IDEAS home Printed from https://ideas.repec.org/a/kap/sbusec/v46y2016i1p79-91.html
   My bibliography  Save this article

The role of informal capital on new venture formation and growth in China

Author

Listed:
  • Julie Elston
  • Sandy Chen
  • Alois Weidinger

Abstract

This study examines the nature and role of informal capital used by micro-firms in the dynamic emerging market of China. Using a unique source of data for 260 urban entrepreneurs, this study provides empirical evidence that entrepreneurs’ personal savings and family funding are important sources of start-up capital. However, household income was found to be the most important funding source in driving firm growth over time. This research directly addresses the lacuna of studies on entrepreneurship in emerging economies and contributes to our understanding of the critical role informal capital plays in the Chinese entrepreneurial process. Overall findings suggest that informal capital is still predominantly used over formal capital sources for financing firm start-up, underscoring the slow transition in China from an emerging to a modern economy. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Julie Elston & Sandy Chen & Alois Weidinger, 2016. "The role of informal capital on new venture formation and growth in China," Small Business Economics, Springer, vol. 46(1), pages 79-91, January.
    • Handle: RePEc:kap:sbusec:v:46:y:2016:i:1:p:79-91
    DOI: 10.1007/s11187-015-9674-9
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11187-015-9674-9
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11187-015-9674-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Li Xiao & David North, 2012. "Institutional transition and the financing of high-tech SMEs in China: A longitudinal perspective," Venture Capital, Taylor & Francis Journals, vol. 14(4), pages 269-287, October.
    2. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
    3. Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July.
    4. David Audretsch & Julie Elston, 2006. "Can Institutional Change Impact High-technology Firm Growth?: Evidence from Germany’s Neuer Markt," Journal of Productivity Analysis, Springer, vol. 25(1), pages 9-23, April.
    5. Audretsch, David B. & Elston, Julie Ann, 2002. "Does firm size matter? Evidence on the impact of liquidity constraints on firm investment behavior in Germany," International Journal of Industrial Organization, Elsevier, vol. 20(1), pages 1-17, January.
    6. Garry D. Bruton & David Ahlstrom & Krzysztof Obloj, 2008. "Entrepreneurship in Emerging Economies: Where Are We Today and Where Should the Research Go in the Future," Entrepreneurship Theory and Practice, , vol. 32(1), pages 1-14, January.
    7. Li Xiao, 2011. "Financing high-tech SMEs in China: A three-stage model of business development," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 23(3-4), pages 217-234, April.
    8. Sven-Olov Daunfeldt & Daniel Halvarsson, 2015. "Are high-growth firms one-hit wonders? Evidence from Sweden," Small Business Economics, Springer, vol. 44(2), pages 361-383, February.
    9. Sam Tavassoli & Nunzia Carbonara, 2014. "The role of knowledge variety and intensity for regional innovation," Small Business Economics, Springer, vol. 43(2), pages 493-509, August.
    10. Elston, Julie Ann & Audretsch, David B., 2010. "Risk attitudes, wealth and sources of entrepreneurial start-up capital," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 82-89, October.
    11. Bruton, Garry D. & Ahlstrom, David, 2003. "An institutional view of China's venture capital industry: Explaining the differences between China and the West," Journal of Business Venturing, Elsevier, vol. 18(2), pages 233-259, March.
    12. Maryann Feldman, 2014. "The character of innovative places: entrepreneurial strategy, economic development, and prosperity," Small Business Economics, Springer, vol. 43(1), pages 9-20, June.
    13. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
    14. R. Glenn Hubbard & William M. Gentry, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May.
    15. Howard E. Van Auken & Lynn Neeley, 1996. "Evidence of Bootstrap Financing among Small Start-Up Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 5(3), pages 235-249, Fall.
    16. Becker-Blease, John R. & Sohl, Jeffrey E., 2007. "Do women-owned businesses have equal access to angel capital?," Journal of Business Venturing, Elsevier, vol. 22(4), pages 503-521, July.
    17. Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
    18. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
    19. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
    20. Howard H. Frederick & Bill Bygrave, 2004. "How we finance our new and growing firms," International Journal of Entrepreneurship and Small Business, Inderscience Enterprises Ltd, vol. 1(3/4), pages 287-293.
    21. Tom Vanacker & Sophie Manigart & Miguel Meuleman & Luc Sels, 2011. "A longitudinal study on the relationship between financial bootstrapping and new venture growth," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 23(9-10), pages 681-705, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Anna M. Ferragina & Fernanda Mazzotta & Khalid Sekkat, 2016. "Financial constraints and productivity growth across the size spectrum: microeconomic evidence from Morocco," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 6(3), pages 361-381, December.
    2. Canfei He & Jiangyong Lu & Haifeng Qian, 2019. "Entrepreneurship in China," Small Business Economics, Springer, vol. 52(3), pages 563-572, March.
    3. Bach Nguyen, 2022. "Small business investment: The importance of financing strategies and social networks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 2849-2872, July.
    4. Léon, Florian, 2019. "Long-term finance and entrepreneurship," Economic Systems, Elsevier, vol. 43(2), pages 1-1.
    5. Ying Sophie Huang & Buhui Qiu & Jiajia Wu & Juan Yao, 2023. "Institutional distance, geographic distance, and Chinese venture capital investment: do networks and trust matter?," Small Business Economics, Springer, vol. 61(4), pages 1795-1844, December.
    6. Anthony Howell, 2019. "Ethnic entrepreneurship, initial financing, and business performance in China," Small Business Economics, Springer, vol. 52(3), pages 697-712, March.
    7. Simba, Amon & Martins Ogundana, Oyedele & Braune, Eric & Dana, Léo–Paul, 2023. "Community financing in entrepreneurship: A focus on women entrepreneurs in the developing world," Journal of Business Research, Elsevier, vol. 163(C).
    8. Julie Ann Elston & Alois Weidinger, 2019. "Entrepreneurial intention and regional internationalization in China," Small Business Economics, Springer, vol. 53(4), pages 1001-1015, December.
    9. Wei Huang & Agyenim Boateng & Alexander Newman, 2016. "Capital structure of Chinese listed SMEs: an agency theory perspective," Small Business Economics, Springer, vol. 47(2), pages 535-550, August.
    10. Bach Nguyen & Nguyen Phuc Canh, 2021. "Formal and informal financing decisions of small businesses," Small Business Economics, Springer, vol. 57(3), pages 1545-1567, October.
    11. Andrea Fracasso & Kun Jiang, 2022. "The performance of private companies in China before and during the global financial crisis: firms’ characteristics and entrepreneurs’ attributes," Economic Change and Restructuring, Springer, vol. 55(2), pages 803-836, May.
    12. S. Ramakrishna Velamuri & Wilson Liu, 2017. "Ownership structure, insider behavior, and IPO performance of SMEs in China," Small Business Economics, Springer, vol. 48(3), pages 771-793, March.
    13. Beverlley Madzikanda & Cai Li & Francis Tang Dabuo, 2021. "What Determines the Geography of Entrepreneurship? A Comparative Study Between Sub-Saharan Africa and South-East Asia," Journal of Entrepreneurship and Innovation in Emerging Economies, Entrepreneurship Development Institute of India, vol. 7(2), pages 246-262, July.
    14. Maribel Guerrero & Francisco Liñán & F. Rafael Cáceres-Carrasco, 2021. "The influence of ecosystems on the entrepreneurship process: a comparison across developed and developing economies," Small Business Economics, Springer, vol. 57(4), pages 1733-1759, December.
    15. Zhiyang Liu & Zuhui Xu & Zhao Zhou & Yong Li, 2019. "Buddhist entrepreneurs and new venture performance: the mediating role of entrepreneurial risk-taking," Small Business Economics, Springer, vol. 52(3), pages 713-727, March.
    16. Mohd Nor Hakimin Bin Yusoff & Fakhrul Anwar Zainol & Mohammad Ismail & Razman Hafifi Redzuan & Rooshihan Merican Abdul Rahim Merican & Muhammad Ashlyzan Razik & Asyraf Afthanorhan, 2021. "The Role of Government Financial Support Programmes, Risk-Taking Propensity, and Self-Confidence on Propensity in Business Ventures," Sustainability, MDPI, vol. 13(1), pages 1-16, January.
    17. Surender Mor & Sonu Madan & Geoffrey R. Archer & Arvind Ashta, 2020. "Survival of the Smallest: A Study of Microenterprises in Haryana, India," Millennial Asia, , vol. 11(1), pages 54-78, April.
    18. Giancarlo Giudici & Massimiliano Guerini & Cristina Rossi-Lamastra, 2018. "Reward-based crowdfunding of entrepreneurial projects: the effect of local altruism and localized social capital on proponents’ success," Small Business Economics, Springer, vol. 50(2), pages 307-324, February.
    19. Mohamedou Bouasria & Arvind Ashta & Zaka Ratsimalahelo, 2020. "Bottlenecks to Financial Development, Financial Inclusion, and Microfinance: A Case Study of Mauritania," JRFM, MDPI, vol. 13(10), pages 1-28, October.
    20. Wei Wang & Kimberly A. Eddleston & Francesco Chirico & Stephen X. Zhang & Qiaozhuan Liang & Wei Deng, 2023. "Family Diversity and Business Start-Up: Do Family Meals Feed the Fire of Entrepreneurship?," Entrepreneurship Theory and Practice, , vol. 47(4), pages 1265-1297, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Julie Elston & Sandy Chen & Alois Weidinger, 2016. "The role of informal capital on new venture formation and growth in China," Small Business Economics, Springer, vol. 46(1), pages 79-91, January.
    2. Sven-Olov Daunfeldt & Niklas Elert, 2013. "When is Gibrat’s law a law?," Small Business Economics, Springer, vol. 41(1), pages 133-147, June.
    3. Canarella, Giorgio & Miller, Stephen M., 2018. "The determinants of growth in the U.S. information and communication technology (ICT) industry: A firm-level analysis," Economic Modelling, Elsevier, vol. 70(C), pages 259-271.
    4. Daunfeldt, Sven-Olov & Elert, Niklas & Lang, Ã…sa, 2012. "Does Gibrat's law hold for retailing? Evidence from Sweden," Journal of Retailing and Consumer Services, Elsevier, vol. 19(5), pages 464-469.
    5. Thurik, A. Roy & Carree, Martin A. & van Stel, André & Audretsch, David B., 2008. "Does self-employment reduce unemployment?," Journal of Business Venturing, Elsevier, vol. 23(6), pages 673-686, November.
    6. Geurts, Karen & Van Biesebroeck, Johannes, 2016. "Firm creation and post-entry dynamics of de novo entrants," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 59-104.
    7. Guidi, Francesco & Solomon, Edna & Trushin, Eshref & Ugur, Mehmet, 2015. "Inverted-U relationship between innovation and survival: Evidence from firm-level UK data," EconStor Preprints 110896, ZBW - Leibniz Information Centre for Economics.
    8. David Audretsch & Taylor Aldridge & Adam Lederer, 2010. "SMEs, Industry Dynamics and Economic Growth," Chapters, in: Jean-Luc Gaffard & Evens Salies (ed.), Innovation, Economic Growth and the Firm, chapter 3, Edward Elgar Publishing.
    9. D.B. Audretsch & L. Klomp & E. Santarelli & A.R. Thurik, 2004. "Gibrat's Law: Are the Services Different?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 24(3), pages 301-324, May.
    10. Erhardt, Eva, 2017. "Who persistently creates jobs? Absolute versus relative high-growth firms," MPRA Paper 79307, University Library of Munich, Germany.
    11. GABLER, Alain & POSCHKE, Markus, 2011. "Growth through Experimentation," Cahiers de recherche 11-2011, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    12. Kim, Jungho & Lee, Chang-Yang, 2016. "Technological regimes and firm survival," Research Policy, Elsevier, vol. 45(1), pages 232-243.
    13. Tarek Ibrahim Eldomiaty & Mohamed Hashem Rashwan, 2013. "The use of financial data to monitor competing models of firm growth," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 6(1), pages 69-86.
    14. Colombelli, Alessandra & Krafft, Jackie & Quatraro, Francesco, 2013. "Properties of knowledge base and firm survival: Evidence from a sample of French manufacturing firms," Technological Forecasting and Social Change, Elsevier, vol. 80(8), pages 1469-1483.
    15. Marco Vivarelli, 2013. "Is entrepreneurship necessarily good? Microeconomic evidence from developed and developing countries," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 22(6), pages 1453-1495, December.
    16. Enrico Santarelli & Marco Vivarelli, 2007. "Entrepreneurship and the process of firms’ entry, survival and growth," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 16(3), pages 455-488, June.
    17. David B. Audretsch & Max Keilbach, 2006. "Entrepreneurship, Growth and Restructuring," Papers on Entrepreneurship, Growth and Public Policy 2006-13, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
    18. Roberta Piergiovanni, 2010. "Gibrat's Law in the “Third Italy”: Firm Growth in the Veneto Region," Growth and Change, Wiley Blackwell, vol. 41(1), pages 28-58, March.
    19. Gémar, Germán & Moniche, Laura & Morales, Antonio J., 2016. "Survival analysis of the Spanish hotel industry," Tourism Management, Elsevier, vol. 54(C), pages 428-438.
    20. Marco Vivarelli, 2012. "Entrepreneurship and Post-Entry Performance: the Microeconomic Evidence," DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali dises1286, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

    More about this item

    Keywords

    Informal capital; New venture growth; Emerging markets; China; GOO; L26; O53;
    All these keywords.

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:sbusec:v:46:y:2016:i:1:p:79-91. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.