger
firms.
H2: In institutional environments characterized by an emphasis on
government central planning and control, entrepreneurs with government
ties will create larger firms compared to entrepreneurs without such ties.
H3: As institutional environments transition from government central
planning and control to market-based incentives, entrepreneurs who can
access programs by non-gov. institutions (such as science parks) to create
entrepreneurial behavior will create larger firms.
H4: In institutional environments that have transitioned from government
central planning and control to market-based institutions, greater
competition will make entrepreneurs with exposure to the firm creation
11 process and those who are innovating create larger firms.
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12. Performance in a Developing Economy
Context
Alumni survey Tsinghua University
26,700 mailed (correct addresses)
3,000 surveys
11% r.r.
Growing tradition: Stanford GSB, Chicago, HBS
Disadvantages: Biased towards tech., other
response bias?
Advantages: Defined‗at risk‘ set, first abroad,
detailed work history and founding data, less
biased by govt. concerns
Other surveys: business owners, self-employed and entrepreneurs merged together –
Treiman and Walder, ―Life Histories and Social Change in Contemporary China‖
 Self-employment (Chinese Health and Nutrition Survey, NBS HH Survey)
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13. Performance in a Developing Economy
Tsinghua Univ.
•Established in Beijing in 1911
•1952 reorganized Soviet style
•1966-1976 Battlefield during Cultural Revolution
•1978 restored departments in sciences, economics and
management, and humanities
•1984 – First Graduate school in China created at Tsinghua
•1998 – Tsinghua Science Park established
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14. Performance in a Developing Economy
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15. Performance in a Developing Economy
Context - interviews
79 pages of notes from interviews with 42
individuals
– 26 Tsinghua alumni entrepreneurs
– 2 Tsinghua staff (TLO, Science Park)
– 5 Chinese venture capitalists (VCs)
– 2 Government officials
– 3 Other Chinese entrepreneurs (non-Tsinghua)
– 2 MIT Alumni (non-entrepreneurs)
– 2 Tsinghua alumni (non-entrepreneurs).
• Interviews were in Beijing, Shanghai and Xi‘an
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16. Benchmarking Tsinghua Data
Performance in a Developing Economy
Categories Tsinghua CHNS NBS HH NBS HH
survey survey
Sample Urban Rural and Urban Urban – self- Urban –
employed non.Entrep.
Male 0.89 0.53 0.56 0.50
Age 50.13 41.45 36.2 37.2
Married 0.88 0.98 0.83 0.84
Years of 17.1 9.1 9.2 9.4
Education
Household Size 3.40 3.9 -- --
Self-employed 0.26 0.14 (4% in 1999) --
(0.8% in 1999)
Experienced a 0.13 -- 0.26 0.19
layoff
Father’s Educ. 4.11 -- 5.4 5.2
Mother’s Educ. 4.89 -- 6.0 5.9
Parent Self-Empl. 0.08 -- 0.06 0.05
Comm. Party 0.62 -- 0.05 0.18
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17. Why China?
Performance in a Developing Economy
 "The storm center of the world has shifted . . . to China, whoever understands
that mighty Empire . . . has a key to world politics for the next five hundred
years.‖ --U.S. Secretary of State John Hay, 1899
 Tech-based entrepreneurship in developing countries rarely appears in
academic literature (Lu 1997, 2000; Puga and Trefler, 2005)
 Vernon‘s (1966) product-cycle model
 19892004 China 29% vs. US 1% (State Statistics Bureau)
19782004 # employed in private business up 300X
 Policies and institutions changing rapidly (Cull &Xu, 2006; Nee, 1998; 1992;
1996; Peng& Heath, 1996; Steinfeld, 2007)
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18. Performance in a Developing Economy
China’s S&T Policy Reform
Experimental Structural Deepening S&T reform Firm-centered
(PRO centered) Reform of S&T innovation system
78-85 85-95 95-2005 2005+
Gradual, local and sectoral experimentation, partial reforms dual-track approach
(Gregory, Tenev, &Wagle, 2000; Nee, 1996) Economic, not political liberalization
National Key Tech. Bankruptcy law Private Join WTO
R&D Program for SOEs (1986)
ownership (2001)
Promotions and tax revenue were tied to local economic development (―eating from
(1984)
separate kitchens‖, or fenzaochifan) (1999)
Univ. reform Stock Exchange Tsinghua 2006 Adoption
TVEs (getihu) FDI, 1988 (saying qiye)
(1985) (1990) Science of medium and
Park(1998) Long Term
SE Zones (zhuanzhi) or “restructuring of ownership” (suoyouzhigaizao) 1995 – 1996
Privatization
created (1980) National Natural Promotion of S&T Strategic
“Grasping the large, letting go of the small.”
Science Fndtn. VC/PE (1998) Plan
Open door policy (1986)
(1978) CAS Knowledge
>7 emp. Innov. Prog.
permitted (1998)
Deng Xiao Ping Innov. Fund for (Thanks OECD
reform report Torch Program Tech. SMEs Review, 2007)
(1975) (1988) (1999)
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19. Performance in a Developing Economy
S T A N F O R D U N I V E R S I T Y • Management Science & Engineering

20. Performance in a Developing Economy Comparison of Key Demographic Characteristics by Survey Wave
Variable Respondents Non-respondents t-stat for equal
(N=2,667) (N=299) means
Age 49.3 54.1 -4.216**
Age (founders only) 38.4 37.4 0.602
Bachelor’s Graduation Yr 1980.9 1977.4 3.777**
Bach. Grad yr (founders only) 1991.6 1993.2 0.941
Years of Education 17.2 17.0 2.381**
Entrepreneur parents 0.09 0.12 -0.713
Entrepreneur 0.29 0.40 -2.168**
Privatized 0.10 0.05 1.392
First start-up founded 2000.3 2001.1 -0.661
Tech only 0.28 0.29 0.757
Business only 0.10 0.09 0.235
Gender 0.88 0.90 0.901
Family economic status 3.75 3.85 -1.871*
High Salary 3.21 2.93 3.351**
Avg. Tenure 6.94 8.01 -2.045*
Overseas work exp. 0.26 0.26 -0.126
Number of positions 2.39 2.26 -2.012*
High government 0.03 0.03 -0.239
Low government 0.18 0.17 0.617
Last job academia 0.19 0.19 -0.051
Ever job academia 0.32 0.27 2.323**
Last job business 0.62 0.61 0.348
Student Leader 0.61 0.57 0.874
GPA Rank 2.28 2.58 -2.661**
Bach. Grad Yr. 10th percentile 1954 1953 --
Bach. Grad Yr. 25th percentile 1965 1961 --
Bach. Grad Yr. 50th percentile 1986 1979 --
Bach. Grad Yr. 75th percentile 1996 1993 --
Bach. Grad Yr. 90th percentile 2001 2001 --
***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively. 20
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Back

21. Performance in a Developing Economy
First Foundings by Year
35
30
Number of Start-ups
25
20
15
10
5
0
First Founding Year
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22. Performance in a Developing Economy
Industries
INDUSTRY NUMBER OF FIRMS %
AEROSPACE 3 0.90
ARCHITECTURE 13 3.88
BIOTECH AND DRUGS 7 1.09
CHEMICALS 8 2.39
CONSUMER
PRODUCTS 17 5.07
ELECTRIC 12 3.58
ELECTRONICS 69 20.60
ENERGY 14 4.18
FINANCE 10 2.99
INTERNET 33 9.85
LAW, ACCOUNTING 22 6.57
MACHINERY 19 5.67
MANAGEMENT 21 6.27
MATERIALS 13 3.88
MED DEVICES 4 1.19
OTHER MFG 16 4.78
PUBLISHING 11 3.28
SOFTWARE 34 10.15
TELECOM 9 2.69
TOTAL 335 100
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23. Performance in a Developing Economy
Descriptive results
 Could create a figure or t-tests of means across time periods
here
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24. Performance in a Developing Economy
Interview Quotes
China is more state-led than a market economy still. The
government controls many resources. For firms the quickest
way to make a lot of money is through the government. The
government has incentives for firms to put up good numbers
(it‘s good for the politicians‘ careers).
In the 1990s … government was giving them less support. Many
universities created “university –run” enterprises and were basically selling
off the periphery of campus. Even high schools had school—run enterprises
that were considered acceptable. There is a Tsinghua name to many of them.
- GC – 2nd generation investor
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25. Performance in a Developing Economy
Interview Quotes, cont.
In the US you don‘t see the government, but in China the role
of the government is seen from the very beginning. They could
be a major funding source, help in penetrating the markets,
and in protecting the competitive advantage. There is some
over-emphasis of the role of the government however. - GY–
VC investor
There is a big government legacy. In the early days the
government connections and system were the currency. Power
was the currency, but that is changing to a system whose
currency is monetary. There was an opportunity to monetize
that power. - GC - investor
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26. Performance in a Developing Economy
Interviews
Historically, investors in China see fewer
experienced, serial entrepreneurs
―Forced to rely more on work experience outside of an entrepreneurial
context to judge the quality of entrepreneurs – GY – VC investor
Tsinghua alumni, entrepreneurship among alumni has a meta-effect
where some learn the process and mentor each other so in the future
there will be more and more entrepreneurs from Tsinghua as has
already happened with MIT alumni. – RC – Wave Communications
(his 6th start-up firm)
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27. Performance in a Developing Economy
Analysis:
 E[yi | x] = α + ρ’zi + ’xi + ’yi + ’pre xi + ’Xi + pre, mid, post + η + φ
+ i

 Dep. Variables: yi represents our measures of firm performance
 xi is government ties (father in government, privatized, coastal province)
 yi is government programs (specifically science parks)
 zi is separate measures for exposure to entrepreneurship, prior founding
experience, or innovation
 Xi vector of control variables - Everjob_govt, Comm. Party, Govt.
customer, Privatized, Entrep. parents, Entrep. index, rural, EECS, Overseas,
SEZ, software, electronics, wealthy family, Master’s, PhD, number of
cofounders
 η and φ represent year and industry sector dummies
27  >0
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28. Performance in a Developing Economy Results: firm performance
VARIABLES Log(rev) Log(rev) Log(rev) Log(rev) Log(rev)
Coastal 1989-2000 2.637**
(1.049)
Privatize 1989-2000 2.406**
(1.058)
Gov. dad 1989-2002 0.868**
(0.403)
Park x 2000-02 1.391*
(0.712)
Park x 2004-07 -1.545**
(0.646)
E-index x 2004-07 0.214**
(0.100)
Serial x 2003-07 1.409**
(0.689)
Innovation x 03-07 1.939**
-0.912
1989-2002 5.021**
(1.942)
1989-2002 0.834
(0.925)
2000-02 -3.396**
(1.388)
Log(firm age) 0.360 0.448** 0.417** 0.450** 0.007 0.085
(0.243) (0.190) (0.183) (0.180) (0.458) -0.431
N=230; (R2 0.627) ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively. Everjob_govt,
Comm. Party, Govt. customer, Privatized, Entrep. parents, Entrep. index, rural, EECS, Overseas, SEZ, software,
28
electronics, wealthy family, Master’s, PhD, number of cofounders, industry and year fixed effects were included as
controls but coefficients are not shown to save space.
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29. Performance in a Developing Economy
Robustness Checks / Limitations
 Deeper analysis of how gov. father and other factors helped
(doesn’t appear to be through gov. purchases or more government
funding) Information on opportunities?
 Broad set of controls
 Next Steps
– Additional analysis – government role in certain industries remains?
Limitations
 Representativeness, response rates, self-reporting
 Reverse causality, lobbying for reforms
 Effect of higher competition
 May be some shift back towards government connections with
more recent govt. focus on standards
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30. Performance in a Developing Economy
Conclusions
H1: In the beginning, … entrepreneurs in locations where government control was initially
relaxed will create larger firms. (coastal regions, privatized)
H2: …, entrepreneurs with government ties will create larger firms compared to entrepreneurs
without such ties. (father in government)
H3: … entrepreneurs who can access programs by non-gov. institutions (such as science parks)
to create entrepreneurial behavior will create larger firms. (science parks)
H4: In institutional environments that have transitioned … to market-based institutions, greater
competition will make entrepreneurs with exposure to the firm creation process and those who
are innovating create larger firms. (entrep. index, serial, innovation)
 Factors driving which individuals start larger, more successful firms is not
constant over time.
 Shifts in the directions consistent with the model that the drivers of
performance follow the institutional changes: government, science parks,
market-based free competition
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31. Performance in a Developing Economy
Implications
Institutions guide macro-level economic performance
Institutions – may guide (or constrain) the individual characteristics and firm
creation strategies leading to performance
Individual and institutional characteristics interact to generate performance, no
single blueprint
Comparable process at University Level
MIT Case Study – cite Entrepreneurial Impact
From Administration/TLO central control to relaxing constraints
Next, University programs – b-plan competitions, etc.
Finally, faculty/student/alumni entrepreneurial behavior grows outside of
programs
May explain mixed-results in university entrepreneurship literature - Rothaermel
review
Entrepreneurship Literature
Drive to find “universal” drivers of performance
 Context-specific
 Opportunity recognition vs. resource mobilization
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32. Performance in a Developing Economy
Boundary Conditions
 China had gradual economic reforms while political system remained largely
unchanged.
 Contrast with Russia where economic liberalization was sudden and
accompanied political changes as well
 Careful study of Western models and intention to move from government-
centered innovation to firm-centered innovation
 Regional experimentation, incentives for local economic development
 Focus on tertiary education reform
 Strong historical culture of entrepreneurship (esp. in certain locations)
 Focus on firm performance, not social welfare or aggregate economic impact
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33. Performance in a Developing Economy
Thank you!
Chuck Eesley
Stanford University
Management Science & Engineering (MS&E)
cee@stanford.edu
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34. Performance in a Developing Economy
Results: Conditioning on “inefficient matching”
Use a subsample where we are more confident of seeing inefficient matching.
Removing firms where the team and idea both came from the same source (less
evidence of search for optimal pairings)
Coefficients remain significant and of similar magnitude reassuring us that
endogeneity is not driving the results.
To further test whether our contracting variables might be serving as a proxy for
higher human capital founders who would only become involved if there is a
chance for a very high outcome …
Probit - in the top 5% of the revenue distribution or the valuation at exit
distribution (in the case of IPO or acquisition). The results held, and likelihood of
being in the extreme right tails of the distribution increased only when both
capabilities and contracting expertise were present.
Unobservable heterogeneity, mainly in the form of individual ability is a concern,
but mitigated by the relative homogeneity.
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35. Performance in a Developing Economy
Results
Ln(Alliances) Ln(Employees) Ln(Revenues) Pr(Public) Pr(Acquired)
Capabilities 0.023 0.328 0.256 -0.266 -0.188
(0.094) (0.322) (0.284) (0.346) (0.242)
Capab.*contract 0.203** 0.864*** 0.475* 0.861*** 0.433*
(0.101) (0.355) (0.323) (0.328) (0.246)
Contracting -0.068 0.061 0.029 -0.004 0.273**
(0.049) (0.164) (0.153) (0.146) (0.119)
Controls
Work Idea 0.242*** 0.452 0.801*** 0.607** 0.192
(0.087) (0.302) (0.274) (0.283) (0.212)
Social Idea 0.119 0.142 0.595* 0.418 0.444*
(0.104) (0.362) (0.324) (0.316) (0.252)
Military/Gov. Idea 0.325* -0.044 0.272 1.534*** 0.210
(0.168) (0.623) (0.511) (0.538) (0.416)
Work Team 0.048 0.183 0.286 -0.572** -0.114
(0.087) (0.297) (0.266) (0.292) (0.207)
Research Team 0.086 -0.333 -0.013 -0.630** 0.019
(0.093) (0.322) (0.289) (0.307) (0.222)
Social Team 0.203*** -0.089 -0.101 -0.417* -0.007
(0.075) (0.262) (0.236) (0.252) (0.182)
Family Team 0.022 -0.185 -0.147 -1.397** -0.531*
(0.115) (0.394) (0.348) (0.619) (0.313)
N=500; Controls: idea/team source, education, external funding, age, firm age, num. cofounders, industry, year. ***, **, and * indicate statistical
significance at the 1%, 5%, and 10% levels, respectively. P-values represent one-tailed tests. All regressions include industry sector dummies,
though the coefficients are not shown.
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36. Performance in a Developing Economy
Boundary Conditions
 New Business Line & New Entrepreneurial Firms
 Stable Institutional and Industry Environment
 Frictions in Markets for Technology
 Industry Life Cycle
– Mature  contracting
– Fluid/Early-stage  capabilities
– High velocity – firms selected out more quickly
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