If You Want to See Entrepreneurs, Go to China

As MIT political scientist and China expert Ed Steinfeld says, "China [is] one of the most entrepreneurial places on earth."

Perhaps this observation doesn't surprise you, given what's been happening to the Chinese economy in recent years. But you might not recognize how widespread entrepreneurship is in China, or why the country is so full of entrepreneurs.

What the Data Show

The latest numbers from the Organization for Economic Cooperation & Development (OECD) show that China's rate of self-employment far exceeds that in the U.S.—51.2% versus 7.2%—a gap that hasn't changed much since 2001, when the data first became readily available.

Lest you think that self-employment represents something other than entrepreneurship, consider some other statistics. According to the 2009 GEM report, China exceeds the U.S. in its rate of nascent entrepreneurship (a measure of people in the process of starting a business), rate of ownership of new businesses, and rate of ownership of more established businesses. And, as the figure to the right shows , the differences aren't trivial.

China Has More Growth-Oriented Entrepreneurs

China doesn't just have more small business owners than the US; it also has more growth-oriented business founders. According to the 2009 GEM Report, from 2004 through 2009, China had the highest rate of high-expectation entrepreneurship (intending to create more than 19 jobs) of any country covered by the study. More than 4% of the Chinese working-age population is engaging in high-growth-expectation entrepreneurship. In the U.S. that share is less than 1.5%.

Furthermore, China scores higher than the U.S. (and many other nations) on realized rates of new business growth. So it's not just how much people expect to grow, but also what they accomplish in creating jobs that marks China's entrepreneurial activity.

What about the rest of the population in both countries? How many plan to become entrepreneurs some day? According to the 2009 GEM, only 7% of Americans between ages 18 and 64 not currently starting a business intend to start a company in the future. In China, the number is 23%.

China Has Vibrant Financing Markets for Entrepreneurs

The 2009 GEM report also shows that the informal capital market is extremely vibrant in China. Approximately 6% of Chinese people between ages 18 and 64 made an informal investment in the past three years, compared with less than 4% in the U.S. Informal investment equaled 11.3% of China's gross domestic product in 2009, compared with only 1.5% of America's.

One place where the U.S. remains ahead of China is in venture capital. The 2009 GEM Report says that in 2008, the U.S. had more than three times as much committed venture capital as China—$27.9 billion versus $8.6 billion. The gap is shrinking, however: In 2008 venture capital investment declined in the U.S. but rose in China.

Why Is China So Entrepreneurial?

What accounts for this remarkable level of entrepreneurship in China? It isn't the size of the country's private sector. According to a paper by Oxford University economics fellow Linda Yueh, the government sector accounted for more than 90% of China's GDP as recently as 1978. And the National Bureau of Statistics in China reports that the public sector still accounts for approximately 40% of GDP.

It also isn't the ease of business formation. According to the World Bank's Doing Business 2010 Report, the U.S. is ranks No. 8 among the easiest nations in which to start a business, but China ranks No. 151 (out of 183). Moreover, it isn't easy to do business in China, which ranks 89th on this measure in the same report. By contrast, the U.S. is No. 4. How about the institutional environment? Most scholars don't think so. China doesn't have a strong system for enforcing contracts or protecting private property, according to Jaingyong Lu and Zhigang Tao of Tsinghua University. Moreover, on the World Bank's measures, the U.S. ranks more highly on this dimension, particularly on protecting investors, where it is No. 5, compared with China, which is No. 93.

How about ease of hiring employees? It doesn't seem likely. According to the World Bank report, the U.S. scores more favorably on labor regulations, particularly on the cost and difficulty of shedding employees.

What about taxes? Again, it's a "no.". The U.S. has a more favorable tax system than China, according to the World Bank report.

Getting Rich Is Good

Keming Yang, a sociologist at Durham University, and author of the book Entrepreneurship in China, thinks the high rate of entrepreneurship in China results from a national focus on getting rich. "The Chinese people have a very strong desire, perhaps the strongest among all nations in the world, to lead an enviable material life," he explains. "It is a life-long struggle as they constantly compare their standard of material life with that of others around them."

The 2007 GEM Report supports the notion that Chinese entrepreneurs are motivated by the desire to make money. The GEM data reveal that fewer than 40% of Chinese entrepreneurs start businesses to have more independence, and more than 60% start businesses to increase their income. In the U.S., by contrast, only a little more than 40% of entrepreneurs start businesses to increase their income, while almost 60% do so to gain more independence.

MIT's Steinfeld identifies another aspect of Chinese thinking responsible for high rates of entrepreneurship. The Chinese are not easily deterred by economic or political conditions unfavorable to business formation. Says Steinfeld: "Chinese entrepreneurs, whether because of cultural or other factors, have consistently proven willing to establish businesses … in a number of high-risk, deeply unstable environments."

Maybe it shouldn't surprise anyone that China is so full of entrepreneurs. But the evidence that China is a go-to place to see entrepreneurs suggests we might learn something from studying Chinese attitudes toward starting businesses.

Before it's here, it's on the Bloomberg Terminal.